Ivy High Income Fund - Investment Update
Commentary as of December 02, 2020
As we look back over the past seven months, the Ivy High Income Fund has performed well relative to its benchmark, the broad bond market and its peer group. In fact, the Fund has outperformed the broad bond market seven out of seven months and both its benchmark and peer group six out of the last seven months. The high yield asset class also resumed downside protection in September and October relative to the S&P 500 Index, which sold off 3.8% and 2.6%, respectively, while high yield was roughly flat, as measured by the ICE BofAML US High Yield Index.
During our high yield update with Ivy High Income Fund Portfolio Manager Chad Gunther in March, he mentioned it was an optimal time to invest in high yield. Since the market bottom on March 23, the broad bond market, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index, is up 7%. Since that same point, the high yield asset class is up more than 20% as measured by the ICE BofAML US High Yield Index.
Chad: Clearly, it’s been an impressive recovery since March 23. Spreads in high yield have nearly recovered almost the entire loss from the March correction. We are long-term investors and hope to outperform given the full cycle. We believe the portfolio is positioned well given the market backdrop.
Within the next few months, there is likely to be additional fiscal stimulus when President-elect Biden gets in office. We’ve already seen some movement in the 10-year U.S. Treasury rate likely as a result of discussions. Ivy’s global economist, Derek Hamilton, is not expecting any Federal Reserve (Fed) rate hikes for at least two years given the recent changes announced in its framework.
The Ivy High Income Fund has about 26% in loans, which are offering more attractive rates than the BB-rated bonds. We believe a steepening in the yield curve should help with the outperformance of the loan category. Currently, the Fund’s loan portfolio average price is about 90 cents on the dollar versus bonds which are at about par. The pull-to-par effect, which is the tendency for a loan’s price to approach its par value as it approaches its maturity, takes time to work itself out, but we are clipping more yield while we wait. That is more attractive to us than being in the BB-rated space with an average yield on BB near 3.5%, compared to realizing 5-6% on the loans.
Additionally, the technical backdrop is positive based on the return environment over the last 30-60 days. Fund flows into the high yield asset class are still positive, while the average yield has come down quite a bit, currently near 4.75% yield on the ICE BofAML US High Yield Index.
One of the things we’re currently struggling with is replacing 8-9% coupons with 4-5% coupons. Income levels are going to be difficult to maintain. On the flip side, there is not a lot of yield left anywhere else. That’s the dynamic we’re dealing with and another reason we like loans.
In terms of the view going forward, I think the first six months once the vaccine gets through the system will generate robust gross domestic product (GDP) growth. Then the question becomes, does the market change the Fed’s rate trajectory? Overall, my outlook for 2021 is constructive. If things play out in the back half of 2021 in which GDP growth continues to be robust, investors could get a coupon-plus-return type of year in high yield. Alternatively, if there are questions regarding inflation and the Fed is seen as being behind the curve, we could see increased volatility.
Past performance is no guarantee of future results. This information is not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Dec. 2, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This information 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 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.
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. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. 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 ICE BofAML U.S. High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. 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.