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    Quarterly Fund Commentary


    Delaware Ivy High Income Fund (prospectus)
    December 31, 2016


    Manager(s):
    Adam H. Brown, CFA
    John P. McCarthy, CFA

    Market Sector Update

    • In general, bond markets experienced bouts of volatility and sell offs during the quarter instigated by President-elect Donald Trump’s surprise victory in November. The post-election environment initiated a backup in rates, further emphasized by a 25 basis point hike of the Federal Funds rate on Dec. 14 by the Federal Open Market Committee. These events marked the largest month-overmonth increase in 10-year Treasury yields in years. The 10-year Treasury found its low for 2016 in the previous quarter at 1.36% then rebounded to 2.60% in December.
    • Despite the recent sell off and price pressure experienced within several areas of the fixed-income markets, such as U.S. Treasuries and municipals, highyield bonds garnered positive returns across the majority of sectors. The BofAML US HY Master II Index returned 1.88% for the quarter, making 2016 one of the best performing years for the highyield category since 2009. The index was up approximately 17.5% for the year.
    • Flows into the high-yield asset class were also positive for the quarter, making 2016 the first annual year of net inflows since 2012. For comparison sake, the previous three years (2013, 2014 and 2015) combined for a total of $45 billion of outflows. Loans also participated in positive inflows for the year totaling $9.2 billion, a substantial rebound from $21.7 billion in outflows in 2015.
    • Defaults continued on a downward trajectory in the midst of stronger oil prices and therefore a continued recovery in commodity sectors.

    Portfolio Strategy

    • The Fund outperformed the benchmark (before the effects of sales charges) for the quarter. Outperformance was attributed to a variety of factors, including the Fund’s relative overweight to CCC rated securities, favorable sector allocation, individual security selection and a meaningful allocation to loans.
    • The Fund’s allocation to loans and CCC paper has allowed the Fund to be less interest rate sensitive, which benefited performance in a rising-rate environment.
    • From a sector selection standpoint, the Fund’s underweight to the energy sector detracted from overall performance. Energy once again was a top-performing sector, and finished out 2016 up more than 40%. This cognizant underweight has been consistent within the overall strategy of the Fund for some time now, established in the belief that energy companies are not necessarily the best stewards of cash and therefore bad for bonds. The Fund has historically had a meaningful underweight allocation to the sector relative the benchmark and peer group.
    • Individual security selection within the basic industry and services sectors were large contributors to performance during the quarter. Many of these securities traded at default prices until the Feb. 11, 2016 low in a “baby thrown out with the bath water” fashion, but then appreciated substantially as the true solid fundamentals of the company were realized.

    Outlook

    • Since the peak in yields and spreads on Feb. 11, which coincided with a year-overyear market low of -5.13%, the high-yield asset class has rallied more than 400 basis points and is up approximately 17.50% for 2016.
    • At year end, the BofA Merrill Lynch US High Yield Index sits at a yield of 6.47% and a spread of 476 basis points. Although this is roughly at the 20-year historical average spread for the index (implying the market is close to fair value), we believe there is strong relative value in high-yield spreads if defaults continue on their downward trajectory and a U.S. postelection, pro-growth environment results in stronger corporate earnings.
    • It is our view that finding value in the highyield market has become increasingly more difficult, and considerable caution is warranted in making new investments. As such, we believe our continued process of bottom-up, in-depth fundamental research and analysis will guide us to those investments where the risk/reward is in our favor.
    • We also think with the potential of a continuation of rising interest rates accompanied by the possibility of a more active U.S. Federal Reserve, the ability to continue to invest in loans will be an attractive differentiator for the Fund. We believe our relative underweight to bonds may prove beneficial as we believe bonds (especially those long in duration) may have more downside risk on average over the next 12 months.

    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.

    BofA Merrill Lynch US High Yield Index reflects the performance of securities representing the high yield sector of the bond 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 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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