Ivy High Income Fund Sound Solutions Conference Call

Transcription

1 Page 1 Current Fund Holdings Ivy High Income Fund Sound Solutions Conference Call July 14, 2015 Operator Good afternoon and welcome to the Ivy High Income Sound Solutions Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer Session. If you would like to ask a question during this time, simply press * then the number 1 on your telephone keypad. If you would like to withdraw your question, press the # key. Thank you. Voiceover Today s Ivy Funds conference call will focus on the Ivy High Income Fund distributed by Ivy Funds Distributor, Inc. The opinions expressed on this conference call are those of the portfolio managers and current only through today s call. The portfolio managers views are subject to change at any time based on the market or other conditions, and no forecast can be guaranteed. Holdings and other sector information are not intended to represent any past or future investment recommendations. Past performance is not a guarantee of future results. Performance information for the funds through the most recent month end, including the funds most recent quarterly information, can be found online at Potential risks related to investing in the Ivy High Income Fund: 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 funds prospectus. Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. For a prospectus or if available a summary prospectus containing this and other information for the Ivy Funds, please contact the Ivy Funds sales desk at Please encourage your clients to read the prospectus or summary prospectus carefully before investing.

2 Page 2 This conference call is for investment professional use only and is not approved for use with the general public. Good afternoon, everyone. We so appreciate you taking the time out of your busy day to join us on the Ivy Sound Solutions Conference Call. My name is and I m the Product Manager for the Fixed Income Funds at Ivy. On behalf of myself and everyone at the home office here in Kansas City, we would like to thank you for your continued support of the Ivy Funds. Today s call will be featuring the Ivy High Income Fund, where our manager will provide a strategy update on the products within the High-Yield suite while also providing an outlook on the high-yield market. It is my absolute pleasure to introduce you to my colleague, Mr.. Many of you are familiar with Chad since he took over sole leadership of these funds almost exactly one year ago from today. What many of you may not know is that Chad has been a part of the Ivy high-yield team since 2003 when he joined the firm. I certainly am looking forward to hearing Chad s comments, thoughts and commentary, and to hopefully give you the opportunity to answer any questions you might have at the end of his prepared remarks. So without further ado, I will turn the floor over to Mr. Chad Gunther. Okay. Thanks, Kori. Thanks for everyone on the phone joining us. I appreciate the time and hopefully this will be beneficial to give you an update on high-yield. I thought I would go through just the current market environment and then I ll give you an update on the portfolio and the positioning of the portfolio and then touch upon the second half of the year and how we see things unfolding and our outlook. So without further ado, just, you know, volatility has crept its way back into the highyield market, basically since the end of May when spreads and yields started widening again. Clearly, Greece and maybe a little less importantly, China, started impacting I d say the psychology in the marketplace, but when you look back year-to-date we started the year wider in both yield and spread on Jan. 1, than where we are today. So we started the year at a 713 yield-to-worst and a 575 spread. Today, we are at 7% and a 550 spread. I characterize that kind of how I characterized that at the beginning of the year. High-yield doesn t look overly expensive and it doesn t look overly cheap but relative to other alternatives in the fixed income universe, it looks pretty attractive. So far year-to-date, that s how things have played out. High-yield s outperformed. The investment grade has outperformed treasuries and it has outperformed munis. So I would say that is still my base case as far as thinking goes.

3 Page 3 To give you kind of an update on where the portfolio sits, we are still overweight in loans. The portfolio is 28% in loans and of that 28%, 10% is in first lien and 18% is in second lien. Just by having the 28% exposure in loans, it reduces our duration which reduces our interest rate risk exposure. So we are much more making a credit bet than we are an interest rate bet. We would rather take credit exposure than interest rate risk exposure, and then that leaves 68% of the portfolio in bonds and we ve got 3% cash and roughly 1% in equities. The effective duration on the fund is a little over 3 years, 3.06 years, and has a yield-toworst today of 7.12%. Just to give you kind of a breakdown of the portfolio by ratings class: we are at 14% in BB, 31% in B and 46% in CCC. Just to touch upon, you know, the exposure to CCC, we clearly realize that we have more exposure to CCC than the index does but to characterize or to paint a broad brush on that CCC basket is all the same CCC risk across the board and is really kind of false. To give you a sense of that, of the 46% that we have in CCC, 6% of that total has a yield of less than 7%. So 6% of that CCC exposure is yielding less than the average market rate of 7%, and your average CCC credit yields a little over 11%. So that s where our credit picking comes into play and as you guys have heard me say before, rating agencies we view as lagging indicators and they don t really drive our investment in decision making. That s kind of an update on where the portfolio sits. Just to kind of give you an outlook or my outlook for the rest of the year and beyond, the Fed looks poised to raise rates either in September or December or possibly both. I think we are well positioned to absorb that given our exposure to loans. Most of our peer group has something less than 5% loan exposure and ours at 28%, I think sets us up well for that. Companies continue to refinance balance sheets, pushing out the maturity walls that you can see over the next couple of years. So we don t see big defaults picking up outside of say the energy services space. There are some offshore drilling companies out there that are highly distressed. Bonds traded in the 30s, or 20s that are on the radar for default but, you know, outside of those I don t think in the overall market will see a big default cycle happening in the next couple of years. Like I have said before, relative to other fixed income alternatives, high-yield at 7% and a 550 basis point spread over the risk free rate, we still think looks attractive and that s where we stand. To just kind of give you an update on where we have found value more recently, Informatica was leveraged buyout (LBO) that was done at the end of May. It came with a 7.25% yield. Again, CCC rated but not priced with the yield like a CCC like 11% that I had mentioned before, but it is a company we have valued and it is basically the #1 independent provider of enterprise data integration and software services. It has over 5,000 customers. It has 82 of the Fortune 100 as customers. High 90% recurring revenue as far as contracted revenue and the retention rates are in the high 90s as well. So that s a new addition to the Top 10 of our portfolio.

4 Page 4 Other names in the Top 10 really haven t moved around all that much. Laureate is still our number two position. There are rumors that they are getting ready to IPO which would be another positive credit event for one of the names in the Top 10. So that is kind of the update on a couple of names in the portfolio. With that, I want to answer any questions you guys have so hopefully you have some and we will turn it back over for Q&A. Q&A Session Thank you, Chad. While we are queuing up for questions and waiting to get those in, I know you have spoken in the past on some calls and to some teams in the field about your theory on the energy high-yield space and why historically. So it s been very volatile this year and traces your outlook on that sector. Energy still makes up 14% of the index. We are still very underweight the energy space. We are roughly at 5%, which is an increase over where we were at the beginning of the year but only slightly. We have picked up what we think are attractive assets at decent yields. We are not sticking our neck out playing in the distressed E&P land but we are picking away at names where we feel like we are compensated more than the market, but more than covered by asset values even if oil were to go lower than it is today. So the way we try to look at it and make our judgement calls on some of the E&P names in the energy space is if oil goes to $40 (a barrel), are we still covered from an asset value perspective? That s kind of how we look at it and how we make our investment decisions in that space. Right now, we are still underweight. I think oil prices are going to do what they are going to do. We just signed an Iran deal today. That could pressure oil prices a little bit going forward but we are also keeping an eye on global demand and that is more of the factor that will drive prices as well as production or lack thereof. So we are keeping an eye on it. We haven t taken our exposure up dramatically. We ve taken up a little bit but we continue to do due diligence on many of the names in that space. Thank you. Operator, can you also give instructions on how to ask questions again? Operator If you would like to ask a question or if you have a comment, please press * 1 on your telephone keypad. You do have an audio question. Would you like to take it?

5 Page 5 Yes. Hey, Chad, thanks for taking the call today. I just wanted to ask you a quick question. It looks like the common stock position picked up from.4% last quarter to about 1% as you had said this quarter. I wanted to find out if you ve added to your equity exposure or if that was a result of convertibles or something like that; also what your strategy with the equities is. Right. So I would say our equities strategy is opportunistic. I would characterize our equity exposure as probably never going to go above something like 5% or more than that, but it picked up over the last quarter because we took a position in Time Warner Cable before they were bought out by Charter. We owned a pretty large position in a company called Altice which is the leading European cable provider and Altice was interested in also buying Time Warner Cable which we had learned through our position in Altice and the outlook there was you had two bidders for, well, you had more than two bidders for the Time Warner Cable asset and the bet was each of them were going to drive the price up more than what the market thought. We still have the position on today. We think that Time Warner Cable/Charter combined company is going to be received extremely well and be accretive to numbers and so we are not selling the position but I think we roughly bought into the position at $162 and Time Warner today is roughly $185, I believe. Our equity exposure really comes from our credit work and that is really how we get involved. I mean we were involved in Altice which led to the Time Warner but we are not going out actively looking at just individual equity securities by themselves. Typically, the idea is they come to the portfolio through our credit work. Hey, Chad! Thanks for doing this call today. We really appreciate it, and actually you kind of touched on my question a little bit in that last question. The CCC exposure, I ve held this fund for a few years now and I know you guys have always been a little bit heavier CCC but we are just trying to find out with that 46% weighting in CCC if there has really been a fundamental shift in the philosophy. There has been no fundamental shift or the way we look at credits. Every investment we make is done on an individual basis. Like I had mentioned Informatica in my prepared remarks, I mean that s a CCC company but it really wasn t priced like a CCC business at 7.25% when the average CCC out there is yielding 11%. So I m not going to shy

6 Page 6 away from making an investment in a good company just because it s CCC rating. Like I said before, there has been absolutely no fundamental shift in the way we think about what is in the portfolio. It just so happens that a lot of the portfolio right now, 46%, is CCC rated. As I have mentioned, if you were to go through each CCC line item by line item, you will find that a lot of that portfolio is not CCC risk to kind of paint it with a broad brush. That s just how we think about it. You know, rating agencies will upgrade CCC paper after the improvement or reduction in leverage has happened and, you know, you would have wanted to own that paper two years prior to the upgrade. So that s how we think about it. Hey, Chad. Thanks for taking our call today. I wanted to touch base on the cash position. I know the fear of liquidity concerns in the market continue to drive some of the main concerns and I just wanted to see if you can touch on it hearing the allocations in your cash position and maybe make any adjustments in the future and how you guys will manage liquidity issues moving forward. Our cash position should stay between 2% to 5% position. Today it is roughly just slightly over 3% and I would expect it to stay there and not really moving all that much. Liquidity is definitely a topic, a popular topic, and rightfully so. How we meet liquidity is a question of there are parts of the portfolio that are more illiquid than other parts of the portfolio and when we see redemptions we typically go to the names that are yield-tocall paper or we know are being taken out. Those types of names are candidates or credit issues that are either our investment thesis isn t working out the way we thought it was and it s a sell candidate. When I go back and I look at the back half of 14, so call it July 1, 2014 to the end of the year, we had fair amount of redemptions in high-yield altogether as an industry. We may have had more than our fair share at Ivy, but we were able to meet those redemptions with no problem. So we didn t have to borrow money to meet redemptions or anything like that. So that was somewhat of a test. Liquidity will be there. Say there s a 2008 crisis again, there will be liquidity and people providing liquidity but the price will be less. Your guess is as good as mine when we have the next crash and so we don t try and time the market. If you are putting money in the fund, we assume that you want high-yield exposure and that s what we are going to give you. If you want cash, I would assume the money would be out of the fund and in cash somewhere and so that s how we think about it. Hi, Chad. A few quick questions on points that some people are probably thinking. One is - what has to happen to get the Morningstar outlook from negative to something more positive? That s a small item but I thought I d ask you. Then I m really looking at funds at how they did the last time the Fed raised. So back to 2004, 2005 and 2006, the fund did very well during that period. What other things need to happen to have this fund do

7 Page 7 better than just the dividend so at 6% or 7% total return? Is it heavily dependent upon the price of oil or anything else that you can think of? I think the Fed is going to raise the rates later this year and if you go back and look at the three past tightening cycles, call it starting in February of 87, February of 94 and June 04, the 6-month leading up to the first rate hike spreads actually tightened and then call it eight months later in all three periods, spreads were tighter in all three circumstances. Then if you look out 18 months later, two of the three periods spreads were tighter. So I think the economy needs to continue to muddle along and eventually get away from the stories like Greece or a hard landing in China and really show acceleration and growth. That may not be the type of growth that we ve had in the past but if the Fed can raise rates maybe once or maybe twice and see how the economy handles it and if it shows it handles it fine, I think you can see a tightening in spreads which would drive returns above that, call it 6%. Hey, Chad, thanks for the call. I was just wondering if you could touch on your thesis behind the, I guess pretty similar floating rate position the last couple of years, but if that s because you see rates rising in the future or the recent volatility or what are your thoughts there? I ll come back to the Morningstar question too. I forgot to answer that. As far as our exposure to floating rate, our 28% exposure in loans has a floating rate component to it but that floating rate component will not kick in until the Fed has basically taken the fed funds rate up to 100 basis points basically. So you really need almost the three 25- basis-point hikes by the Fed before you start to see an increase in the rate that we are paid on our loan. It goes back to my comments about taking credit risks versus taking interest rate risk. We are not good predictors of where we think interest rates are going and so we don t try and make bets in relation to that. Our exposure in loans really came from the credit work we do and where we think we found value in the capital structure and so when we were making bets in first lien and second lien loans, which we still have put some money to work in first liens and second liens, it is really where we thought we were compensated for the risk in the capital structure and where we were paying for it. Naturally that has brought our duration down and reduced our interest rate exposure but it is more a credit call than an interest rate call. Back to the first question on Morningstar comment - what can we do to get that off of negative? I do have a call with them tomorrow actually but I m not exactly sure what drives their decision making on whether to take it off of negative or not. I know that it went on when we had the management turnover and so I ve been on the fund as the lead manager for a year now and on the fund for 12 years going on 13 years. We will address all of their concerns and then they are going to do what they want to do.

8 Page 8 A rating normally takes about one to two months after a call like we are doing this week. Hey, Chad. Two questions for you. What do you find is kind of the environment in general by CFOs of companies lately about refinancing or borrowing in anticipation of rate hikes? On that tilt, is there going to be just in the high-yield environment overall when is kind of the refinance hit going to come, do you think? Well, I think you ve already seen it. If you were to look at the wall of maturities that have been pushed out, for 2015 and the rest of the year, there is roughly about $28 billion of maturing debt. We have already done over $150 billion of new issue this year. That is really not meaningful at all. There are $57 billion of high-yield bonds maturing in So borrowing some type of left-field event or crisis, that will be met with no problem. There is $102 billion maturing in 2017 and so double what it was in When you think about the high-yield market it is roughly $1.3 trillion to $1.5 trillion in size. You have something less than basically 1% maturing over the next 2 years and then something less than 2% maturing through So I don t expect huge default cycles to happen overall. Like I said, there might be some instances in the energy service side of high-yield but, outside of that, we don t see a big uptick in defaults. Operator There are no further questions at this time. Well, thank you, Operator. Once again, thank you for joining us today. A replay of this call will be available starting tonight running through August 14. To access the replay, please call and enter the same Conference ID The call will also eventually be posted to ivyfunds.com. If you would like more information on the Ivy High Income Funds or any of the funds within the Ivy Funds family, please contact the Ivy Sales Desk at This concludes today s call. Have a great evening! Operator Thank you, ladies and gentlemen. You may now disconnect. END

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