Apollo Multi-Asset Fund

Helping investors solve the "yield conundrum"

August 11, 2016
Ivy Apollo Multi-Asset Income Fund

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Story Highlights

  • Investors expect the Fed to raise rates in December -- the first hike since December 2015.
  • The Funds reached their one-year anniversary on Oct. 1, 2016.
  • We think longer U.S. Treasury rates will be more volatile, based on uncertainty about fiscal and monetary policies.

Investors widely expect the U.S. Federal Reserve (Fed) to increase interest rates at its December meeting, which would mark the first rate hike since December 2015.

Forecasts for rate hikes have changed frequently since that move in 2015, based on an unsettled market environment in the U.S. and globally.

If rates do move higher as expected, low-yielding securities — those viewed by most investors as the “safest” since they are deemed the most likely to be repaid — still face interest rate risk. That’s the risk that higher interest rates will reduce the value of lower-yielding securities. The highest-yielding securities, by contrast, may present unacceptably high risk to some investors.

Taken together, these factors mean many income-seeking investors face difficult portfolio decisions now. We continue to think investors may want to consider the Ivy Apollo products as a potential solution to this “yield conundrum.” The Funds combine multiple strategies or multiple asset classes within a single fund.

Recap of the process

The Funds reached their one-year anniversary on Oct. 1, 2016. They share an investment objective that seeks to provide a high level of current income with a secondary objective of capital appreciation.

Ivy Apollo Multi-Asset Income Fund targets a 50/50 split between fixed income and equities, including dividend-paying stocks, global real estate securities, investment-grade bonds, high yield bonds and non-traditional credit securities. The Fund pursues opportunities through four investment sleeves, offering a diversified combination of equities and fixed income.

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Ivy Apollo Strategic Income Fund goes beyond single-sector fixed income funds. It seeks to capture the return opportunities and risk mitigation potential of a diversified mix of fixed-income securities across a range of factors, including credit, liquidity and complexity. The Fund combines sleeves ofthree complementary fixed-income strategies into a single fund.

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We believe the Total Return Strategy Sleeve is a key differentiating factor for these Funds. It provides investors with access to the full breadth of the credit markets, including some nontraditional credit securities. For example, subadvisor Apollo Credit Management can explore the market for nontraditional opportunities or partner with banks to lend money to smaller companies or underwrite loans for a select entity — all as part of seeking to generate attractive yield while keeping duration low. As with the other sleeves, this is a long-only strategy and does not pursue derivative-oriented transactions.

Market outlook

Risk aversion related to emerging markets has been consistently declining this year. Attitudes to emerging markets are improving, based on valuations that are considered attractive, improving macro momentum and a range-bound U.S. dollar. We are looking for opportunities to make investments in foreign currencies in certain emerging markets should they weaken versus the dollar.

We think longer U.S. Treasury rates will be more volatile and subject to market emotions regarding fiscal and monetary policies. The dramatic grab for safe, long-term duration securities has seen global long-term rates decline dramatically.

The notable decline in Treasury yields is not following a conventional path and we do not believe it is based on U.S. economic fundamentals. In a sense, we think long-term U.S. rates are saying more about the fragility of Europe and Japan than about the U.S. In addition, markets are expecting the U.S. Federal Reserve to again raise interest rates, perhaps as early as December, and then take a slower trajectory to future rate hikes than its past guidance had indicated.

We continue to hold a higher level of liquidity in the Funds because of ongoing structural changes in the capital markets. Wall Street dealer’s incentives to carry high inventory levels of corporate bonds have been reduced by higher capital requirements, making those bonds more expensive to hold. As a result, market liquidity has been reduced and we think there are more opportunities for dislocations in corporate bonds ahead. Those dislocations in turn may provide investment opportunities for the Funds.

We continue to seek opportunities to reduce the volatility in both Funds. We have maintained a lowduration strategy, as we believe it allows a higher degree of certainty involving those companies in which we can invest.

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Past performance is no guarantee of future results. The opinions expressed are those of the portfolio managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through November 2016, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

Diversification cannot ensure a profit or protect against a loss in a declining market.

Risk factors: The value of the Funds’ shares will change, and you could lose money on your investment. Although asset allocation among different sleeves and asset categories generally tends to limit risk and exposure to any one sleeve, the risk remains that the allocation of assets may skew toward a sleeve that performs poorly relative to the Funds’ other sleeves, or to the market as a whole, which would result in the Funds performing poorly. While Ivy Investment Management Company (IICO) monitors the investments of Apollo Credit Management (Apollo) and LaSalle Investment Management Securities (LaSalle) in addition to the overall management of the Funds, including rebalancing the Funds’ target allocations, IICO, Apollo and LaSalle make investment decisions for their investment sleeves independently from one another. It is possible that the investment styles used by IICO, Apollo and LaSalle will not always complement each other, which could adversely affect the performance of the Funds. As a result, the Funds’ aggregate exposure to a particular industry or group of industries, or to a single issuer, could unintentionally be larger or smaller than intended. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investment risks associated with investing in real estate securities, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes and differences in real estate market values. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Funds 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 Funds’ prospectus. Not all funds or fund classes may be offered at all broker/ dealers.

IVY INVESTMENTS℠ refers to the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds, and those financial services offered by its affiliates

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