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    Quarterly Fund Commentary

    Delaware Ivy Mid Cap Income Opportunities Fund (prospectus)
    December 31, 2016

    Kimberly A. Scott, CFA
    Nathan A. Brown, CFA
    Bradley P. Halverson, CFA

    Market Sector Update

    • 4Q2016 was an eventful period for the financial markets broadly with two major events driving most of the news flow: the election of Donald Trump to President and the OPEC meeting where the members agreed on a production cut. Both events were viewed favorably by the equity markets as the prospect for lower tax rates, less regulation, and promise of growth accrued to the positive in investor’s minds while the risk of more corporate defaults in the energy sector diminished. The events in 4Q2016 were punitive in the fixed-income markets as interest rates increased significantly in the period.
    • During 4Q2106, the Russell Midcap Index, the Fund’s benchmark, posted a positive return. The more defensive and/or negatively impacted interest rate sensitive sectors, health care, real estate, consumer staples and utilities all struggled. Generally, the more cyclical sectors, financials, industrials, energy, materials and technology outperformed. Consumer discretionary, for the second consecutive quarter, underperformed despite outperformance in other more cyclical sectors. Finally, telecommunications slightly underperformed.
    • Despite the significant increase in interest rates and broad underperformance of some of the more defensive sectors, dividend-paying equities performed well in the quarter. While the highest yielding quartile of stocks underperformed, so too did those that didn’t pay a dividend. The strength in the market was driven by those companies that had dividend yields of 1- 3%.

    Portfolio Strategy*

    • The Fund outperformed the benchmark during the quarter. Dividend income produced 81 basis points of performance. Performance was a result of positive sector allocation and stock selection. Sector positioning stayed consistent throughout as we remained overweight consumer discretionary, materials, energy and technology. Most notable underweight positions remained real estate, utilities, financials and industrials. The Fund also carried 2.7% cash during the quarter due to steady inflows.
    • Consumer discretionary produced the largest positive contribution quarter despite an overweight position in the underperforming sector. Cracker Barrel has continued to consistently outpace its peers with growing sales, operational discipline, and consistent ability to beat analyst expectations. Another top performer was Kohl’s as we saw the prospect for better margins forthcoming due to an improved inventory position versus last year. Our thesis was realized and we sold the stock given very strong appreciation.
    • We also generated strong outperformance in industrials despite being underweight the outperforming sector. HNI was the best performing stock in the Fund during the quarter. Republic Services continued its streak of outperformance given solid business fundamentals.
    • We continue to be underweight real estate as we struggle to find what we believe are true differentiated structurally advantaged companies within the sector. This underweight produced nice relative performance real estate was one of the worst performing sectors in the benchmark.
    • An overweight position in energy has continued to produce positive relative performance throughout 2016 and the fourth quarter. While the Fund generated outperformance across most sectors, financials was our largest laggard.


    • For the first time in recent memory, stock market participants appear to have moved their attention away from global central bank policies toward the potential impact of what President Trump means for multiple variables.
    • Since Fund inception, we have continued to watch several key variables to determine positioning. These variables include domestic economic growth, change in interest rates, change in commodity prices, and foreign economic growth. As for the unknown events that transpire every year, 2017 has the potential to have a larger set of those given the uncertainty of a successful businessman as U.S. President.
    • The two potential issues that the market has gained the most confidence in the probability of enacting are the reduction and simplification of corporate and individual tax rates and a smothering of the ever-increasing regulations that have plagued corporations over the past eight years. We believe both would be quite beneficial to our universe of equities.
    • While a lower tax rate would improve profitability and potentially promote growth as it could more closely match those of other developed economies, it truly is the proverbial “the devil is in the details.” One of the most talked about plans involves a border tax rate adjustment that would promote exporting from the U.S., but penalize importing. Given the amount of goods imported, particularly in the consumer discretionary sector, this could have significantly negative implications.

    *Top 10 holdings (%) as of 12/31/2016: American Campus Communities 2.9, Polaris Industries 2.9, Arthur J. Gallagher & Co. 2.8, OGE Energy Corp. 2.8, Xilinx, Inc. 2.8, HNI Corp. 2.8, Cinemark Holdings, Inc. 2.8, Glacier Bancorp, Inc. 2.8, Mattel, Inc. 2.8 and Rockwell Automation, Inc. 2.8.

    The opinions expressed in this commentary are those of the Fund’s managers and are current through Dec. 31, 2016. The managers' 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.

    The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. It is not possible to invest directly in an index.

    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. Investing in mid-cap stocks may carry more risk than investing in stocks of larger, more well-established companies. The Fund’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform non-dividend paying stocks and the market as a whole over any period of time. In addition, there is no guarantee that the companies in which the Fund invests will declare dividends in the future or that dividends, if declared, will remain at current levels or increase over time. The amount of any dividend the company may pay may fluctuate significantly. In addition, the value of dividend-paying common stocks can decline when interest rates rise as fixed-income investments become more attractive to investors. This risk may be greater due to the current period of historically low interest rates. The Fund typically holds a limited number of stocks (generally 35 to 50). As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a large number of securities. 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 may be obtained here or from a financial advisor. Read it carefully before investing.

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