Waddell & Reed

Quarterly Fund Commentary

Ivy High Income Fund (prospectus)
March 31, 2015

Chad Gunther

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 3/31/15.
  • 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.

Portfolio Strategy

  • 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 holdings.
  • 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 future.
  • 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 environment.
  • 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. Please read the prospectuses or summary prospectuses carefully before investing.

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