Waddell & Reed

Quarterly Fund Commentary

Ivy Limited-Term Bond Fund (prospectus)
December 31, 2015

Susan K. Regan

Market Sector Update

  • The Federal Reserve (Fed) delivered on its promise to start raising interest rates in December 2015. The bond market was well prepared for the increase and it showed little reaction following the announcement. The tightening cycle has begun. The pace of future rate hikes is now a major focus for the bond market.
  • Fourth quarter gross domestic product is expected to be just 1%. Oil prices have not yet stabilized. China’s growth has slowed dramatically, and much of the Eurozone is in or near recession. There is a clear divergence in the policies of the Fed and other central banks around the world.
  • Corporate bonds have been very popular with investors for several years. Annual corporate issuance has reached record highs recently, as investors demand yield and issuers continue to supply bonds in this low interest rate environment. Bonds have helped to fund mergers, acquisitions, dividend increases and stock repurchases. Most of these activities are not bond investor “friendly,” however, generally leading to increased leverage on corporate balance sheets and deteriorating credit ratings.
  • These activities reinforce our view that we are much nearer the end of the credit cycle than the beginning. The appeal of corporate bonds now seems to be fading, with spreads to U.S. Treasuries widening and liquidity concerns increasingly on the minds of investors.

Portfolio Strategy

  • Our portfolio duration is neutral to the benchmark and we anticipate keeping it neutral. Should the Fed begin surprising the market with more frequent hikes than expected, we may take a defensive position and shorten duration.
  • We have a slight barbell strategy in place, with an overweight in 0-3 years, an underweight in 3-5 years and a small allocation in the 5-10 year maturity range. We began this strategy in late 2014.
  • We reduced credit exposure slightly and increased investments in both shortduration residential and commercial mortgage-backed securities during the quarter.
  • We will continue to look to add more mortgage exposure, being careful to avoid mortgages that add much duration extension risk. This is a process best undertaken over time so that we continue to add mortgages at higher yields.


  • We expect the Fed to be gradual in its pace of rate hikes in 2016. A very gradual path of two to three hikes of 25 basis points this year should not derail the economy and should be tolerated well by the market, as long as the economy grows like it did in 2015.
  • Declines in oil/other commodities are destabilizing many parts of the economy and could be very deflationary, if they persist. Crude oil prices fell 20% in 4Q. Companies in energy and energy-related sectors are struggling in this environment. While the Fed has said these declines are transitory, prolonged drops in these commodities could keep inflation very low for longer and may keep the Fed from fully pursuing its intended tightening cycle.
  • Many analysts believe investment grade corporate bond issuance will continue to be robust. Investor appetite for corporate bonds continues to be quite strong, even with all the concerns about liquidity.
  • The U.S. bond market, especially U.S. Treasuries, should continue to be a safe haven for investors. A strong dollar and higher interest rates than in other developed markets have kept foreign investors interested in our market. Geopolitical tensions will keep the flight-to-quality trade alive and well in the bond market.
  • The volatility we saw in the market in 2015 will continue as market participants assess domestic and international data points and try to ascertain whether and when the Fed will engage in its next rate hike.

The opinions expressed in this commentary are those of the Portfolio's managers and are current through Dec. 31, 2015. The manager's view is 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 fund, the value of the Portfolio's shares will change, and you could lose money on your investment. An investment in the Portfolio 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 Portfolio may fall as interest rate rise. These and other risks are more fully described in the Portfolio'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 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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