Waddell & Reed

Quarterly Fund Commentary


Ivy Municipal High Income Fund (prospectus)
March 31, 2013


Manager(s):
Michael J. Walls

Market Sector Update

  • Municipal bond flows continued into the first quarter of 2013, albeit at a slower pace than in 2012. Ongoing downgrades of Puerto Rico caused continued pressure on prices of the territory's outstanding debt.
  • With higher tax rates moving into 2013, demand for high yield municipal bonds should remain strong, however we believe there will be headwinds in the months to come. Puerto Rico plans additional issuance in the form of a large refinancing which could, in the short term, put pressure on municipal bond prices. We also expect the level of issuance to increase in the second half of 2013, which could potentially affect bond prices if retail investors reallocate to equities and reduce their exposure to fixed income.
  • Overall, supply in the municipal bond market should continue to remain within norms, with the majority of bond issuance originating as refinancing of current debt and not net new money.
  • Although we see choppy waters ahead for the next few months, high-net-worth investors with patience should be rewarded.


Portfolio Strategy

  • 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 as 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 defensive structures. We believe these bonds, which offer above-market coupons and are priced to shorter calls, represent greater value and better downside protection in a rising interest rate environment. We also have started to add floating rate notes into the portfolio which we believe will protect from potential rises in interest rates.


Outlook

  • In the near term, we believe the market will be volatile as investors review their portfolio mix of fixed income and equities.
  • 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 should be rewarded over the long haul.

 

The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 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.

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