Ivy Pictet Targeted Return Bond Fund

Ivy Pictet Targeted Return Bond Fund

Market Sector Update

  • U.S. Treasury rates rose over the last quarter as the Federal Reserve (Fed) closed the year with its third interest rate hike in 2017 and Janet Yellen’s time as Fed Chair came to an end. The Fed raised rates by 0.25 percentage points, to the still-low range of 1.25-1.50 percent, and kept plans to reduce its bond portfolio at a measured pace and continue normalizing policy rates. As with the earlier hikes in the year, this latest rate hike was well anticipated and prepositioned by the markets.
  • Another driver of higher Treasury yields in December was Congress’ passage of a sweeping tax reform bill, marking the first significant legislative achievement of the Trump Administration. The bill is aimed at simplifying individual tax rates and lowering corporate rates, but which will likely result in higher future federal deficits. A partial U.S. government shutdown was averted as both congressional chambers voted to extend the government funding until the New Year.
  • In Europe, the September general election in Germany secured another term for Angela Merkel as Chancellor, but in a weakened position, as her coalition alliance failed to secure a majority and a new, three-way coalition must be formed. Growth momentum in the Eurozone remained strong, though, as consumer confidence improved on better labor market data. European Central Bank (ECB) President Draghi implied a gradual slowdown in pace of its asset purchase program will be forthcoming, as inflation remains weak. He said various scenarios to end quantitative easing were being considered, as the ECB wishes to move cautiously and not undermine the recovery.
  • The U.S. treasury curve bull flattened over the quarter as growth numbers surprised on the upside and oil prices rose. While U.S. Treasuries weakened, the 30-year Treasuries was well-supported after U.S. Treasury Secretary Steve Mnuchin announced that plans for an ultra-long Treasury issuance were scraped. Further, while the long-term impact of the U.S. tax reform bill is yet to be fully analyzed, the anticipated boost to the economy from the tax reform is not expected to cause a long-term boost to inflation that would justify aggressively higher policy rates.
  • In Europe, the Bund curve steepened after flattening earlier in the quarter and yields rose over the final month. In October, the ECB announced a cautious approach to unwinding its bond purchase program, with monthly purchases to halve, but with the program extended until at least September 2018. ECB President Draghi commented that there would be "no sudden end to the buying" and interest rates will remain stable for some time, leading Bunds to rally and the German curve to steepen.
  • Later in the quarter, the ECB raised its gross domestic product forecasts for the Eurozone, commenting that economic expansion in the Eurozone was broad-based and solid across sectors and countries, yet ECB President Draghi emphasized that inflation is the ECB’s primary focus. The German government announced a potential ultra-long bond issuance, while Chancellor Angela Merkel continued efforts to form a coalition government with the SPD party, after earlier three-way coalition talks with the other parties failed. This, in addition to hawkish central bank comments and thinner year-end liquidity, caused German yield curves to further steepen in December. Peripheral Europe outperformed Bunds on improving growth, and cooling political tensions in Spain.
  • The Bank of England (BOE) hiked its benchmark rate to 0.5 percent from 0.25 percent in November, the first rate hike in a decade, a move supported by the news that U.K. inflation breached 3 percent, following the deterioration in the growth data and continued lack of clarity and progress around Brexit negotiations. The Bank of Korea joined the BOE in raising rates for the first time since 2011, but with the intent to prevent capital outflows should the U.S. Fed hike rates further.
  • In Japan, Shinzo Abe’s decision to hold a snap election resulted in a landslide victory for him and his economic reforms and continued loose monetary policies. The Bank of Japan’s policy of targeting the yield curve remained in place, and long-dated governments rallied over the quarter.

Portfolio Strategy

  • The Fund's spread positions were the largest contributor to performance, with strong performance from emerging market hard currency debt, developed market investment grade and high yield. Rates positioning in the U.S. detracted from performance over the quarter as U.S. rates moved higher. Performance from our foreign exchange (FX) positions detracted over the quarter, given our short emerging market FX exposure versus the long U.S. dollar.
  • In rates, we increased duration over the quarter, primarily in the U.S., where we maintain our curve flattened, as yields rose and valuations improved. In Germany we reduced our Bund curve. In credit, we took profit in certain sectors such as subordinated financials but remain long financials due to continued de-risking by the banks and improved global economic outlook. We added short dated corporates and floating rate bonds where we saw value, both in secondary and new issue markets. In FX, we remain long U.S. dollars and short emerging market FX.


  • 2018 has started with the same degree of optimism in financial markets as the end of 2017. Global growth continues to be robust and inflation numbers moderate. At the same time, the market seems to be getting close to fully pricing the three rate hikes that the Fed still forecasts by the end of 2018. Also surprisingly, the U.S. dollar has started the year stronger versus most other currencies.
  • In our view, the surprise this year would be a continuation of this trend. This could happen as a result of stronger growth in the U.S. despite continued Fed tightening or a “risk off” event, which would make investors want to find refuge in the U.S. dollar. The bond market is pricing the first case, but the U.S. dollar seems to be pricing very little chance of a risk event happening. A combination of long U.S. intermediate Treasuries and the U.S. dollar continues to be, in our view, the best way to protect some of our riskier positions in credit and emerging markets.
  • We continue to think that a scenario similar to 2017 where rates went up meaningfully in the U.S. accompanied by a significantly weaker U.S. dollar is less likely, given that the U.S. yield curve is already quite flat and the easier fiscal policy should support the greenback.

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 does not guarantee a profit or protect against loss in a declining market. It is a method to manage risk.

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. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. 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, especially securities with longer maturities. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher rated bonds. The Fund may seek to manage exposure to various foreign currencies, which may involve additional risks. The value of securities, as measured in U.S. dollars, may be unfavorably affected by changes in foreign currency exchange rates or exchange control regulations. Investing in foreign securities involves a number of risks that may not be associated with the U.S. markets and that could affect the Fund's performance unfavorably, such as greater price volatility; comparatively weak supervision and regulation of securities exchanges, fluctuation in foreign currency exchange rates and related conversion costs, adverse foreign tax consequences, or different and/or less stringent financial reporting standards. Mortgage-backed and asset-backed securities in which the Fund may invest are subject to prepayment risk and extension risk. The Fund employs investment management techniques that differ from those often used by traditional bond funds, including a targeted return strategy, and may not always perform in line with the performance of the bond markets. The Fund is also non-diversified and may hold fewer securities than other funds and a decline in the value of these holdings would cause the Fund's overall value to decline to a greater degree than a more diversified fund. The Fund expects to use derivatives in pursuing its investment objective. The use of derivatives presents several risks including the risk that fluctuation in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative's value is derived. Moreover, some derivatives are more sensitive to interest rate changes and market fluctuations than others, and the risk of loss may be greater than if the derivative technique(s) had not been used. These and other risks are more fully described in the Fund's prospectus.