Apollo Multi-Asset Fund

Helping investors solve the "yield conundrum"

August 11, 2016
Ivy Apollo Multi-Asset Income Fund


Story Highlights

  • The Fund combines global reach, well-defined strategies and access to nontraditional credit securities.
  • We believe the Total Return Strategy Sleeve is a clear differentiator in the marketplace.
  • We think longer-dated U.S. Treasury rates are likely to be volatile and subject to market emotions about fiscal and monetary policies.

Interest rates are stuck at historically low levels and even turning negative in several countries outside the U.S.

As a result, many income-seeking investors are looking for new and nontraditional ways to generate income for their portfolios. But they face a difficult choice: Invest in lower-risk, lower-yield securities that may not provide the desired income over time or step up to higher-yielding securities that carry higher risk. We believe investors may benefit from a diversified approach to address this “yield conundrum,” including allocations to the entire yield spectrum of traditional, nontraditional and alternative strategies.

The yield conundrum

In our view, many investors in the last several years have not just taken risk with fixed income, but they have taken the wrong types of risk. By chasing yield to generate income, they also have been chasing duration and credit risk. In simple terms, duration is based on yield and maturity, and reflects a bond’s vulnerability to rising interest rates. Credit risk is the risk that a bond issuer will not be able to repay its debts; the greater the credit risk, the higher the yield.

In general, we think investors instead should consider taking on a degree of illiquidity risk, or the risk based on a lack of marketability of an investment that cannot be bought or sold quickly. Illiquid securities can open additional options within the world of fixed-income choices.

A potential solution

The Ivy Apollo Multi-Asset Income Fund is designed to help investors pursue income in today’s complex markets by combining global reach, well-defined strategies and access to nontraditional credit securities. Such securities typically are not available in a mutual fund.

The Fund offers diversified access to alternative incomeproducing assets as well as traditional investment via a “sleeve” allocation to four investment strategies. In creating the portfolio, the managers target a 50/50 split between fixed income and equities including dividend-paying stocks, global real estate securities, investment-grade bonds, high yield bonds and nontraditional credit securities.

We believe the Total Return Strategy Sleeve is a differentiating factor in the marketplace. It provides investors with access in the Fund to the entire breadth of the credit markets, including some nontraditional credit securities — that may not have been accessible to all investors in the past. For example, the sleeve’s subadvisor, Apollo Credit Management, can explore the market for nontraditional opportunities or partner with banks to lend money to smaller companies or underwrite loans for a select entity — all as part of seeking to generate attractive yield while keeping duration low. As with the other components of the Fund, this sleeve is a long-only strategy. The managers do not pursue derivative-oriented transactions.

Our market outlook

We think the global outlook is characterized by two opposing forces. Activity in the U.S. suggests some further firming ahead, but the results of the U.K.’s referendum on membership in the European Union — the so-called “Brexit” vote — sent shock waves through the financial markets. We believe there is a renewed risk of an economic slowdown and financial volatility. Brexit also has raised concerns about wider trends towards nationalism and protectionism.

In addition, we think longer-dated U.S. Treasury rates are likely to be more volatile and subject to market emotions the market's opinions and response to fiscal and monetary policies. The decline in Treasury yields is not following a conventional path and we do not think it is based on U.S. economic fundamentals. In a sense, we think the long-term U.S. rates imply more about the fragility of Europe and Japan than about the U.S.

We now expect the U.S. Federal Reserve to continue to normalize interest rates over time, but at a slower pace. That view gained further credibility after the Fed’s July meeting, when it decided to make no change in short-term rates.

The Fund includes a Global Real Estate Strategy Sleeve, and we think real estate fundamentals remain healthy across most of the globe. However, we think U.K. real estate will be negatively affected by the Brexit vote and the uncertainty that it has generated. In other regions, occupancies and rents are holding or improving in most markets, while supply has rebounded to more normal levels. We think the current fundamental outlook means global real estate companies can produce earnings growth in the high-to-mid single digits in 2016.

In general, we continue to seek opportunities to reduce the volatility in the Fund. We maintain a low-duration strategy because we believe that allows a higher degree of certainty in our portfolio holdings. We continue to look for opportunities to allocate capital when we find what we consider to be dislocations in the market.

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Past performance is not a guarantee of future results.The opinions expressed are those of the Fund’s portfolio managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through August 2016, are subject to change based on market conditions or other factors, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

Diversification does not guarantee a profit or protect against loss in a declining market. It is a method to manage risk.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Although asset allocation among different sleeves and asset categories generally tends to limit risk and exposure to any one sleeve, the risk remains that the allocation of assets may skew toward a sleeve that performs poorly relative to the Fund’s other sleeves, or to the market as a whole, which would result in the Fund performing poorly. While Ivy Investment Management Company (IICO) monitors the investments of Apollo Credit Management, LLC (Apollo) and LaSalle Investment Management Securities, LLC (LaSalle) in addition to the overall management of the Fund, including rebalancing the Fund’s target allocations, IICO, Apollo and LaSalle make investment decisions for their investment sleeves independently from one another. It is possible that the investment styles used by IICO, Apollo or LaSalle will not always complement each other, which could adversely affect the performance of the Fund. As a result, the Fund’s aggregate exposure to a particular industry or group of industries, or to a single issuer, could unintentionally be larger or smaller than intended. 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. Investment risks associated with investing in real estate securities, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes and differences in real estate market values. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. 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.

IVY INVESTMENTS℠ refers to the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds, and those financial services offered by its affiliates

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