Ivy Apollo Strategic Income Fund

Ivy Apollo Strategic Income Fund
09.30.17

Market Sector Update

  • Renewed discussions about U.S. tax reform supported another move higher in risk assets in September, with credit spreads well below their average levels.
  • Crude oil prices rallied off their June 2017 lows with Brent crude oil prices up 8.9% in September. Energy was one of the best performing sectors, as persistently high inventory levels began to decline.
  • The trade-weighted U.S. dollar rebounded as market started to price in more interest rate increases by the U.S. Federal Reserve (Fed). The Fed announced the details of its plans to begin drawing down its balance sheet. Beginning in October, the drawdown will be capped at $10 billion monthly and will increase by $10 billion quarterly until it reaches $50 billion per month.
  • The Bank of Japan did not provide any guidance about a change in direction with its monetary policy of targeting interest rates. Inflation forecasts suggest that while the bank might have overcome deflation in Japan, its 2% inflation goal still is not on the horizon.
  • China announced it would implement a targeted reduction in the reserve requirement ratio for commercial banks to support small businesses and to counteract the slowdown in growth in the third quarter.

Portfolio Strategy

  • The Fund had a positive return during the quarter (before the effect of sales charges) that slightly underperformed the return of its blended benchmark index.
  • An overweight position in the U.S. dollar in the Fund was a key factor in the underperformance. That positioning hurt relative performance as the dollar weakened during the quarter as the Canadian dollar, euro and British pound appreciated.
  • An overweight in corporate credit contributed to relative performance as the demand for income continues to attract foreign capital into the credit markets and compress spreads.
  • Volatility in the interest rate markets was low and had little impact on the returns of the Fund or its benchmark. We also continued to hold a higher level of liquidity during the quarter because of structural changes we see in the capital markets, and will use it as opportunities arise from dislocations in the market.
  • We continued a low-duration strategy, believing it allows a higher degree of certainty about the companies in which we can invest. We also looked for opportunities to make long-term investments in foreign currencies in certain emerging markets should they weaken versus the dollar.

Outlook

  • We think strength in the dollar will depend on several variable factors, including the Fed becoming more hawkish while other central banks are on the sidelines, potential for major fiscal stimulus and regulatory rollbacks in the U.S., and growth in Europe and Japan disappointing sufficiently to lower expectations of monetary tightening.
  • We believe dollar weakness will continue if the soft inflation data does not prove to be temporary. If it persists, the market is likely to question the Fed’s intentions in raising rates over the next 18 months. We also think fiscal policy provides some uncertainty for the direction of the dollar.
  • Investors are concerned that tax reform will be underwhelming because of the Trump administration’s inability to pass other legislative priorities so far this year. There are strong incentives for both the Republicans in Congress and President Donald Trump to make it happen, which may change the process and potential for implementing a tax plan.
  • Risk aversion related to emerging markets has been declining steadily this year. With attitudes improving, valuations are becoming less attractive even though macro conditions remain firm. Concerns about the U.S. changing its global trade policies still have investors concerned.
  • We think the European Central Bank is likely to announce its own tapering in quantitative easing at its Oct. 26 meeting, with the program starting in January 2018. We think this will provide further evidence that the era of lower rates, including negative rates, and expanding balance sheets is starting to wind down.
  • We anticipate increasing scrutiny on the difficult Brexit negotiations between the U.K. and European Union as talks heat up through year end.
  • Economic data from China suggest growth momentum may have moderated. Investment still is an important driver of growth, and we believe another round of stimulus may be coming. We think monetary policy will remain accommodative as the central bank works to reduce the risk of a more severe slowdown.
  • The U.S. budget deficit is on the rise and we think it is likely to continue with Trump’s pro-growth proposals. Treasury supply is likely to increase and in our view would be funded largely through T-bill issuance absorbed by new money market reforms, as well as via incremental demand from investors from Japan searching for yield.

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, 2017, 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.

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.