Market Sector Update

• The strong rebound seen in the prior quarter continued in third quarter, but to a lessor extent with the ICE Bofa U.S. High Yield Index returning 4.7% compared to 9.6% in the second quarter. This brought the year-to-date (YTD) return through the third quarter to negative 0.30%.
• Leveraged loans gained 4.1% in the quarter versus a 9.8% gain in the second quarter. Leveraged loans are down 0.45% YTD through the end of the quarter.
• The best performing sectors were air transportation, aerospace/defense and recreation/travel, up 11.53%, 9.14% and 9.10%, respectively. The worst performing sectors were oil field services, oil refining/marketing, down 8.63%, 1.72%, respectively, and theaters/entertainment, which was up 1.9%.
• Spreads on the ICE BofA U.S. High Yield Index compressed by 102 basis points (bps) in the third quarter, compared to 228 bps of compression in the second quarter. Credit is readily available and bond issuance has equaled or eclipsed many prior records. New issuance activity in high yield continued in the quarter with 206 issues pricing for $133.9 billion, while leverage loan had 100 issues price for $67.8 billion. On a YTD basis, gross high yield volume totals are $350 billion, up 68% from $208 billion that priced during the first nine months of 2019.
• During the quarter, 26 companies totaling $19.3 billion defaulted, with $16.2 billion defaulting and $3.1 billion completing distressed exchanges. By comparison, 51 companies accounting for $80.3 billion defaulted/completed distressed exchanges in the second quarter. Including distressed exchanges, the U.S. high-yield default rate is 6.36%, and 4.33% excluding the energy sector.
• High yield fund flows ended the period at a positive $10.7 billion, but leverage loans experienced continued outflows of $3.3 billion.

Portfolio Strategy

• The Fund returned had a high-single-digit return, outperforming its benchmark and Morningstar peer group.
• The high-yield bond portion of the Fund outperformed the index and the peer group during the quarter. Contributors to performance were credit picks in support-services, aerospace/defense and telecom. Detractors from performance in the quarter include credits in oil field services, gaming and an overweight allocation to the food sector.
• The Fund's Leveraged loan investments returned nearly 10%, outperforming both the index and the peer group during the quarter. Credits in the retail sector drove the vast majority of outperformance. Detractors from performance in our loan portfolio were concentrated in the energy sector.
• Equities outperformed and contributed to performance during the period.

Outlook

• Looking forward into next quarter and further into 2021 there are a tremendous number of unknowns. Specifically, the outcome of the U.S. Presidential election, the potential of a vaccine, the time to get a vaccine into the worldwide population, concerns of a second wave of COVID-19 infections and whether another round of stimulus is upcoming. We think there is a high probability of a vaccine getting into the market sometime in the first half of 2021.
• We think the probability of another stimulus bill is high and is only a question of timing – before or after the U.S. election. One of the biggest short-term risks we see on the horizon is a contested election result with no clear winner. This would likely create short-term volatility to the downside but would ultimately get resolved. We would use any spread widening to add to the asset class.
• In our outlook last quarter, we stated we remained constructive on the high-yield market with credit spreads at levels between 675-700 bps. At the end of the quarter, spreads are in the 500-550 bps range, and we continue to be constructive on the asset class.

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, 2020, 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 impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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.