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    Quarterly Fund Commentary

    Delaware Ivy Limited-Term Bond Fund (prospectus)
    December 31, 2016

    J. David Hillmeyer, CFA
    Daniela Mardarovici, CFA

    Market Sector Update

    • Equity markets rallied and the U.S. Treasury market sold off following President-elect Donald Trump’s victory in November. The Republican sweep of both the House and Senate likely contributed to the negative market action. This has many believing that the gridlock which has plagued Washington may be ending and that we will see “business friendly” legislation and regulations enacted in the near future.
    • These actions could include: repatriation of profits and cash sitting overseas; a lowering of corporate tax rates; a reduction in regulations (e.g. repeal of some parts of the Dodd-Frank legislation focused on banks); and increased “progrowth” policies. While we have not seen any concrete changes or policies yet, the markets have definitely reacted to the possibility that the business environment will improve in 2017 and beyond.
    • The elections weren’t the only driver of higher rates in the quarter. The Federal Open Market Committee (FOMC) raised the Federal Funds rate by 25 basis points at the conclusion of their meeting on December 14. The increase was the first hike since December 2015.
    • In the announcement, Chairperson Yellen put forth the idea there could be as many as three more hikes in 2017. This caught the market off guard and caused an immediate jump in yields. Yields retreated later in the month, perhaps as market participants remembered the FOMC anticipated four rate hikes in 2016 but only delivered one.
    • Returns across the investment grade fixed income universe were negative for the quarter as the move in rates was perceived by many as “too far too fast”. The five-year U.S. Treasury note began the quarter at 1.15%, rose as high as 2.09% following the FOMC rate hike, and retreated to end the year at 1.95%.

    Portfolio Strategy

    • We lightened up on the long-end of the barbell as yields rose during the quarter, and increased the weighting on the frontend of the barbell. We shortened duration in the process, from slightly long the benchmark to 95-97% of the benchmark at quarter’s end.
    • We have maintained our overweight in investment-grade credit, as it has been the best performing asset class in our universe this year. Low interest rates here have kept U.S. corporations issuing bonds, in many cases to fuel dividend increases and stock repurchases. Lower interest rates abroad have helped to keep foreign investors interested in U.S. corporate bonds also.
    • We did see some instances in the fourth quarter where recent new issues of corporate bonds did not perform as well as they did earlier in the year. Whether that was because of the U.S. Treasury selloff or due to “new issue fatigue” remains to be seen. We do know that, in general, debt levels and leverage ratios of U.S. corporations have increased. One day that will become a problem and we will want to lighten up on corporate debt ahead of it, but most analysts and prognosticators believe that day is well into the future.
    • We have added some floating rate securities to the portfolio both in short and intermediate maturities. Floating rate notes have the potential to perform particularly well in a rising rate environment, due both to their increasing coupon and short duration, as duration is calculated not to maturity but to the next coupon reset date. We do not anticipate having a large allocation to floating rate securities at this time, but do feel it is a valuable addition to the mix of bonds in the portfolio.


    • The first quarter will be interesting as we see a new regime take control in Washington. We will see what real changes take place and how quickly they occur. We have a new voting group in the FOMC and many feel it will be more dovish than the 2016 voting members. There are two vacancies on the Federal Reserve Board of Governors which we may see filled by President-elect Trump.
    • The FOMC meets twice in the first quarter, both two-day meetings culminating with their announcements on February 1st and March 15th. While the FOMC dots did suggest three rate hikes in 2017, few anticipate a hike at either of these first two meetings of the year.
    • As the future unfolds with the new regime in Washington, we will assess whether our barbell strategy is one to continue or whether we should stay closer to the benchmark in our maturity buckets. For now we are comfortable with our small but reduced allocation to bonds longer than five years.

    The opinions expressed in this commentary are those of the Fund's manager and are current through December 31, 2016. The manager's view is 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. As with any fund, 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. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rate rise. 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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