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    Quarterly Fund Commentary

    Delaware Ivy Total Return Bond Fund (prospectus)
    December 31, 2016

    Andres Sanchez Balcazar, CFA
    David Bopp, CFA
    Ella Hoxha
    Ossi Valtanen
    Filip Vojnic-Zelic

    Market Sector Update

    • Despite the rebound in December, government bonds under-performed globally over the quarter, mainly on expectations of easier fiscal policies and tighter monetary policies coupled with stronger oil prices. U.S. President-elect Trump’s promises of tax cuts and infrastructure spending, supported by a Republican Party that controls both chambers of Congress, prompted concerns of sooner and more frequentthan- expected U.S. Federal Reserve interest rate hikes.
    • The prospects of inflationary pressures, further deterioration of the U.S. fiscal position, the real possibility of US protectionism policies and a more tense relationship with its creditor countries led U.S. yields higher and emerging market bonds to sell off. The Euro area data also showed stronger growth and signs of inflationary pick up, while announced changes in the European Central Bank (ECB) quantitative easing program indicated continued accommodation.
    • Credit markets were strong over the quarter, especially U.S. high yield and European subordinated financials. In emerging markets, bonds underperformed on concerns that the strong U.S. dollar and potential protectionist measures from the incoming U.S. administration will hurt the export-based economies. December ended the quarter strong, with a rebound in markets after a sell-off from previous months, as investors continued to look for yield.
    • The U.S. dollar had a strong quarter, especially against the Turkish lira and Japanese yen. The strength was a mix of potentially more expansionary fiscal policy by Trump which would boost the U.S. economy, but also the upward drift of oil prices and actual signs of U.S. growth leading to tighter monetary policy measures.

    Portfolio Strategy

    • Performance was negative over the quarter, mainly coming from our long U.S. 30-year duration position in November and our underweight in Italian government bonds in December. Spread and FX positions contributed positively to performance, in particular our long U.S. dollar versus emerging currencies and more specifically the Turkish lira.
    • We increased duration in October, but moved to protect the portfolio by reducing it over the quarter. We have reduced duration short and intermediate maturities in the U.S., while increasing it in Europe, by reducing our short in Germany. In credit, we bought credit protection to take advantage of multiyear lows of volatility pricing and to further protect the portfolio going into year-end.
    • We have also increased U.S. credit in both high yield and investment grade bonds. In currencies, we increased our short in emerging market currencies (especially Korean won and Colombian peso) and decreased our exposure to the U.S. dollar against G10 currencies.


    • 2017 starts in a very similar fashion to 2016, with a rate hike by the Federal Reserve Board (Fed) and efforts from the People's Bank of China to contain the fall in its international reserve balances. Optimism around the capacity of the Trump administration to generate growth is running high and bearishness on rates is also running high.
    • The environment seems ripe for U.S. dollar liquidity to continue to tighten, and, unsurprisingly, for the U.S. Treasury curve to continue to flatten. Yet equity markets and credit markets do not seem to be worrying. Since the beginning of the year, risk markets have performed exceptionally well. This is in our view not sustainable.
    • The market seems to be implying lower inflationary pressures coming from lower oil prices, but the issue in our view is real rates, where the prospects of an easier fiscal policy have changed the Fed’s reaction function. The Fed has moved from a backward looking data dependent mode to a more forward looking mode.
    • The Fed will not wait to see inflation rising before it hikes gain. Higher government spending and lower taxes might support U.S. assets for a while, but a tighter Fed is not good news for the rest of the world and in particular emerging markets.

    The opinions expressed in this commentary are those of the Fund’s managers and are current through Dec. 31, 2016. The managers’ views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is not a guarantee of future results.

    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. 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. 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, especially securities with longer maturities. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher rated bonds. The Fund may seek to manage exposure to various foreign currencies, which may involve additional risks. The value of securities, as measured in U.S. dollars, may be unfavorably affected by changes in foreign currency exchange rates or exchange control regulations. Investing in foreign securities involves a number of risks that may not be associated with the U.S. markets and that could affect the Fund's performance unfavorably, such as greater price volatility; comparatively weak supervision and regulation of securities exchanges, fluctuation in foreign currency exchange rates and related conversion costs, adverse foreign tax consequences, or different and/or less stringent financial reporting standards. Mortgage-backed and asset-backed securities in which the Fund may invest are subject to prepayment risk and extension risk. The Fund employs investment management techniques that differ from those often used by traditional bond funds, including a targeted return strategy, and may not always perform in line with the performance of the bond markets. The Fund is also non-diversified and may hold fewer securities than other funds and a decline in the value of these holdings would cause the Fund's overall value to decline to a greater degree than a more diversified fund. The Fund expects to use derivatives in pursuing its investment objective. The use of derivatives presents several risks including the risk that fluctuation in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative's value is derived. Moreover, some derivatives are more sensitive to interest rate changes and market fluctuations than others, and the risk of loss may be greater than if the derivative technique(s) had not been used. These and other risks are more fully described in the Fund's prospectus. Diversification does not guarantee a profit or protect against loss in a declining market. It is a method to manage risk.

    IVY INVESTMENTSSM refers to the investment management and investment advisory services offered by Ivy Investment Management Company, the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds and IVY VARIABLE INSURANCE PORTFOLIOS?, and the financial services offered by their affiliates.

    Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a mutual fund. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from a financial advisor or at www.ivyinvestments.com. Read it carefully before investing.

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