Investment update

12.16.20

Investment update – Ivy Securian Core Bond Fund

Commentary as of December 16, 2020

Over the last three months ending Nov. 30, Ivy Securian Core Bond Fund has outpaced the broad bond market and peer group, returning more than three times its benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index. This period has been a solid reminder as to why we believe it is important to maintain exposure to a core bond portfolio. When the S&P 500 Index sold off nearly 4% and 3% in September and October, respectively, the Fund return was resilient. During the recovery in November, the Fund outperformed its peer group and benchmark.

Tom Houghton: It’s been a wild year with numerous challenges, but we have steadily recovered from the dislocation that started in March. Typically, we invest in a substantial amount of “off the run,” or those securities already outstanding, as well as off-benchmark securities that are less followed by the market. Both these security types were hit hard in March, many with no bids as liquidity briefly evaporated. Throughout this period, we stuck to our philosophy and process, fundamental bottom-up and catalyst investing. Coming out of March, we reassessed the landscape and looked at what we held to determine whether those securities could weather the ongoing storm.

One part of the portfolio that was hit hardest was enhanced equipment trust (EETC) securities, which are backed by airline collateral. We recognized this was going to be a new environment for the airlines coming out of the pandemic. Following the March bottom, most major airlines were able to shore up liquidity, which we believe should last at least two to three years. These securities started coming back in September and have continued to perform well.

Energy, where we hold many pipeline positions, was also hit hard. Contrary to popular perception, results for the pipelines are not directly tied to the commodity prices. Looking at the contracts right now and type of fuel (gas, oil, refined petroleum) the pipeline positions have rebounded with some stability in the market.

The other side of the portfolio we speak about is our securitized allocation. The securitized sector was initially hit hard, specifically the non-agency backed mortgages and credit risk transfer securities, which are agency mortgage securities not guaranteed by government-sponsored enterprises (Fannie Mae and Freddie Mac). We believed the homeowner coming into the COVID-19 crisis was in much better shape compared to the Great Financial Crisis when lending was 100-125% above home values. We felt comfortable that these homeowners would be able to refinance, or at least sell, given the average 40% equity position.

Dan Henken: As Tom mentioned, our process and philosophy is driven by fundamental investing. This year is a great example of what that means. At times of extreme stress, or when correlations of asset classes are all tied together, the Fund may struggle. Fortunately, that doesn’t happen often in markets. When it does happen, we have the opportunity with our bottom-up and fundamental credit selection process to purchase undervalued bonds and we think we did that to the benefit of performance over the last several months.

Outlook

While valuations are becoming stretched, the environment for credit is still decent and we are likely to see spreads continue to grind tighter. This is a product of lower issuance at the end of year, a continued reach for yield by most market participants and a continuing economic recovery as the distribution of a vaccine should cause Covid-19 concerns to slowly lessen. As a result, we remain overweight corporates and consumer-facing asset-backed securities. We are underweight U.S. Treasuries and Agency Pass-Throughs.

This is still going to be a Federal Reserve (Fed)-driven market, especially in fixed income. Interest rate levels are low with the 10-year U.S. Treasury rate under 1% and we don’t see rates going materially higher. What we need to see before getting concerned about an increase in rates is actual moves in inflation. We expect to see consistent wage growth for that to happen. There is a lot of slack in the labor market that will take time to unwind, while we are still seeing the “Amazon-effect” keeping inflation down on the goods side.

We also think the Fed is going to remain involved – it has added $3 trillion to its balance sheet this year. We expect that to continue at a pace of $120 billion per month, if not more. If we see rates move towards the 1.5% range, we will move to take advantage of higher rates that are likely temporary. We also expect the Fed to maintain the strong housing market. We believe it will increase purchases of long-term U.S. Treasuries in order to maintain a positive balance in housing

Supply is positive from a technical perspective. We’ve seen a dearth of new issuance and it should lighten up further through December and early 2021. We’re still underweight high yield relative to our benchmark and peers. Investors who normally stick with investment grade are reaching for yield in BB rated space. We’re not going to elbow our way into a crowded room in that space and will hold off until we see meaningful repricing coupled with credit repair.

Relative value is seen in the US with over $18 trillion in negative yielding securities around the world. Roughly 90% of positive yielding fixed income in the world is in the U.S., so there are few alternatives for investors to find yield.

Fund Performance

Past performance is not a guarantee of future results.The views are current through Dec. 12, 2020 and are subject to change at any time based on market or other conditions. This information is not meant as investment advice or to predict or project the future performance of any investment product. The opinions are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This informa¬tion 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.

Risk factors: 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 in¬sured 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. Mortgage-backed and asset-backed securities are subject to prepayment risk and extension risk. 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.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

The S&P 500 Index is an unmanaged index of common stocks. It is not possible to invest directly in an index.

The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes treasuries, government-related and corporate securities, MBS, ABS, and CMBS.