Ivy Funds - Ivy Tax Managed Equity Fund Quarterly Commentary

Quarterly Fund Commentary

Ivy Tax Managed Equity Fund (prospectus)
June 30, 2010

Manager(s):
Sarah C. Ross, CFA

Market Sector Update
United States equity markets experienced declines during the quarter as concerns regarding European sovereign debt and fears of a double-dip recession in the global economy pressured stocks. Second quarter marked the largest quarterly decline in equities since the last recession. High debt levels among many European countries and deteriorating credit quality of governments such as Greece and Spain called into question economic recovery. In addition, U.S. private sector employment recovery throughout 2010 has been slower than expected, putting pressure on growth expectations and equity markets. Cyclical sectors led the market drop as financials, materials and energy were the worst performing within the large-cap-growth market. More defensive telecomm, utilities and consumer staples sectors declined the least.

Portfolio Strategy
The Fund's pro-cyclical tilt hampered second quarter relative performance as economic growth prospects weakened during the quarter. However, we believe that earnings growth for high-quality, large-cap-growth companies will ultimately prove more sustainable than current market expectations assume. We continue to overweight technology, consumer discretionary and industrial companies. We believe structurally advantaged companies with innovative products and barriers to entry are particularly well positioned to outperform in the current slow growth environment. Firms that fit these characteristics will be able to grow earnings and gain market share, despite anemic gross domestic product (GDP) growth. Valuation of our large-cap-growth universe is particularly attractive today with free cash flow yields well above historical averages. Some of the most competitively advantaged businesses are trading at small premiums and in some cases at parity to businesses with less sustainable earnings. We are opportunistically taking advantage of attractive valuations of companies that meet our sustainable growth and profitability criteria.

Outlook
U.S. corporations are facing a number of headwinds including a weaker economic climate than previously expected, currency headwinds and tougher compares as the year progresses. Despite these headwinds we are not expecting a double-dip recession, but rather expect the U.S. economy to sustain low single-digit GDP growth. Corporate America has high levels of cash on the balance sheet and has partially deferred capital spending, investment and labor force growth. Unemployment may be slow to recover, but high levels of productivity indicate some job creation is likely to occur. In addition, corporate spending should gradually improve over time given low levels of capital expenditure and high cash balances. Finally, valuations of large-cap-growth stocks remain very attractive with investors pricing in some risk of a double dip.

Past performance is no guarantee of future results. The Ivy Funds are managed by Ivy Investment Management Company and distributed by its subsidiary, Ivy Funds Distributor, Inc. Waddell & Reed Financial, Inc., the ultimate parent company of Ivy Funds Distributor, Inc., acquired the investment advisor to the Ivy Funds in December 2002.

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Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus, or if available, a summary prospectus, containing this and other information for the Ivy Funds, call your financial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully before investing.