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    Quarterly Fund Commentary

    Delaware Ivy Emerging Markets Local Currency Debt Fund (prospectus)
    December 31, 2016

    Mary-Therese Barton
    Guido Chamorro
    Carrie Liaw
    Alper Gocer
    Robert Simpson,CFA
    Ali Bora Yigit
    Adriana Cristea

    Market Sector Update

    • The fund outperformed the index where selected underweights to emerging market currencies was the key driver for performance. A marginal detractor was some active local rates positions and the give up of implied yields from being underweight currencies. In Latin America, timing of an underweight to the Brazilian real was a strong contributor, as some periods saw the currency down as much as 6%. This was partly offset by an underweight to local rates.
    • An underweight to the Chilean peso was a solid contributor. Timing of a Colombian peso underweight was positive as a strong reliance on commodity exports, pressure on the credit rating and a disappointing labor market resulted in weakness. The Mexican peso underweight also contributed as it was hit by less robust economic data and Trump’s negative trade rhetoric.
    • In EMEA, the efforts of Turkey’s president to strengthen his authority coupled with terrorist attacks and sharply lower growth contributed to a 15% drop in the currency while the portfolio was underweight. An underweight to Turkish local rates was also a solid contributor. Timing of an underweight to South African local bonds detracted.
    • In Asia, Chinese data was positive overall including retail sales and industrial production while inflation was above consensus at 2.3%. Timing of an underweight to the Malaysian ringgit was mostly neutral, but an underweight to local rates detracted. A Thai baht underweight contributed while offbenchmark short positions to Hong Kong and Singapore rates were also positive.

    Portfolio Strategy

    • We remain with our conviction to be underweight more vulnerable emerging market (EM) currencies while being selectively underweight local rates. If the ‘Trump tantrum’ is similarly negative in market reaction to the ‘taper tantrum’ of 2013, then we could see more market weakness. However, we remain more optimistic on Asian currencies, as manufacturing and growth have been more stable and they are benefiting from lower commodity prices. Nevertheless, we do not believe we have reached the right entry point to go overweight.
    • Conversely, we remain cautious on those vulnerable currencies that are more linked to commodities, sluggish growth and current account deficits as well as increased pressure on credit ratings. Examples continue to include the South African rand and Brazilian real.
    • When we do reach a turnaround supported by fundamentals, the Mexican peso and Indian rupee – both markets with good growth prospects and structural reforms – are key candidates to move overweight. In local rates there are few opportunities for overweights and these are mostly in Asia, where monetary policy is either on hold or there is an easing bias. Given a more hawkish U.S. Fed, we remain concerned with local bond markets with larger foreign investor bases, making them subject to selling pressure if yields continue to rise.


    • A recent spike higher in global yields has turned the short-term outlook less certain. Continued slow global and emerging market growth, a potentially more hawkish U.S. Fed, oil prices and potential systemic risks such as Italian banks remain potential headwinds in the short term. While good U.S. growth prospects should benefit emerging markets, this may be partially offset by potential protectionist trade measures by the new U.S. president.
    • In addition, we believe weaker currencies remain one of the only tools emerging market countries have to stimulate growth as there are more limits around how much countries can expand on the fiscal side which could lead to credit rating downgrades and increased borrowing costs.
    • Long term, the asset class remains supported given it is an investment-grade government bond asset class with a yield of nearly 7% while currencies look undervalued compared to their long-term equilibrium levels. Some investor may argue that current valuation make it an interesting entry point.
    • In local rates, Asia remains the only region with a clear easing bias. However, Latin America is changing with Brazil and Colombia already cutting rates presenting possible opportunities. Overall, the longterm prospects remain attractive compared to other fixed-income asset classes and emerging market currencies provide a long-term opportunity.

    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 no guarantee of future results. Past performance is not a guarantee of future results.

    Risk factors. The value of a fund’s shares will change, and you could lose money on your investment. An investment in a 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. 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, especially securities with longer maturities. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may seek to manage exposure to various foreign currencies, which may involve additional risks. The value of securities, as measured in U.S. dollars, may be unfavorably affected by changes in foreign currency exchange rates or exchange control regulations. Investing in foreign securities involves a number of risks that may not be associated with the U.S. markets and that could affect the Fund’s performance unfavorably, such as greater price volatility; comparatively weak supervision and regulation of securities exchanges, fluctuation in foreign currency exchange rates and related conversion costs, adverse foreign tax consequences, or different and/or less stringent financial reporting standards. Sovereign debt instruments are also subject to the risk that a government or agency issuing the debt may be unable to pay interest and/or principal due to cash flow problems, insufficient foreign currency reserves or political concerns. Risks of credit-linked notes include those risks associated with the underlying reference obligation, including but not limited to market risk, interest rate risk, credit risk, default risk and foreign currency risk. The buyer of a credit-linked note assumes the risk of default by the issuer and the underlying reference asset or entity. If the underlying investment defaults, the payments and principal received by the Fund will be reduced or eliminated. Also, in the event the issuer defaults or there is a credit event that relates to the reference asset, the recovery rate generally is less than the Fund’s initial investment, and the Fund may lose money. The use of derivatives presents several risks including the risk that fluctuation in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. Moreover, some derivatives are more sensitive to interest rate changes and market fluctuations than others, and the risk of loss may be greater than if the derivative technique(s) had not been used. Derivatives also may be subject to counterparty risk, which includes the risk that a loss may be sustained by the Fund as a result of the insolvency or bankruptcy of, or other non-compliance by, another party to the transaction. 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.&br;

    IVY INVESTMENTSSM refers to the investment management and investment advisory services offered by Ivy Investment Management Company, the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds and IVY VARIABLE INSURANCE PORTFOLIOS?, and the financial services offered by their 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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