Ivy Pictet Targeted Return Bond Fund
Commentary as of April 22, 2020
You previously stated that March was the month that changed the world and markets. Could you provide some context on how you're viewing the current environment?
The main thing that sets this environment apart from previous crises is that our lives are at risk here, too. So it's quite understandable that we're seeing this sort of volatility in the markets over the course of the last several weeks. What we've seen is the acceleration of trends that have been in place for several years now if not decades. We're looking at the spectrum of growth falling in the U.S. by as much as 5- 7%. We're not in the business of trying to predict exactly how large the impact to gross domestic product (GDP) will be. We know how we entered this crisis, but little can be said on how we come out of it.
Most fixed-income assets have performed poorly, with the exception of very high quality assets like U.S. Treasuries and a few other sovereign bonds. Anything with a spread has had a negative return, ranging from -5% to -18%. If we look at currency markets, it's a pretty dire picture there as well. The U.S. dollar is king, and some commodity and emerging-market currencies have seen declines in value anywhere from 10-23%. If you think about corporates, we've seen funding stress in markets as demand for U.S. dollars and cash remained elevated. The market has seen hefty outflows as investors collectively hit the sell button. At one point, every major asset class we track was experiencing outflows.
With regards to policy response in the U.S., the U.S. Federal Reserve (Fed) is trying to minimize the liquidity risk and the U.S. Treasury is focused on minimizing solvency risk emanating from this crisis. They're also working to improve liquidity in the market. We've seen unprecedented policy moves, not just in the U.S. but across the world. Fiscal responses have been fairly large. In some countries, the amount of fiscal expansion equates to somewhere around 7%-10% of GDP. Depending on how much longer this crisis lasts, those figures could continue to grow. On monetary policy response, we have seen strong response and expect $5.5 trillion in balance sheet expansion across the world in 2020 alone. That equates to about 9.5% of GDP, so these are very big numbers we're dealing with. If we look at the Fund, performance has been down, but we've been able to claw back some of that underperformance through the first few weeks of April and trail our cash benchmark by about 1.5%. As far as what's been driving performance, rates have been a strong performer, while spreads have been the main detractor of performance year-to-date. Currency has been slightly positive.
From a qualitative standpoint, and relative to expectations, how would you characterize performance?
When we think about allocating risk, we look at potential shocks to the downside. If we look at what happened in March, our stress tests based on half of 2008 drawdowns and risk, we would have expected a loss of around 400 basis points. The portfolio has behaved as expected given that we've been confronted with as large a risk event as the 2008 financial crisis. With regards to things that didn't behave as expected, we would have expected a larger contribution from currency. Although contribution from currency was positive, it wasn't as large as we had expected if faced with such a hit in markets.
Could you provide your thoughts on the portfolio's current positioning?
We have increased exposure to longer-term U.S. Treasuries, mainly because we think we're going to be in the crisis for a while. We don't expect a quick recovery, so we like having an allocation to quality sovereign debt. We've also taken profits from some Norwegian bonds reallocated to more liquid parts of the market. We also like the opportunity in BBB-rated corporate bonds in the U.S. We find the opportunity in European investment-grade bonds to be less attractive than those in the U.S although some value remains. In currencies, we've increased short positions in emerging-market countries and increased exposures to higher quality currencies such as the U.S. dollar.
How has the recent increase in oil market volatility impacted currency markets?
We've seen a continuation of the weakening of the Canadian dollar, Australian dollar and Norwegian krona in developed markets. Broadly, all the commodity exporters in emerging markets have been weaker after seeing a bit of a bounce in late March/early April. It will be difficult for emerging-market currencies to stabilize without oil prices hitting a floor or dollar funding needs dissipating – neither seems to be the case right now. In terms of our allocations, we haven't changed any of our short positions to commodity exporters.
Past performance is not a guarantee of future results. This information is not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through April 22, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This information 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 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.
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.