Market Sector Update
- The high-yield sector saw a tightening of both spreads and yields for the first two months of Q2 ’15 but as headlines over the problems in Greece became front and center again as well as the continued slowdown China, tightening quickly turned to widening of spreads and yields.
- Despite the widening, high-yield spreads essentially ended the quarter unchanged at 550 basis points, as measured by the JP Morgan U.S. High-Yield Index. As a reference point, spreads were around 575 at the start of the year.
- The Fund continues to be overweight loans compared to its peers. As a result, this shortens the Fund’s duration, or its potential interest rate risk, versus the index.
- 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.
- It currently appears that the Federal Reserve (Fed) will raise its key benchmark rate later this year, likely in September or December, but possibly both.
- We do not expect a substantial increase in defaults across the sector. There are some distressed credits in the energy services space that are trading at extremely low prices, but we believe these are an exception to the overall health of the high-yield market.
- We believe that spreads of around 550 basis points at quarter end remain attractive relative to other fixed income alternatives. It is our view that, within fixed income, high-yield is the best-suited category in a rising rate environment.
- While we have selectively increased our holdings of energy credits, the Fund’s energy exposure remains well below its benchmark. The additions to the Fund were credits that we believe offer attractive returns with asset coverage even if oil prices fall.
The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 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.
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 fund carefully before investing. For a prospectus, or if available, a summary prospectus, containing this and other information for the mutual funds offered by Waddell & Reed, call your financial advisor or visit us online at www.waddell.com. Please read the prospectus or summary prospectus carefully before investing.