Market Sector Update

• Financial markets reacted positively during the quarter as political conflicts, trade uncertainty and global economic growth concerns waned late in the year. The macro environment stabilized with indicators of growth in both China and Europe improving, although slowly. The U.S. and China announced phase one of a trade deal, the U.S. House of Representatives approved the U.S.-Mexico-Canada Agreement (USMCA) and passed it to the Senate for approval, U.K. Prime Minister Boris Johnson’s party won an election that kept him in power and reduced uncertainty about the planned Brexit, and the U.S. Federal Reserve (Fed) made it clear that it is unlikely to increase interest rates in 2020.
• The normalization of the Fed’s balance sheet ended in the third quarter as it stated it would reinvest maturing U.S. Treasuries and mortgage-backed securities. The Fed also announced it would start expanding its balance sheet to better align it with the size of nominal gross domestic product (GDP). It cut the fed funds rate 25 basis points (bp) in October to 1.50%. In addition, the Fed injected cash into the system to calm year-end funding pressures because of stress during the quarter in the short-term funding, or “repo,” market.
• During the previous quarter, the European Central Bank (ECB) and Bank of China started loosening monetary conditions by cutting deposit rates, strengthening forward guidance, relaunching asset purchase programs and reducing reserve requirements for the banking industries. This quarter, there was a change in leadership at the ECB with Christine Lagarde taking over as president. She has hinted at more of a fiscal response to the lack of growth in the region with a continuation of the easy monetary policies.
• The U.S. Treasuries yield curve steepened 30 bp with renewed growth prospects as 2-year Treasuries remained range bound and 10-year Treasuries declined approximately 25 bp. Credit spreads narrowed in the high grade, high yield and emerging markets over the course of the quarter.
• By switching their focus from tight labor markets and accelerating wage growth to slowing economies and softening inflation expectations, we continue to believe policymakers are trying to create a backdrop for lower volatility.

Portfolio Strategy

• The Fund had a positive return for the quarter and outperformed its benchmark and Morningstar peer group. Most of the outperformance was attributable to the Fund’s exposure to credit. The Fund’s large exposure to CCC-rated credits helped its performance, as this sector’s credit spreads tightened relative to other higher quality credits. There also was a rebound in prices related to Argentina because investor expectations improved about potential recovery rates. The Fund’s shorter relative duration also helped its performance because the yield curve steepened during the quarter.
• With renewed global growth prospects, the U.S. dollar weakened during the quarter against other developed market currencies, with the U.K. pound and the euro gaining 8% and 2.8%, respectively. The Fund’s 98.8% U.S. dollar exposure detracted from its relative performance versus its benchmark and category peers.
• We continue to seek opportunities to reduce volatility in the Fund. We also have continued a low-duration strategy, as we feel it allows us a higher degree of certainty about those companies in which we can invest.
• The Fund also continued to hold a higher level of liquidity in the quarter. We will be opportunistic in allocating that capital as we find dislocations in the market.

Outlook

• The Fed’s interest rate cuts in 2019 paid out with strong support in the interest-sensitive segments of household activity. The benefit of lower rates continues to support the U.S. economy and counteract the loss of the “tailwind” supplied by tax cuts implemented in late 2017. We think exports and business investment will stabilize and rise from very low levels on the likely implementation of USMCA and phase one of a trade deal with China. We think the Fed will remain on hold throughout the first half of 2020 and watch to see if inflationary pressures build from an ever-tightening labor market.
• We still expect the U.S. budget deficit to rise to $1.0 trillion (4.7% of GDP) in 2019 from structural forces that have deteriorated by a much greater amount than the offsetting cyclical improvement.
• Fundamentals in the credit markets remain stretched, with balance sheets still leveraged and debt levels at historic levels. Technical factors in credit are supported by international investors searching for yield, domestic demand for income and “reverse Yankee” issuance to tender for U.S. issues. A “reverse Yankee” refers to a company issuing debt in Europe at extremely low rates, taking the proceeds in euros, changing them into U.S. dollars and then tendering for the higher yielding dollar securities. It means fewer issues to buy for U.S. investors and the resulting supply/demand issue tends to compress spreads – which is considered a positive technical factor.
• Given the current levels of credit spreads and our expectation for modest widening of these spreads during 2020, we believe our conservative positioning relative to the benchmark is appropriate. We will be opportunistic about our credit selection and overall positioning in order to seek to take advantage of perceived opportunities and dislocations as they present themselves.

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, 2019, 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.

All information is based on Class I shares.

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

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.