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    Quarterly Fund Commentary

    Delaware Ivy International Core Equity Fund (prospectus)
    December 31, 2016

    Chace Brundige, CFA
    Aditya Kapoor, CFA
    Charles John

    Market Sector Update

    • Broad international markets were generally positive in local currency, but the strong U.S. dollar offset those returns. As a result, performance abroad was slightly negative for the quarter. The yen was notably weak, with the exchange rate moving from 101 to 117 yen/U.S. dollar.
    • The surprise U.S. presidential outcome benefited markets as many believe President-elect Trump will lower taxes, increase infrastructure spending, decrease regulation and renegotiate trade deals/bring manufacturing home. The Italian referendum “no vote” poses long-term risks, but over the short term a Government led bailout of troubled Italian banks likely will aid their economy.
    • Global economic data was better than expected across all major regions – an outcome that hasn’t happened in a very long time. Economic growth expectations are being revised up. With the help of commodities, inflation is rising around the world. As a result of better economic data and inflation, earnings estimate revisions for public companies saw their best quarter globally in five years.
    • The U.S. Federal Reserve (Fed) raised rates in December and signaled there may be three more hikes coming in 2017. Better economic data, rising inflation and the Fed hike resulted in the 10-year U.S. Treasury to rise 84 basis points during the quarter to a 2.44% yield.
    • The European Central Bank (ECB) reduced monthly bond purchases but extended the time period for purchases – we view this as a minor taper. The Bank of Japan (BoJ) increased the stakes by targeting their 10-year Treasury yield at approximately zero. They are now the most aggressive bond purchaser and the first to target rates out the curve. Despite the Fed starting down the path of tightening from low levels, monetary policy remains at the extremes of easy.

    Portfolio Strategy

    • The Fund outperformed the benchmark (before the effects of sales charges) for the quarter. Currency effects were the main drivers of outperformance as a combination of the Fund’s short to the euro, exposure to American depositary receipts (ADRs) and underweight allocations to countries with relatively large currency depreciations drove the gains. The Fund’s sector allocation slightly aided performance with energy, real estate and utilities posting the strongest relative gains.
    • Strong stock selection in industrials and telecommunications benefited performance, but poor selection in information technology, health care and consumer discretionary more than offset those returns. The Fund’s allocation in Japan was a top relative contributor as exposure to relatively inexpensive cyclical companies drove performance. Top individual contributors included Dai- Ichi Life Holdings and Adecco S.A. (1.1% and 2.1% of Fund net assets, respectively).
    • Our nominal economic growth outlook has changed due to expectations of greater inflation; we also expect real growth to be slightly better than last year. Thus, in financials we are increasing exposure to beneficiaries of a steepening yield curve. We believe higher nominal growth should accelerate earnings from about 0% to 5%, excluding energy and materials, where earnings growth should be much greater barring a significant reversal in commodity prices.
    • We believe European multinationals (including the U.K. and Switzerland) provided a nice relative value opportunity over the quarter. As such, we added to those regions largely at the expense of Japan. Additionally, we reduced our hedge to the euro from a little more than 7% to slightly below 5%. The Fund's cash allocation remains low and averaged approximately 1.5% over the quarter.


    • We believe real economic growth will remain muted for the longer term. However, we anticipate inflation and President-elect Trump’s aggressive stance on fiscal spending (infrastructure spending and tax cuts) to drive greater nominal growth this year. Global monetary policy remains at the extremes of easy and we do not see that changing materially unless inflation accelerates at a higher-thanexpected rate. That said, it seems unlikely that many central banks will enact further easing and, of course, the U.S. has already begun tightening from low levels.
    • We think relative valuation remains supportive for international equities, while absolute valuations are less attractive. Equities, outside emerging markets, are trading at valuation levels above their historic averages (over the last 25 years), while bonds are trading at a dramatic historic premium to long-term averages. We believe emerging-market equities trade at reasonable valuations.
    • Long term, we believe emerging-market countries will try to improve their populations’ standards of living. To accomplish this feat, the countries will require solid real economic growth, which currently is not being achieved. There are signs of stress in these developing countries, though in many cases their growth remains ahead of their developedmarket counterparts. In the end, we believe maintaining our exposure to developing markets makes sense. We believe emerging-market valuations are the most attractive in our investing universe.
    • We continue to seek opportunities that are in line with the Fund’s current investment themes: disproportionate growth of emerging-market consumers; believable and sustainable dividend yield; companies benefiting from increased mergers and acquisitions; and infrastructure development – including the internet.

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

    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. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. These and other risks are more fully described in the fund's prospectus.

    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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