Ivy High Income Fund

09.30.20

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 leveraged 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 (64% of Fund net assets) outperformed the index and the peer group during the quarter by 200 bps. 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.
  • Leverage loan investments (26% of Fund net assets) returned nearly 10% during the period, outperforming both the index and the peer group. 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 (2.9% of Fund net assets) outperformed as well driven by a rebound in a key equity holding.

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. Past performance is not a guarantee of future results.

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.

The ICE BofAML US High Yield 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

All information is based on Class I shares.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. 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 fund classes may be offered at all broker/ dealers.