Ivy Funds - Ivy Small Cap Value Fund Quarterly Commentary

Quarterly Fund Commentary

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

Manager(s):
Matthew T. Norris, CFA

Market Sector Update
Various macroeconomic fears drove the markets down in the second quarter of 2010. The Russell 2000 Value Index, the most relevant index for small cap value investors, fell 10.6 percent. Performance was driven by a number of stocks that performed poorly during the quarter. Areas of relative strength were real estate and utilities, both sectors that offer high-dividend yields and help support stocks during weak market periods. The Fund was underrepresented in real estate and this contributed to the lagging performance. The weakest areas of the market were those with economic exposure such as retail, capital markets, and other consumer-facing areas. The Fund's best performers included technology names iGate Technology (1.56 percent of assets as of June 30, 2010) and Tibco Software (1.62 percent of assets on June 30, 2010); and also Liberty Media (0.87 percent of assets on June 30, 2010) in the entertainment space. Some of the Fund's worst performers included mining firm Quadra Mining (0.82 percent of assets on June 30, 2010) and aerospace parts supplier AAR Corporation (1.64 percent of assets as of June 30, 2010).

Portfolio Strategy
In our effort to capitalize on value for our investors, we employ a long-term focus on value investing, searching for companies that are trading 30 percent or more below our estimate of their intrinsic value. Companies are analyzed on the basis of normalized cash generation, among other features. Gaylord Entertainment (2.1 percent of assets as of June 30, 2010) owns a number of hotels nationwide, including four hotels that are used to host large conventions. One of their hotels is located in Nashville and was flooded in April, 2010. The hotel will be unusable until approximately December 2010. Between the lost revenue from the hotel and the expense to repair it, about nine months of corporate earnings will be eliminated. The stock reacted to the downside, falling from $35 to $25 in the week of the flood, down from an all-time high of $60. Our analysis shows the hotel repairs should be completed on time, and there should be no permanent loss of business from the event. Accordingly, the cash flows of the business will return to normal in time, and investors also have the support of the value of the hard assets' the land and buildings. We feel the company's intrinsic value is high than our invested price. The only thing required now is patience.

Outlook
The Fund's approach is to analyze individual companies to find opportunities such as Gaylord. We also employ top-down thinking to reduce portfolio risk. We think this approach will improve performance of the Small Cap Value Fund over time.

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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