Quarterly Fund Commentary

Ivy International Balanced Fund (prospectus)
June 30, 2010

Manager(s):
John C. Maxwell, CFA

Market Sector Update
Our blended index was down a little more than 7.5 percent. In addition to falling asset prices, currencies provided a headwind of less than 3 percent as the U.S. dollar strengthened against most international currencies. Bottom line, only the least risky assets such as cash and higher quality sovereign debt performed well in the quarter. The Fund underperformed due to heavy weightings in equities--between 65 and 70 percent through the quarter--and corporate bonds. Sovereign debt, politics and policies roiled the markets during the quarter. Greek debt is trading like junk and spreads on Spanish and Portuguese debt widened throughout the quarter. The European Union appears to be holding. Three major countries--Japan, the United Kingdom and Australia--made prime ministers changes. The United Kingdom chose a more conservative leader, Australia replaced its prime minister due to a proposed tax scheme on resource companies, and Japan made its seemingly annual change at the top. China continues to be on a tightening track, though the resumption of yuan revaluation was welcomed by the market at the end of the quarter. Looming global financial regulation, the BP oil spill, slower U.S. economic data and North Korea committing an act of war against South Korea all made for a tough quarter for riskier assets. We believe the threat and likelihood of increased government involvement in business and the markets has not been higher in the last 30 years. Regime uncertainty leads to lower multiples, which is exactly what has happened--stocks are cheap. We believe they are not, however, priced for a double-dip recession.

Portfolio Strategy
While performance was not great, we believe the Fund is well positioned. Stocks appear more attractively priced than debt. While it is rare for the dividend yield of the broader market to exceed the yield on 10-year sovereign debt, today this is the case in virtually all major developed markets. Because of this, our emphasis on strong and believable dividend yield has never been higher in our stock selection. Within the fixed-income portion of the fund we continue to see value in high-quality corporate debt rather than lower yielding, high-quality sovereigns. Bottom line, at this point we see stocks and corporate bonds as inexpensive and believe they present strong relative-value opportunities.

Outlook
We no longer place a high probability on global growth exceeding current expectations; while it is possible, recent economic data and the move to austerity around the world are risks. We are increasingly concerned about government mismanagement of the recovery. Therefore, we are adopting a more consensus outlook along the lines of moderate growth in the developed world with strong growth in the emerging world. At this point we believe a V-shaped recovery and double dip seem similarly likely. In a moderate growth world, current valuations are reasonable and should lead to positive returns. Investor exposure to low-yielding, short-duration bonds and cash remains high when compared to history across the developed markets. We think it makes increasing sense for investors to switch out of these low-yielding, capital-preservation instruments to higher return opportunities. For the long term, we continue to believe that the emerging populations in countries like China, India, Russia and Brazil will continue to try to create a standard of living closer to ours. To accomplish this, they will require vast amounts of infrastructure and increasingly productive economies. These trends should drive consumer-facing companies serving these markets and infrastructure companies. We remain focused on solid dividend yields and have been increasing our emphasis there. As always we will continue to buy stock in companies that demonstrate strong cash generation, less leveraged balance sheets and solid opportunities for growth.