Quarterly Fund Commentary

Ivy European Opportunities Fund (prospectus)
June 30, 2010

Manager(s):
Thomas Mengel

Market Sector Update
Global markets were volatile during the second quarter of 2010, as government debt, politics, and mixed economic signals left investors on guard and with little direction. Concerns over sovereign credit risk driven by Greece continued to roil the markets, and heightened tensions between North and South Korea just added fuel to the uncertainty and volatility. Spain, Italy and peripheral countries, including Ireland and Portugal, continue to weigh on Europe's economic recovery. The United Kingdom, which remains vulnerable due to high deficits, replaced its Prime Minister with a more conservative leader during the quarter, which could prove negative for the markets. Yet another hurdle for the United Kingdom is that credit remains fairly tight. Banks know they have more debt to write down, so they're keeping tight fist on lending. However, Germany demonstrated growth in exports and France benefited from higher private consumption, so the picture was not entirely bleak.

Portfolio Strategy
The Fund's performance during the quarter slightly trailed that of its benchmark. Both declined due to negative absolute performance across all market sectors. Relative performance was helped most by the Fund's slight overweight and better stock selection among energy and industrials firms. The Fund also had no exposure to utilities, which restrained the benchmark and had been a source of weakness for the Fund during the first quarter of 2010. Relative performance was also hampered by the Fund's health care holdings. The Fund remains overweight in technology firms, which struggled during the quarter but we think will soon see better days. In terms of strategy during the second quarter, it was business as usual. The Fund is now more aggressively positioned and resides on the smaller end of the capitalization range; fully 25 percent of fund assets is held in small- and mid-cap companies. We continue to look for opportunities in this end of the capitalization range, with a goal of getting about one-half of the portfolio invested in small- to mid-cap companies. We also have, as a result of currency weakness, hedged part of the Fund's currency exposure. In geographical terms, we continue to overweight Germany and Switzerland, due to their positive economic outlook, and continue to underweight Italy and Spain, given the debt and economic challenges they are currently facing.

Outlook
Our outlook remains largely unchanged from the previous quarter. We still see a mixed picture for many European economies. The sovereign debt crisis facing Greece is a dark cloud that continues to hover over other European markets, although the European Union appears to be holding together. Some other countries have begun to reign in their fiscal stimulus, which could create some difficulties. That said, Central banks are keeping rates low and inflation remains benign, which are positive signs. We don't believe we will see a deflationary environment develop. Private consumption remains low across Europe because of unemployment, which we believe has not yet peaked. Due to the Greek turmoil and high budget deficits, with think it is likely that European currencies may remain under pressure for some time to come. We remain cautiously optimistic about the months ahead, and will continue to look for companies that are exposed to the emerging middle class.