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    Quarterly Fund Commentary

    Ivy High Income Opportunities Fund (prospectus)
    December 31, 2015

    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.

    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.


    • 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.


    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. 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.

    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.

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