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    Quarterly Fund Commentary

    Ivy Small Cap Value Fund (prospectus)
    March 31, 2016

    Kenneth G. Gau

    Market Sector Update

    • In 2Q 2015 we introduced the analogy “three yards and a cloud of dust” comparing football legend Woody Hayes’s run heavy style offense at Ohio State to the current market environment, suggesting that we should expect net positive yardage yet in small chunks, and also suggesting that not every play would generate positive yardage.
    • After encountering several negative return quarters in the market (2Q and 3Q 2015 for the Russell 2000 Value Index, Fund’s benchmark) this analogy was looking ill conceived, but once again in the 1Q 2016 the index was up and building off the positive yardage seen in the 4Q 2015. While we will continue to stand by the Woody Hayes analogy, we believe that positive market performance (yardage) will be more challenging to achieve unless oil continues to show signs of stabilization and the U.S. dollar remains range bound.
    • In 1Q, the top performing sectors in the index were utilities, materials and consumer staples while the worst performing were health care, energy and financials, which quite frankly was an odd mix of leading contributors and detractors, but can be attributed the tremendous volatility and uncertainty that was exhibited in the 1Q.
    • For the first half of 1Q, the market was in a pretty sizeable down draft driven by concerns regarding slowing global growth and in the second half there was a tremendous snap back rally as economic data showed some signs of improvement.

    Portfolio Strategy*

    • Before the effects of sales charges, the Fund outperformed the benchmark in the quarter ended March 31, 2016, which is a solid start to 2016 and builds on the the positive performance generated in 2015.
    • In terms of sectors, consumer discretionary, financials and industrials provided the greatest contributions to performance, while materials and consumer staples were the two laggards. At the stock level, three securities contributed greater than 50 basis points to performance (Carmike Cinemas, Great Plains Energy and TreeHouse Foods), and one detracted over 50 basis points (Flotek).
    • Overall, we are pleased with the Fund’s start to the year, and are encouraged by our positioning heading into 2Q.


    • Last quarter we suggested that due to lack of visibility on what could stem the strengthening of the dollar and when oil would stabilize that a more defensive stance in the Fund was prudent. We now believe we have greater clarity on both issues, and both appear to have been resolved in a positive fashion; oil appears to have bottomed, and the Federal Reserve’s (Fed) more dovish stance seems to have cooled the dollar. Overall, we believe these new dynamics should be positive for stocks in general.
    • We have made several positioning changes. On the margin, we added some cyclicality to the portfolio (energy, materials and industrials, more specifically with focus on gaining great exposure to areas that would benefit from a flat to weakening dollar), and we took some profits in a few defensive areas where we had been considerably overweight (predominantly consumer staples). We more firmly think interest rates will be lower for longer in the U.S. and therefore, have trimmed some bank exposure while adding to REITs (real estate investment trusts).
    • Independent of this tweak to our macro assessment, we remain committed to bottoms up analysis first and foremost. Our focus on identifying quality undervalued companies over time has seemed to serve our clients’ best, and therefore, continues to garner our greatest attention. We are confident in the Fund’s investment process and are looking forward to see what the remainder of the year yields.


    **Top 10 holdings (%) as of 03/31/2016: Take-Two Interactive Software 4.7, Monro Muffler Brake 4.6, TreeHouse Foods, Inc. 4.1, Great Plaines Energy 4.0, Webster Financial Corp. 3.9, Bank United 3.7, Reinsurance Group of America 3.1, Scotts Miracle-Gro Co. 3.0, Diamond Foods 3.0 and Smart & Final Stores 3.0.

    The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 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.

    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 INVESTMENTS? 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.

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