Ivy Closed-End High Income Opportunities Fund

Ivy High Income Opportunities Fund

Market Sector Update

  • Steady as she goes described the majority of the bond markets in the final quarter of 2017, with 10-Year Treasuries down slightly and investment grade bonds, high yield bonds and emerging market bonds all posting slight increases. Bond investors contemplated several events at the close of the calendar year including a Federal Reserve (Fed) rate hike, rising oil prices and the passage of a highly anticipated tax bill. The Treasury curve continues to flatten (almost 70 basis points for 2017) and is now at levels not seen since 2007.
  • The high yield sector provided proportionate gains to its carry amount in 2017 with the ICE Bank of America Merrill Lynch US High Yield Index posting a 7.48% return. Credit spreads continued to tighten, ending the year at 404 basis points, down from 484 basis points at the beginning of the year. Yields also declined in 2017, going from 6.54% on January 1 to 6.1% at year-end. For the fourth quarter, October and December mirrored performance at 0.44% and 0.38% respectively, balancing an extremely flat (0.01%) November. Senior loans saw greater returns during the fourth quarter than high yield bonds, but not enough to lead the asset class for the year.
  • High yield mutual funds experienced outflows of $9.5 billion in the fourth quarter, with November in focus as the ninth largest month of outflows on record. This brings the full 2017 year of outflows to $20.3 billion, more than double the redemptions of 2016.
  • High yield bond new issuance for 2017 was $314 billion, but only $114 billion net of refinancing. Therefore, net new issuance was at its lowest level since 2011, whereas refinancing volume totaling $199 billion for the year is behind only 2013’s record pace. Loan new issuance for 2017 was $908 billion, of which $414 billion was repricing and $256 billion refinancing. This puts net new volume on the loan side at $238 billion.
  • Default activity continues on a downward trajectory, ending the year at 1.27%, or down 230 basis points since January 2017. For perspective, the long term default rate average is 3 to 3.5%.

Portfolio Strategy

  • The Fund outperformed both its benchmark and Lipper peer group (before the effects of sales charges) for the quarter.
  • The Fund retains a 21.75% allocation to Loans. The ICE Bank of America Merrill Lynch US High Yield Index does not have an allocation to loans but the exposure was a positive contributor to the Fund for the quarter. Although the strategy is driven by fundamental, bottom-up research selection rather than a quality or sector bias, we believe the Fund’s allocation to CCC paper and loans will allow it to be less interest rate sensitive in a rising rate environment.
  • Other contributors to performance for the quarter include credit selection in education, specialty finance, specialty retail and equities. Being underweight in the satellite sector and health facilities helped as well.
  • The greatest detractor to the portfolio over the three month timeframe was exposure to credits in the cable, telecom and broadcasting sectors. Being underweight exposure to the banking and building/construction sectors also detracted from performance but to a lesser extent than the credit selections mentioned above.


  • Global growth and expansion have continued into 2018, along with accommodative policy (albeit being taken away slowly) from central banks which is helping keep rates low, as measured by historical standards. With the passage of both corporate and individual tax reform, we believe the credit cycle seems likely to last a year or two longer, at a minimum, given these tail winds. However, a year or two more does not come without risks. At the top of our list of data points to watch include inflation, the pace of tightening policy - not only from the Fed but around the globe - geopolitical events and oil prices.
  • As of December 31, 2017, CCC credits were trading at $92.22 while BB quality credits and B credits were still trading well over par at $104.62 and $102.13, respectively. In the era of ever present demand for yield accompanied by compressing spreads and lower rates across the entire credit spectrum, there is increasing concern over risk-adjusted returns. As yields on the high yield indexes and the exchange traded funds tracking them have pushed down to 5% levels, it begs the question of how much risk investors should be taking for incremental yield.
  • It is our view that finding value in the high-yield market has become increasingly more difficult, and caution is warranted in selecting new investments. We remain focused on idiosyncratic and credit-specific relative value opportunities. The global search for yield has kept demand at all-time highs. As such, we believe our continued process of bottom-up, in-depth fundamental research and analysis will guide us to those investments where the risk/reward is in our favor. We also think with the potential of a continuation of rising interest rates accompanied by the possibility of a more active Fed, the ability to continue to invest in loans will be an attractive differentiator for the Fund. We believe our relative underweight to bonds may prove beneficial.

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, 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.

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.

The ICE BofAML U.S. HY Master II TR USD Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. It is not possible to invest directly in an index.

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.