Ivy Securian Core Bond Fund

03.31.21

Market Sector Update

  • The big story in the first quarter was a continued shift to strategies that are poised to capitalize on better expected growth this year. This prospect propelled strong returns for previous laggards like small caps, cyclical stocks and value strategies. The same was true in credit markets where the best performing corporate sectors included airlines and energy, and the bid returned to less liquid asset classes. While credit outperformed U.S. Treasury securities as demand drove spreads tighter, the total returns of high-quality fixed income strategies were negative as interest rates rose.
  • The economy built on fourth quarter momentum and accelerated early this year. New relief measures and a clearer path to lifting restrictions laid the foundation for the fastest expected growth in decades. With former Federal Reserve (Fed) chair, Janet Yellen, now Secretary of the Treasury, fiscal and monetary policy are both focused on driving an inclusive recovery. Their policies are underpinned by a common belief that past estimates of inflation-free potential growth may have been too low.
  • The Biden administration hit the ground running. It coordinated an effective rollout of several vaccines. Congress passed the $1.9 trillion American Rescue Plan. This is the third COVID-19 relief effort in the last year, bringing total pandemic support to more than $5 trillion. It targeted the nearly 10 million Americans who are still unemployed and added a new child tax credit. In the coming months, Congress will consider the Biden administration’s American Jobs Plan, a $2.25 trillion infrastructure proposal funded by higher corporate taxes. A final package focused on human capital is likely later this year.
  • Interest rates rose along with the economic outlook, but so far the moves aren’t alarming. The 10-year U.S. Treasury yield ended the quarter at 1.74%, up 0.83%. To put this in perspective, the 10-year U.S. Treasury yield was 1.84% on 12/31/19. On the other hand, short rates remained anchored near zero, in line with Fed guidance. Long-term inflation expectations remain in check, just north of the Fed’s 2% target. The recent increase in rates isn’t enough to slow the economy and reflects expectations for a return to normal growth and inflation in years to come.

Portfolio Strategy

  • The Fund outperformed its benchmark for the quarter. Positive security selection results drove most of the Fund’s relative outperformance. The Fund benefitted from strong performance of its positions in the energy, airline, telecommunications and health care sectors relative to those represented in the benchmark. The Fund also benefitted from strong performance of its recently purchased private student loan securitizations, as well as from further strength in its positions in residential-related securitizations. The Fund benefitted from more spread tightening relative to the index in its positions in non-bank financial sector. The decisions to overweight the spread sectors, particularly industrials and utilities, contributed the balance of the Fund’s performance during the quarter.
  • We were active during the first quarter, ultimately reducing the Fund’s exposure to corporate bonds by roughly 3.0%. The team added to positions in the telecommunications space. The team also participated in the newly issued airline bond offerings. We reduced positions in financials and consumer non-cyclicals taking profits in positions we added in 2020.
  • The Fund’s exposure to corporate bonds finished the quarter at about 51%, compared to the index weighting of 27%. The largest overweight positions in the corporate bond sector are transportation, electric utilities, energy, banks and insurance. The largest underweights from a market weight perspective in the corporate space are in capital goods, technology, REITS, consumer non-cyclicals, and finance companies.
  • The Fund’s overweight position in corporate credit is prudent as we believe a robust economic recovery, falling rates of corporate defaults and strong investor demand for yield. This strong technical backdrop is supported by a Fed that has pledged to remain accommodative for the foreseeable future.
  • The team was more active in the securitized sector relative to recent quarters. We added to positions in the nonagency residential sector, which continues to benefit from a robust housing sector. We also added to the Fund’s commercial mortgage backed securities (CMBS) exposure, buying new-issue, senior-level, offerings in the healthcare and industrial property sectors. The team also purchased positions backed by private student loan securitizations.
  • The Fund remains overweight asset backed securities (ABS), CMBS and non-agency mortgage backed securities (MBS), and underweight Agency MBS. The team remains comfortable with its overweight positions in the consumerfacing sectors of ABS and non-agency MBS and we continue to look to add exposure in the space.
  • The Fund’s overall duration was little changed during the quarter, and its interest rate positioning contributed very little to fourth quarter performance relative to the benchmark.

Outlook

  • Expectations for growth in the U.S. continue to increase, on an absolute basis and relative to much of the rest of the world. The Fed and the Biden administration are doubling down on policy support to make sure the economy takes off. With the vaccine rollout exceeding expectations, consumers and businesses are ready to get back to normal.
  • Despite the forecast for eye-popping growth, the Fed is steadfast in its commitment to keep a lid on rates until there is clear evidence of full employment and realized inflation. Members of the Federal Open Market Committee (FOMC) predict this process will take at least two years. Policymakers expect easy money to spur investment and better productivity, increasing sustainable growth. This risks an overshoot, but Fed officials are confident in their ability to slow the economy with available monetary tools if needed.
  • Recent fiscal and monetary policies are unprecedented. The levels of fiscal support and easy money already in place are each considerable. Together, these policies – and proposed programs - are taking us into the unknown. The economy is poised for takeoff with plenty of liquidity as an accelerant. We’re likely to exceed pre-pandemic trend growth by the end of this year, and new businesses are forming at a rapid pace. For now, the potential benefits to the economy, and more importantly, to people, seem to outweigh the risks. But it would be imprudent to think that there isn’t a potential downside as well.
  • Projects that don’t make sense in a normal environment can be funded when interest rates are held below inflation. Episodes like the GameStop short squeeze and the recent implosion of a highly levered investment fund are warning signs that discipline may be waning. Many of the policies proposed by the current administration make sense, but less productive spending has begun to creep into emergency measures. While inflation remains muted, more of the necessary conditions are in place for rising prices, a potential threat to a key foundation of current valuations and risk taking.

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 March 31, 2021, 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.

All information is based on Class I shares.

The Bloomberg Barclays U.S. Aggregate Bond Index is market capitalization weighted index, representing most U.S. traded investment grade bonds. It is not possible to invest directly in an index.

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. 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.