Active management: Going beyond the index

Actively managed funds? Passively managed index-based funds? Reports about the merits of each approach are published on a regular basis. Yet the evolving needs of investors mean many financial advisors want the flexibility to use both types of funds in the investment planning process.

Many passively managed funds seek to match the return of a market index, essentially tracking an average. Active managers, however, seek to exceed the returns of index averages by managing securities selections and seeking opportunities using research techniques that go beyond tracking an index. Active and passive investing strategies are not mutually exclusive and many investors use both as they allocate across a balanced portfolio. While Ivy offers passively managed funds, we also believe investors can derive the most long-term benefit through exposure to well-researched actively managed funds.

Why? In our experience, investors don’t set “average” goals – they instead put a priority on important milestones in their lives. When it comes to investing for those major goals, the right information can make a meaningful difference in going beyond average results.

In this review, we take a closer look at Ivy’s commitment to active management and the reasons we believe it can provide benefits to investors. With decades of experience in actively managing money for investors, we’ve learned that differentiated ideas, skilled interpretation of data and experienced professionals are important to successful investing over time.

Our portfolio managers and analysts conduct their own original research, every day. They don’t simply repackage the work of others. This approach leads to individual ideas, collaboration and conviction in the holdings we select. Active investment options typically have higher expenses than passive, but there is more at stake for investors than simply the cost.

Active selection of fund holdings

Because we do our own research, our funds tend to be more concentrated. For example, our equity funds average 55 holdings in each portfolio.1 In addition, 72% of Ivy Funds’ active portfolios have lower turnover than their Morningstar peer group averages.1 We believe it is best to know and understand what you own.

Breakdown of S&P 500 index holdings
Chart Showing Breakdown of S&P 500 index holdings

Top holdings shown as average percentage of total index as of 12/31/2018

Consider funds based on the S&P 500 Index and the several hundred stocks it represents. That many holdings can make it difficult to understand exactly where investment dollars are going and how they are performing. By Dec. 31, 2018, the top 50 holdings within the S&P 500 Index on average made up about 51% of the weight of the index. The top 200 holdings — or 40% — made up about 83% of the index.1

However measured, that concentration indicates that index investors are not getting market exposure that is as wide as the index name suggests. In addition, holdings outside of these concentrated groups may hurt performance in down markets more than they help in up markets. Research shows that since the Great Depression, the correlation of returns was greater in down months than in up months — in other words, stocks tended to move down together. And even in up markets, index investors lose the chance to achieve more than average returns. That may be because of large investors taking short positions in exchange-traded funds (ETFs) and other pooled vehicles to get defensive when the market falls.

From 2008 through 2018, the correlations increased, especially in down months.2 Indexes that track the market overall reflect those close correlations, while actively managed funds have the opportunity to be more selective.

Active management offers potential in rising and falling markets

The “efficient markets theory” states that the prices of stocks and other securities fully reflect all available information at any time. According to the theory, investors find it very difficult to identify securities that allow them to consistently perform better than the market.4

But history shows that markets often are not efficient. Certain categories of mutual funds historically have presented particular opportunities for active managers to outperform. In general, these categories often are considered less efficient in terms of the information available about the types of securities they represent.

In addition, investor behavior can exert a direct impact on prices and markets. Stock market volatility in reaction to geopolitical uncertainty or other factors often has lasted a relatively short time and shown the potential of careful stock selection.

Active managers have the ability to exploit potential market inefficiencies, or to “overweight” or “underweight” fund holdings in different proportions to a given index. Based on that capability, we believe actively managed funds offer the potential for above-market returns as well as the potential for downside protection. That’s a combination the index-tracking funds may have difficulty matching.

Many investors have shown they agree. Of the roughly 11,200 mutual funds and ETFs available at the end of December 2018, approximately 8,700 were actively managed and represented $13.2 trillion of the total $19.7 trillion in assets under management.3

Chart Showing Actively managed mutual funds stats

As of 12/31/2018. 3

We live in a time of global rebalancing, with rapid economic growth in emerging markets as well as accelerating innovation in technology, health care and other areas. These changes often bring opportunity for the right companies and potentially for investors. The Ivy investment team uses a disciplined, collaborative research process as part of our active approach to finding potential opportunities for investors.

1Source: Morningstar Direct as of 01/23/2019

2Sources: Empirical Research Partners, S&P 500 Monthly Average Return Correlations, Small- and Large-Cap Growth Stocks, 1928-2016 ; Morningstar Direct, 1928-2018

3Source: Strategic Insight Simfund, mutual funds and exchange traded funds, as of 12/31/2018

4Source: University of Chicago Booth School of Business, www.chicagobooth.edu


Ivy Live Replay - Active allocation: A world of ideas

Our Ivy Live panelists discuss the evolving investment landscape, including the recent U.S.-China trade escalation, and ideas to help guide allocation decisions.

Get the full perspective


Past performance is not a guarantee of future results. Investment return and principal value will fluctuate, and it is possible to lose money by investing. 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.

The opinions expressed are those of Ivy Investment Management Company 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.

Category: 

Article Short Summary: 

We believe investors can derive the most long-term benefit through exposure to well-researched actively managed funds.

Article Type: 

Normal Article

Show video On Home Page: 

0

Story Highlights: 

- Active management offers potential in rising and falling markets.
- Certain categories of funds historically have presented particular opportunities for active managers to outperform.
- Ivy uses a disciplined, collaborative research process as part of our active approach.

Expiration Date: 

Wednesday, October 16, 2019 - 01:00

Lock this content.: 

Preparing for parenthood: Millennial style

Becoming a parent can be both an exciting and nerve-racking time. Although you and your friends may still feel young, the number of Millennial parents is growing. More than a million Millennials become parents each year – in addition to the 16 million Millennials who are already parents. 1 But don’t fret too much about parenthood; your unique generational characteristics will allow you to handle the daunting journey of preparing for kids with relative ease.

Seeking durable quality in a volatile market

The past six months has been “a tale of two quarters,” but also part of a new market reality. The Fund’s blended structure seeks to build a portfolio with equilibrium of risk and reward to withstand this type of highly volatile environment.

Forgive us for co-opting the Charles Dickens’ classic A Tale of Two Cities, but it serves as a good frame of reference for asset class performance over the last six months ending March 31, 2019.

Intense volatility throughout the fourth quarter of 2018 triggered dramatic declines across all equity indexes. This selloff was accentuated by the December performance of the S&P 500 Index, the Fund’s equity benchmark, which plummeted 9% for the month, marking its worst performance for the final month of a year since 1931. On the fixed income side, the yield curve flattened with the spread in yields between the 2-year and 10-year Treasury notes narrowing to 19 basis points (bps) at year’s end, coming uncomfortably close to inversion*. Fast forward to March 2019. The equities selloff has reversed, with the S&P 500 Index up 12% since the start of the year while fixed income markets appear to be holding steady.

(* An inverted yield curve occurs when the yield on a fixed-income instrument, or bond, with a shorter duration is higher than the yield on a bond with a longer duration. An inverted yield curve has been a precursor to every modern-era recession.)

It’s against this erratic backdrop that the Fund offers a strategy looking to optimize the equilibrium of risk and reward while seeking to manage volatility.

The Fund is a blended strategy with predictable guardrails that generally invest at least 50% of its assets in equities and at least 30% in fixed-income securities, giving investors the chance to seek consistent growth and current income while managing risk.

The equity portion of the portfolio typically holds a limited number of stocks (generally 45–55), with a maximum sector weight of 35%. We look for profitable companies and identify the fundamental drivers of those returns and the likelihood they can sustain growth projections over a two- to three-year investment horizon.

Our fixed income approach focuses on companies with solid balance sheets and cash flow metrics, with at least 70% of the fixed-income portion of the portfolio comprised of investment grade debt securities.

The Fund’s current allocation (as of 03/31/2019) is 64% equity and 35% fixed income, with the balance invested in cash. Over the course of the last six months, the Fund’s allocation was relatively stable outside of impacts from market action. These periodic bouts of volatility can be unnerving, but the Fund’s performance over the past 12 months is a reminder of the value of patient, disciplined investing with a long-term perspective.

What is durable quality?

We define durable quality as the ability for a security to exhibit above-average profitability that has the potential to persist over time. The Fund is predicated on finding investment ideas we believe demonstrate durable quality from the universe of profitable companies.

Part of our screening process includes an assessment of companies by their structural competitive advantages. These metrics can include a company’s brand equity, proprietary technology, economies of scale and capital intensity. We further narrow the list to companies we believe are trading at a reasonable valuation with visible catalysts that can help drive high performance over the next year or beyond. The remaining pool of candidates is sufficiently small and relatively stable, allowing our team to adequately vet and identify attractive investment opportunities.

Our emphasis on durable quality helps us to sharpen our focus on what we believe are successful and proven companies whose pedigree inspires our belief in them across economic cycles. Equally important, it disciplines us to reduce or divest positions when relative valuation suggests their inherent characteristics are fully appreciated by the market.

Assessing holdings with our approach

Let’s look at how we apply our durable quality investment philosophy.

Union Pacific Corp. (UNP) Yum! Brands, Inc. (YUM)

Market Cap: $120 billion

Market cap: $31 billion

Valuation: 18 times
2019 earnings estimates

Valuation: 26 times
2019 earnings estimates

Current fund holding: yes

Current fund holding: no

UNP is the most profitable U.S. railroad company with an expansive physical rail footprint. However, its operating costs, adjusted for length of haul, were above the industry average. In response, UNP implemented an efficiency strategy it believes will improve the company’s efficiency ranking to a best-in-class level over the next several years. In our view, this idiosyncratic driver of earnings growth is an underappreciated catalyst, which is not reflected in UNP’s current valuation using its forecasted 2019 earnings.

YUM is a quick-service restaurant holding company comprised of three chains: Kentucky Fried Chicken, Pizza Hut and Taco Bell. These brands have successfully brought innovation to their menus with an emphasis on value that has resulted in strong same-store sales, net new unit growth and profitability. YUM’s success has been recognized by the equity market and its valuation metrics have expanded meaningfully over the past five years. While we continue to believe in YUM’s business model, our valuation discipline motivated us to close our position in this holding after several years of profitable ownership.

While uncertainty and volatility ebb and flow, we believe a blended portfolio of assets, diversified across sectors, with security selection governed by a disciplined emphasis on finding what we believe to be durable quality will continue to be a sound approach for investors. Across economic cycles and irrespective of market moods, this approach has served investors well and our confidence in it has not waned.

Top 10 Equity Holdings

Ivy Insights podcast




Past performance is no guarantee of future results. The opinions expressed are those of the Fund’s managers 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.

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. The lower-rated securities in which the Fund may invest may carry greater risk of nonpayment of interest or principal then higher-rated bonds. In addition to the risks typically associated with fixed-income securities, loan participations in which the Fund may invest carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loan participations may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. The Fund’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform non-dividend paying stocks and the market as a whole over any period of time. In addition, there is no guarantee that the companies in which the Fund invests will declare dividends in the future or that dividends, if declared, will remain at current levels or increase over time. The amount of any dividend the company may pay may fluctuate significantly. In addition, the value of dividend-paying common stocks can decline when interest rates rise as fixed-income investments become more attractive to investors. This risk may be greater due to the current period of historically low interest rates. The Fund typically holds a limited number of stocks (generally 45 to 55). As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a large number of securities. The value of a security believed by the Fund’s managers to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.

The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index.

Tags: 

Category: 

Article Related Management: 

Matthew A. Hekman
Mark Beischel
Susan K. Regan

Article Related Articles: 

Q2 Outlook<br> Global economy is slow out of the gates

Article Short Summary: 

The market fluctuations over the past two quarters are unsettling, but part of a new reality. The Ivy Balanced Fund seeks to build a portfolio with equilibrium to withstand a highly volatile environment.

Article Type: 

Normal Article

Show video On Home Page: 

0

Story Highlights: 

- Volatility is likely to persist throughout 2019.
- The Fund looks to optimize the equilibrium of risk and reward while seeking to manage volatility.
- Our strategy is predicated on investing in companies that exhibit durable quality.

Expiration Date: 

Wednesday, October 16, 2019 - 02:00

Associated Funds: 

Lock this content.: 

Risks vs. Reality: Are the markets out of step?

Watch full replay


Brexit, trade wars and geopolitical intrigue dominate the headlines. Yet, U.S. business confidence remains high while stocks continue to climb and P/E levels suggest less global risk. We explore this Goldilocks scenario to determine investment opportunities, as well as bears to avoid.

SPEAKERS

Derek Hamilton
Global Economist
Ivy Investment Management Company
View Full Bio


Jonas Krumplys, CFA
Portfolio Manager
Ivy Investment Management Company
View Full Bio


Sarah Ross, CFA
Portfolio Manager
Ivy Investment Management Company
View Full Bio

Category: 

Article Short Summary: 

Brexit, trade wars and geopolitical intrigue dominate the headlines. Yet, U.S. business confidence remains high while stocks continue to climb and P/E levels suggest less global risk. We explore this Goldilocks scenario to determine investment opportunities, as well as bears to avoid.

Article Type: 

Livestream

Show video On Home Page: 

0

Video: 

Shortened URL: 

{ "error": { "errors": [ { "domain": "global", "reason": "forbidden", "message": "Forbidden" } ], "code": 403, "message": "Forbidden" } }

Lock this content.: 

Q2 Outlook<br> Global economy is slow out of the gates

Activity in segments of the global economy moderated throughout the first quarter of 2019 as policy risks and decelerating trade continued to hamper growth. The overall sluggish pace of economic expansion, particularly in the eurozone, has led us to recast our global growth forecast. However, we believe headway on a number of key issues could lead to a rebound later this year.

U.S. steady in slowing global economy

We have revised our global gross domestic product (GDP) growth forecast to 3.3%, down slightly from our outlook as the year began. While we project U.S. growth around 2.5%, the waning effect of tax cuts and fiscal stimulus, the trade dispute between the U.S. and China and tighter monetary policy by the Federal Reserve (Fed) continues to weigh on economic activity.

The ongoing trade standoff between the world’s two largest economies has been a drain on both and each wants a resolution. We believe a new trade agreement between the U.S. and China will be announced in the next few months, especially as President Donald Trump eyes reelection next year.

The Fed indicated it will likely leave rates unchanged this year because of weaker global growth and tepid inflationary pressure. In a surprising move, Fed Chairman Jerome Powell also announced plans to halt the Fed’s program of reducing bonds and mortgage-backed securities holdings on its balance sheet in September. These actions could help minimize a more meaningful slowing in U.S. economic growth.

The yield curve has continued to flatten in the U.S., with portions of the curve already slightly inverted. While an inversion in the yield curve has been a precursor to every modern-era recession, this is just one indicator of economic trajectory. We do not see a downturn in the U.S. economy on the horizon.

Eurozone GDP performance has been surprisingly poor so far in 2019, although it already had been weakened by the general slowdown in global growth and ongoing trade burdens. A number of local issues, including the lack of a plan for the U.K. to leave the European Union (EU), growing unrest in France over fuel taxes and rising prices generally, and the lagging effects of government mandates on automobiles in Germany have stymied growth in the region. The European Central Bank’s (ECB) response to this weakness has been to delay its plans to raise interest rates from the third quarter of 2019 to early 2020 and to add a new round of liquidity to the banking system. The lackluster economic performance in the first quarter prompted us to downgrade our 2019 eurozone GDP forecast to 1.2%.

Global growth continues at a sluggish pace
Chart Showing Global growth continues at a sluggish pace

Source: Ivy Investments. Chart shows Ivy 2018, 2019 forecasts of annual gross domestic product growth, all based on purchasing power parity. Past performance is not a guarantee of future results. The gross domestic product growth forecasts are current through April 2019, and subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed.

When — and how — will Brexit end?

Nearly three years after the U.K.’s initial referendum, Brexit has become a political quagmire and a drag on its economy. The U.K. Parliament through early April had failed to pass a withdrawal agreement despite three attempts, leaving an already wounded Prime Minister Theresa May in further political limbo as momentum to reevaluate the “divorce” has grown.

While we continue to believe the U.K. will ultimately leave the EU with agreements that keep the two somewhat connected on key issues, the possibility of a “hard Brexit” — where the U.K. leaves the EU without a deal to clarify trade, its status with the Republic of Ireland and other issues — cannot be ruled out. Parliament’s failure to pass any Brexit legislation suggests the odds of calls for early elections have increased. We believe the thought of a change in government — especially one led by Jeremy Corbyn, the far-left leader of the Labour Party — and the increasing likelihood that the departure deadline could be significantly extended is likely to send jitters through the markets.

In our view, it is highly likely that the U.K. will fall into recession if a hard Brexit becomes reality. Such a result could send negative repercussions throughout the EU.

Emerging markets poised for a rebound

After battling through multiple headwinds in 2018 that spilled over into the first quarter of this year, emerging markets appear ripe for improvement. Along with its trade turmoil with the U.S., China has felt pressures from its decision to reduce the pace of debt accumulation in the economy. The deceleration in economic growth has caused the government to introduce fiscal stimulus, including infrastructure spending, tax cuts and stronger credit growth.

In addition, China’s property market recently has shown signs of weakness, but cities continue to move away from purchase restrictions, which we think will limit downside risks in the sector. We continue to believe that looser policy and the potential for a trade deal with the U.S. could result in stronger economic growth in China in the second half of 2019.

In India, the central bank recently reduced interest rates in response to slower growth. The upcoming presidential election will determine whether the coalition government of Prime Minister Narendra Modi can earn another term, which we believe could be a key factor in India’s long-term growth potential.

Following a record-setting recession, Brazil is showing signs of recovery as markets have strengthened in anticipation of pension reform, one of several fiscal reforms championed by new president, Jair Bolsonaro. While the legislation still faces an uphill battle to gain lawmakers’ approval, we believe pension reform could be passed sometime later this year.

Currency markets looking upward

Currency markets were mixed in the first quarter, with the U.S. dollar modestly stronger on average. The dollar’s strength came despite the Fed’s revised position on rate hikes for the remainder of 2019. While a lack of support from higher interest rates might normally be expected to undermine the dollar, the focus in currencies has shifted from interest rates to worries about global growth. That change has benefited the dollar as it tends to appreciate during times of uncertainty.

However, we expect the dollar to weaken marginally as global growth picks up throughout the year. Among developed market currencies, the pound shows potential for appreciation, assuming a Brexit accord is agreed upon in the very near term. The euro also could appreciate as growth in the eurozone begins to rebound.

The Fed’s more dovish stance on rate hikes and a weakening U.S. dollar could bode well for some emerging market currencies. We anticipate any trade agreement between the U.S. and China will include language prohibiting currency manipulation, stabilizing the yuan versus the dollar in the near term. However, we believe an uptick in economic growth in places like China and Europe will be necessary before there are any meaningful currency rallies among other emerging markets.


Ivy Live Replay - Active allocation: A world of ideas

Our Ivy Live panelists discuss the evolving investment landscape, including the recent U.S.-China trade escalation, and ideas to help guide allocation decisions.

Get the full perspective


Risk factors: Investment return and principal value will fluctuate, and it is possible to lose money by investing. 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. Fixed income securities are subject to interest rate risk and, as such, the net asset value of a fixed income security 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. Investments in real estate may be more susceptible to a single economic, regulatory, or technical occurrence than a fund that does not concentrate its investments in this industry. Debt securities, like mortgage-backed securities and asset-backed securities, are subject to additional risks due to their exposure to interest rate risk. Changes in interest rates can cause the value of these securities to be more volatile than other fixed-income securities and may magnify the effect of the rate increase on the price of such securities.

Past performance is not a guarantee of future results. The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through April 2019, 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.

Tags: 

Category: 

Article Related Management: 

Derek Hamilton
Michael Yeager

Article Short Summary: 

The global economy was sluggish through the first quarter of 2019. Get Ivy's view on key issues that have slowed growth and the possibility of a rebound later in the year.

Article Type: 

Normal Article

Show video On Home Page: 

0

Story Highlights: 

- U.S. steady in slowing global economy
- When – and how – will Brexit end?
- Emerging markets poised for a rebound
- Currency markets looking upward

Expiration Date: 

Wednesday, October 16, 2019 - 01:45

Lock this content.: 

Moving to a defensive position for uncertain times

A combination of asset classes may offer lower volatility — a concern for many investors today. The Fund’s sleeve structure allows us to blend three complementary fixed-income strategies while adjusting allocations as needed, based on market conditions and our outlook. In the current environment, that means taking a more defensive position.

We think low interest rates are likely to continue in the foreseeable future, based on the “dovish” policies of major central banks, slower economic growth worldwide and a market dealing with uncertainty about a wide range of issues:

  • Central bank policy: Both the U.S. Federal Reserve (Fed) and the European Central Bank (ECB) have turned to more accommodative interest rate policies in the last three months. Europe’s loss of economic momentum was a key factor for the ECB, which cut its 2019 eurozone economic growth forecast to an annual rate of 1.1% from 1.7%. We do not expect the ECB to raise interest rates until at least March 2020. The ECB committed to providing liquidity to credit markets until 2023 through its targeted longer-term refinancing operations (TLTRO), which is a source of funding for European financial institutions. We believe Fed and ECB policies reflect the global economy, including an expectation that the U.S. is in the later stages of an economic cycle.
  • Slower global growth: Market participants widely are forecasting slower global economic growth in 2019; Ivy estimates the global growth rate this year at 3.4%.
  • Trade dispute: China’s slowing economy and the U.S.-China trade war have raised many concerns about the direction of the world’s no. 2 economy. While there is no resolution yet to the trade dispute, we think a deal ultimately could add economic stimulus, help growth inside and outside both countries, and boost business and consumer confidence. In our view, a deal thus could help prolong the current cycle.
  • Direction of dollar: The strong U.S. dollar was a global market factor in 2018. The Fed’s prediction of no rate hikes in 2019 and one in 2020 will likely cause the dollar to weaken against high yielding emerging market currencies as investors search for yield continues. Lacking a major change in global growth, the dollar should be range bound against developed currencies ( euro, yen and pound) as these countries deal with their own idiosyncratic issues.
  • North Korea: There is concern that the U.S. is losing traction on any agreement to eliminate nuclear weapons.
  • Political uncertainty: Distractions already are developing as we face the 2020 U.S. election campaigns. In addition to the presidential election, there will be voting on all 435 seats in the House of Representatives, 34 of the 100 Senate seats and a wide range of state and local elections.

Against this backdrop, credit spreads have been somewhat volatile but remain compressed. We believe the more dovish Fed — compared with its position at the beginning of 2018 — will keep a lid on credit spreads, and we think the high income sector offers value in certain sectors.

We have chosen to position the Fund defensively in this environment and in general are seeking to move to higher quality securities and longer duration overall.

Philosophy and process

Unlike single-sector funds, the Fund seeks to capture the return opportunities and risk mitigation potential of a diversified mix of fixed-income securities. It invests across a range of factors, including credit, liquidity and complexity, and combines sleeves of three fixed-income strategies.

We believe a portfolio that spans the fixed-income credit spectrum can offer higher return potential from high-yield, high-risk bonds and non-traditional credit vehicles, while using highly rated investment-grade bonds to provide fund liquidity. Flexible sleeve allocations allow for adjustments based on market conditions and our outlook, potentially creating an opportunity to mitigate risk exposure, volatility and overall Fund duration.

The Fund’s stated objective is to seek to provide a high level of current income, with capital appreciation a secondary objective. While income is not guaranteed, the Fund has continued to capture a competitive yield for shareholders. We consider it a defensive fund and have positioned it for an uncertain economic environment.

A closer look at each sleeve

Strategy Sleeve Allocation Allocation at 02/28/2019

Global Bond

Flexible  10–70%

47.5%

High Income

Flexible  10–70%

32.5%

Total Return

Target   20%

20.0%

  • Global bond strategy: Decisions are based on factors including fundamental global themes, such as country analysis, issuer analysis, including domicile, performance and credit history across economic cycles; and issue analysis, including maturity, quality and denomination. We invest primarily in a diversified portfolio of bonds of foreign and U.S. issuers.
  • High income strategy: We focus on bottom-up credit work to find companies we think can outperform throughout a business cycle. We dig into the details of the business models, covenants and competitive advantages as part of our investment decision. While doing the bottom-up analysis, we don’t turn a blind eye to the business cycle or credit spreads, and want to be sure we can be compensated for the risks we take. We ypically hold names throughout the cycle, don’t want to rely on timing the big macro calls and tend to stay away from highly cyclical sectors.
  • Total return strategy: The Fund’s sub-adviser, Apollo Credit Management, manages this sleeve. It provides access to the full breadth of the credit markets, including some nontraditional credit securities. Such securities may not have been accessible to all investors in the past, especially within a mutual fund. Apollo can explore the market for nontraditional opportunities, partner with banks to lend money to smaller companies, or underwrite loans for a select entity — all as part of seeking to generate yield while keeping duration low. As with the other sleeves, it is a long-only strategy. The managers do not pursue derivativeoriented transactions.

Near-term outlook

We see some opportunity now among emerging markets and Brazil in particular, based on reform programs announced by the new presidential administration there. Conversely, Mexico’s new administration has raised some troubling issues that make it less attractive to us now. We also have an ongoing concern about the risk of potential sanctions on Russia and what that could mean for its debt.

In the U.S., we think slower economic growth is likely for the first half of 2019 and we expect the dollar to remain strong. We also do not expect the Fed to raise interest rates this year. However, U.S. economic growth still is above trend, with healthy real income growth and an elevated personal savings rate that we think can insulate against the negative wealth affect from the lower stock market late in 2018.

Labor markets continue to expand, which has kept consumer confidence near cycle highs and supported strong spending growth. But we think trade will continue to be a risk factor going forward. There is a potential for more tariffs followed by retaliatory action that could impact the capital investment plans of many companies. That raises the risk of what we would consider a negative feedback loop that could affect all markets and ultimately consumer confidence.


Late cycle factor risks


An increasingly volatile environment has raised questions about the stock market’s ability to sustain its historic bull run. Our Ivy Live panel shared their views on the subject.

Get the full perspective


Past performance is no guarantee of future results. The opinions expressed are those of the Fund’s managers 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.

The Fund is managed by Ivy Investment Management Company. The total return strategy is sub-advised by Apollo Credit Management, LLC.

Diversification cannot guarantee a profit or protect against loss in a declining market. It is a method to manage risk.

Risk factors: The value of the Fund’s 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 Fund’s other sleeves, or to the market as a whole, which would result in the Fund performing poorly. While Ivy Investment Management Company (IICO) monitors the investments of Apollo Credit Management (Apollo) in addition to the overall management of the Fund, including rebalancing the Fund’s target allocations, IICO and Apollo make investment decisions for their investment sleeves independently from one another. It is possible that the investment styles used by IICO or Apollo will not always complement each other, which could adversely affect the performance of the Fund. As a result, the Fund’s aggregate exposure to a particular industry or group of industries, or to a single issuer, could unintentionally be larger or smaller than intended. 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. 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. 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.

Tags: 

Category: 

Article Related Articles: 

Fed stays consistent; what's next for rates?

Article Short Summary: 

A combination of asset classes may offer lower volatility – a concern for many investors today. The Fund’s sleeve structure allows a blend of three fixed-income strategies.

Article Type: 

Normal Article

Show video On Home Page: 

0

Story Highlights: 

- We think low interest rates are likely to continue, based on the “dovish” policies of major central banks.
- In general, we are moving to higher quality securities and longer duration in the Fund.
- We consider it a defensive fund and have positioned it for an uncertain economic environment.

Expiration Date: 

Wednesday, October 16, 2019 - 02:00

Associated Funds: 

Lock this content.: 

Pages

Subscribe to Ivy Investments RSS