Market Sector Update
- The high-yield sector saw negative
returns in the opening weeks of the year,
but investor sentiment turned favorable
after the European Central Bank (ECB)
launched its quantitative easing bondbuying
program on 1/21/15. In February,
we saw more of a “risk-on” environment
in the market.
- Higher-quality, longer duration credits
outperformed lower-quality credits
during the quarter. Higher quality, longer
duration credits benefited from the 10-
year Treasury rate falling from 2.17% at
the start of the year to 1.92% on
- The Fund’s exposure to lower-quality
credits, which have higher yields, and
being overweight relative to peers in
loans, detracted from performance
during the quarter. Energy, where we
were underweight, also performed well,
hampering Fund performance.
- Performance benefited from our
overweight exposure to the retail sector,
which was the best performing sector
during the quarter according to the JP
Morgan High Yield Index. Our
positioning reflects our view about the
strength of the U.S. consumer.
- Our investment process is based on
bottoms-up research of the individual
opportunities. We seek good risk/reward
characteristics, particularly related to
companies that we believe the market
does not understand or which generate
outsize yield related to their risk.
- We believe that credit selection is the
basis for above-average performance
through a credit cycle and believe it to
be preferable versus attempting to time
the market or place macro bets.
- While we have increased our exposure
to some energy credits, the Fund’s
energy exposure remains well below its
benchmark. Generally, it is our view
that valuations in the sector have not
become attractive enough to merit
substantially increasing our energy
- We are favoring firms that are U.S.-
based and do business primarily in the
U.S. to avoid foreign exchange issues.
- Speculation about Federal Reserve
(Fed) policy will continue to be an
issue in the market. With the removal
of patient language in the Fed
statement (3/18/15), we currently
expect one Fed rate hike this year.
Without signs of significant inflation
risks on the horizon, we believe the
Fed will remain accommodative to
capital markets for the foreseeable
- We don’t think credit spreads around
550 basis points at quarter end look
too stretched. It is our view that, within
fixed income, high-yield is the bestsuited
category to perform in a risingrate
- As we have said previously, we do not
foresee a wave of defaults on the
immediate horizon. If oil prices do
remain exceptionally low for an
extended period, we believe most of
the energy-related defaults would not
occur until late 2016 or early 2017.
However, we do not currently expect
this to occur.
The opinions expressed in this commentary are those of the Fund’s managers and are current through March 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 rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Loans (including loan assignments, loan
participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject
to restrictions on resale and sometimes trade infrequently on the secondary market. These and other risks are more fully described in the Fund's prospectus. Not all funds or fund classes may be offered
at all broker/dealers.
Investors should consider the investment objectives, risks, charges and expenses of a portfolio and the variable insurance product carefully before investing. The portfolio and variable
insurance product prospectuses contain this and other information, available by calling your financial advisor, visiting www.ivyfunds.com or contacting the applicable insurance company.
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