Market Sector Update

• The global credit market renewed its grind tighter in the fourth quarter after pausing in September. The credit spread on the Bloomberg Barclays U.S. Universal Index ended the quarter at 81 basis points (bps), which is 125 bps tighter than the widest levels reached in March and just 8 bps wider than the year’s tights in January 2020.
• The Organization for Economic Cooperation and Development (OECD) in December again upgraded its forecast for global economic growth in 2020 to a decline of 4.2%, up from September’s estimate of negative 4.5%. China, with growth expected at 1.8%, remains the only G20 country that the OECD forecasts to have grown in 2020. The OECD does expect global growth to rebound in 2021 to 4.2%, although the rebound will be very uneven across the globe.
• Fixed-income investment returns generally remained positive for the year, despite the U.S. Treasury yield rising steadily over the fourth quarter to end the year at 0.91% after falling near 0.5% multiple times earlier in the year. The U.S. Treasury curve steepened during the quarter as market-implied inflation metrics rose on optimism over an economic recovery and the election of Joe Biden as the 46th president of the United States.
• Growth in U.S. consumer spending slowed towards the end of the quarter as a new wave of COVID-19 cases swept the country and Congress failed to pass further stimulus measures until the end of December.

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 and expectations of a successful vaccine roll-out supported market sentiment. Lower quality CCC credit 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 levels tighter than their historical averages, we are continuing to move to a more 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. Inflation will also remain low due to growth constraints, although it is likely to be higher than we had previously anticipated due to the Democrats gaining control of the Senate along with the House of Representatives.
• 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.
• The federal government finally passed another fiscal stimulus bill at the end of December, while states look to fill gaps in their budgets. The outlook is good for additional stimulus as Democrats have stated it is one of their first priorities in the new term.
• 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 Chinese authorities are unlikely to tighten policy for the foreseeable future, momentum in its credit cycle is likely to have peaked which could weigh on global resource demand later in 2021.
• 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 cases hit record highs across much of the world.
• West Texas Intermediate crude began to rise in mid-November as COVID-19 vaccine trials showed positive results. The crude benchmark rose from $36 per barrel at the end of October to $48 per barrel at the end of the year. Saudi Arabia has committed to cutting supply during the first quarter of 2021 which should provide further support for higher oil prices as well as the finances of countries that depend on oil exports. Meanwhile, China’s economic strength continues to support 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 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 Dec. 31, 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.