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    Quarterly Fund Commentary

    Ivy Small Cap Value Fund (prospectus)
    June 30, 2016

    Kenneth G. Gau

    Market Sector Update

    • The start of 2016 has been a wild ride any way you look at it, and 2Q was no exception. While the Russell 2000 Value Index, the Fund’s benchmark, drifted upward pretty much throughout the quarter (up 4.31% in 2Q and above 6% year-to-date), which is positive, it sure feels like we have packed more than a year of activity into these first six months to arrive at where we reside today.
    • Between the seesawing by the Federal Reserve, the continued aggressive activity of global central banks, the everchanging political landscape here and abroad (Brexit), the massive gyrations in the global currency markets, the downward pressure in sovereign debt yields, the huge snapback in commodities, and all the geopolitical machinations, it is not hard to feel somewhat overwhelmed. Maybe it is just that global growth has waned to the point to where we all have a heightened sensitivity to every incremental data point, but most likely it is some combination between the two.
    • As we head into the 3Q and the remainder of the year, there are no signs that the backdrop will in any way simmer down as the combination of slower global growth, the impending U.S. election, a very active group of central bankers, and negative yields in much of the developed world is sure to continue to deliver some excitement.
    • Much like what has happened year-todate, there was a strange mixture of sectors that drove the performance of the index in 2Q. Materials was by far the biggest sector outperformer, closely followed by utilities and consumer staples. This marks the 4th consecutive quarter where utilities have outperformed, and this is the only sector to have done so over this period of time. This odd concoction of performance can be attributed to the market volatility.

    Portfolio Strategy

    • Before the effects of sales charges, the Fund outperformed its benchmark in the quarter ended June 30, 2016 by roughly 300 basis points, which puts it up just over 450 basis points on the benchmark yearto- date and further adds to the strong historical performance of the past several years.
    • In terms of sectors, materials, energy and industrials provided the greatest outperformance while financials, consumer discretionary and health care were the greatest laggards. At the stock level, three securities contributed greater than 50 basis points to performance (Flotek, Laredo Petroleum and Kinross Gold), and one detracted over 50 basis points (Monro Muffler).
    • In 2Q we once again drove a good portion of Fund performance by registering greater gains in our biggest winners rather than losses from our greatest detractors. Among the securities that contributed 25 basis points or greater to attribution, this group netted to add just over 240 basis points of performance to the portfolio.
    • Overall, we remain excited about the start of 2016 and continue to be encouraged by Fund positioning heading into 3Q.


    • As we enter 3Q, we continue to stick with the football analogy we introduced roughly a year ago where we suggested that the market should expect net positive yardage, yet in small chunks, and not every play will generate positive yardage. After the decent gain the market has posted year-todate, we have on the margin shifted to a more defensive posture. We have accomplished this through multiple measures, but two of the more visible are by lowering the Fund’s weighting to financials (more specifically banks) and adding to the consumer staples weighting.
    • In this current environment, the combination of heavier regulations and a flattening yield curve make it very difficult for banks to earn their cost of capital, and there are no signs of imminent relief coming. On the consumer staples front, we believe that the recent merger and acquisition activity suggests greater consolidation as deals often come in clusters, and we generally like the stability in earnings offered by this sector in a choppy environment.
    • All in all, we are somewhat surprised how easily the market has recovered post the downdraft from Brexit, and believe greater balance in the portfolio is warranted than the offensive position we had advocated last quarter.
    • Independent of this tweak to our macro assessment, we remain committed to bottom up analysis first and foremost. We are focusing on identifying quality undervalued companies that we believe over time should serve our clients’ best. These companies garner our greatest attention. We are confident in the Fund’s investment process and we look forward to seeing what the remainder of the year yields.
    • All in all, we are somewhat surprised how easily the market has recovered post the downdraft from Brexit, and believe greater balance in the portfolio is warranted than the offensive position we had advocated last quarter.

    The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 2016. The manager’s views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is not a guarantee of future results.

    The Russell 2000 Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It is not possible to invest directly in an index.

    Top 10 holdings (%) as of 06/30/2016: Take-Two Interactive Software, Inc. 5.0, Beacon Roofing Supply, Inc. 4.8, Webster Financial Corp. 4.7, Flotek Industries, Inc. 3.4, Woodward, Inc. 3.3, LifePoint Health, Inc. 3.3, Nu Skin Enterprises, Inc. 3.0, Continental Building Products, Inc. 2.8, Laredo Petroleum Holdings, Inc. 2.7 and Communications Sales & Leasing, Inc. 2.6.

    Risk factors. The value of the Fund’s shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The value of a security believed by the Fund’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. Investing in small-cap stocks may carry more risk than investing in stocks of larger, more well-established companies. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

    IVY INVESTMENTSSM refers to the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds, and those financial services offered by its affiliates.

    Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a mutual fund. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from a financial advisor or at www.ivyinvestments.com. Read it carefully before investing.

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