Quarterly Fund Commentary
Ivy High Income Fund (prospectus)
June 30, 2010
Manager(s):
Bryan C. Krug, CFA
Market Sector Update
Over the past year all the capital markets, including the credit markets, have enjoyed a massive rally from their lows. The rally has been fueled by excess liquidity provided by the Federal Reserve. The abundant liquidity combined with low interest rates has driven demand the demand for risk assets which directly benefited all risk assets, including those held by the fund.
Portfolio Strategy
All sectors contributed to absolute performance during the period. The Fund's relative performance lagged that of its benchmark primarily because the riskiest assets within the category rallied the most after selling off the most during the market downturn. It is our view that many of these capital structures are unsustainable without a robust economic recovery; therefore, The Fund did not own the riskiest assets, which we believed had the greatest default risk. As the rally in high yield has been more of a technical rally and less of a fundamental improvement in company operations, we have been cautious of too much excessive risk taking, with yields having rallied so much. Given all this, the portfolio strategy remains consistent. The Fund is bottom-up driven, and we continue to evaluate and invest in companies across the capital structure and ratings spectrum. After we are comfortable with the business model risk of a company, we optimize our risk/reward by investing in the debt portion of the capital structure we find most attractive, which includes secured bank loans or floating rate notes, unsecured high-yield bonds, and busted convertibles. With the appreciation of the markets, we have moved up in the capital structure and have increased our ownership of Senior Secured first-lien debt. We have made these investments in first-lien bonds as well as first-lien secured bank loans, or floating rate notes.
Outlook
Our outlook is cautious, future performance will be driven both by both fundamentals of the economic outlook as well as liquidity in the system. Much like last quarter, as investors appear to have excess cash to invest and other non-traditional accounts still playing the risk trade the technicals continue to be strong with companies able to access the capital markets at a strong pace. There still appears to be less value in the lower-rated end of the high-yield spectrum. As default rates are still relatively high, investors look to be reaching for yield, even though the compensation for risk is less compelling.
Going forward, we believe the market will transition from a beta-driven liquidity market to a "stock pickers" market in 2010. We further believe that future performance will ultimately be driven by credit selection as well as the overall macro environment.