Market Sector Update

• High yield bonds posted positive gains in the second quarter by returning 2.57%, as measured by the ICE BofAML US High Yield Index. Year to date, the index has returned 10.16%. Meanwhile, leveraged loans underperformed high yield, returning 1.63% and 5.58% for the quarter and year to date, respectively.
• The Federal Reserve (Fed), tariffs and the trade war between the U.S. and China continued to dominate the markets in the quarter. At the Fed’s June meeting, the interest rate forecast “dots” were lowered, indicating participants are looking for 50 basis point (bps) in cuts by the end of the year. This helped extend the equity and bond market rallies as a dovish Fed is seen as supportive of asset values. The U.S. and China agreed to continue talks after the G20 Summit, which was viewed positively.
• After seeing $14.1 billion of inflows in the first quarter, the high yield asset class recorded $600 million in outflows in the second quarter. Year to date, high yield mutual fund inflows are $12 billion compared with outflows totaling $24.5 billion during the first six months last year.
• Leveraged loans continued to experience outflows in the quarter with approximately $8.8B leaving the asset class mainly due to the Fed’s dovish pivot and high likelihood of a 25 bps rate cut at the end of July.
• High yield new-issue volume in the second quarter was strong at $74.7 billion versus $65.4 billion last quarter. Yearto- date volume is up 11% over last year. Leveraged loan new-issue volume was $90.9 billion in the quarter versus $66.8 billion in the first quarter. However, year-to-date gross loan issuance is down 38% relative to last year reflecting the negative sentiment and technicals in the loan market.

Portfolio Strategy

• The Fund’s weighting in bonds versus loans did not change materially from quarter over quarter. Our weighting by rating category is 16% BB, 50% B and 24% CCC, as measured by Standard & Poor’s ratings.
• We have maintained our exposure to leveraged loans as they continue to offer attractive yields relative to their seniority in the capital structure. They also offer the potential for less volatility in times of stress, such as fourth quarter of 2018, when leveraged loans outperformed the Fund’s benchmark by 339 bps.
• As yields have tightened and spreads compressed year to date, we have become more cautious about the risks we are taking. The outperformance of the BB rated bonds has mostly been rate-driven as the 10-year U.S. Treasury note has moved from 2.68% to start the year to 2% at the end of the quarter. We view our loan exposure as a replacement to our exposure to the BB rated category and has underperformed year to date. When looking at the yield pick-up we are getting in loans relative to that of BB rated paper, we think it continues to make sense holding loans, especially as the 10-year Treasury note is close to 2%.
• Our structural underweight in high yield bonds, when compared to the all-bond benchmark, again detracted from performance as bank loans underperformed the ICE BofAML High Yield Index. The allocation to loans was the largest single detractor during the quarter, for reasons outlined above. We continued to have a meaningful underweight to the energy sector, but unlike the first quarter, the energy sector in the second quarter underperformed which helped our relative performance.
• Credit selection in health care services and cable sectors contributed to performance in our bond portfolio, while credits in agriculture and gaming detracted. Our weighting in equites also detracted from performance.

Outlook

• We continue to think there is a favorable probability that several of the uncertainties plaguing the market will come to resolution giving investors and company executives more clarity on the macro environment. This has already begun, and spreads have tightened substantially from their widest point in December.
• Given our expectation of a sharp rebound in growth for the second quarter of 2019 and modest above-trend growth afterwards, we view risks to spreads on the tighter side in the near-term and fairly balanced over the longer-term.
• We continue to keep an eye on the yield curve, oil prices, improvements or lack thereof of leverage and coverage ratios across our holdings. Not all signs are indicating green lights for investors, but our base-case is that a recession is not in the foreseeable future.
• As always, our focus when evaluating investments is a company’s business model and competitive advantages in order to weather a recession and perform throughout the cycle.

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 June 30, 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.

Risk factors: The price of the Fund’s shares will fluctuate with market conditions and other factors. Fund shares are not guaranteed or endorsed by any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation. Closed-end funds frequently trade at a discount from their net asset values (NAVs), which may increase an investor’s risk of loss. At the time of sale, shares may have a market price that is below NAV, and may be worth less than the original investment. There is no assurance that the Fund will meet its investment objective. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than with 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.

An investment in the Fund is not appropriate for all investors and is not intended to be a complete investment program. The Fund is designed as a long-term investment and not as a trading vehicle.

Ivy Investment Management Company (IICO) serves as the Fund’s investment adviser. IICO is a wholly-owned subsidiary of Waddell & Reed Financial, Inc.

The Fund is a closed-end exchange traded investment company. This material is presented only to provide information and is not intended as investment advice or recommendations for trading purposes. Closed-end funds, unlike open-end funds, are not continuously offered. After the initial public offering, shares of closed-end funds are sold on the open market through a stock exchange. Investment policies, management fees, risks other than those mentioned above, and other matters of interest to prospective investors may be found in the closed-end fund prospectus used in its initial public offering. For additional information, contact our sales desk at 800-532-2780.