Q:  Would you give a brief overview of the fund? A : The Ivy High Income Fund invests in fixed income securities of companies that are either rated below investment grade or simply not rated. We generally look for investment opportunities in the market segments of leveraged loans or high yield bonds. Not only do we seek to build a fund of debt securities trading at prices we believe are below their long-term values, but we also want to make sure that they are issued by companies whose business models are robust and resilient. We try to be opportunistic and capitalize on market dislocations as much as we can. Q:  What core beliefs guide your investment philosophy? A : Our investment philosophy is rooted in two principles – avoiding permanent capital losses and selectively exploiting market inefficiencies. When investing in credit products there is an asymmetric risk profile with investors often having limited upside and significant downside. By avoiding credit impairments you can provide a significant amount of value by avoiding credit losses. Furthermore, these asset classes are relatively inefficient, and we seek out inefficiencies in companies that are often times underfollowed or in a business that does not fit neatly within a sector. Additionally, the views and methodology of rating agencies affect market behavior and offer excellent opportunities since often times the ratings are not correct. We believe rating agencies put too much value in assets and underemphasize cash flow resiliency of the business. Rating agencies ratings often guide certain investors ability to own different assets but the big assumption is that the ratings are accurate. For example, if an insurance company holds more lower rated debt, they may have to hold more capital against it, which limits the depth of the market in that segment compared to a higher-rated security. Q:  What is your investment process? A : First of all, the fixed income securities that we invest in have an asymmetric risk profile, meaning we have limited upside and a substantial downside. We are looking for investment opportunities in three areas. The first one is core investment, consisting of companies with resilient business models and companies that we expect to have significant credit improvement, which we believe will lead to lower volatility. When we look to take risks outside the core arena we do it in either the spread tightening opportunity or an event driven opportunity. In a spread tightening opportunity, on an individual security the drivers are idiosyncratic to the company. We also use the spread tightening bucket to play cyclical out-of-favor ideas where we believe the cycle will benefit us, and when it does, spreads will tighten. Finally, we like to find event drive opportunities where we find credits that we like and believe the probability of an event such as an IPO or a merger is probable but the market is assigning a low probability to that event, and if it occurs, we will benefit. Q:  Where do you find ideas? Could you give a few examples to illustrate your research process? A : There is no one place where our ideas come from, and we rely on multiple sources for our for our possible security selection. We rely primarily on ideas generated by our team of analysts and sector experts. Even though we have relationships with various managements and brokerage firms on Wall Street together with independent consultants, I must say that our primary source of new ideas has been a combination of our independent thinking and internal resources. Formula One Holdings Ltd., the holding company of the Formula One racetracks, is a very good example of a core investment for the fund. The fund owns the bank debt and we like the business model resiliency. HD Supply, Inc., the building materials and tools distributor, which is a spin-off from Home Depot, is an example of a spread tightening opportunity. We think that the housing market and the macro-economic recovery bode well for strong prospects for the company. HD Supply went through a tough period from a macro perspective, but the company survived and we believe by surviving they are increasing their market share and when we get a recovery the benefit will allow significant credit improvement.. An example of an event driven investment is Air Lease Corp., one of the largest aircraft leasing services. Air Lease is a young company with a strong management team and the company is unrated. The company has aspirations to be investment grade and we believe in time the company will achieve its goals. We believe the company will get its bonds rated so that they do not have to pay penalty interest, and we think a credit rating, even a high yield rating, will lower its cost of capital . Lastly, we have a significant investment in Vantage Drilling Company, an offshore drilling company that has used its finances to buy jack up and deep-water oil drilling rigs. The company leases out these rigs with four- to six-year contracts, which results in a high degree of recurring revenue with visibility. We like this company because the business model is easy to understand with a high degree of cash flow visibility, and also because there is a significant amount of assets with real market value. Q:  How do you build your portfolio? A : We have between 120 and 170 securities in the fund. While we do not have any sector limits, we typically use 8% as the limit for an individual issuer, and right now the top ten issuers account for roughly a quarter of the portfolio. We do have higher conviction ideas and we attempt not to over-diversify. We are value driven and we try to be opportunistic. In terms of indices, we are aware of the fund’s benchmark but we do not manage to a benchmark. As a whole, we tend to be overweight in business models revolving around services, software, select technology and distributor businesses. At the same time, in the current market we are avoiding cyclical sectors such as automotive sectors, specifically auto makers, energy, chemicals, paper and steel. Although we will occasionally have an investment in these sectors, we generally stay away from the issuers in that space. In general, we see a fair amount of capital needs from energy, utility and some cyclical sectors. When we see more distress we will revisit. An example of how we have waited for signs of distress is in Chesapeake Energy. We have a significant investment in the Chesapeake loan, which we view as an asset sale bridge. The covenant package gives the company a huge incentive to pay the loan back in quick order. Q:  What is your buy-and-sell discipline? A : Our buy discipline is based on three factors: our view on the credit; our conviction about the company and its bond values; and the relative value of the bond compared to other issues. In the meantime, there are a few reasons that could force us to sell a security. If the information that comes out on an investment is not consistent with our original thesis that we had when we bought the investment, we are sellers. This can include our views on the business, management, the industry dynamics, etc. We do not hold out hope that things will get better and The second reason to sell would be based on valuation and how attractive alternative investment opportunities are. In other words, if the original reason why we bought the security does not hold true or look as solid as we initially thought, we will be ready to sell. Q:  What are your views on risk? How do you contain risk in the portfolio? A : Our primary way of controlling risk is through our credit selection and the companies we choose to invest in or avoid. We are mindful of two main types of risk – macro-economic events and the possibility that we have made a mistake in our investment thesis of an individual company. The way we try to manage overall risk is by going through every one of our holdings on a quarterly basis. In addition to that, we maintain contact with businesses to make sure we are aware of any unexpected events at a company level.