Ivy Product Insights – Ivy municipal strategies update

11.02.20

Ivy Product Insights – Ivy municipal strategies update

Commentary as of November 2, 2020

As the portfolio manager (PM) of Ivy Municipal Bond Fund, and now the PM of Ivy Municipal High Income Fund and Ivy California Municipal High Income Fund, can you provide your background as well as the team of analyst that supports the municipal product set at Ivy?

I have managed the Ivy Municipal Bond Fund for 20 years and have 32 years of industry experience. I joined the firm in 1993 as a municipal bond trader and analyst but have served as a PM since 2000. Also, I earned an MBA in Financial Management and Statistics from the University of Chicago and I am a CFA charterholder. Prior to my MBA program, I worked for Edward Jones on the sell-side of the business. Working on both the sell-side and buy-side of the business offers me some unique perspective as I’m analyzing securities.

Our municipal franchise is supported by four analysts who work across the three municipal strategies. They provide credit analysis on investment grade and high yield issues. Together, the team has more than 70 years of experience in municipal bond markets.

How would you describe your investment philosophy?

The core tenant of the philosophy behind the municipal funds is that we want to provide a consistent tax-advantaged income, and with regards to Ivy Municipal Bond Fund, with capital preservation. While I’ve assumed new portfolio management responsibilities for Ivy Municipal High Income Fund and Ivy California Municipal High Income Fund, that core tenant remains the focus. We believe that investors choose us to help them keep their wealth, not to create wealth. This is a philosophy that drives our investing decisions across the Ivy municipal strategies. In our view, municipal funds can help ballast an overall portfolio as a hedge to equities, especially in a down cycle.

How does that philosophy play out in the investment processes of the municipal funds you manage?

The two primary drivers in the municipal space are duration and credit. We take a cautious top-down view on global macro factors and have a definitive opinion on interest rates. The portfolio manager makes the top-down decisions, then we search for value based on sector and spreads to identify sectors, rating buckets and the yield curve.

In terms of duration, which generally measures the portfolios price sensitivity to interest rate changes, the goal is to keep the funds’ duration within certain ranges of their respective benchmark’s duration. Generally, for Ivy Municipal Bond Fund that range is around +/- 30%. So, for example, if the benchmark has duration of 5 years, the Fund’s duration will typically range from 3.5 to 6.5 years. For Ivy Municipal High Income Fund, that range is much wider at 50% to 150% of benchmark duration, depending on current market conditions and interest rate outlook, though we may seek to tighten those bands slightly going forward. Obviously, interest rates are difficult to predict and many factors can cause interest rate volatility, such as Federal Reserve statements or fiscal stimulus, so we want to make sure portfolios are structured to achieve their duration target.

As we evaluate credit decisions, we decide whether to underweight or overweight different sectors or credit quality baskets based on relative value, often measured by historical spreads. This process and template is used across the municipal funds, with the exception that Ivy Municipal High Income Fund and Ivy California Municipal High Income Fund are both farther out on the risk curve compared to Ivy Municipal Bond Fund. However, we are still analyzing the same factors, and seeking to answer the ultimate question: “Are we getting paid to take the risk?”

In terms of revenue bonds or general obligation (GO) Bonds, which do you prefer and why?

Generally, we do prefer revenue bonds compared to GO bonds. Most state GO bonds are highly rated and don’t provide much return for the risk. As an investor, we believe revenue bonds provide a much more attractive risk/reward profile. For example, Puerto Rico has been in bankruptcy for nearly five years. The bonds may do well one month if a positive headline comes out, but underperform a month later when a negative headline is published.

What is your overall outlook for the municipal bond space?

These are difficult times and no single sector has been able to avoid revenue hits. Right now, we are in an issuers market with a definitive supply and demand imbalance. Investors are desperate for yield, which has propped up the market. Issuers can raise capital at low rates and offer few creditor protections like covenants, mortgages and reserve funds. We’ve seen the market rally when credit is deteriorating, which is the opposite of anything ever taught in a finance class.

In our opinion, technicals are driving the market. As uncertainty lingers, we don’t think it’s the proper time to taking excessive credit risk. We believe taking a defensive position is the prudent approach.


Past performance is no guarantee of future results. The opinions expressed are those of Ivy Investments and are 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 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.

Ivy Municipal Bond Fund
Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. 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. The Fund may include a significant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax (AMT). Exempt-interest dividends the Fund pays may be subject to state and local income taxes. The portion of the dividends the Fund pays that is attributable to interest earned on U.S. government securities generally is not subject to those taxes, although distributions by the Fund to its shareholders of net realized gains on the sale of those securities are fully subject to those taxes. The municipal securities market generally, or certain municipal securities in particular, may be significantly affected by adverse political, legislative or regulatory changes or litigation at the Federal or state level. 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.

Ivy Municipal High Income Fund
Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Investing in high-income securities may carry a greater risk of nonpayment or interest or principal than higher-rated bonds. 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. The Fund may include a significant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax (AMT). Investments in municipal instruments can be volatile and significantly affected by adverse tax rulings, legislative or political changes, market and economic conditions, issuer, industry-specific (including the credit quality of municipal issuers), and other conditions. 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.

Ivy California Municipal High Income Fund
Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. 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. The Fund may include a significant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax (AMT). Exempt-interest dividends the Fund pays may be subject to state and local income taxes. The portion of the dividends the Fund pays that is attributable to interest earned on U.S. government securities generally is not subject to those taxes, although distributions by the Fund to its shareholders of net realized gains on the sale of those securities are fully subject to those taxes. The municipal securities market generally, or certain municipal securities in particular, may be significantly affected by adverse political, legislative or regulatory changes or litigation at the Federal or state level.Because the Fund invests predominantly in California municipal securities, events in California are likely to affect the Fund’s investments and its performance. As with California municipal securities, events in any of the U.S. territories, such as Puerto Rico, Guam and the U.S. Virgin Islands, where the Fund is invested may affect the Fund’s investments and its performance. These events may include economic or political policy changes, tax base erosion, constitutional limits on tax increases, budget deficits and other financial difficulties, and changes in the credit ratings assigned to municipal issuers of California or U.S. territories.

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.