Ivy Global Bond Fund

Ivy Global Bond Fund
03.31.19

Market Sector Update

  • In January, the Federal Open Market Committee (FOMC) pivoted from a tightening bias to a new message of “patience”. U.S. Federal Reserve (Fed) Chairman Powell implied that rate hikes were off the table for the remainder of the year. The markets welcomed the pause as financial conditions loosened with equity prices rising, credit spreads tightening and the U.S. dollar weakening relative to emerging market currencies.
  • The normalization of the Fed’s balance sheet is also winding down as the Fed slows down the pace of decline in the balance sheet to a level consistent with what we believe is efficient and effective policy implementation.
  • The yield curve inverted as the market brought down expectations of the Fed’s tightening policy and overall expectations of a slower global growth environment. The Fed brought down U.S. gross domestic product (GDP) growth from 2.3% to 2.1% for 2019 and kept the Core Personal Consumption Expenditures (PCE) inflation forecast unchanged at 2.0%.
  • The Trump Administration’s negotiations with China continued during the first quarter of 2019 but nothing material happened; expectations are rising that a settlement will occur soon.
  • Central banks across the globe continued to inject volatility into the markets as they try to guide market expectations with their data dependent policies. Dovish forward guidance from the European Central Bank, Bank of Japan and Bank of England stemmed from slowing growth, persistent geopolitical uncertainty and underwhelming inflation, placing policymakers on a more cautious footing.
  • By switching their focus from tight labor markets and accelerating wage growth to slowing economies and softening inflation expectations, policymakers are trying to create a backdrop for lower volatility.

Portfolio Strategy

  • The Fund had a positive return but underperformed its benchmark for the quarter primarily due to its shorter effective duration and defensive posturing in credit and Treasuries. The recent risk-on environment led to a significant tightening in credit spreads and the market’s reaction to the pause in monetary policy led to a rally in long duration Treasuries.
  • The U.S. dollar weakened over the quarter against emerging market currencies, as the Russian ruble, Chilean peso and Colombian peso rose 6.2%, 2.5%, and 2.0%, respectively. The Fund’s 97.5% U.S. dollar exposure hurt performance relative to peers.
  • We continue to seek opportunities to reduce volatility in the Fund. Additionally, we are maintaining a low duration strategy for the Fund as we feel it allows us a higher degree of certainty involving those companies in which we can invest.
  • We continue to focus on maintaining proper diversification for the Fund. We continue to hold a higher level of liquidity (patient capital) because of structural changes in the capital markets. We will be opportunistic in allocating that capital when we believe dislocations in the market arise.

Outlook

  • We expect modest improvement in economic growth in the next couple of quarters that will provide cover for the Fed to not raise rates for the remainder of 2019.
  • Labor markets continue to grow and beat expectations, which has kept consumer confidence near cycle highs. The U.S. government shutdown, severe weather and tax refunds were a few special factors that were headwinds for GDP growth during the quarter, but we believe these factors will have less of an impact as we move through the year.
  • We continue to believe uncertainty regarding trade, the ongoing Brexit saga and global growth concerns will result in economic growth modestly below consensus forecasts.
  • Trade will continue to be a risk factor going forward. There is the potential for more tariffs, followed by retaliatory action that might impact company’s capital investment plans. A negative feedback loop might impact markets, stocks and ultimately consumer confidence.
  • Fundamentals in the credit markets continue to remain stretched with balance sheets remaining levered. Softer global growth is concerning and leads us to be cautionary on the outlook for credit spreads.
  • Given our expectation for modest widening of spreads in 2019, we believe our conservative positioning relative to the benchmark is appropriate. We will be opportunistic about our credit selection and overall positioning 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 March 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.

Diversification and asset allocation are investment strategies that attempt to manage risk within your portfolio but they do not guarantee profits or protect against loss in declining markets.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. 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 classes may be offered at all broker/dealers.