Ivy Funds - Ivy Small Cap Growth Fund Quarterly Commentary

Quarterly Fund Commentary

Ivy Small Cap Growth Fund (prospectus)
June 30, 2010

Manager(s):
Timothy J. Miller, CFA

Market Sector Update
The small-cap market started the second quarter in an uptrend but succumbed to the pressures from the Greek/European debt crisis and concerns over slowing growth in China. The correction was sharp. Small caps continue to outperform large caps, however, declining less in the second quarter and year to date. The growth component of the small-cap index declined less than value in the quarter, narrowing the gap for the year to date. The weakest sectors for the quarter were energy, consumer discretionary and health care. The most notable shift in performance for the quarter was a transition favoring higher quality growth stocks.

Portfolio Strategy
The industrials sector was the largest contributor to the Fund's performance for the quarter, generating an absolute gain for the period led by significant moves in Portfolio Recovery Associates (4.30 percent of assets as of June 30, 2010) and Ladish Co., Inc. (2.09 percent of assets as of June 30, 2010). Technology was the next best sector, aided by the acquisition of Fund holding CyberSource Corp. by Visa (CyberSource is no longer in the portfolio). Also performing well was OSI Systems (1.22 percent of assets as of June 30, 2010). Although the consumer discretionary and energy sectors were among the weakest in the index, the Fund's positions held up much better for the period. We scaled back the energy positions during the early part of the quarter to avoid the subsequent downdraft, and were buoyed by the steady performance of Core Laboratories (2.27 percent of assets as of June 30, 2010). A gain from Under Armour (3.06 percent of assets as of June 30, 2010) and the defensive nature of O'Reilly Automotive (3.09 percent of assets as of June 30, 2010) buffered the weakness in the consumer sector. On the negative side of the ledger, the financials underperformed due to weakness in Greenhill (2.05 percent of assets as of June 30, 2010) and the commercial banks, but the correction in these stocks more than discounts the near-term risks and undervalue the intermediate-term potential.

Outlook
The high-quality factor should continue to play out over the balance of this year due to the macro and regulatory uncertainties plaguing the markets. We feel the higher quality small caps are the larger companies with strong market positions, debt-free or low-debt balance sheets, and high returns on capital. Overall corporate earnings and cash flow should continue to be healthy but the concern over future revenue growth is justifiable. We think that many of our small cap growth companies have strong enough product cycles to get through any near-term economic stutter, and we will continue to favor those stocks and industries.

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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