Ivy Securian Core Bond Fund

Ivy Securian Core Bond Fund
12.31.18

Market Sector Update

  • After an exceptionally strong third quarter, early indications show the pace of U.S. gross domestic product (GDP) growth, slowed in the fourth quarter. Domestic growth exhibited signs of fatigue amid multiple headwinds, including a slumping housing market, lower oil prices, higher costs and ongoing trade concerns.
  • While the U.S. growth rate is slowing, the economic foundation remains strong. The labor market finished 2018 with the unemployment rate around 3.9%, a near-record low. Rising wages and heightened job security kept consumer confidence high through the holiday shopping season.
  • Despite the relative strength of the U.S. economy, the global outlook started showing cracks in the fourth quarter, sparking a flight to quality. Major equity indexes declined significantly for the period, wiping out the gains made for the year.
  • The Federal Reserve (Fed) raised interest rates in December –the fourth rate hike in 2018– the U.S. central bank appears to have adopted a more dovish tone for 2019, announcing rates were close to neutral.
  • Credit markets also had a tough quarter. High-yield bonds produced a negative total return greater than 4.5%, finishing down 2% for the year. Investment-grade corporate bonds were down for the period and the year. The securitized sectors performed better than corporates during the quarter, but could not keep up with the strength of the Treasury market.
  • Treasuries benefitted from the overall flight to quality, returning 2.5% for the period.

Portfolio Strategy

  • The Fund underperformed its benchmark for the quarter.
  • Poor results from security selection decisions were the largest contributor to the Fund’s relative underperformance for the period. The overall increase in volatility during the quarter put pressure on many of the securities held in the Fund, particularly out-of-index positions in both the corporate and securitized sectors.
  • In addition, the slide in oil prices weighed heavily on the energy positions held in the Fund. The portfolio’s overweight allocations to financials, utilities, commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) also contributed to the underperformance, while the Fund’s underweight positions in agency mortgage-backed securities (MBS) and its cash position contributed positively to performance during the quarter. The Fund’s duration was slightly less than that of the benchmark throughout the quarter and this produced slightly negative results as rates fell.
  • During the quarter, we further reduced the Fund’s corporate bond exposure, both from a market weight perspective and from a contribution to duration perspective. The reduction in corporate exposure came primarily from the banking and utilities sectors. While we continue to favor the relative value of these sectors, the rising market volatility necessitates a more cautious approach to positioning in the near term. We did add to positions in the industrial sector as valuations have become quite attractive recently. The Fund remains overweight corporate bonds relative to its benchmark, but we remain relatively cautious even in the face of much more attractive valuations.

Outlook

  • The interest rate yield curve reflects rising concern over future economic growth, with the gap between long- and short-term interest rates flattening. Many analysts view an inverted yield curve, in which long-term rates fall below short-term rates, as a predictor of a future recession. For now, the 10-year yield remains higher than the three-month.
  • A more dovish Fed has projected two rate increases in 2019. However, futures markets now indicate the Fed may not raise rates at all this year, with further speculation about the possibility of a rate cut at some point in the near term. Given the level of uncertainty over the economy’s direction, we believe the Fed will depend heavily on economic data to guide future decisions.
  • The markets are clearly rattled entering 2019. Higher volatility is intensifying the tightening of financial conditions and risks to growth are to the downside. Lower market liquidity and global growth slowing faster than expected is amplifying the deceleration already in place. Concerns of recession and the continued worries about trade and tighter credit could prompt companies and consumers to pull back, creating the downturn they fear.
  • In spite of the obstacles it faces, we believe the economy will continue to expand through 2019. The ingredients for a slowdown exist, but we don’t think the conditions for a recession are in place. Employment is too robust and consumer spending too strong for the economy to contract in the next several quarters.

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, 2018, 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.

The Ivy Advantus Bond Fund was renamed Ivy Securian Core Bond Fund on April 30, 2018.

David Land served as a portfolio manager on the Fund until May 11, 2018.

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.

The Bloomberg Barclays U.S. Aggregate Bond Index is a 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.