Quarterly Fund Commentary

Ivy Mortgage Securities Fund (prospectus)
June 30, 2010

Manager(s):
Chris Sebald, CFA
David Land, CFA

Market Sector Update
Heightened sensitivity to risk returned in the second quarter of 2010 across all asset classes, propelling bonds higher. Stocks and riskier assets fell, credit market spreads widened, and a drop in bond yields brought gains to the bond market. Mortgage-backed securities (MBS) performed relatively well for the quarter. Alternatively, spreads on all non-government bonds widened on the quarter as they underperformed government securities. Several developments combined to stir up investor worries. Government solvency issues in Europe pushed credit default spreads wider on most European countries, with default risk for some countries exceeding levels reached at the peak of the financial crisis in late 2008. Meanwhile, austerity measures proposed by European governments have the potential to make already severely slow growth conditions even worse. In the United States, the economy continued to grow, but most signs pointed to a falloff in the growth rate, particularly near the end of the quarter. The impact of the federal economic stimulus is clearly ebbing, which is most evident in the housing market. May new home sales fell significantly, in no small part because the federal tax credit program ended. While jobs recorded some welcome increases, most of the boost came from temporary hiring by the Census Bureau. As if the negative news surrounding the economic recovery wasn't enough, the Gulf oil spill and its yet-to-be-quantified negative economic impact certainly was enough to lower the appetite for risk. Inflation remains contained, well below where the market feared it would be earlier this year. However, with concerns that growth will lessen in the future, the risk of deflation is on the horizon, and is already being felt in some European countries.

Portfolio Strategy
We reduced our asset-backed securities exposure during the quarter to lower our risk exposure. Housing data appears soft to us, and we can't rule out further declines in home prices. Although prices for MBS are at all-time highs, we continue to view them as a safe haven against further disruptions in the housing market. Investor demand for MBS remains strong with limited supply; prepayments remain low as borrowers are unable to refinance because of underwater loans and other credit issues.

Outlook
We continue to expect that interest rates won't rise significantly in the near term. Inflation remains under control, and we believe it will likely fall in the months ahead. There's even a chance that long-term interest rates could come down further if risk flares up or the economy generates more downbeat news. We are becoming increasingly convinced this recovery will be on the very slow side for growth. Leading indicators imply we are past the peak in growth, and it is our guess that a significant slowdown is very likely in the coming quarters. We further believe housing prices are apt to fall somewhat in the coming year or two and are preparing the Fund to withstand the possibility of a surprise decline in home prices and its impact on financials, consumers and the cyclical recovery. Although we remain concerned about risk in the near term, manufactured housing securities appear attractive, with little or no credit risk, attractive yield and fundamentally sound credit profiles.