Quarterly Fund Commentary
Chris Sebald, CFA
David Land, CFA
Thomas Houghton, CFA
Market Sector Update
- Concerns about a global growth slowdown that gripped the markets in the third quarter subsided rather quickly, despite further declines in commodity markets. These concerns have faded not because economies have gotten better, but primarily because they haven't gotten worse.
- Most of the economic data in the U.S. is still disappointing. However, the U.S. continues to chug along with decent employment growth, supportive housing growth and strong auto sales when compared to the performance of the past couple years.
- After more than two years of preparing markets for higher interest rates, the U.S. Federal Reserve (Fed) at last felt strong enough about the prospects for growth and inflation that it decided to raise the fed funds target rate. The environment doesn’t exactly paint a picture of a runaway strong market or economy that needs Fed restraint via tighter policy. But the Fed clearly wanted to get started with rate increases.
- Stocks rebounded in the quarter but corporate credit didn't, primarily because credit -- especially high-yield credit -- is much more exposed to commodities and energy prices.
- With the investment-grade credit markets stabilizing in the fourth quarter, we shifted our exposure in corporates. We increased the weighting in the financials sector, primarily in banks, and further reduced exposure to industrials, especially in energy.
- The energy sector, and Master Limited Partnership (MLP) bond prices in particular, continued to be driven by the falling price of crude oil. The decline comes despite actions by many of these companies to improve their balance sheets and financial profiles.
- We think these sectors will continue to track oil prices. As the pressure to pump more oil from the Middle East continues to rise, we believe there could be more downside.
- We believe economic growth in the U.S. will remain near the current level. With weaker data recently in business sentiment, industrial production and existing home sales, we don’t expect a positive surprise in gross domestic product growth for the fourth quarter.
- We think interest rates will remain relatively low and the yield curve will continue to flatten. The U.S. trade-weighted dollar rose in the quarter. If the Fed continues to raise rates, we think the strengthening dollar is likely to be a headwind for growth in the coming year.
- Our biggest concern for 2016 is how high credit defaults may rise in the high-yield market and how much wider this will pressure spreads in high yield and investment grade. After five years of low and falling high-yield corporate bond defaults and rising credit ratings, mining and energy sectors have provided the fodder for higher defaults and ratings downgrades on the back of plunging commodities prices.
- In our view, it is unusual to be entering such a late stage of the corporate credit cycle with the Fed just beginning to tighten monetary policy. We think this and other factors will mean "fits and starts" for Fed policy as it tries to normalize interest rates.
- A playbook for this investment market is difficult to create, based on past experience. Corporate credit looks cheap if we don't enter a recession in the next couple of years. But the volatility of oil prices makes our exposure to credit more likely to be restrained in the near term.
The opinions expressed in this commentary are those of the Fund's managers and are current through Dec. 31, 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.