Waddell & Reed

Quarterly Fund Commentary


Ivy Bond Fund (prospectus)
March 31, 2013


Manager(s):
Thomas Houghton, CFA
David Land, CFA
Chris Sebald, CFA

Market Sector Update

  • Consumer spending has increased, home prices are on the rise and new home sales and housing starts are up. Additionally, we are seeing more steady employment data. Unemployment claims, which are a leading indicator of economic growth, hit a five-year low during the quarter.
  • The Federal Reserve (Fed) is still concerned, despite improvements in the economy, and continues its accommodative policy to spur growth. The 10-year Treasury rose in the first quarter, rising almost 30 basis points by the middle of March, only to end the quarter less than 10 basis points higher than where it started the year.
  • Macro concerns outside of the U.S. such as Europe’s deepening recession, China’s slow growth and the Cyprus bank crisis influenced the markets, reminding us that Europe’s debt and banking problems are far from over.
  • In the U.S. credit markets, the strongest performers were financials, which were fundamentally impacted by easy Fed policy and rising home prices.


Portfolio Strategy

  • Given the outlook and improving trends in the first quarter, we decided to increase our credit exposure and raised corporate holdings by 5%. We see opportunities in the commercial mortgage-backed securities, insurance, transportation, energy and communications spaces.
  • We reduced exposure to agency mortgage-backed securities and Treasuries and slightly increased the portfolio’s duration as interest rates rose during the quarter.


Outlook

  • While we remain encouraged by economic progress in the U.S., we are also cautious about the possibility of a repeat summer slowdown. Over the past three years, the economy has experienced a slowdown from the second quarter through the summer.
  • We are cautious that gains can be extended—especially considering that the effects of fiscal constraint and tax increases will likely begin to materialize in the economy—but comforted that prospects of the downside will be more limited due to the strength of the housing recovery.
  • Treasury yields are likely to remain range-bound, around two percent. This would be higher than the lows of last summer, and reflects an improved economic outlook, but is far from a return to normal.
  • We have near-term concerns about the strength of the markets witnessed in the first quarter. However, we think the combination of low but improving economic growth and the Fed’s aggressive policies to keep interest rates low will continue to compel investors to seek yield and cause nongovernment spreads to tighten by the end of the year.
  • While stocks have done well and have begun attracting new investments in mutual funds, bond funds have also been gaining investments. We don’t see evidence of a great rotation from bonds to stocks and do not expect it in the current environment. We believe we would need much higher growth and inflation to frighten bond investors from their current investment path.

 

The opinions expressed in this commentary are those of the Fund’s managers and are current through March 31, 2013. 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 f nancial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully i before investing.

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