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    Quarterly Fund Commentary


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


    Manager(s):
    J. David Hillmeyer, CFA
    Daniela Mardarovici, CFA

    Market Sector Update

    • Donald Trump’s victory in the U.S. presidential election sent reverberations through the fixed income markets. His policy plans on fiscal stimulus, tax reforms and reduced regulations caused global interest rates to rise. Uncertainty remains about the potential impact from fiscal policy changes by the new administration. Credit spreads tightened with renewed hope for better economic growth.
    • The U.S. Federal Reserve (Fed) on Dec. 14 announced a 0.25 percentage point hike in the fed funds rate to 0.75%. Most members of the decision-making Federal Open Market Committee indicated there could be upside to their economic forecasts, which could mean a faster pace of rate hikes than now is expected
    • The Bank of Japan (BOJ) introduced a new policy framework in which it will control the short-term policy rate at -0.1% and the 10-year Japanese government bond yield at zero. This new policy underscores the BOJ’s reduction of its dependence on large-scale asset purchases. The policy and the global reflation trade have provided incentive to Japanese investors to sell yendenominated assets and reinvest in higher-yielding U.S. Treasuries.
    • The European Central Bank (ECB) extended its asset purchase program by nine months at a reduced rate of 60 billion euros per month. The ECB will do nothing to tighten monetary policies until its 2% inflation target is met, which is likely to be in the distant future.
    • India “demonetized” the local currency market to eliminate the underground economy, reduce counterfeit currency and curb corruption and criminal activity that was focused on the 500- and 1,000- rupee notes. Economic disruption was severe and led to a sharp selloff of local equities. We think the process will slow India’s economic growth.

    Portfolio Strategy

    • The Fund had a small positive return for the quarter (before the effect of sales charges), compared with a negative return of its blended benchmark index.
    • The outperformance primarily was because of the relatively shorter effective duration of the Fund versus the index. Global interest rates rose dramatically as the markets responded to the Trump election win with renewed hope of fiscal, regulatory and tax reform. The Fund’s exposure to the U.S. dollar also contributed to performance, as the yen, British pound and euro depreciated during the quarter by 13.6%, 4.8% and 6.4%, respectively.
    • We maintained a low-duration strategy during the quarter, as we believe it allows a higher degree of certainty about those companies in which we can invest. We also continued to focus on maintaining diversification in the Fund. We also continue to seek opportunities to make long-term investments in foreign currencies in certain emerging markets should they weaken versus the dollar.
    • We continued to hold a higher level of liquidity (“patient capital”) because of structural changes in the capital markets. We will be opportunistic in allocating that capital when dislocations in market arise.

    Outlook

    • We think strength in the dollar will depend on a variety of factors, including the potential for the Fed to become more hawkish while other central banks are on the sidelines; potential for major fiscal stimulus and regulatory rollbacks in the U.S.; and whether European and Japanese growth will prompt monetary tightening.
    • Attitudes to emerging markets are improving, as valuations are considered attractive and macro momentum is improving. Future U.S. global trade policy remains a concern.
    • Soft economic data from China suggests growth may have moderated. Investment remains an important driver of growth, so another round of stimulus may be coming. We think monetary policy will remain accommodative. If the flight to quality continues and the dollar appreciates, we think China’s central bank may offset it with currency depreciation.
    • We think realignment of global geopolitics needs to be re-evaluated. Russia may benefit from the potential lifting of economic sanctions and better U.S.- Russia relationships. Mexico, however, faces stiffer competition as Trump’s prodomestic manufacturing policy has led to cancelled projects there.
    • We believe longer U.S. Treasury rates will be more volatile and subject to market emotions about fiscal and monetary policies. The idea of a “lower for longer, no-growth environment” has flipped to expectations of higher global growth. We think monetary policy might trail if Trump is successful in enacting his agenda.
    • The U.S. budget deficit is increasing and is likely to continue to grow if Trump’s progrowth policies are enacted. We think Treasury supply will increase and be funded largely through Treasury Bill issues absorbed by new money market reforms as well as demand from Japanese investors searching for yield.

    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.

    Risk factors: \The value of the Fund's shares will change, and you could lose money on your investment. Although asset allocation among different sleeves and asset categories generally tends to limit risk and exposure to any one sleeve, the risk remains that the allocation of assets may skew toward a sleeve that performs poorly relative to the Fund's other sleeves, or to the market as a whole, which would result in the Fund performing poorly. While Ivy Investment Management Company (IICO) monitors the investments of Apollo Credit Management (Apollo) in addition to the overall management of the Fund, including rebalancing the Fund's target allocations, IICO and Apollo make investment decisions for their investment sleeves independently from one another. It is possible that the investment styles used by IICO or Apollo will not always complement each other, which could adversely affect the performance of the Fund. As a result, the Fund's aggregate exposure to a particular industry or group of industries, or to a single issuer, could unintentionally be larger or smaller than intended. Investment risks associated with investing in real estate securities, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes and differences in real estate market values. 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. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans 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. Not all funds or fund classes may be offered at all broker/dealers.

    IVY INVESTMENTSSMrefers 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 may be obtained here or from a financial advisor. Read it carefully before investing.

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