Waddell & Reed

Quarterly Fund Commentary

Ivy Municipal High Income Fund (prospectus)
March 31, 2014

Michael J. Walls

Market Sector Update

  • The large municipal bond fund outflows which occurred in 2013 did not continue into the first quarter of 2014. After record redemptions from mutual funds in 2013 the first quarter of 2014 was much more benign with flows turning slightly positive.
  • With higher tax rates moving into 2014, we expect demand for high yield municipal bonds to remain strong. We believe issuance will continue to hover near record lows which should be positive for municipal bond prices.
  • 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 would most likely negatively affect bond prices.
  • With the significant sell-off in the last three 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 some instances of municipal bond yields that are higher than taxable equivalents.
  • Recent headlines in the municipal market have created choppy waters, however, funds which focus on quality credits should provide high net worth investors with attractive levels of income over the long term.


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 longer dated coupon bonds trading at discounts. We believe these bonds represent greater value and better upside as the talk of higher interest rates subsides and investors realize the relative value in the municipal bond market.



  • In the near term, we believe volatility in the market will recede as investors move past the negative headlines and focus on tax advantage investing with higher tax rates in the years to come.
  • 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, 2014. 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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