Quarterly Fund Commentary
Ivy Municipal High Income Fund
September 30, 2013
Michael J. Walls
Market Sector Update
- Large municipal bond fund outflows continued to accelerate in the third quarter. Year to date municipal bond funds have had net outflows of $40.4 billion with high yield municipal funds losing just under $7 billion. To date, municipal high yield funds have lost 14.1% of their total assets compared to 13.7% and 9.8% in 2010 and 2008, respectively.
- With higher tax rates moving into 2014, we believe demand for high yield municipal bonds should remain strong, however, we expect there will be headwinds in the months to come.
- Although we believe the worst of the selling in the asset class is behind us, municipal fund managers may be forced into additional bond sales if outflows pick back up. This likely would negatively affect bond prices.
- With the significant selloff in the second and third quarters of 2013 we have become very constructive on the high yield municipal space and are much more bullish moving forward. We are now seeing yields on municipal bonds that in some cases are higher than taxable equivalents.
- Recent headlines in the municipal market have created choppy waters. However, we believe funds that focus on quality credits should provide high networth investors with attractive levels of income over the long term.
- We will continue to purchase deals we feel offer above-market yields based on the underlying credit fundamentals of the projects or municipalities.
- We continue to favor revenue bonds over tax-backed debt. Revenue bonds, in our view, provide diversification from the general tax issues, which affect states and local governments and offer more attractive yields for our investors.
- Going forward, the majority of our purchases will focus on longer-dated coupon bonds trading at discounts. We believe these bonds represent greater value and better upside as the talk of higher interest rates, subside and investors realize the relative value in the municipal bond market.
- In the near term, we believe the market will be volatile as investors review their portfolio mix between fixed income and equities, while potential negative headlines continue to intimidate investors.
- We believe investors will continue to search for tax-exempt yield due to higher tax rates which should benefit the municipal market. In our view, patient investors may be rewarded over the long haul.
The opinions expressed in this commentary are those of the Fund’s manager and are current through Sept. 30, 2013. The manager’s views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results.
Risk Factors. As with any mutual fund, the value of the Fund’s shares will change and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher- rated bonds. 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. The Fund may include a significant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax. 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.
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 us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully before investing.