Investors continue to face challenges when seeking income from their portfolios because of stubbornly
low interest rates. Many have been left with two choices: Invest in lower-risk, lower-yield securities that may
not provide the desired income over time or step up to higher-yielding securities that carry higher risk. But
there's another option. Individuals may benefit from a diversified approach that includes allocations to the
entire yield spectrum of traditional, nontraditional and alternative strategies.
The yield conundrum
By chasing yield to generate income, investors also chase
duration and credit risk. In simple terms, duration is based
on yield and maturity, and reflects a bond’s vulnerability to
rising interest rates. Credit risk is the risk that a bond issuer
will not be able to repay its debts; the greater the credit risk,
the higher the yield.
In general, we think investors should consider taking on
a degree of illiquidity risk, or the risk based on a lack of
marketability of an investment that cannot be bought or sold
quickly. Illiquid, nontraditional securities can add options
within the world of fixed-income choices.
A potential solution
The Fund is designed to help investors pursue income by
combining global reach, well-defined strategies and access to
nontraditional credit securities. The Fund offers diversified
access to alternative income-producing assets as well as
traditional investments via a “sleeve” allocation to four
In creating the portfolio, we target a 50/50 split between
fixed income and equities including dividend-paying stocks,
global real estate securities, investment-grade bonds, high
yield bonds and nontraditional credit securities.
Role of total return strategy
The Total Return Strategy Sleeve in the Fund provides
investors with access to the full breadth of the credit markets,
including some nontraditional credit securities. Such
securities may not have been accessible to all investors in the
past, especially within a mutual fund.
For example, the sleeve’s sub-adviser, Apollo Credit
Management, can explore the market for nontraditional
opportunities, partner with banks to lend money to smaller
companies, or underwrite loans for a select entity — all as
part of seeking to generate attractive yield while keeping
As with the other components of the Fund, this sleeve is a
long-only strategy. The managers do not pursue derivativeoriented
Our market outlook
The persistent strength of the global economy has continued
to surprise many in the markets and we expect overall
growth to continue to increase slightly in 2018. We expect
the U.S., Europe, China and other emerging market countries
to be the main engines of this growth.
It's important to note that risk aversion related to emerging
markets has declined steadily in 2017. As investor attitudes
have improved, valuations of emerging market securities
have become less attractive even though macro conditions
still are providing some support.
In general, the acceleration in global growth has occurred
against a backdrop of low inflation, allowing most developed
market central banks to keep interest rates at low levels.
But global monetary policy continues to diverge and we
think more central banks are moving away from the policies
prompted by the 2008 global financial crisis.
The U.S. Federal Reserve (Fed) has hiked interest rates four
times since late 2015 and we think it will raise rates again
in December, followed by two more in 2018. The Fed also has announced that it will begin to reduce its balance sheet by
allowing maturing Treasury and mortgage-backed securities to
roll off. The drawdown will start at $10 billion per month, then
increase by another $10 billion each quarter until it reaches $50
billion per month. We think most financial markets already have
the Fed's plan built into their projections and we do not expect
major volatility as a result.
We think the European Central Bank (ECB) also is likely to begin
tapering its quantitative easing program by January 2018. We
believe ECB action will provide further evidence that the era of
lower rates, including negative rates, and expanding balance
sheets is starting to wind down.
The value of the trade-weighted U.S. dollar has weakened this
year, although it began to rebound in the third quarter. We think
strength in the dollar will depend on several variables, including
the Fed's actions while other central banks stand back, the
potential for major fiscal stimulus and regulatory rollbacks in
the U.S., and some uncertainty about economic growth rates in
Europe and Japan. In general, we believe dollar weakness will
continue if the latest soft inflation data is not temporary. We also
think fiscal policy provides some uncertainty about the future
direction of the dollar.
For the Fund in general, we are maintaining a low duration that
we believe will allow us to focus on higher yielding corporate
bonds in the near term. We also have built what we believe to be
sufficient liquidity to allow the Fund to respond to this rapidly
changing market environment.
Past performance is not a guarantee of future results. The opinions expressed are those of the Fund’s portfolio 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 October 2017, are subject to change based on market conditions or other factors, 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.
Diversification does not guarantee a profit or protect against loss in a declining market.
Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Although asset allocation among different sleeves and asset categories generally tends to limit risk and
exposure to any one sleeve, the risk remains that the allocation of assets may skew toward a sleeve that performs poorly relative to the Fund’s other sleeves, or to the market as a whole, which would result in
the Fund performing poorly. While Ivy Investment Management Company (IICO) monitors the investments of Apollo Credit Management, LLC (Apollo) and LaSalle Investment Management Securities, LLC (LaSalle) in
addition to the overall management of the Fund, including rebalancing the Fund’s target allocations, IICO, Apollo and LaSalle make investment decisions for their investment sleeves independently from one another.
It is possible that the investment styles used by IICO, Apollo or LaSalle will not always complement each other, which could adversely affect the performance of the Fund. As a result, the Fund’s aggregate exposure
to a particular industry or group of industries, or to a single issuer, could unintentionally be larger or smaller than intended. 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. Investment risks associated with investing in
real estate securities, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes and differences in real estate market values. 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. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not
fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. 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.