Ivy Funds - Ivy Core Equity Fund Quarterly Commentary

Quarterly Fund Commentary

Ivy Core Equity Fund (prospectus)
June 30, 2010

Manager(s):
Gus C. Zinn, CFA
Erik R. Becker, CFA

Market Sector Update
During second quarter 2010, the Fund performed in line with the broader market. Materials, financials and energy sectors performed the worst during the quarter while utilities, technology, and consumer staples outpaced the market. However all 10 sectors reported negative returns. Economically-sensitive stocks declined substantially as investor confidence waned due to the global economic recovery. Early in the quarter we sold positions within the financials, industrial, and materials sectors while raising cash and investing more in stable growers to pare back portfolio risk. While these moves had positive effect, the portfolio still fell meaningfully as cash was the only true safe haven.

Portfolio Strategy
Our strategy continues to focus on companies that we believe have the opportunity to significantly exceed multi-year earnings forecasts and are in strong competitive positions. The composition of the portfolio has changed to emphasize more stable growth companies and industries as 12-to-24-month visibility on earnings in many cyclical areas has diminished. We look to identify stocks that are major beneficiaries of multi-year themes we view as underappreciated, as well as stocks with their own company-specific drivers for earnings outperformance. Currently, the most prominent themes include credit loss normalization in the financial sector, mobile computing adoption, energy services, and to a lesser extent rebounding consumer spending.

Outlook
We believe that near-term profits will surprise on the upside given reduced cost structures and healthy demand through the second quarter. However, market events over the past three months have led us to question the rate of recovery in global gross domestic product (GDP). The first event was a substantial rise in government bond yields in European nations. This occurred as investors questioned the creditworthiness of nations such as Greece, Spain, and Portugal that had run up large fiscal deficits in an attempt to spend their way out of recession. Second, the Chinese government moved to slow down inflation in property prices with a series of measures to avoid a U.S.-like property bubble. Third, the U.S. government launched an indictment against Goldman Sachs related to their actions in the financial crisis. This put the financial community and business leaders on notice that financial regulation would be aggressive and that it would have far reaching effects on profits, credit availability and potentially growth. Fourth, employment indicators began to stall in March and April. Finally, the dollar began an ascent against other major currencies to a level not seen since the height of the financial crisis. These events have highlighted risks in the current investment climate that could dampen consumer and business leader optimism.

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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