Waddell & Reed

Quarterly Fund Commentary

Ivy Bond Fund (prospectus)
December 31, 2014

Chris Sebald, CFA
David Land, CFA
Thomas Houghton, CFA

Market Sector Update

  • While the fallout from low oil prices in the financial markets was particularly acute in energy, spreads overall in the corporate sector rose and excess returns across all subsectors in the corporate index were negative.
  • Lower global oil demand is in part rooted in slow growth in Europe and emerging markets. Europe continues to dance on the edge of recession, and emerging markets, particularly China, are ratcheting down growth as they reduce investment and migrate from export-led growth. Slower growth outside the U.S. has led to even more dramatic drops in global interest rates and inflation.
  • Despite the drop in oil, the Standard & Poor's (S&P) 500 reached an all-time high on Dec. 29, 2014. Interest rates hit a new year-to-date low and remained low even after markets recovered.
  • The Federal Reserve (Fed), recognizing the potential impacts of lower oil prices on inflation, lowered its long-term inflation expectations but maintained its forecast for the target funds rate to rise in 2015.

Portfolio Strategy

  • Corporate and other spreads widened in the quarter primarily on the decrease in oil. But most sectors outside of energy rebounded by the end of the quarter, even though oil prices continued their slide.
  • We reduced corporate holdings in the energy sector, particularly exploration and production companies.
  • We believe a further slide in oil prices will continue to negatively impact energy bonds bonds.
  • We took advantage of the wider spreads in mortgage-backed securities to add positions. We also increased bank and insurance company bonds while reducing our Treasury holdings.


  • We believe a lot is riding on where the price of oil shakes out. At the current price or lower, we believe defaults in the high-yield sector are likely to rise, and may do so fairly rapidly. There will surely be a consumer boost to the already healthy trend.
  • While growth is the most important determinant for interest rates, falling oil prices and their impact on inflation in the coming quarters will likely dampen the potential for any significant rise in rates.
  • Divergent growth among the U.S., Europe and emerging markets is driving diverging monetary policy. The U.S. is expected to tighten monetary policy while Europe, Japan and China will ease monetary policy in 2015. This is the first time in the current expansion that developed countries’ central bank policies will be at odds.
  • With the U.S. tightening, we expect higher volatility in stocks and highyield bonds along with somewhat rising interest rates. Within the investment grade market, the conditions are good for narrowing spreads in mortgage-backed securities and commercial mortgage-backed securities as supply is still very low in these sectors.
  • While volatility will likely rise and could impact the investment grade bond sectors as well during the year, we look for good returns in corporate bonds overall based on their attractive valuations and limited rise in interest rates.

The opinions expressed in this commentary are those of the Fund’s managers and are current through December 31, 2014. 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.

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