Market Sector Update

• At the end of last year, we were cautiously optimistic that returns for the next 12 months would be attractive due to the more than 200 bps spread widening of the high yield index during the fourth quarter. We did not expect to see a large portion of those returns in the first quarter. The dovish pivot by the U.S. Federal Reserve (Fed), progress on U.S.- China trade talks, increasing oil prices and a return to inflows for the high yield mutual fund asset class were factors that contributed to gains.
• The concerns and risk-off sentiment that consumed investors in the fourth quarter of 2018 have all but disappeared at the end of the first quarter. The high yield asset class snapped back from the lows of December 2018 and posted one of the best quarterly starts to a calendar year in recent history, returning approximately 7.4%.
• The past 12 months saw net outflows in the high yield asset class of $17.9 billion with the first quarter of 2019 being a bright spot with inflows of $14.1 billion, helping offset the negative flows seen in the previous three quarters.
• Leveraged loans were not immune to outflows over the past 12 months, losing $19.7 billion with most of the outflows coming in the past two quarters. As rate-hike expectations subsided, the market is placing a higher probability of the Fed’s next move being a rate cut, which has caused loan technicals to quickly turn negative.
• The quarter had new issue activity of $65.4 billion, while the past 12 months was $209 billion. Year over year, the 12-month volume was a startling decrease of 35%. This was highlighted by zero high-yield deals being priced in December 2018, which was the first time since November 2008 and only the second time since 1990. Leveraged loan new-issue volume was $68 billion and $638 billion for the quarter and prior 12 months, respectively.

Portfolio Strategy

• The Fund had a positive return, but underperformed the benchmark.
• Our structural underweight to high-yield bonds, when compared to the all-bond benchmark, detracted from performance as bank loans underperformed the benchmark for the quarter. The Fund’s exposure to the CCC category ended the period at 35%.
• The Fund’s allocation to loans was the largest single detractor during the quarter. The allocation to loans helped reduce our downside risk in the fourth quarter of 2018 and detracted from relative performance during the first quarter. We maintained a meaningful underweight to energy. Oil rebounded with other risk assets in the first quarter, and the energy component of our benchmark was one of the best-performing sectors returning 8.4%.
• Credit selection in both cable and services sectors contributed to performance in the first quarter along with underweights in the automakers and auto equipment sectors.
• 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.

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 to focus on a company’s business model and competitive advantages in order to weather a recession and perform throughout the cycle.

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.