Two broad shifts increasing income demand
Globally, there are two fundamental shifts happening
in the current environment that are increasing the need
for income-producing products. First, as baby boomers
continue to retire from their work lives, the demand for
investment income is likely to grow. According to the
2019 BlackRock Defined Contribution Pulse Survey,
“plan participants are sharpening focus on how to
secure crucial, ongoing retirement income.”
Second, interest rates have been in a downward
trend and most recently have hit record lows. This
means that total return from fixed-income assets
will not help bridge the $1 trillion funding gap¹
that 76 million baby boomers² are likely to face in
pensions, health care and other benefits.
STOCKS COULD OFFER A COMPETITIVE INCOME SOURCE (%)
Source: Evercore ISI (Data 01/31/1995 through 03/31/2020). Past performance is no guarantee of future results.
Mid-cap stocks may provide opportunity for capital appreciation, income
In an environment where bond yields are at a record
lows, we believe that stocks in the mid-cap universe may
be well positioned to fill the income gap and provide
an opportunity for capital appreciation. Generally,
investors think that dividend-paying companies mostly
exist in the large-cap universe. However, as shown
below, there are numerous companies in the mid-cap
universe that pay dividends.
Many mid-cap companies pay dividends
Russell Midcap Index
Russell 1000 Index
S&P 500 Index
Source: FactSet and Ivy Investments.
An active approach to income growth, capital appreciation
In today’s environment where stocks are supported
by expansionary monetary policy and cheap money³,
we believe investing in an actively managed dividend
portfolio with the potential to generate income and
provide attractive growth characteristics is a sound
approach. This is where the Ivy Mid Cap Income
Opportunities Fund can fit into an investor’s portfolio.
The Fund was created to achieve a dual mandate of
investing in companies that have the potential to grow
their dividends and provide an opportunity for capital
appreciation across all market cycles. Focused on
companies in the mid-cap space, we invest in core
growers at a stage in their lifecycles where they have
enough earnings growth and are generating cash in
excess of what is needed to grow organically that they
can offer return of capital to shareholders. Since the
Fund’s inception in October 2014, portfolio investments
have provided nearly a 3% gross yield and have generated
high single-digit income growth annually.
Dividend growers in the past, future
As shown in the chart below, dividend growers have
generally been rewarded by the markets. Historically,
within the Russell Midcap Index, the Fund’s benchmark,
divided payers have tended to perform better than the
index. This chart also shows the importance of avoiding
those companies that don’t pay or eliminate dividends.
Overall, as interest rates remain low, investor demand
for yield and income have become elevated and should
remain so. In such an environment, we expect dividendpaying
companies to become increasingly valuable. In
our view, companies with strong cash flows, low payout
ratios, and durable business models are in a favorable
position to increase dividends and grow over time.
DIVIDEND STOCK RETURNS ACCORDING TO DIVIDEND PAYMENT TRENDS (%)
Source: Evercore ISI (Data: 12/31/1999 through 03/31/2020). Past performance is no guarantee of future results.
An active approach providing diversification into dividend-yielding stocks with growth characteristics
We think the foundation of a successful actively
managed strategy within the mid-cap universe is a
focus on companies that offer capital appreciation and
have as history of dividend increases. Yields are an
unappreciated aspect of the universe.
Through the Fund’s bottom-up investment process, we
seek companies that have a current yield above 0.5% (as
of 03/31/2020 — the lowest yielding security in the Fund
is at 1.6%) and a track record of yield growth and earnings
growth that can allow for upside potential in stock prices.
As of 03/31/2020, the Fund’s largest overweight positions
were in materials and consumer discretionary because
these sectors offered a combination of competitive
yield and income growth supported by underlying
earnings growth. In the generally low-yielding consumer
discretionary sector, Fund holdings as of 03/31/2020
had an average yield of 4.4% versus the lower yield in the
sector in the index (see chart below).
Fund offers income growth, stock price appreciation
With interest rates at record lows, stocks appear well
positioned to fill the income gap. While investors
generally believe income-generating stocks are found
within large caps, data shows that the mid-cap universe
not only has a competitive stream of income payers
and potential for growth, but it is also considerably
underutilized.⁴ With such a backdrop, we believe the
Ivy Mid Cap Income Opportunities Fund’s bottom-up
active approach and dual mandate of income growth
and capital appreciation may fill the income gap created
by record low interest rates and the income needs of an
RUSSELL MIDCAP INDEX: DIVIDEND YIELD AND GROWTH BY SECTOR (%)
Source: Evercore ISI; Data as of 03/31/2020. Past performance is no guarantee of future results.
³ To support economic growth impacted by the coronavirus outbreak, the U.S. Federal Reserve re-started quantitative easing on 03/15/2020.
⁴ Source: FTSE Russell and Strategic Insight Simfund as of 12/31/2019. Mid-cap stocks make up 25% of the U.S. equity space. This indicates that some value is being left on the table. Equity mutual fund assets represent
open end mutual funds, domestic mid-cap categories vs. all domestic equity categories. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell 3000
Index measures tracks the performance of the 3,000 largest U.S.-traded stocks which represent about 98% of all U.S. incorporated equity securities. It is not possible to invest directly in an index.
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 current through March 2020, 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. Investing in mid-cap stocks may carry more risk than investing in stocks of larger, more well-established
companies. 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 35 to 50). 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. 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. 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 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
Class I shares are only available to certain types of investors.
The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell 1000 Index measures the performance of the large-capitalization segment of the U.S. equity
universe. The S&P 500 Index measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index.
Through July 31, 2021, IICO, IDI and/or WISC have contractually agreed to reimburse sufficient management fees, 12b-1 fees and/or shareholder servicing fees to cap the total annual ordinary fund operating expenses
(which would exclude interest, taxes, brokerage commissions, acquired fund fees and expenses and extraordinary expenses, if any) as follows: Ivy Mid Cap Income Opportunities Fund Class I shares at 0.83%. Prior to
that date, the expense limitation may not be terminated without the consent of the Board.