Quarterly Fund Commentary
Chris Sebald, CFA
David Land, CFA
Thomas Houghton, CFA
Market Sector Update
- Interest rates rose in the second quarter, driving returns on bonds negative for the first time since 2013. The 10-year Treasury yield rose 43 basis points during the quarter. The rise was driven by improving growth expectations in Europe and the U.S., and the likelihood of a Federal Reserve (Fed) rate hike later this year.
- Greece will remain a wildcard for markets in the near-term, pressuring stocks and likely credit spreads. However, the response should be much less negative than in 2011 and 2012, when the market faced the risk of a Greek default. Monetary policy is much more accommodative now in the European Union, and the core European banking system has been able to reduce its exposure to Greek and other peripheral country risks.
- Supply is certainly a concern in the corporate credit market weighing corporate bonds relative to Treasuries. Industrial companies continue to issue debt, buy back stock and increase the financial leverage of their companies.
- Corporate bond spreads, according to the Barclays Corporate Credit Index, are now 46 basis points wider compared to last year at this time.
- The Fund’s exposure to the corporate sector declined about 1% and most of the activity in the Fund during the quarter was centered on corporate bonds. Issuance was very strong and we participated in several attractively priced new issues, particularly in the banking, pipeline, utility and healthcare sectors.
- We added to exposure in the communications sector to take advantage of merger and acquisitionrelated spread widening. We sold positions in real estate investment trust (REIT) bonds. Although we continue to like the fundamentals in the real estate space, we are concerned about liquidity in this sector.
- We also sold several airline enhanced equipment trust certificate (EETC) positions. We also continue to like the fundamentals in this space longer term, but we are concerned about near-term volatility as capacity discipline appears to be waning a bit. We also sold some positions in the banking sector.
- The Fund’s duration relative to its index slipped a bit during the quarter. Some of this was driven by the extension of the duration of the index. We’ve also allowed cash to build up in the Fund in anticipation of future volatility. This has also lowered the Fund’s duration relative to the index.
- We continue to expect the U.S. economy to improve, but the growth trajectory will still be within the bounds of the post-financial crisis economy, which is closer to 2% long term. We believe the age demographic shifts and debt overhang in the U.S. will continue to be headwinds over the next decade.
- In the near-term, we believe employment has stabilized, and the consumer is responding to lower gas prices and the strengthening employment outlook. Housing and commercial real estate markets overall continue to generate steady gains. Except for still weak inflation, this is the backdrop the Fed is looking for to raise interest rates.
- Despite our more rosy view of the economy, we’ve entered a phase of increased volatility in the markets.
- The Fed is raising rates, the European Central Bank is easing its policy, and the Greek debt crisis is a reminder that Europe’s debt problems have only been delayed and masked by aggressive monetary policy. The China stock market, after doubling in just 12 months, is in bear market territory.
- Any one of these factors could have been a cause for more volatility. For bonds we also focus on the signs that we are in the maturing phase of the credit cycle where higher debt levels, particularly in high-yield bonds, don’t generally get offset with higher cash flow to afford the debt and leverage ratios to fall.
The opinions expressed in this commentary are those of the Fund’s managers and are current through June 30, 2015. The managers’ 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. Fixed-income securities are subject to interest-rate risk and, as such, the net asset value of the fund may fall as interest rate rise. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus..
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.