Market Sector Update

• The global credit market continued to grind tighter through the first two months of the quarter before giving up some of those gains in September. The credit spread on the Bloomberg Barclays U.S. Universal Index ended the quarter at 109 basis points (bps), which is 96 bps tighter than the widest levels reached in March but 36 bps wider than January’s tightest level.
• The Organization for Economic Cooperation and Development (OECD) upgraded its forecast for global economic in September to a decline of 4.5%, up from the previous estimate of negative 6.0%. China, with growth expected at 1.8%, is the only G20 country the OECD forecasts to grow this year.
• Fixed-income investment returns have generally remained positive year to date, as the 10-year U.S. Treasury yield has traded in a tight 25 bps range after the volatility during the first and second quarter. The U.S. Treasury curve steepened slightly after Federal Reserve (Fed) Chair Jerome Powell used his speech at the Jackson Hole Symposium at the end of August to signal sustained looser monetary conditions. Specifically, he indicated that the Fed would change its interpretation of its price-stability mandate to target “inflation that averages 2% over time,” thus allowing for “inflation moderately above 2%” after periods of low inflation.
• Growth in U.S. consumer spending has slowed as Congress has failed to pass further stimulus after the $600 per week unemployment payments ended at the end of July. Nonetheless, many economic indicators have improved faster than expected a quarter ago.

Portfolio Strategy

• The Fund outperformed its benchmark during the quarter. Most of the outperformance against the benchmark was attributable to the Fund’s exposure to credit as monetary stimulus continued to support market liquidity levels. Lower quality CCC and leverage loans outperformed higher quality credit over the quarter.
• We continue to seek opportunities to reduce volatility in the Fund. Additionally, we are maintaining a low-duration strategy as we feel it allows us a higher degree of certainty involving those companies in which we can invest. With the compression on credit spreads to more normalized levels, we are moving back to a defensive position by moving up in higher quality credit/companies at the expense of high-yield credits in emerging market countries.

Outlook

• We believe short-term interest rates will stay near zero for the foreseeable future and low inflation will keep a lid on long-term rates.
• 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, the packages are not fiscal stimulus that will generate sustained stronger growth.
• The federal government has been unsuccessfully debating another fiscal stimulus bill, while states look to fill gaps in their budgets. We think the outlook for a near-term solution is poor due to considerable focus on the Supreme Court and U.S. elections in early November.
• Demand for corporate credit remains intact, though recently decelerated from record-setting levels. Across the globe, fixed-income yields are staggeringly low, leaving investors few alternatives. The Fed has stepped in as a buyer in the U.S. investment-grade and high-yield markets, 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 as “business-as-usual.” This has been a major support to global resource demand.
• 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 as COVID-19 continues to heavily impact Latin American economies and a second-wave arrives in Europe.
• While West Texas Intermediate crude has remained in a tight band near $40 per barrel during the quarter, we don’t believe it is a level that will sustain fiscal spending in oil-based economies such as those in the Persian Gulf and Nigeria. Meanwhile, China’s resurgent economy and supply disruptions have supported the prices of many industrial metals.
• 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 will fuel the move further away globalization, which will change complex international supply chains, 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 Sept. 30, 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. 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.

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.

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.