Market Sector Update

• The global credit market ended the first quarter of 2021 tighter than calendar year-end 2020. Rallying credit markets to start and end the quarter were enough to offset weakness in late February and early March. Credit spreads generally tightened throughout the credit complex with high yield and leverage loans outperforming.
• The International Monetary Fund (IMF) recently published its April 2021 World Economic Outlook (WEO). Its researchers again upgraded global gross domestic product (GDP) growth estimates and expectations. Looking back at last year, it estimates that the global economy contracted by -3.3% in 2020 which is 1.1 percentage points (pp) less contraction than it expected at the time of its last WEO in October 2020. At the same time, it projects global GDP growth of 6.0% in 2021 and 4.4% in 2022, which is higher by 0.5 pp and 0.2 pp, respectively, compared to October 2020 expectations. Unfortunately, low-income developing countries stand out with GDP growth expectations revised downward compared to last October’s WEO. Meanwhile, among major economies, the U.S. stands out with expectations to surpass pre-COVID-19 GDP levels this year, while China returned to pre-COVID-19 GDP in 2020.
• Fixed-income investment returns were generally negative for the quarter, as tighter credit spreads could not overcome a dramatic steepening of the U.S. Treasury yield curve. The 10-year U.S. Treasury yield ended the quarter at 1.74% after entering at 0.93% as the Federal Reserve (Fed) maintained loose policy in the face of increasing fiscal stimulus. Short-duration U.S. Treasuries (less than two years) did not rise with the market’s expectation of the Fed being on hold for the foreseeable future.
• Broadly, consumer consumption and activity data improved into the end of the quarter as the late-2020 COVID-19 surge receded and consumers began to spend the latest round of stimulus checks. The U.S. COVID-19 vaccination rate continues to be ahead of most of the world, further bolstering sentiment.

Portfolio Strategy

• The Fund outperformed its benchmark during the quarter. The outperformance was primarily attributable to two factors. First, the Fund’s shorter duration benefited it as interest rates rose significantly during the quarter. Second, the Fund’s exposure to credit supported returns as spreads continued to tighten through the quarter.
• The Fund also outperformed its Morningstar peer group. The outperformance stemmed from the Fund’s higher credit exposure, lower duration, and lack of foreign currencies, as the U.S. dollar outperformed most major currencies, both in developed and emerging markets.
• We continue to seek opportunities to reduce volatility in the Fund. We are maintaining a low-duration strategy, although we are more open than in the recent past to marginally increasing duration to levels that would still remain low compared to peer funds. With credit spreads back to levels tighter than the historical average, we started move towards a more defensive position by moving up in higher quality credits/companies at the expense of high-yield credits.

Outlook

• We believe short-term interest rates will stay near zero for the foreseeable future. Base effects and fiscal stimulus are likely to result in increased inflation in the near term, but this increase should be both limited and transitory due to growth constraints as we exit the pandemic. The U.S.’s sizable fiscal packages provided much needed income support for sidelined workers and financial support for businesses facing interrupted product demand and cash flows. However, stimulus packages passed thus far are not fiscal stimulus that will generate sustained stronger growth.
• As expected, Democrats were able to push through another large economic stimulus bill in the first quarter of 2020. The Biden administration recently proposed a large infrastructure bill, although significant hurdles remain for that to become law.
• Demand for corporate credit remains intact. Across the globe, fixed-income yields are staggeringly low, leaving investors few alternatives. The Fed has indicated it will continue to support markets beyond the point at which the COVID-19 virus is contained, which we believe is likely to support current spread levels.
• China has contained COVID-19 more effectively than most countries and is now the closest of the major countries to operating at “business-as-usual.” This has been a major support to global resource demand. While China’s credit cycle has likely peaked, which could weigh on global resource demand later in 2021, vaccine rollouts in the U.S. and the U.K., and later in the year in the European Union, are likely to provide a counterweight.
• The economies of many emerging market countries have been supported by surprisingly aggressive fiscal stimulus. With ballooning fiscal deficits, however, governments will likely have less room to respond in 2021. Furthermore, major emerging market countries including Brazil and India are now the epicenter of the COVID-19 pandemic.
• West Texas Intermediate (WTI) crude began to rise in mid-November as COVID-19 vaccine trials showed positive results. The rise continued through most of the first quarter, driven by Saudi Arabian supply cuts, lower recent investment, and increasing demand. The WTI crude benchmark increased from $48 per barrel at the start of the year to peak at $66 before retreating slightly to end the quarter at $59 per barrel.
• Finally, the tilt away from globalization that has been underway for about half of the decade is likely to be reinforced. We believe new factors stemming from COVID-19 and heightened geopolitical tension between the U.S. and China will fuel the move further away from globalization, which will change complex international supply chains, and lead to higher tariffs and potentially increased barriers to immigration.

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 31, 2021, 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. Past performance is not a guarantee of future results.

The Bloomberg Barclays U.S. Credit Index measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government-related bond markets, including a non-corporate component of non U.S. agencies, sovereigns, supranationals and local authorities. It is not possible to invest directly in an index.

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

All information is based on Class I shares.

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.