Waddell & Reed

Quarterly Fund Commentary

WRA Municipal High Income Fund (prospectus)
June 30, 2014

Michael J. Walls

Market Sector Update

  • We continued to see solid inflows into municipal bond funds in the second quarter of 2014. Although nowhere near the record inflows of 2012 they were solid and consistently positive. This was not unexpected after the high level of outflows in 2013.
  • With higher tax rates moving into 2014, demand for high-yield municipal bonds should remain strong. We believe issuance will continue to hover near record lows, which should be positive for municipal bond prices.
  • With the solid inflows in the first quarter of 2014, we have become less constructive on the high-yield municipal space ;however, we still see it as very attractive relative to other fixed income asset classes. We believe this attractiveness will allow returns in the space to remain stable.
  • Headlines about Puerto Rico, especially Puerto Rico Electric Power Authority bonds, have caused extreme amounts of volatility; however, we believe that funds that 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 that affect states and local governments and offer more attractive yields for our investors.
  • Going forward, we have begun to get somewhat more cautious and will look for opportunities in bonds with more defensive structures as interest rates rise. We believe these bonds represent greater value and will better protect the Fund from the potential of slightly higher rates as growth picks up.



  • In the near term, we believe volatility in the market will pick up as investors focus on the negative headlines out of Puerto Rico. It is important for investors to realize that prudent managers diversify across states and sectors and would not put too many eggs in one basket.
  • 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 June 30, 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 higherrated 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.waddell.com. Please read the prospectus or summary prospectus carefully before investing.

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