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    Quarterly Fund Commentary

    Ivy High Income Fund (prospectus)
    March 31, 2016

    Chad Gunther

    Market Sector Update

    • Volatility and uncertainty continued in the credits markets from the fourth quarter into the beginning of 2016. The credit markets reached a low on Feb. 11, with spreads at a six-year high of 919 basis points.
    • Despite the horrible start, the asset class rebounded from the Feb. 11 bottom and posted a gain of 3.25% for the quarter (BofA Merrill Lynch High Yield Master II Index). The rebound was primarily driven by an uptick in commodity prices, dovish global central bank policy narrative, incremental improvements across a broad range of global issues and an influx of cash into the asset class.
    • New issue activity remains somewhat subdued but slightly accelerated during the quarter. High yield and loan newissue volumes increased in March for the third consecutive month. The high-yield issuance totaled $28.2 billion in March (a 10-month high) and raised activity to $51.2 billion for the quarter. That said, new-issue volume totaled $95.6 billion through the first quarter of 2015, equaling a 46% year-over-year decline.
    • Since the market’s low point on Feb. 11, the bounce in CCC non-commodity related high-yield bonds (+11.08%) has handily outperformed non-commodity B (+5.34%) and BB-rated bonds (+5.24%). CCC-rated bond spreads remain 176 basis points wide of where they began December, whereas spreads have slightly narrowed for BB (16 basis points) and B (5 basis points).

    Portfolio Strategy

    • We ended the quarter with an approximate 10% cash allocation, up from 7.5% at year end as volatility and uncertainty in the credit markets continued from the fourth quarter through the beginning of 2016.
    • The Fund underperformed the benchmark for the quarter, with the Fund’s allocation to loans, a credit type not included in the benchmark, a significant driver of underperformance. The Fund’s approximate 25% allocation to loans posted a -5.67% return for the quarter.
    • On a positive note, the corporate bond portion of the portfolio was up 5.33% versus the benchmark return of 3.25%. The largest contributor to performance for the quarter was the Fund’s allocation to and selection within the retail sector. Despite a slight underweight to the retail category (4.18% average Fund allocation versus 4.98% benchmark allocation), individual credit selection and an overweight allocation to the subsector specialty retail aided relative performance. The Fund had an approximate 3.5% weighting to specialty retail versus the benchmark weighting of 2.6%.
    • The Fund’s underweight allocation to financials, particularly the banking subsector, aided performance. The underweight in the relatively strongperforming energy sector materially detracted.


    • Recent economic data is pointing to continued slowing in manufacturing activity. There are also few signs of inflation, and companies continue to struggle to exhibit top-line growth. Finally, instability in China continues to weigh on the markets. Given this environment, we think the U.S. Federal Reserve could have a hard time making the case for any additional rate increases throughout 2016.
    • Given market uncertainties, we believe it is prudent to maintain a higher cash balance going forward as well as to maintain a more balanced portfolio in regards to liquidity and risk.
    • Our goal of finding businesses that offer the best risk-adjusted return characteristics will continue as it is our belief that bottom-up fundamental credit analysis should produce better relative performance in both up and down credit cycles.

    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 BofA Merrill Lynch U.S. High Yield Index tracks the performance of U.S. dollar-denominated, below investment-grade corporate debt issued in the U.S. domestic market. It is not possible to invest directly in an index.

    Risk Factors. Fixed-income securities are subject to interest-rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in high-income securities may carry greater risk of nonpayment of interest or principal than higher-rated bonds. In addition to the risks typically associated with fixed-income securities, loan participations in which the fund may invest carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loan participations may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. These and other risks are more fully described in the Fund’s prospectus.

    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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