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    Quarterly Fund Commentary


    Ivy High Income Fund (prospectus)
    December 31, 2015


    Manager(s):
    Chad Gunther

    Market Sector Update

    • Continued weakness in commodity prices, namely oil; the first U.S. Federal Reserve (Fed) rate hike in seven years; outflows in the asset class; a risk-off mentality in the investor base; and concerns over liquidity after the shuttering of a distressed-debt focused fund all contributed to a significant widening in spreads and yields during the quarter. Spreads on the BOFA Merrill Lynch Master High Yield Index saw a widening of 122 basis points from November 4 to December 31, ending the year at a 695 basis point spread.
    • The high-yield asset class ended 2015 with a loss of -4.6% according to the Fund’s benchmark, its first negative annual return in a non-recessionary period. 2015 returns were heavily dragged down by energy and metals/mining and to a lesser extent utilities and chemicals. Returns by ratings saw an enormous dispersion with BB, B and CCC-rated bonds providing losses of -1.04%, -5.0% and -15.02%, respectively.
    • New issue activity was negligible in December and was the lowest since December 2011. For seven months now, new issue activity in the high-yield space has remained subdued. New issue volume totaled $293 billion for 2015, representing an 18% year-over-year decline from last year’s $356 billion.

    Portfolio Strategy

    • We ended the third quarter with an approximate 2% cash allocation, which rose to about 7.5% by year end. Volatility and uncertainty in the credit markets reached a fever pitch in the month of December. The risk-off sentiment that hit the market in the fourth quarter also had a negative impact on the portfolio and our performance.
    • The Fund underperformed the benchmark for the quarter. Contributors to relative underperformance were investments in specialty retail, department stores, services and software. Retail was hit hard as unseasonably warm weather and soft traffic trends resulted in disappointing results. Also contributing to underperformance was our exposure to second lien loans.
    • On a positive note, our underweight allocation to the energy sector helped offset losses as well as being underweight to the utility sector.

    Outlook

    • We expect volatility and uncertainty regarding commodity prices, global recession fears, liquidity fears and Fed rate hikes to continue in 2016. As of December 31, 2015, these market dynamics have created a rating and sector bifurcation within the asset class that can be seen when comparing the average yields on BB rated bonds at 6.49% versus average yields on CCC rated bonds at 17.68% -- an approximate 11.20% differential.
    • Recent economic data is pointing to continued slowing in manufacturing activity; there are few signs of inflation; companies continue to struggle to exhibit top-line growth; and instability in China continues to weigh on the markets. Given this environment, we think the Fed could have a hard time making the case for any additional increases throughout 2016.
    • Given all of these uncertainties, we believe it is prudent to maintain a higher cash balance going forward as well as to maintain a more balanced portfolio in regards to liquidity and risk.
    • Our goal of finding businesses that offer the best risk-adjusted return characteristics will continue as it is our belief that bottom-up fundamental credit analysis should produce better relative performance in both up and down credit cycles.

    The opinions expressed in this commentary are those of the Fund’s manager and are current through December 31, 2015. The manager’s 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.

    The BofA Merrill Lynch U.S. High Yield Index tracks the performance of U.S. dollar-denominated, below investment-grade corporate debt issued in the U.S. domestic market. It is not possible to invest directly in an index.

    Risk Factors. 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 fund carefully before investing. For a prospectus, or if available a summary prospectus, containing this and other information for the Ivy Funds, call your f nancial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully i before investing.

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