Waddell & Reed

Quarterly Fund Commentary


Ivy Bond Fund (prospectus)
December 31, 2013


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

Market Sector Update

  • The economy continued to show signs of strength. Housing, along with improved employment and increasing business investment, is providing a lift to the economy. This sets the stage for a growth rate that we feel could reach 3% or higher in 2014.
  • Inflation continues to run below policymaker expectations, and is surprising investors. This helps the markets, as stable inflation typically lifts returns of risky assets such as stocks and credit.
  • Interest rates rose late in the quarter as expectations for improved growth increased. Investors also firmed up expectations about how the Federal Reserve would withdraw from quantitative easing. The quarter closed with the 10-year Treasury yielding just over 3%, the highest level in more than two years.
  • The Fed announced that it would reduce its bond buying program by $10 billion from $85 billion to $75 billion a month. Investors for the most part anticipated a change in the policy, and the announced adjustment did not have a significant impact on rates.
  • Stocks and higher-risk assets such as lower-rated corporate bonds continued to rise through year-end.

Portfolio Strategy

  • We shortened duration in the Fund, anticipating the likelihood of rising interest rates and an improved economy.
  • We maintained our overweight in credit and various non-government bond sectors. We were primarily overweight on corporate bonds in financials and transportation. Overall, we reduced weights in corporate bonds from the maximum exposure held earlier in the year, as credit spreads have tightened to the lowest level this year.

Outlook

  • We expect growth to strengthen in 2014. Growth is increasing because of improvements in housing, business, employment, and the waning of fiscal restraint that weighed heavily on the economy in 2013.
  • We anticipate that interest rates will rise slightly in 2014, but we do not expect a significant increase in the 10- year Treasury yield over the gross domestic product (GDP) growth rate.
  • We believe the Fed will continue to pull back from quantitative easing as the economy improves. The Fed, however, will strengthen the commitment to providing forward guidance on shortterm rates. We think that the Fed’s forward guidance significantly influences long-term interest rates and will prevent rates from rising significantly.
  • Interest rates are now higher than inflation, creating some value in fixedincome securities. Among nongovernment bonds, however, nothing is cheap. Corporate spreads have narrowed so much that further improvement could only occur if spreads revisited all-time lows.
  • Interest-sensitive sectors of the fixed income market had the widest variation in performance. Commercial mortgage-backed securities narrowed the least, as the rising cost of funds will likely begin to hurt commercial real estate economics. On the other hand, financials, did particularly well.

The opinions expressed in this commentary are those of the Fund’s managers and are current through Dec. 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 financial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully before investing.

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