Ivy Pinebridge High Yield Fund

Ivy PineBridge High Yield Fund
12.31.17

Market Sector Update

  • High yield spreads, along with risk assets, generally outperformed in October as the optimism around corporate earnings and a pro-reflationary rise in equities more than offset the impact of Treasury rate concerns.
  • Volatility ensued in the first two weeks of November, but this proved to be short lived as Congress made surprising progress on U.S. tax reform during the second half of the month.
  • Finally, in December, investors saw positive performance from the high yield asset class, as the market was able to easily absorb the passage of the tax reform bill, a Federal Reserve (Fed) rate hike and multi-year highs in oil prices.
  • The option-adjusted spread (OAS) for the Bloomberg Barclays US Corporate High Yield Bond Index, the benchmark for the Fund, began the quarter at 347 basis points, traded as wide as 379 basis points intra-quarter, and then ultimately rallied into December month-end to finish the quarter at 343 basis points, or four basis points tighter overall.
  • The primary market remains active with gross new issuance totaling $72.5 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 during the period, with five- and 10-year Treasuries trading seven basis points higher each.

Portfolio Strategy

  • Relative performance benefitted from both sector selection and security selection, but security selection served as the primary driver.
  • 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 an overweight to finance companies.
  • From a security selection standpoint, the Fund benefitted most from credits in the consumer non-cyclical, finance companies, energy and consumer cyclical sectors. These positive contributions more than offset the negative contributions from credits that we owned in the communications and electric utilities space.

Outlook

  • Solid global growth, higher oil prices, the passage of the tax reform bill, Jerome Powell being chosen as the next Fed chair, as well as an on-going dovish tone from the Bank of England and European Central Bank still provide a positive backdrop for risk assets.
  • Spreads on high yield bonds should have a tightening bias in 2018 but price appreciation will be difficult to attain as the index OAS is approaching post-crisis tight levels.
  • The momentum in earnings improvement continues to play out, however, we have seen some pockets of weakness in the wireline, health care and retail sectors. High yield is currently priced for an approximate 1.5 percent default rate. We forecast the next twelve month default rate to be higher (2-3 percent) but to be dominated by a smaller number of larger capital structures.
  • We continue to find the most attractively priced bonds among core single-B rated credits, as BB-rated bonds carry a longer duration and outperformed meaningfully in 2017.

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.

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.