of this trend, Research asked four industry shales. I talked about the average being up

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1 2014 Supplement By Ed McCarthy, CFP to Research: Magazine Drilling for Profits The 2014 Oil & Gas Investment Roundup N ews on the U.S. energy front continues to be source to apply that technology. It hasn t been a group call for the E&P space. It s positive as the country moves toward energy independence. Since the oil and natural gas been very much a stock-picking call. In the past three exploration and production industry is a key component years, the right call has been to have been long in the companies that dominate the low-cost of this trend, Research asked four industry shales. I talked about the average being up experts for their views on the sector: 6.7% a year; that really masks a whole lot John Dowd, portfolio manager of the that s been going on within the group. Fidelity Select Energy Fund and Fidelity David Ginther, Ivy: As a whole, E&P Select Natural Resources Fund; companies were in line with the general David P. Ginther, CPA, senior vicemarket in the past year, but underperformed president, Ivy Investment Management significantly over the past two- and threecompany and portfolio manager, Ivy year periods. But within E&P, there was Energy Fund; a wide range of results overall with huge Robert Thummel, portfolio manager, outperformance from some companies and Tortoise Capital Advisors; and huge underperformance from other compa Jonathan Waghorn, co-manager of the Dowd nies. Overall, it was a period that highlightguinness Atkinson Global Energy Fund. ed stock selection and did not reward an approach that looked at the companies as a group. How did energy exploration & production (E&P) Robert Thummel, Tortoise: The stocks of U.S. oil and companies perform recently? John Dowd, Fidelity: The group as a whole was up, but natural gas producers had a very good 2013, with the it lagged the S&P 500 by a little bit. The total return for Tortoise North American Oil and Gas Producers Inthe S&P Exploration & Production (E&P) index was dex posting a 21% total return in The companies 28.77% last year, which underperformed the S&P 500, we focus on are those with significant operations in the which had a total return of 32.36%. If I look back over three premier oil basins (Bakken, Eagle Ford and Permthe last three years ending year-end 2013, they were up ian) and the Marcellus shale, a premier natural gas basin. The stock price of our largest holding with signifiabout 6.7% annually versus the S&P 500, which was up cant Permian production rose by 73% in Simi16.14%. That s the group. Within that group, there was a tremendous vari- larly, the stock prices of our two largest holdings with ance between the performance of the stocks that exposure to the Eagle Ford and Marcellus shales rose PRINTED COPY FOR PERSONAL READING ONLY. FOR in DISTRIBUTION. 52%, NOT respectively, The strong perbenefited from the application of unconventional oil 40% and and gas technology and those who didn t have the re- formance in each of these stocks was supported by solid APRIL 2014 RESEARCH: Guide to Oil & Gas Investing

2 2014 Research Guide to Oil & Gas Investing probably the biggest headwind that the industry is seeing as a whole. Ginther: We were surprised at the magnitude of the production growth in oil during that time. You really just had a hockey stick type of growth in production. We expected it to be strong, but the magnitude of the change was surprising. The main reason behind the explosion in production growth was the efficiency gains that E&P companies were able to achieve. As they got a better understanding of shale resources and shifted into development mode, it allowed them to be much more efficient. Production rates then came in much better than expected. The volatility in domestic crude oil prices also was a surprise, with wide swings in the domestic oil price. The differential between the domestic and international prices also grew significantly, as the infrastructure system was trying to catch up with the production growth. That reflected a mismatch in where the production was happening Did this performance differ from what and where you had the infrastructure to get you were expecting a year ago and, if it to market. so, why? Thummel: We had no significant surprisdowd: If you asked me three years ago was es last year. The total return of the index was I looking for this, the answer would have Ginther in line with our expectations, but the perforbeen no. I think I was surprised with most people that the U.S. would be able to grow produc- mance of certain stocks in the Permian, Eagle Ford and tion materially. But over the past year, the performance Marcellus exceeded our expectations. Horizontal drilling in the Permian basin uncovered of the group has really been playing out according to script, where the companies with the resources and with a new area with significant potential called the the inventory of good assets have been materially out- Wolfcamp shale, which is expected to accelerate production of oil in the Permian. Select oil and gas performing the others. If there has been a surprise, it s been the continued producers in the Eagle Ford and Marcellus shales bottlenecks emerging downstream. While we have seen were successful in increasing the expected amounts of a lot of production growth over the past three years, as I oil and gas they are able to produce from each well, noted before, the whole space is only up 6.7% per year. boosting rates of return. Waghorn: We were pleasantly surprised by the The producers as a whole have not benefited from the performance of the North American unconventional advent of this technology. Why is that? For natural gas, over the past three E&Ps, especially given the relatively low levels of natuyears, prices declined: The natural gas futures prices ral gas price in the U.S. on average in Our net asdropped about 10% over that timeframe. So while set value modeling indicated some significant value upsome E&P companies delivered lots of production side potential in the peer group at the start of the year, growth, not all of them were paid for it, because the and the delivery of that upside was aided by merger and commodity came under pressure. Costs have also risen acquisition (M&A) activity, shareholder activism and shareholder-friendly actions by some of the companies. over this timeframe. On the flip side, despite some exploration failures For oil, most of the benefit of the growth in oil production has gone to the downstream consumers. That in 2013, the international E&Ps still have lots of interwould be the refiners or the chemical companies that esting opportunities ahead, and we note that we now COPY FOR crude PERSONAL READING ONLY. NOT FOR DISTRIBUTION. very interesting valuation upside in some of areprinted benefiting from discounted oil prices in the see some U.S. The inability to move crude oil out of the U.S. is these companies. company fundamentals, which resulted in strong production growth. Jonathan Waghorn, Guinness Atkinson: We held a broad range of E&P companies in the fund during 2013, focusing on areas such as North American unconventionals, emerging markets, U.S. natural gas, Canadian tar sands and international natural gas. As a result, the group s performance was diversified. The best performers were focused on the North American unconventional activities with [some companies] delivering returns in excess of 50% for International E&Ps performed less well in 2013 and, while some were up in absolute terms, we also held some that were down in absolute terms over the year. This divergence in performance reflects the lack of interest in international exploration given the better growth opportunities in North American unconventional exploration in the market currently. RESEARCH: Guide to Oil & Gas Investing

3 2014 Research Guide to Oil & Gas Investing What energy trends are driving the E&P sector s business results and strategies, and why? make economic returns on many unconventional wells nor to fund the high levels of capital expenditure required to develop the unconventional reservoirs to their full extent in North America. Natural gas remains a wild card for 2014; early indications are that the natural gas rig count is not increasing, following the current cold-weatherinduced higher levels of natural gas price. We expect to see further asset divestments and companies focusing on their core assets and plays through 2014 and note that the asset market is quite heavily loaded to the sell side in the U.S. currently. We would also highlight the very attractive resourcebased valuation of many U.S. and international focused E&P companies and the fact that we believe that there could be further M&A activity in the sector; this is a very non-consensus view currently. Dowd: It s a balancing act. It continues to be a balance of technology vs. market opportunity. The technology continues to improve and the companies are generally getting better at increasing oil or gas production. We continue to see the productivity of wells improving either in terms of the total production yield per well, or in terms of the number of wells that you can position in a certain area of land. Over the past several years we ve been seeing the technology improve, so the companies are getting better and better at stripping as much of the natural resource out of the ground as they can. Ginther: The major trends are going to continue to be the shale formations and how production develops from those domestically. The E&P sector is very different domestically versus internationally. Growth is quite robust domestically but continuing to What potential upside do you see for struggle internationally. the E&P sector for the next 6, 12 or 18 On the domestic side, the E&P compamonths? nies are increasing efficiency and lowering Dowd: The potential for companies that are costs in the shale formations in the U.S., the low-cost producers remains really, redrilling better wells and drilling more effially strong. The low-cost producers in the Thummel ciently. Internationally, we think the growth Marcellus, the Permian, the Bakken and the is going to be more difficult and will involve higher Eagle Ford will continue to grow their margin advancosts, such as developments offshore. We think it s tage relative to peers. likely to be a continuation of what we ve been seeing At the end of the day, the U.S. E&P business has in recent years. moved from being one of the high-cost operators in Thummel: We believe the U.S. oil and gas production the world to one of the low-cost operators in the world. story is underappreciated by the market. Improvements Within the whole group, some of the companies are in drilling technologies are driving robust production materially lower cost than the average. growth of oil and natural gas out of North American That s significant that s something that the sector shales. For perspective, consider that U.S. crude oil pro- has not seen over the past 30 years. It really is different, duction is up 50% since 2008, topping 8 million barrels this production growth that we re seeing in the U.S. We per day by the end of 2013, and the pace of production could continue to see production surprise to the upside; we re likely to continue to see the transportation bottleis still gaining momentum. The benefits of an improving domestic oil and gas necks hinder the returns of the companies. But, on the flip side, these issues are now known by supply outlook spreads across the U.S. economy in the form of new jobs. An increase in U.S. oil production the market and are being addressed as quickly as posalso reduces the federal deficit and improves national sible. The MLP industry is investing north of $30 bilsecurity as the U.S. relies less on foreign counties to lion a year, expanding the oil and gas transportation infrastructure within the U.S. Those are big numbers, supply our oil. Waghorn: As ever, the key determinant is forward oil and it s resulting in differentials across the U.S. for oil price expectations, and we will be following with great shrinking significantly. Ginther: As always, it s not a group call with E&P interest the activity plans of the North American sector, given that five-year forward West Texas Intermediate companies. We re focused on stock picking within this PRINTED READING NOT DISTRIBUTION. grouponly. and think you llfor see quite a bit of difference (WTI) oil pricescopy have nowfor fallenpersonal to around $75/barrel. We believe that this oil price will not be sufficient to among companies, as you always do.

4 2014 Research Guide to Oil & Gas Investing All acreage is not created equal just because you re in a shale play doesn t mean you re in the right part of the shale play. Companies that secure long-life, lowcost acreage in shale formations will be the winners. We re also assuming that commodities prices are not going to be a tailwind for these companies. Successful companies are going to need to grow revenues and margins in another way than commodity-price inflation. The traits that we look for when making selections in the E&P group are: long-life, low-cost assets; accelerating production growth; rising productivity growth on the incremental wells that they are drilling; falling unit costs; strong reserve replacement; healthy balance sheets; strong management; and adequate access to get their product to market. Beyond that, prices probably are going to continue to be volatile as infrastructure struggles to keep up with production growth. Thummel: From where we sit, the future for North American producers looks bright, especially for producers with significant exposure to the Bakken, Eagle Ford, Permian, and Marcellus fields. We see a continuance of the robust oil and gas production growth in each basin. Typically, strong production growth is a positive for the E&P sector. There are a lot of developments in the shale basins that will dictate the pace of production growth. For the most part, the core areas of these four key basins have been delineated. Technology advancements continue to increase the volume of oil and gas that is recovered from each basin. Look what has happened already. U.S. oil production has risen from 5 million barrels per day just five years ago to averaging 7.5 million barrels per day in The U.S. Energy Information Administration projects a 24% increase in U.S. oil production to more than 9 million barrels per day by In addition, technology is driving efficiencies, resulting in lower costs to drill each well. For example, a producer in the Marcellus shale is using a 10-well pad that represents a new standard for operational efficiencies. Waghorn: This diverse sector has very diverse valuation positions and share price outcomes, in our opinion. On our assumption of $95/barrel WTI, $105/barrel Brent and $4.50/million cubic feet Henry Hub gas Waghorn there are a couple of holdings that have the potential to double as a result of production and free cash flow profiles being delivered. We note that the fund holdings are focused mostly on the P rather than the E of E&P, and hence high risk exploration successes or failures are unlikely to be material to the Guinness portfolio. We believe that these upsides could be crystalized in a month view. How do you expect the E&P sector to perform in the intermediate- and long-term? Ginther: We think it will be very similar to the shorterterm outlook, and we don t think there is likely to be a lot of change in the longer term. We never assume there will be commodityprice help, so we focus on the individual companies and their potential or options. We focus on stock selection and individual company performance. Thummel: We are just as optimistic about the longer-term outlook. Collectively, the top three oil basins are expected to grow crude oil production volumes by approximately 55% by 2020, which would represent about 60% of production out of the lower 48 states good news for drillers in these reservoirs. And gas production out of the Marcellus is expected to remain robust. Global demand for natural gas produced in the U.S. is expected to increase, as well. We expect natural gas will continue to displace coal as the fuel source to generate electricity. U.S. natural gas also is expected to be shipped internationally to fulfill rising demand in Europe and Asia. Waghorn: We see no reason why the E&P sector should not perform in the future broadly in line with its historical characteristics. The E&P sector has historically been higher return than the broader energy sector, albeit with higher volatility. The Guinness fund has delivered circa 15% per annum return over the last 15 years, while the MSCI World Energy Index has delivered circa 10% per annum; we would estimate that the E&P sector has therefore delivered somewhere around or just in excess of 15% per annum. On the expectation of steady increases in oil and natural gas prices, in line with inflation and maintaining a price on average through 2014 and 2015, we see a number PRINTED of the E&Ps COPY in the Guinness FOR PERSONAL Global Energy READING Fund sector ONLY. (and the NOT E&Ps specifically) FOR DISTRIBUTION. have a good chance similar global GDP intensity, we believe that the energy offering between 20% and 50% upside. In addition, of outperforming broader equity markets. RESEARCH: Guide to Oil & Gas Investing

5 2014 Research Guide to Oil & Gas Investing What potential risks should E&P-sectors investors monitor? Dowd: Looking at the sector as a whole, the risks are political both within the U.S. and outside of the U.S. The political risks in the U.S. would be increased regulation of oil and gas or changes in the tax code. Additionally, there s currently a ban on exporting oil from the U.S., and if that continues there will be an increasing drag on the industry. Over time, limitations on exports will increasingly impede the ability of the U.S. industry to The one thing that the industry will watch closely is the potential for a regulatory change that would allow crude oil exports by the U.S. risks compared with the past because of the increase in domestic production. Thummel: When investing in the E&P sector, you always have to keep your eye on commodity prices. We expect oil and natural gas prices to remain within a range that will support meaningful production growth from the most prolific North American basins. On the regulatory front, hydraulic fracturing is always a popular topic. The EPA is scheduled to publish a final report on its findings of hydraulic fracturing and its po- grow oil production. tential impact on drinking water Internationally, clearly there resources in The oil and are risks both to the upside and gas industry continues to improve the downside. There are risks that safety measures through increased oil prices decline, and there are disclosure and better well design. risks that growth in production Support for lifting the existing ban on exporting oil is strong, from Iraq or Libya or other countries pushes down oil prices. with energy and petrochemical There s also risk that the political industry heavyweights publicly instability in the Middle East gets calling for changing the law, citing worse and oil prices actually move robust production and a boost to higher. There s definitely volatility. trade. The oil industry also points I m trying to mitigate risks to falling oil prices in some parts by owning lower-cost companies of the country that could threaten that can grow in a flat-to-down investments in new drilling and commodity priced environment and [in the past] compa- Meanwhile, opponents of lift- David P. Ginther the jobs that go along with it. nies that were low-cost producers ing the ban predict that doing and reduced their cost structure and grew volume at the so would raise the price of gas for American consumers, while environmentalists fear that all this new oil is expense of the rest of the industry did very, very well. Ginther: The one thing that the industry will watch bad for the planet. In any case, we think it unlikely that closely is the potential for a regulatory change that President Obama will take any steps to relax current would allow crude oil exports by the U.S. It is a topic exportation rules in this mid-term election year. that s just starting to be debated among policymakers. Waghorn: There are continuous business risks for But if the law allowed crude exports from the U.S., that the E&P sector, and these can come in the form of would be a very positive thing for the E&P group. political, fiscal, environmental or regulatory actions as Production is growing fast but refining capacity for domestic crude generally is fixed. We re getting within one are not unduly concerned about specific E&P sector well as typical operational and macro-related risks. We to two years of bumping against a wall of what refiners can risks currently but note the operating environment can accept in domestic crude. Many people want a change in rapidly change for the sector with little or no warning. export policy to allow another outlet if we do hit that wall. Sometimes this is the result of political changes (e.g. If the law doesn t change, there could be extreme tax increases in the United Kingdom-North Sea) and volatility in domestic prices and possible significant sometimes this is the result of poor operational activities by the companies themselves, resulting in increased downside. We re also watching pipeline approval regulations, including Keystone XL, and the actions in several states to ban or closely regulate fracking. Gulf of Mexico). At the macro level, the biggest risk for levels of regulation (e.g. the Macondo blowout in the Internationally, political turmoil and the resulting the oil price and for the E&P sector would be the spontaneous ONLY. breakout NOT of world FOR peace DISTRIBUTION. and harmony; and we disruptions PRINTED in oil COPY production FOR also PERSONAL are significant READING risks. However, the U.S. is slightly more insulated from these see this as unlikely at the moment. (#81747) Reprinted with permission from Research Magazine by The National Underwriter Company doing business as Summit Professional Networks. All Rights Reserved. For more information about reprints from Research Magazine, visit PARS International Corp. at

6 IVY ENERGY FUND FUND PERFORMANCE Average Annual Total Returns (%) As of 06/30/2014 Ticker Inception Date 1-Year 3-Year 5-Year 10-Year Life Gross/Net Expenses Class A (NAV) IEYAX 04/3/ N/A /1.60 Class A (Load) IEYAX 04/3/ N/A /1.60 Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Please visit for the Fund s most recent month-end performance. Class A share performance, including sales charges, reflects the maximum applicable front-end sales load of 5.75%. Performance at net asset value (NAV) does not include the effect of sales charges. PORTFOLIO MANAGEMENT David P. Ginther, CPA Senior Vice President and Portfolio Manager 19 years in the industry 8 years with the Fund S&P 500 Index: an unmanaged index of common stocks that generally is representative of the U.S. stock market. S&P Commodity Producers Oil & Gas Exploration & Production Index: an unmanaged index that includes the largest publicly traded companies involved in the exploration and production of oil and gas around the world. Tortoise North American Oil and Gas Producers Index: a floatadjusted, capitalization-weighted index of North American energy companies primarily engaged in the production of crude oil, condensate, natural gas or natural gas liquids. It is not possible to invest directly in an index. Past performance is not a guarantee of future results. The opinions expressed in the article are those of Mr. Ginther and are current to the date of the article, and are subject to change due to market conditions or other factors. They are not intended as investment advice, nor are they intended to predict or project the performance of any investment product. Risk factors: As with any mutual fund, the value of the Fund s shares will change, and you could lose money on your investment. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. Investing in the energy sector can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments, and the cost assumed by energy companies in complying with environmental safety regulations. These and other risks are more fully described in the Fund s prospectus. Not all funds or fund classes may be offered at all broker/dealers. Through July 31, 2014, Ivy Investment Management Company (IICO), the Fund s investment manager, Ivy Funds Distributor, Inc. (IFDI), the Fund s distributor, and/or Waddell & Reed Services Company, doing business as WI Services Company (WISC), the Fund s transfer agent, have contractually agreed to reimburse sufficient management fees, 12b-1 fees and/or shareholder servicing fees to cap the total annual ordinary fund operating expenses for Class A shares at 1.60%. Prior to that date, the expense limitation may not be terminated by IICO, IFDI, WISC or the Board of Trustees. Diversification and asset allocation do not ensure a profit or protect against loss. They are methods to help manage risk. PRINTED COPY FOR PERSONAL READING ONLY. NOT FOR DISTRIBUTION. 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 Please read the prospectus or summary prospectus carefully before investing. NOT FDIC/NCUA INSURED MAY LOSE VALUE NO BANK GUARANTEE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY Ivy Funds Distributor, Inc TMF10986 (07/14)