TURBULENCE, PERSPECTIVE AND OPPORTUNITY

VALUATIONS AND : MAY OVERLOOK KEY FACTORS IN ASSET SELECTION

History shows that many investors simply follow the herd or latch onto a trend. They often chase the asset class that performed well in the past, rather than focusing on the future. Now some have added a pursuit of low volatility as a means to select investments. Individuals with a -term investment goal, such as funding retirement, may not succeed with such a strategy.

Valuations and behavior Treasury , in general may be considered overvalued. At Ivy Funds, we think equities overall remain attractively Conversely, if the equities earnings yield is higher relative to priced, especially when compared with their historic averages bonds, equities may be considered undervalued. That is the case and with other asset classes. U.S. monetary policy continues to in the current market environment. The S&P 500 Index has an be supportive of risky assets such as equities and we think it is earnings yield of about 7%, compared with less than 2% yield likely to remain so for the near future. Conversely, we think for the 10-year U.S. Treasury note. The resulting positive spread fixed-income securities carry risks that may become more in favor of equities — more than 500 basis points — is the apparent when rates eventually begin to rise. highest in almost 40 years.

Despite these indicators, investors in long-term mutual funds The data suggest that it may be beneficial to target equities when the continue to focus on fixed-income investments. In the nine earnings yield of the S&P 500 Index is shown to be higher than that months ended Sept. 30, 2012, fixed-income funds had inflows of the 10-year Treasury. In the past half-century, there have been four of more than $289 billion while equities funds had inflows of distinct long-term cyclical periods in which the positive spread on $49 billion — including outflows of $2.2 billion in domestic equity yields versus fixed-income yields peaked and then eventually equities funds.1 A concern about risk, volatility or protecting hit a trough. Those four periods are shown in the green segments of principal may be behind many of these investment decisions. the chart that follows. During those periods, the average cumulative return for equities (as represented by the S&P 500 Index) was Fixed-income investments also are a frequent choice as an 366%. By comparison, it was 73% for fixed income (as represented income source. In the current market environment, equities offer a by the 10-year U.S. Treasury note). In other words, a hypothetical meaningful alternative. Corporate profitability overall remains high investment in the S&P 500 Index had a return five times greater and balance sheets continue to show strength. Many companies than fixed income by investing when the positive spread on equity again are choosing to use their cash for payments. The earnings yields had peaked versus fixed income yields. estimated 2012 of U.S. equities in early October was 2%, compared with the 10-year Treasury yield of 1.7%.2 HOW MIGHT THE MILLENNIALS One way to assess relative valuations of equities and fixed-income investments is to compare their earnings yields. AFFECT EQUITIES? That might involve a comparison of individual securities in each The millennial generation — those born in 1980 asset class or representative indexes for each asset class overall. through the early 2000s — represents a coming wave The earnings yield on an investment — also known as its of potential investors. The transfer of an earnings-price ratio — is calculated by dividing the earnings estimated $41 trillion in baby boomer wealth to the per share by the . millennials, or their children, could benefit stocks as The current difference between the earnings yields on equities younger people reinvest in equities. (Source: Center on and fixed income is extreme from a historical standpoint. When Wealth and Philanthropy at Boston College) the earnings yield on equities is less than the 10-year U.S. IVY FUNDS

EQUITIES EARNINGS YIELD SPREAD AT 40-YEAR HIGH VERSUS FIXED INCOME (03/31/1954 — 03/31/2012)

8 I Yield spread of equities to fixed income; period of peak to trough 7 I Yield spread of equities to fixed income; period of trough to peak 6 5 4 3 2 TS

IN 1 PO 0 SIS

BA -1 -2 -3 -4 -5 -54 -56 -58 -60 -62 -64 -66 -68 -70 -72 -74 -76 -78 -80 -82 -84 -8 6 -8 8 -9 0 -9 2 -9 4 -9 6 -9 8 -0 0 -0 2 -0 4 -0 6 -0 8 -1 0 -1 2 Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar

Past performance is not a guarantee of future results. Difference in equities earnings yields versus fixed-income earnings yields, using the yield on the S&P 500 Index as a proxy for equities and yield on the 10-year U.S. Treasury note as a proxy for fixed income. Periods above zero indicate equity earnings yields exceeded fixed-income yields and the positive spread of that difference; periods below zero indicate fixed-income yields exceeded equity earnings yields and the negative spread for equity earnings yields. The S&P 500 Index is an unmanaged index of common stocks that generally is considered to represent the U.S. . Investments cannot be made directly in an index. Source: Haver Analytics

EQUITIES AND FIXED-INCOME YIELDS AGAIN SHOW WIDE DIVERGENCE (09/30/1954 – 09/30/2012) 16% 10-Year Treasury Note Yield at Constant Maturity S&P 500 Index Composite: Earnings Yield 14%

12%

10%

8%

6%

4%

2%

0% Sep-54 Sep-56 Sep-58 Sep-60 Sep-62 Sep-64 Sep-66 Sep-68 Sep-70 Sep-72 Sep-74 Sep-76 Sep-78 Sep-80 Sep-82 Sep-84 Sep-86 Sep-88 Sep-90 Sep-92 Sep-94 Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12

Past performance is not a guarantee of future results. The S&P 500 Index is an unmanaged index of common stocks that generally is considered to represent the U.S. stock market. Investments cannot be made directly in an index. Sources: U.S. Federal Reserve, Standard & Poor’s

Assessing the risks The Federal Reserve in late October said it expected interest Although equities typically are more risky than fixed-income rates to stay at current historically low levels into at least investments, we think some equities may represent better value mid-2015. In our view, rates at these levels mean fixed-income in the current market environment because of the high securities carry risks that may become more apparent when valuations of bonds now versus their historical levels. While rates eventually begin to rise. That would include interest-rate equities may appear to be undervalued now, it also is possible risk, meaning the risk that lower-yielding bonds will be less that equities may lose additional value. valuable as rates rise. TREASURY YIELD AT LOWEST POINT IN MORE THAN 50 YEARS (03/01/1962 – 10/31/2012)

18%

16%

14%

12%

10%

8%

6%

4%

2%

0% Mar-62 Mar-64 Mar-66 Mar-68 Mar-70 Mar-72 Mar-74 Mar-76 Mar-78 Mar-80 Mar-82 Mar-84 Mar-86 Mar-88 Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12

Past performance is not a guarantee of future results. Data shows 10-year U.S. Treasury note yield. Source: Bloomberg

We think we are in a period in which monetary and fiscal policy • The volatility of U.S. equities declined dramatically in 1999 responses will provoke investor behavior in a way that will be at the height of the tech stock boom. The standard deviation favorable for global equity markets. of the S&P 500 Index that year was about 13% — indicating relatively low volatility for equities. The dot-com bubble burst A look at recent market volatility just one year later and the S&P 500 Index lost a cumulative Low volatility in a highly popular asset class has indicated in 37.6% by the end of 2002. the past that the asset class may have become too expensive when compared to other choices. Consider the performance of • Conversely, equities volatility increased significantly at the start the U.S. bond market. In an environment in which interest rates of the global financial crisis in 2008. In the year that began on already are very low, the yields on investment-grade bonds again Sept. 15, 2008 — the day Lehman Bros. failed — the standard have set record lows in recent months. deviation of the S&P 500 Index was up to 54.2%. Then, in the three years that ended on Sept. 14, 2012, the index gained a For example, the yield on the benchmark 10-year U.S. Treasury cumulative 48.7%. During the same three years, the Barclays note fell below 1.5 percent in July and then rose to only 1.7% U.S. Aggregate Bond Index had a standard deviation of 9.2% by late October. For comparison, from 1992 through 2010, the and a cumulative return of 16.6%. Based on this data, a 10-year Treasury average yield was around 5%. It has not been hypothetical investment in the S&P 500 Index had a three- above 3% since the summer of 2011.3 year return that was about three times that of one in the Barclays U.S. Aggregate Bond Index. The low yields in bonds have resulted in high fixed-income valuations. Bond market volatility has reached historic lows as History thus suggests that simply avoiding volatility may not those valuations have continued to climb. When equities showed always be the right thing for investors. a similar pattern of low volatility and high valuations, index performance suggests some investors may not have benefitted Past performance is not a guarantee of future results. Conditions and global market factors that existed at the time of these examples may not represent current conditions, such as the Federal Reserve’s zero over longer periods. Consider these examples: interest rate policy anchoring Treasury yields, or the effects of expiring tax breaks and stimulus measures after Dec. 31, 2012.

1 – Source: Strategic Insight 2 – Sources: Credit Suisse, U.S. Federal Reserve 3 – Source: U.S. Federal Reserve IVY FUNDS

WHY IVY FUNDS?

Ivy Funds offers investment strategies to help investors best meet their long-term goals. Our approach seeks to deliver highly competitive, long-term results. We recognize that, as the global economy evolves, it creates new opportunities. Through our investment process and global, in-person research, we seek to cover the investment opportunities created around the world.

Past performance is not a guarantee of future results. The opinions expressed in this article are those of the Ivy Funds and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Dec. 1, 2012, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. The S&P 500 Index is an unmanaged index of common stocks that generally is considered to represent the U.S. stock market. The Barclays U.S. Aggregate Bond Index is a -weighted index, representing most U.S.-traded investment grade bonds. Standard deviation is a statistical measure that shows the range of historical returns; it is an indicator of volatility.

Consider all factors. Fixed-income securities are subject to interest-rate risk and, as such, the of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Dividend-paying investments may not experience the same price appreciation as non-dividend-paying instruments. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets.

Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus, or if available, a summary prospectus, containing this and other information for the Ivy Funds, call your financial advisor or visit www.ivyfunds.com. Please read the prospectus or summary prospectus carefully before investing.

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