Market Sector Update
- The quarter was marked by two extremes driven predominately by investor attitudes toward monetary policy.
- At the beginning of the quarter, the absolute level of interest rates decreased, credit spreads tightened and price-to-earnings multiples expanded as investor optimism for low rates, cheap money and the lack of alternatives resulted in increased risk appetite.
- However, in May, the Federal Reserve (Fed) surprised the market by outlining a framework to reduce quantitative easing faster than the market was anticipating. As a result, investors repositioned, causing interest rates on Treasuries to spike, credit spreads to widen and equity risk aversion to increase.
- This is a credit fund and our tenets about the type of companies in which we invest remain consistent.
- We use a bottoms-up approach with an emphasis on security selection. We continue to seek out investments in companies that we believe have strong business models, and we believe the strong fundamentals will result in improved credit. When making our investment in companies we look to invest in the part of the capital structure that we believe has the most favorable risk-adjusted returns and attractive relative value.
- We strive to be opportunistic and deploy capital when it is the most advantageous. In this past quarter we saw more dislocation in the bond market, than we did in the loan market so we incrementally adjusted our allocations to take advantage of the weaker pricing in the bond market.
- Although the Fed announcement of tapering was negative for asset prices, we view the reason for tapering – an improving economic outlook – as a positive fundamental sign for the credit markets. In general, an improving economic environment is positive for corporate profitability, which should allow for companies to improve creditworthiness and reduce the risk of default and principal impairment.
- We believe that if the central bank is correct, fundamentals will strengthen and it will result in a benign default environment for the short to intermediate term.
- Prospectively, we view the increased yield from both the underlying Treasury increasing as well as the spread widening, as increasing compensation for similar risk compared with what investors were receiving just months ago.
- We continue to believe an improving economic environment bodes well for credit investing.
The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 2013. The manager’s views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Any securities or sectors mentioned are based on what the managers feel may be newsworthy and may or may not reflect holdings in this portfolio. It is not intended to represent that an investment in these securities or sectors was or will be profitable. Past performance is no guarantee of future results.
Risk Factors. The price of the Fund’s shares will fluctuate with market conditions and other factors. Fund shares are not guaranteed or endorsed by any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation. Closed-end funds frequently trade at a discount from their net asset values (NAVs), which may increase an investor’s risk of loss. At the time of sale, shares may have a market price that is below NAV, and may be worth less than the original investment. There is no assurance that the Fund will meet its investment objective.
Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than with higher-rated bonds. Loan participations carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loan participations may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. The Fund’s use of leverage may result in special risks and can magnify the effects of any losses. IVH also carries additional risks, including, but not limited to, market discount risk, derivatives risk, duration risk, issuer risk, interest rate risk, prepayment risk, loan risk, credit risk, swap risk, liquidity risk, foreign exposure risk, emerging markets risk,and non-diversification risk For a more complete description of these and other risks, please see the Fund’s webpage at www.ivyfunds.com.
An investment in the Fund is not appropriate for all investors and is not intended to be a complete investment program. The Fund is designed as a long-term investment and not as a trading vehicle.
Ivy Investment Management Company (IICO) serves as the Fund’s investment adviser. IICO is a wholly-owned subsidiary of Waddell & Reed Financial, Inc.
The Fund is a closed-end exchange traded investment company. This material is presented only to provide information and is not intended as investment advice or recommendations for trading purposes. Closed-end funds, unlike open-end funds, are not continuously offered. After the initial public offering, shares of closed-end funds are sold on the open market through a stock exchange. Investment policies, management fees, risks other than those mentioned above, and other matters of interest to prospective investors may be found in the closed-end fund prospectus used in its initial public offering. For additional information, contact the Ivy Funds Sales Desk at 866.263.1985.