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    Quarterly Fund Commentary

    Delaware Ivy Systematic Emerging Markets Equity Fund (prospectus)
    December 31, 2016

    Benjamin Leung, CFA
    Scot Thompson

    Market Sector Update

    • Emerging market equity returns were negative for the quarter. Three major geopolitical events impacted returns, including two unexpected shocks in November from U.S. elections and India’s “demonetization.”
    • The election of Donald Trump as the next U.S. president led to a sharp drop in global bonds, which in turn saw the U.S. dollar appreciate sharply against most currencies.
    • India unexpectedly announced it would “demonetize” and eliminate the two most widely used bank notes, taking more than 85% of the country’s currency out of circulation. The intent was to eliminate the underground economy, reduce counterfeit currency and curb corruption and criminal activity using the 500- and 1,000-rupee notes. The ensuing economic disruption was severe and led to a sharp selloff of local equities. In the intermediate term, it is expected that most of India’s citizens will benefit from this action.
    • Oil producers within the Organization of Petroleum Exporting Countries (OPEC) and outside the cartel agreed to a material reduction in production quotas in 2017. This led to an energy rally as well as in most commodity-related currencies.
    • Emerging market equities outperformed developed market equities for the year. The best performing major market again was Brazil, where a change in government led to a bottoming of local business sentiment, the start of fiscal adjustments and the central bank beginning a rate-cutting cycle.

    Portfolio Strategy

    • The Fund had a negative return for the quarter and underperformed the benchmark index.
    • Key detractors to performance in the quarter were an overweight relative to the benchmark in holdings in Turkey as well as an overweight in internet-related securities.
    • The key contributors to performance were positive security selections, as well as key sector and country allocations. The largest positive contributions were from holdings in Russia financials and energy, Brazil materials and energy, and South Korea information technology.
    • The largest country overweight positions versus the benchmark remain Brazil and Russia, where positive economic trends are beginning to take root. We expect the central banks in both countries to continue to cut policy rates as inflation trends still are improving materially.
    • While the largest underweight relative to the benchmark continues to be Chinese equities, the Fund did add exposure to materials and technology names in China. The Fund continues to have very low exposure to China’s state-owned enterprises.


    • We think global growth appears solid and is getting stronger. This bodes well for developing economies. We believe emerging market equities remain attractive, with valuations trading at a significant discount to developed markets while earnings revisions continue to be ratcheted higher. In fact, emerging market equities now are trading at more than one standard deviation below historical averages versus developed markets.
    • We believe market volatility surrounding geopolitical events will continue for the balance of the year. Uncertainties about the new Trump administration’s economic and geopolitical priorities are likely to lead to volatility in foreign exchange rates and U.S. fixed income rates – both critical factors affecting emerging market equities.
    • OPEC’s ability to deliver the production cuts it announced in November will be a key issue to follow as the year unfolds. The Fund is positioned for stable or gradually rising energy prices.
    • The Fund continues to be significantly overweight versus the benchmark in high- quality new economy companies (internet, “biosimilar” pharmaceuticals, advanced automotive systems and other technology). We believe earnings and revenue trends have the potential to increase in 2017.

    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.

    Frederick Jiang, CFA, previously was a portfolio manager on the Fund. He left the company effective May 14, 2016.

    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. 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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