Ivy Securian Core Bond Fund

12.31.19

Market Sector Update

  • Markets went into full risk on mode in the fourth quarter. While strong returns early in the year were a make up for a dismal fourth quarter 2018, market action in the last quarter of 2019 was an unambiguous scramble for returns. The success of the Federal Reserve’s (Fed) mid-cycle adjustment convinced investors that they can have their cake and eat it too in the form of lower rates and strong stock returns. The fourth quarter marked a definite breakout as the S&P 500 Index gained over 9%, led by cyclical sectors like information technology and financials as investors shunned income producers like real estate and utilities. The S&P 500 index produced a total return of more than 31% for the year.
  • While the economy may have showed further slowing in the fourth quarter, market participants gained confidence that the worst may be over in the trade tensions between China and the U.S., as the two parties closed in on the first phase of a trade deal to finish the year. The consumer showed no real signs of impending weakness as the job market remained healthy with the unemployment rate at a 50-year low and average hourly earnings continuing to come in excess of 3%. Consumer confidence bounced back and the savings rate remained near a healthy 8% level. Also, we started to see signs that the worst may be over for growth in other developed economies around the world.
  • Much of the bullish tone can also be attributed to the Fed’s ability to convince the market that the central bank’s three “insurance cuts” in 2019 were effective and that no further action was necessary. More importantly, the Fed’s dovish commentary regarding its inflation target really got the markets excited. The Fed has acknowledged that it has had difficulty getting inflation to meet its 2% target, and Chairman Jerome Powell announced in November the central back was “strongly committed to symmetrically and sustainably achieving our 2% inflation objective…over time.” Other Fed officials have said that a period of time above 2% would be fine before any Fed hikes would be instituted. This is quite a turnaround from a little over a year ago, when Powell uttered his infamous “we’re on autopilot” comment in regards to further Fed hikes.
  • The Fed’s actions had the effect of tempering returns in the bond market in the fourth quarter as the U.S. treasury yield curve regained its normal positive slope as short rates followed the decline in the federal funds rate and longer rates rose during the quarter. Still, bonds delivered strong returns for the year as rates for long treasury securities fell by over 60 basis points (bps) during 2019. Treasuries produced returns close to 7% for the year.
  • GCredit spreads fell to near post-crisis lows during the quarter with the Bloomberg Barclays U.S. Aggregate Corporate Index, the Fund’s benchmark, average spread finishing tighter on the year. Investment-grade corporate- and high-yield bonds joined long treasuries in producing solid double digit returns for the year. Returns of investment grade corporates relative to Treasuries were up over 2% in the quarter, and up almost 7% for the year. Long corporates did exceptionally well, producing excess returns of almost 5% in the fourth quarter and close to 12% for the year. On the other hand, the securitized sector produced little in the way of excess returns for the quarter or for the full year, as the market was all about chasing lower quality spread and duration.

Portfolio Strategy

  • The Fund outperformed its benchmark for the quarter. The Fund experienced positive results from security selection, particularly from positions in the financials and utilities sectors, as well as agency Mortgage-Back Securities (MBS) and asset-backed securities (ABS) sectors. An overweight allocation to ABS negatively impacted the Fund, as well as an underweight allocation to agency MBS. The Fund’s interest rate exposure and yield curve positioning had a slightly positive impact on performance for the period.
  • In terms of duration contribution from corporate bonds, the portfolio remains most exposed to credits in the utilities, consumer non-cyclicals, energy, transportation and financials sectors relative to the index. The largest underweights from a market weight perspective in the corporate space are in industrials, including technology, capital goods, and consumer non-cyclicals, as well as real estate investment trusts in the financials space.
  • AStructured exposure fell as a percentage of the Fund’s net asset value during the period, primarily through monthly principal pay downs in ABS, as well as agency and non-agency MBS. Proceeds were reinvested primarily in Treasuries. The portfolio remains overweight ABS, CMBS and non-agency MBS, and underweight agency MBS.
  • The relative overall duration of the Fund fell slightly during the quarter.

Outlook

  • While the stage is set for stronger growth in corporate America, the turn hasn’t happened yet. Manufacturing continues to struggle, with weakness in energy and trade putting a damper on investment. The outlook looks brighter for 2020 as shocks from tariffs and a shakeout in energy recede. Earnings should improve on more stable global growth and easier comparisons. With unemployment at a nearly 50-year low, a recession next year seems unlikely.
  • A big question on investors’ minds is whether 2019’s extraordinary returns are justified or if we’ve simply pulled future returns forward. We previously acknowledged that if the Fed’s insurance cuts were effective, conditions could be good for risk assets. This scenario certainly was realized. Now, the market appears to be pricing in a return to a Goldilocks economy where both growth and inflation are measured. This could set the stage for continued demand for risk assets. The Fed is on hold, and the record expansion is set to extend through next year. Rhetoric around Brexit and trade has become more positive, calming markets in the near term. U.S. assets remain in demand in a low-growth, low-interest rate environment.
  • While we can identify much strength, these factors are tempered by real risks. A trade deal is good, but it’s unlikely to produce steadily expanding global flows. Labor markets are tight, corporate margins peaked in 2018, and corporate leverage is high. Nationalistic populism remains on the rise, and we believe that political risks will remain elevated. Late cycle growth of around 2% is good, but provides little room for error. The Fed’s three rate cuts in 2019 used dry powder, increasing concerns about how policy makers will counter the next downturn. With valuations stretched, we continue to think that bursts of volatility are likely in the coming year, placing a premium on risk management and investment discipline.

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, 2019, 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 S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-cap U.S. equity market. The index includes 500 of the top companies in leading industries of the U.S. economy. It is not possible to invest directly in an index.

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.

Duration is a measure of a security's price sensitivity to changes in interest rates. A fund with a longer average duration generally can be expected to be more sensitive to interest rate changes than a fund with a shorter average duration.

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.