Ivy Pinebridge High Yield Fund

Ivy PineBridge High Yield Fund
09.30.17

Market Sector Update

  • High yield spreads resumed their tightening trend in July amid a sharp climb in oil prices, a relatively stable backdrop for Treasury rates and another record high in equity markets.
  • However, investor concerns over political discord in Washington, D.C., terrorist attacks in Spain, and an emboldened North Korea combined amid dwindling August trading volumes to take Treasury rates lower and spreads wider in most spread segments of fixed income.
  • This trajectory reversed course again in September, as higher spread segments of fixed income benefitted from optimism surrounding the release of a plan for tax reform, a firmer backdrop for oil prices and energy-related credits and fresh record highs in equity markets.
  • The option-adjusted spread (OAS) for the Fund's benchmark, the Bloomberg Barclays U.S. Corporate High Yield Index began the quarter at 364, traded as wide as 390 intra-quarter, and then ultimately rallied into September monthend to finish the quarter at 347, or 17 basis points tighter overall.
  • The primary market remains active with gross new issuance totaling $79.8 billion during the quarter. However, net new volume continues to lag the pace that investors experienced this time last year.
  • U.S. Treasury rates moved higher and the yield curve flattened during the period, with 5- and 10- year Treasuries trading five and three basis points higher, respectively.

Portfolio Strategy

  • The Fund generated a positive total return during the period before fees and expenses.
  • Relative performance benefitted from both sector selection and security selection, but security selection served as the primary driver of outperformance.
  • From a sector selection standpoint, the Fund benefitted from an underweight allocation to consumer non-cyclicals and an overweight allocation to energy. The impact of these allocations more than offset the cash drag and the impact of an underweight allocation to transportation.
  • From a security selection standpoint, the Fund benefitted most from credits in the communications, energy and consumer cyclicals sectors. Security selection was strong across most sectors within the portfolio. Only brokerage, transportation, electric utilities and technology detracted from performance. Even so, the impact was minimal.

Outlook

  • The trend in earnings results indicates that fundamentals remain stable to improving which is likely to be the case at least for the remainder of 2017. Leverage metrics are near longer-term averages with an improving trend, though momentum is slowing.
  • Option-adjusted spreads range from tight to the midpoint of fair value. Trading through fair value remains likely because of fundamental strength, but we remain concerned about equity drawdown correlation.
  • For the high yield market overall, credit metrics continue to be near long-term averages with an improving trend, however, momentum is slowing as these statistics are approaching more normalized levels.
  • Technical conditions have been mixed and volatile week to week and we expect this trend to continue for the foreseeable future. Supply bulge weighed on the market in August, and we still saw heavy supply in September that was easily absorbed, despite moderate mutual fund inflows. This leads us to believe institutional inflows are supportive. Technicals should remain neutral at worst through year-end, though fund flows could provide a source of volatility.
  • While current valuations are tight relative to longer-term historical averages, the fundamental backdrop continues to improve and we expect the default environment to remain benign. The high yield asset class is likely to benefit from a continuation of investors’ search for yield when compared to other fixed income alternatives.

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, 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.

Ivy PineBridge High Yield Fund is a new fund with limited performance history. The Fund’s inception date is May 18, 2017.

The Bloomberg Barclays U.S. Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded.

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. 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. 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.