Quarterly Fund Commentary

Ivy Real Estate Securities Fund (prospectus)
June 30, 2010

Manager(s):
Joseph R. Betlej, CFA
Lowell R. Bolken

Market Sector Update
Fear was reintroduced into the market during the second quarter of 2010 as numerous issues surfaced, including sovereign debt, a European banking crisis, potential cuts in government spending, anticipated tax increases, and slowing global growth expectations. Investors clearly expressed their preference for risk aversion in the broad selling of equity securities, including real estate investment trusts (REITs). Volatility increased and overall investor conviction went down. Additional evidence of the fear factor could be found in the widening of credit spreads in the fixed-income markets. Continued strengthening of the U.S. economy and job recovery will be required to support an improvement in the overall health of the commercial real estate markets. Defensive property types, such as apartments, health care and self-storage companies, showed relatively better performance for the quarter. Some of the companies with exposure to Europe, including hotels and warehouses, were some of the worst performers. Other highly leveraged companies that had enjoyed recent strong performance due to increased availability of capital also underperformed as the market became more sensitive to risk.

Portfolio Strategy
The Fund's exposure to higher quality companies and the addition of more defensive market positions were beneficial to performance as investors became increasingly nervous. Best opportunities are with those companies that have seen current earnings drop well below normalized earnings; these include hotels and apartments. Elsewhere, REITs providing high-tech data warehouse buildings are of interest to companies that are attempting to become more efficient in the challenging operating environment. High-quality regional malls are appealing to retail tenants attempting to increase their exposure to better profitability typically found in high-sales malls. While cash levels in the Fund remain within normal operating range, we are underweight apartments, self-storage operators and shopping centers, either due to valuation concerns or weakened fundamentals. However, weights in apartments and regional malls were increased during the quarter. The Fund exited exposure to commercial mortgage REITs due to shrinking net interest margins.

Outlook
In light of concerns about the timing of a rebound in the economy and, further, in real estate fundamentals, we remain cautious. We believe volatility will continue as appetite for risk has become variable with macro events that surround our market. With this uncertainty, we expect a focus on those companies with better-than-average balance sheets that exhibit earnings stability or growth going into mid-cycle recovery. Further recovery will be led by the outlook for jobs, where we are encouraged by recent strength in leading indicators for jobs, which improves our long-term outlook into 2011. Meanwhile, we remain constructive on REITs due to their current pricing relative to long-term value potential. Decreasing cost of capital, particularly debt, has allowed real estate valuations to stabilize and, in some cases, improve. Diligence, however, is necessary if we begin to see the various macro influences affecting confidence in future economic growth, potentially affecting capital pricing. Despite this backdrop, REITs have continued to access both the public equity and debt markets due to their improved balance sheets. Better financial capacity results in a lower cost of capital for REITs, making them strong acquirers of assets in today's markets. While cautious, we feel the sector has strong prospects in the months ahead as the second stage of a real estate recovery is beginning to unfold.