Ivy Securian Core Bond Fund

12.31.20

Market Sector Update

  • Investors looked through near term weakness to bid up lagging asset classes during the quarter, resulting in winners all around. The final quarter provided clarity in the U.S. election, another COVID-19 relief package, and news of a number of effective vaccines, and all boosted confidence that 2021 would see a return to normal. For the full year, almost all major asset classes ended up strongly. In the words of Charles Dickens, “it was the best of times, it was the worst of times.”
  • While COVID continues to take a real toll, the return to normal is likely to be far more robust than in previous recoveries. Unlike most recessions, the pandemic was an exogenous event. Quick regulatory approvals and an imminent vaccine rollout were game changers, lifting a cloud of uncertainty and unleashing animal spirits.
  • Credit markets finished the year on a high note. In the quarter, investment grade and high yield corporates tightened 40 basis points (bps) and 161 bps, respectively, producing excess returns of 4.11% and 6.69%, respectively. Fixed income returns were solid on the year with the Bloomberg Barclays U.S. Aggregate Bond Index up 7.5%.
  • Credit’s fourth quarter rally propelled high yield and investment grade corporates to record low yields, resulting in positive excess returns over comparable U.S. Treasury securities for the full year, despite starting the year with the worst quarter ever recorded for corporate bond performance.
  • Despite the strong positive momentum, equity markets continue to price in stubbornly high volatility. While inflation expectations have perked up, interest rates remain at historically low levels. The Federal Reserve’s (Fed) intentions are clear – rates are to remain anchored near zero until inflation takes hold. The Fed remains committed to maintaining an aggressive pace of asset purchases, even as its balance sheet has grown by over $3.2 trillion since the end of February 2020.

Portfolio Strategy

  • The Fund outperformed its benchmark for the quarter. Security selection contributed, primarily in industrials, which was responsible for just over 50% of the Fund’s relative outperformance. In particular, the Fund benefitted from a continued recovery in its energy positions relative to those in the benchmark, and a further broad-based rebound in the Fund’s secured airline (EETC) positions.
  • On the structured side of the portfolio, the Fund continued to benefit from the solid backdrop in the housing sector, which has supported further spread tightening relative to the benchmark in its agency credit-risk-transfer mortgagebacked securities (MBS) and non-agency MBS positions. The decisions to overweight the spread sectors, particularly utilities, financials and industrials and to a lesser extent, commercial MBS and local authority bonds, contributed the balance of the Fund’s performance during the quarter.
  • During the period, the Fund’s exposure to corporate bonds was increased by roughly 3.0% to 54.1%. Purchase activity was balanced across the new issue and secondary markets; all purchases were investment grade. We added to exposures in senior-level bonds of two large banks, which we believe are well positioned to participate in a continued economic recovery, particularly if we see the Treasury curve continue its recent steepening. We also feel spreads are attractive in this space relative to similar-rated industrial credits. Within industrials, we continue to focus on adding exposure to industries and credits we feel are likely to navigate what we expect now to be a long and uneven economic recovery.
  • The Fund enters 2021 with its largest exposure to corporate bonds since 2017. Its largest overweight positions in the corporate bond sector are in electric utilities, energy, transportation, banking and insurance. The Fund’s energy exposure remains predominantly in midstream pipeline companies and refiners. The largest underweights in the corporate space are in capital goods, technology, REITS, consumer non-cyclicals, and finance companies. We feel our corporate credit overweight is prudent given our expectations for a continued, but bumpy, economic recovery, much reduced corporate bond issuance in 2021, falling corporate default rates and continued strong demand for yield by fixed income investors around the world. This strong technical backdrop is supported by the Fed’s pledge to remain accommodative for the foreseeable future.
  • Despite the positive backdrop for credit, we remain on the sidelines in terms of adding to high-yield exposures. Our philosophy when investing in high yield is to focus on credits that will be upgraded to investment grade over time and we’re not seeing many upgrade candidates currently.
  • Structured exposure fell during the fourth quarter. All the reduction was due to monthly paydowns of structured securities. The portfolio remains overweight asset-backed securities, CMBS and non-agency MBS, and underweight agency MBS. The team remains comfortable with its overweight positions in the consumer-facing sectors of ABS and non-agency MBS – we continue to look to add exposure in the space. We believe these structures will continue to be supported by historically low rates and have sufficient cushion to withstand substantial stress on the underlying borrowers, who will also benefit from further targeted stimulus.
  • The Fund’s overall duration was little changed during the quarter, and its interest rate positioning contributed very little to performance relative to the benchmark.

Outlook

  • Despite the worst economic contraction in decades with consensus growth in real GDP of -3.5% for the year, it could have been far worse. Once signs of an economic stall emerged in the fourth quarter, Congress stepped up once again. While it remains the worst of times for more than 10 million workers who are still unemployed, aggregate personal income is higher than a year ago, a far different result than in previous shocks. Fiscal transfers and a lack of spending opportunities not only provided needed aid but increased the savings rate. Pent-up demand is likely to support a quick rebound by mid-2021 despite lasting damage to some sectors of the economy.
  • While a strong rebound is likely, in our view we’re not going to return to the old normal. The pandemic accelerated trends that were already in place and focused an unflinching spotlight on imbalances and sectors with weak value propositions. Work from home is here to stay, and demand for office space and business travel may take years to recover. We expect that new business models will emerge, and some sectors could experience a painful transition as investment and infrastructure align in new ways.
  • Although markets seem fully priced and even overvalued by normal standards, the stage is set for good economic growth in the coming year. We expect the current slowdown to be short-lived, and ample liquidity remains a strong support. Despite the recent rise in rates and inflation expectations, we do not believe interest rates are set to rise dramatically from current levels. The world’s developed economies are awash in savings and have plenty of labor slack, and their respective central banks are determined to keep rising rates from choking off economic growth.

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, 2020, 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.

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 impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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.