Ivy Municipal High Income Fund

Ivy Municipal High Income Fund

Market Sector Update

  • The municipal markets’ positive returns continued into the fourth quarter of 2017. The positive traction in Congress toward crafting and ultimately the signing of the President’s tax legislation resulted in positive returns for most asset classes. While the market liked the legislation, we believe the changes made to the tax code are mildly negative for the municipal market. Lower absolute tax rates are normally negative to the municipal market, as tax-adjusted returns decrease, therefore making them less attractive than their taxable counterparts. It is important to note, on a relative basis tax-exempt yields are still attractive versus other fixed income asset classes.
  • The fourth quarter of 2017 saw lower yields overall; however, we did see some big negative moves in certain sectors driven by Puerto Rico. Two of the sectors which saw negative returns were water and sewer revenue, and electric revenue bonds, which had returns of -2.23 percent and -8.21 percent respectively for the quarter. It is important to note the Fund sold all exposure to Puerto Rico prior to Hurricane Maria, which helped contribute positively to the Fund’s performance in the fourth quarter.
  • Tobacco rallied the last three months of 2017, returning a positive 2.91 percent, with the sector up 21.53 percent for the year. The Fund being underweight tobacco negatively contributed to performance for the quarter and year, however, we see little upside going forward as most bonds are priced very close to par.
  • High yield General Obligation bonds rallied in the quarter returning a positive 4.24 percent; however, this is somewhat misleading, as one credit skewed the returns. The City of Chicago was the largest and best preforming issuer for the full year. We continue to view Chicago debt in a negative light, as the local pensions continue to be grossly underfunded. With very few credits leading to so much of the total returns we believe the rally is being driven not by fundamentals but rather by isolated credit anomalies.
  • Puerto Rico continued to hurt total returns (-8.31 percent for the quarter), as the Commonwealth’s deteriorating economic health, along with the devastation of hurricane Maria, caused prices to decline further. We believe we will continue to see weakening prices for Puerto Rico paper in the future.
  • With the rally in rates through 2017, we have become less constructive on the high yield municipal space as, with the exception of a few detractors, new issues came to market with historically low absolute yields and weak collateral for investors.
  • Going forward we still believe the municipal market is attractive versus other fixed income asset classes based on higher tax adjusted returns. We have turned more bearish overall, however, as we believe the passage of tax legislation will result in more downside than upside on a total return basis.

Portfolio Strategy

  • The Fund eliminated exposure to Puerto Rico prior to the fourth quarter as it became clear that the debt restructuring would take much longer than first anticipated. The primary objective of the Fund is to provide high levels of tax-exempt income, and the decision to sell was based on the negative income consequences for the bonds going forward. With no clear picture on the debt restructuring and the massive devastation of Hurricane Maria, we feel any prior projections of recovery are inaccurate and there is more downside to come.
  • We continue to favor revenue bonds over tax-backed debt as revenue bonds, in our view, provide higher yields and better diversification from general tax and pension issues currently affecting many municipalities. Historically General Obligations have fared well in Chapter 9 bankruptcies; however, this belief was turned on its head post-Detroit and we expect the same outcome in the Title IV filing in Puerto Rico.
  • Going forward, we will look for opportunities in bonds with more defensive structures, as interest rates continue to hover around historically low levels and credit spreads continue to be tight. We feel at this time it makes sense to maintain a shorter duration, as we view the sector as fully priced.


  • In the near term we believe volatility will continue, as choppy economic data continues to create global uncertainty for markets. It is important investors realize prudent managers diversify across states and sectors and always limit the amount of exposure to those variables as well as any individual bond.
  • We believe investors will continue to search for tax-exempt yield even now that the tax legislation has passed. We view the tax cuts as favoring lower income brackets and with a top personal income tax rate of 37 percent, we believe municipal bonds are still highly attractive. Although we see demand for municipal bonds staying consistent with normal levels, one big outlier would be additional issuance caused by a large infrastructure spending bill getting passed in Congress and signed by the President.
  • That being said, we believe that supply in the municipal market will remain at normal levels which should present opportunities for investors. In our view, municipal bonds will continue to be one of the most attractive fixed income asset classes from a relative valuation standpoint.

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. Past performance is not a guarantee of future results.

Diversification is an investment strategy that attempts to manage risk within your portfolio but it does 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 by investing. 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. The Fund may include a significant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax (AMT). Exempt interest dividends the Fund pays may be subject to state and local income taxes. The portion of the dividends the Fund pays that is attributable to interest earned on U.S. government securities generally is not subject to those taxes, although distributions by the Fund to its shareholders of net realized gains on the sale of those securities are fully subject to those taxes. The municipal securities market generally, or certain municipal securities in particular, may be significantly affected by adverse political, legislative or regulatory changes or litigation at the Federal or state level. 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.