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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-22800
IVY HIGH INCOME OPPORTUNITIES FUND
(Exact name of registrant as specified in charter)
6300 Lamar Avenue, Overland Park, Kansas 66202
(Address of principal executive offices) (Zip code)
Mara D. Herrington
6300 Lamar Avenue
Overland Park, Kansas 66202
(Name and address of agent for service)
Registrant’s telephone number, including area code: 913-236-2000
Date of fiscal year end: September 30
Date of reporting period: September 30, 2013
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ITEM 1. REPORTS TO STOCKHOLDERS.
Table of Contents
Annual Report
September 30, 2013
Ivy High Income Opportunities Fund
The Fund’s common shares are listed on the New York Stock Exchange and trade under the ticker symbol IVH
| The Fund is a non-diversified, closed-end management investment company designed primarily as a long-term investment and not as a trading vehicle.
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| Ivy High Income Opportunities Fund |
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| Management Discussion, Portfolio Highlights and Schedule of Investments |
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| 2 | ANNUAL REPORT | 2013 |
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| Ivy Funds |
SEPTEMBER 30, 2013 (UNAUDITED) |
Henry J. Herrmann, CFA
| 2013 | ANNUAL REPORT | 3 |
Table of Contents
| Ivy High Income Opportunities Fund |
(UNAUDITED) |
The Ivy High Income Opportunities Fund invests primarily in a portfolio of high-yield corporate bonds of varying maturities and other fixed income instruments of predominately corporate issuers, including first and second lien loans.
Since the Fund’s inception on May 29, 2013, our focus has been on building the investment positions within the portfolio, seeking to take advantage of our view of market inefficiencies. At the end of the fiscal year, the Fund was positioned as we expected, with net assets of $321.6 million. On a per-share basis, the Fund’s net asset value rose from $19.10 (includes offering cost of $.04 per common share) at inception to $19.41 at the end of the fiscal year.
Market volatility
In recent months, market dislocation has been driven largely by Federal Reserve (Fed) policy. Fed officials began to signal a possible reduction in the Fed’s $85 billion in monthly quantitative easing (QE) bond purchases at the start of the summer. With the Fed continuing to indicate the move might come in September, fixed income markets turned increasingly volatile over the summer. Within the high-yield sector, open-end bond mutual funds saw record outflows, prompting many open-end fund managers to liquidate investment positions to meet liquidity demands. As liquidity began to dissipate in the market, forced selling increased. As a result, the average price of bonds in the BofA Merrill Lynch High Yield Index dropped below par on June 25 after opening the month above $105. Where appropriate for the investment strategy, we took advantage of what we believed were valuation opportunities that the selloff created in the credit market.
In September, the Fed decided not to begin tapering as economic data did not meet previous Fed expectations, while political uncertainty about the then-building budget impasse generated another round of uncertainty on the political front. As a result, fixed income markets had a slight reversal late in the fiscal year.
Strategy
We expect our tenets about the type of companies in which we invest will remain consistent. We believe security selection, through bottom-up credit research of individual issuers, is central to achieving potentially above-market returns. We strive to be opportunistic and deploy capital in the portion of the capital structure that we believe has the most favorable risk-adjusted returns and attractive relative value.
Outlook
Some of the uncertainty we saw during the fiscal year will probably continue. In addition to the ongoing political concerns, the Fed will continue to hold significant sway over fixed income markets as investors try to determine when the Fed will begin to taper QE. In addition to the communication challenges caused by the Fed signaling a taper and then appearing to reverse course at the last minute, the Fed will also be under new leadership with Vice Chairman Janet Yellen nominated to succeed Ben Bernanke in January 2014.
We continue to believe that improving economic conditions bode well for credit investing because of what it signifies about credit quality. We believe high yield is better positioned than other fixed income segments in the event of an increase in interest rates and note that, as of the end of the fiscal year, approximately 30% of the Fund was in senior loans, which generally have lower interest rate risk than bonds because of their shorter duration.
The investment return, price, yields, market value and net asset value (NAV) of a fund’s shares will fluctuate with market conditions. Closed-end funds frequently trade at a discount to their NAV, which may increase an investor’s risk of loss. At the time of sale, your shares may have a market price that is above or below NAV, and may be worth more or less than your original investment. There is no assurance that the Fund will meet its investment objective.
Risk factors. The price of the Fund’s shares will fluctuate with market conditions and other factors. Fund shares are not guaranteed or endorsed by any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than with 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. An investment in the Fund is not appropriate for all investors and is not intended to be a complete investment program. The Fund is designed as a long-term investment and not as a trading vehicle.
| 4 | ANNUAL REPORT | 2013 |
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PORTFOLIO HIGHLIGHTS
| Ivy High Income Opportunities Fund |
ALL DATA IS AS OF SEPTEMBER 30, 2013 (UNAUDITED) |
| Total Return(1) | Share Price | NAV | ||
| Commencement of operations (5-29-13) through 9-30-13 |
-9.73% | 3.07% |
| (1) | Past performance is not necessarily indicative of future performance. Total return is calculated by determining the percentage change in NAV or share price (as applicable) in the specified period. The calculation assumes that all dividends and distributions, if any, have been reinvested. Total return for a period of less than one year is not annualized. Performance at share price will differ from results at NAV. Returns at share price can be influenced by factors such as changing views about the Fund, market conditions, supply and demand for the Fund’s stock, or changes in the Fund’s dividends. An investment in the Fund involves risk, including the loss of principal. Total return, share price, share price yield and NAV will fluctuate with changes in market conditions. This data is provided for information purposes only and is not intended for trading purposes. Closed-end funds, unlike open-end funds, are not continuously offered. There is a one time public offering and, once issued, shares of closed-end funds are traded in the open market through a stock exchange. NAV is equal to total assets less total liabilities divided by the total number of shares outstanding. Holdings are subject to change daily. |
| (2) | The Fund has entered into a borrowing arrangement with Bank of America, N.A. as a means of financial leverage. See Note 7 in the Notes to Financial Statements for additional information. |
| (3) | The premium/discount is calculated as (most recent share price/most recent NAV) -1. |
| (4) | Share price yield is determined by dividing the annualized current monthly dividend per share (comprised of net investment income) by the share price per share at September 30, 2013. |
| (5) | Structural leverage consists of borrowings outstanding as a percentage of managed assets. Managed assets are the Fund’s total assets, including the assets attributable to the proceeds from any borrowings, minus liabilities other than the aggregate indebtedness entered into for the purpose of leverage. |
| (6) | Total structural and effective leverage ratio is the Fund’s effective leverage, and includes both structural leverage and the leverage effects of certain derivative instruments in the Fund’s portfolio as a percentage of managed assets. The leverage effects of forward foreign currency contracts are included in the effective leverage values, in addition to any structural leverage. |
| 2013 | ANNUAL REPORT | 5 |
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SCHEDULE OF INVESTMENTS
| Ivy High Income Opportunities Fund (in thousands) |
SEPTEMBER 30, 2013 |
| 6 | ANNUAL REPORT | 2013 |
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SCHEDULE OF INVESTMENTS
| Ivy High Income Opportunities Fund (in thousands) |
SEPTEMBER 30, 2013 |
| 2013 | ANNUAL REPORT | 7 |
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SCHEDULE OF INVESTMENTS
| Ivy High Income Opportunities Fund (in thousands) |
SEPTEMBER 30, 2013 |
| 8 | ANNUAL REPORT | 2013 |
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SCHEDULE OF INVESTMENTS
| Ivy High Income Opportunities Fund (in thousands) |
SEPTEMBER 30, 2013 |
Notes to Schedule of Investments
| * | Not shown due to rounding. |
| (A) | Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At September 30, 2013, the total value of these securities amounted to $220,406 or 68.5% of net assets. |
| (B) | Principal amounts are denominated in the indicated foreign currency, where applicable (EUR – Euro and GBP – British Pound). |
| (C) | Payment-in-kind bonds. |
| (D) | Variable rate security. Interest rate disclosed is that which is in effect at September 30, 2013. |
| (E) | Rate shown is the yield to maturity at September 30, 2013. |
| (F) | Variable rate security. Interest rate disclosed is that which is in effect at September 30, 2013. Date shown represents the date that the variable rate resets. |
| (G) | Borrowings Payable as a percentage of Total Investments is 33.0%. |
| (H) | All or a portion of the security position has been pledged as collateral on open borrowings. |
The following forward foreign currency contracts were outstanding at September 30, 2013:
| Type | Currency | Counterparty | Principal Amount of Contract (Denominated in Indicated Currency) |
Settlement Date | Unrealized Appreciation |
Unrealized Depreciation |
||||||||||||||
| Sell |
British Pound | Morgan Stanley International | 3,600 | 10–23–13 | $ | — | $ | 56 | ||||||||||||
| Sell |
Euro | Morgan Stanley International | 19,236 | 10–23–13 | — | 26 | ||||||||||||||
| Sell |
Swiss Franc | Morgan Stanley International | 2,000 | 10–23–13 | — | 17 | ||||||||||||||
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|
|||||||||||||||||||
| $ | — | $ | 99 | |||||||||||||||||
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The following table is a summary of the valuation of the Fund’s investments by the fair value hierarchy levels as of September 30, 2013. See Note 3 to the Financial Statements for further information regarding fair value measurement.
| Level 1 | Level 2 | Level 3 | ||||||||||
| Assets |
||||||||||||
| Investments in Securities |
||||||||||||
| Corporate Debt Securities |
$ | — | $ | 364,296 | $ | — | ||||||
| Municipal Bonds |
— | 1,467 | — | |||||||||
| Loans |
— | 58,775 | 35,321 | |||||||||
| Short-Term Securities |
— | 7,307 | — | |||||||||
| Total |
$ | — | $ | 431,845 | $ | 35,321 | ||||||
| Liabilities |
||||||||||||
| Forward Foreign Currency Contracts |
$ | — | $ | 99 | $ | — | ||||||
| Payable for Borrowing |
$ | — | $ | 154,000 | $ | — | ||||||
The following table is a reconciliation of Level 3 investments for which significant unobservable inputs were used to determine fair value:
| Loans | ||||
| Beginning Balance 5-29-13 |
$ | — | ||
| Net realized gain (loss) |
— | * | ||
| Net change in unrealized appreciation (depreciation) |
12 | |||
| Purchases |
35,371 | |||
| Sales |
(63 | ) | ||
| Amortization/Accretion of premium/discount |
1 | |||
| Transfers into Level 3 during the period |
— | |||
| Transfers out of Level 3 during the period |
— | |||
| Ending Balance 9-30-13 |
$ | 35,321 | ||
| Net change in unrealized appreciation (depreciation) for all Level 3 investments still held as of 9-30-13 |
$ | 12 | ||
There were no transfers between any Levels during the period ended September 30, 2013.
| 2013 | ANNUAL REPORT | 9 |
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SCHEDULE OF INVESTMENTS
| Ivy High Income Opportunities Fund (in thousands) |
SEPTEMBER 30, 2013 |
Quantitative Information about Level 3 fair value measurements:
| Fair Value at 9–30–13 |
Valuation Technique(s) | Unobservable Input(s) | ||||||||||
| Assets |
||||||||||||
| Loans |
$ | 35,321 | Third-party valuation service | Broker quotes | ||||||||
The following acronym is used throughout this schedule:
REIT = Real Estate Investment Trust
See Accompanying Notes to Financial Statements.
| 10 | ANNUAL REPORT | 2013 |
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STATEMENT OF ASSETS AND LIABILITIES
| Ivy High Income Opportunities Fund |
AS OF SEPTEMBER 30, 2013 |
| (In thousands, except per share amounts) | ||||
| ASSETS |
||||
| Investments in unaffiliated securities at value+ |
$ | 467,166 | ||
| Investments at Value |
467,166 | |||
| Cash |
2,497 | |||
| Cash denominated in foreign currencies at value+ |
7,630 | |||
| Investment securities sold receivable |
12,903 | |||
| Interest receivable |
7,466 | |||
| Prepaid and other assets |
6 | |||
| Total Assets |
497,668 | |||
| LIABILITIES |
||||
| Investment securities purchased payable |
21,891 | |||
| Trustees and Chief Compliance Officer fees payable |
1 | |||
| Investment management fee payable |
13 | |||
| Accounting services fees payable |
11 | |||
| Unrealized depreciation on forward foreign currency contracts |
99 | |||
| Payable for borrowing |
154,000 | |||
| Interest payable for borrowing |
4 | |||
| Other liabilities |
65 | |||
| Total Liabilities |
176,084 | |||
| Total Net Assets |
$ | 321,584 | ||
| NET ASSETS |
||||
| Capital paid in |
$ | 315,769 | ||
| Undistributed net investment income |
3,520 | |||
| Accumulated net realized gain |
1,181 | |||
| Net unrealized appreciation |
1,114 | |||
| Total Net Assets |
$ | 321,584 | ||
| SHARES OUTSTANDING |
16,567 | |||
| NET ASSET VALUE PER SHARE |
$19.41 | |||
| +COST |
||||
| Investments in unaffiliated securities at cost |
$ | 465,874 | ||
| Cash denominated in foreign currencies at cost |
7,413 | |||
See Accompanying Notes to Financial Statements.
| 2013 | ANNUAL REPORT | 11 |
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| Ivy High Income Opportunities Fund |
FOR THE PERIOD FROM MAY 29, 2013 TO SEPTEMBER 30, 2013 |
| (In thousands) | ||||
| INVESTMENT INCOME |
||||
| Interest and amortization from unaffiliated securities |
$ | 9,290 | ||
| Total Investment Income |
9,290 | |||
| EXPENSES |
||||
| Investment management fee |
1,435 | |||
| Interest expense for borrowing |
348 | |||
| Custodian fees |
5 | |||
| Trustees and Chief Compliance Officer fees |
2 | |||
| Accounting services fees |
41 | |||
| Professional fees |
65 | |||
| Other |
47 | |||
| Total Expenses |
1,943 | |||
| Net Investment Income |
7,347 | |||
| REALIZED AND UNREALIZED GAIN (LOSS) |
||||
| Net realized gain (loss) on: |
||||
| Investments in unaffiliated securities |
2,357 | |||
| Forward foreign currency contracts |
(942 | ) | ||
| Foreign currency exchange transactions |
81 | |||
| Net change in unrealized appreciation (depreciation) on: |
||||
| Investments in unaffiliated securities |
1,292 | |||
| Forward foreign currency contracts |
(99 | ) | ||
| Foreign currency exchange transactions |
(79 | ) | ||
| Net Realized and Unrealized Gain |
2,610 | |||
| Net Increase in Net Assets Resulting from Operations |
$ | 9,957 | ||
See Accompanying Notes to Financial Statements.
| 12 | ANNUAL REPORT | 2013 |
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STATEMENT OF CHANGES IN NET ASSETS
Ivy High Income Opportunities Fund
| (In thousands) | Period from 5-29-13 to 9-30-13 |
|||
| INCREASE (DECREASE) IN NET ASSETS |
||||
| Operations: |
||||
| Net investment income |
$ | 7,347 | ||
| Net realized gain on investments |
1,496 | |||
| Net change in unrealized appreciation |
1,114 | |||
| Net Increase in Net Assets Resulting from Operations |
9,957 | |||
| Distributions to Shareholders From: |
||||
| Net investment income |
(4,142 | ) | ||
| Net realized gains |
N/A | |||
| Total Distributions to Shareholders |
(4,142 | ) | ||
| Capital Share Transactions: |
||||
| Net proceeds from the sale of shares |
316,331 | |||
| Offering costs charged to paid-in capital |
(662 | ) | ||
| Net increase in net assets from share transactions |
315,669 | |||
| Net Increase in Net Assets |
321,484 | |||
| Net Assets, Beginning of Period |
100 | |||
| Net Assets, End of Period |
$ | 321,584 | ||
| Undistributed net investment income |
$ | 3,520 | ||
See Accompanying Notes to Financial Statements.
| 2013 | ANNUAL REPORT | 13 |
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| Ivy High Income Opportunities Fund |
FOR THE PERIOD FROM MAY 29, 2013 TO SEPTEMBER 30, 2013 |
| (In thousands) | ||||
| Cash flows provided by operating activities: |
||||
| Net increase in net assets resulting from operations |
$ | 9,957 | ||
| Adjustments to reconcile net increase in net assets from operations to net cash used for operating activities: |
||||
| Purchases of long-term investment securities |
(622,126 | ) | ||
| Proceeds from sales of long-term investment securities |
165,668 | |||
| Purchases of short-term portfolio investment securities, net |
(7,293 | ) | ||
| Increase in investment securities sold receivable |
(12,903 | ) | ||
| Increase in interest receivable |
(7,466 | ) | ||
| Increase in prepaid and other assets |
(6 | ) | ||
| Increase in investment securities purchased payable |
21,891 | |||
| Increase in Trustees and Chief Compliance Officer fees payable |
1 | |||
| Increase in investment management fees payable |
13 | |||
| Increase in accounting services fees payable |
11 | |||
| Interest payable for borrowing |
4 | |||
| Increase in other liabilities |
65 | |||
| Net change in unrealized depreciation forward foreign currency contracts |
99 | |||
| Net change in unrealized appreciation on investments |
(1,292 | ) | ||
| Net realized gain on investment securities |
(2,357 | ) | ||
| Net amortization on investment securities |
234 | |||
| Net cash used for operating activities |
(455,500 | ) | ||
| Cash flows provided by financing activities: |
||||
| Proceeds from the sale of shares |
316,331 | |||
| Payments for offering costs |
(662 | ) | ||
| Payments for income distributions |
(4,142 | ) | ||
| Proceeds from borrowing |
154,000 | |||
| Net cash provided by financing activities |
465,527 | |||
| Net increase in cash and foreign currency |
10,027 | |||
| Cash and foreign currency, at beginning of period |
100 | |||
| Cash and foreign currency, at end of period |
$ | 10,127 | ||
| Supplemental disclosure of cash flow information: |
||||
| Interest expense paid during the period |
$ | 344 | ||
See Accompanying Notes to Financial Statements.
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| 2013 | ANNUAL REPORT | 15 |
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| Ivy High Income Opportunities Fund |
FOR A SHARE OF CAPITAL STOCK OUTSTANDING |
| Period from 5-29-13 to 9-30-13 |
||||
| Net Asset Value, Beginning of Period |
$ | 19.10 | ||
| Net Investment Income(1) |
0.45 | |||
| Net Realized and Unrealized Gain on Investments |
0.15 | |||
| Total From Investment Operations |
0.60 | |||
| Distributions From Net Investment Income |
(0.25 | ) | ||
| Common Shares Offering Costs |
(0.04 | ) | ||
| Net Asset Value, End of Period |
$ | 19.41 | ||
| Share Price, End of Period |
$ | 17.80 | ||
| Total Return(2) — Net Asset Value |
3.07 | % | ||
| Total Return(2) — Share Price(6) |
(9.73 | )% | ||
| Net Assets, End of Period (in millions) |
$ | 322 | ||
| Managed Assets, End of Period (in millions) |
$ | 476 | ||
| Ratio of Expenses to Average Net Assets |
1.82 | %(3)(5) | ||
| Ratio of Expenses to Average Net Assets Excluding Interest Expense |
1.49 | %(3)(5) | ||
| Ratio of Net Investment Income to Average Net Assets |
6.88 | %(3)(5) | ||
| Portfolio Turnover Rate |
44 | %(4) | ||
| (1) | Based on average weekly shares outstanding. |
| (2) | Total investment return is calculated assuming a purchase of common stock on the opening of the first day and a sale on the closing of the last day of each period reported. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Total returns for periods less than one year are not annualized. |
| (3) | Annualized. |
| (4) | For the period ended September 30, 2013. |
| (5) | The annualized Ratio of Expenses to Average Managed Assets, Ratio of Expenses to Average Managed Assets Excluding Interest Expense and Ratio of Net Investment Income to Average Managed Assets were 1.35%, 1.11% and 5.12%, respectively, during the period ended September 30, 2013. |
| (6) | Total investment return at share price will differ from results at NAV. Returns at share price can be influenced by factors such as changing views about the Fund, market conditions, supply and demand for the Fund’s stock, or changes in the Fund’s dividends. |
| 16 | ANNUAL REPORT | 2013 |
Table of Contents
| Ivy High Income Opportunities Fund |
SEPTEMBER 30, 2013 (UNAUDITED) |
| 1. | ORGANIZATION |
Ivy High Income Opportunities Fund (the “Fund”) is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as a non-diversified, closed-end management investment company. The Fund was organized as a Delaware statutory trust on January 30, 2013, pursuant to an Agreement and Declaration of Trust, as amended and restated on March 28, 2013, governed by the laws of the State of Delaware. The Fund commenced operations on May 29, 2013. Prior to that date, the Fund had no operations other than matters relating to its organization and the sale and issuance of 5,236 common shares of beneficial interest to Ivy Investment Management Company (“IICO” or the “Adviser”), the Fund’s investment adviser. The Fund’s common shares are listed on the New York Stock Exchange (the “NYSE”) and trade under the ticker symbol “IVH.”
The Fund’s investment objective is to seek to provide total return through a combination of a high level of current income and capital appreciation. The Fund will seek to achieve its investment objective by investing primarily in a portfolio of high yield corporate bonds of varying maturities and other fixed income instruments of predominantly corporate issuers, including first- and second-lien secured loans (“Loans”). Under normal circumstances, the Fund will invest at least 80% of its Managed Assets (as defined in the prospectus) in a portfolio of U.S. and foreign bonds, loans and other fixed income instruments, as well as other investments (including derivatives) with similar economic characteristics. The Fund will invest primarily in instruments that are, at the time of purchase, rated below investment grade (below Baa3 by Moody’s Investors Service, Inc. (“Moody’s”) or below BBB- by either Standard & Poor’s Rating Services (“S&P”) or Fitch, Inc. (“Fitch”), or comparably rated by another nationally recognized statistical rating organization (“NRSRO”)), or unrated but judged by the Fund’s investment adviser to be of comparable quality.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
The following is a summary of significant accounting policies consistently followed by the Fund.
Security Transactions and Related Investment Income. Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses are calculated on the identified cost basis. Interest income is recorded on the accrual basis and includes paydown gain (loss) and accretion of discounts and amortization of premiums. All or a portion of the distributions received from a real estate investment trust or publicly traded partnership may be designated as a reduction of cost of the related investment and/or realized gain.
Foreign Currency Translation. The Fund’s accounting records are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars daily, using foreign exchange rates obtained from an independent pricing service authorized by the Board of Trustees of the Trust (the “Board”). Purchases and sales of investment securities and accruals of income and expenses are translated at the rate of exchange prevailing on the date of the transaction. For assets and liabilities other than investments in securities, net realized and unrealized gains and losses from foreign currency translation arise from changes in currency exchange rates. The Fund combines fluctuations from currency exchange rates and fluctuations in value when computing net realized gain (loss) and net change in unrealized appreciation (depreciation) on investments. Foreign exchange rates are valued as of the close of the NYSE, normally 4:00 P.M. Eastern time, on each day the NYSE is open for trading.
Dividends and Distributions to Shareholders. Dividends to shareholders are declared monthly. Distributions from net realized capital gains from investment transactions, if any, are declared and distributed to shareholders at least annually. Net investment income dividends and capital gains distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America (“U.S. GAAP”). If the total dividends and distributions made in any tax year exceeds net investment income and accumulated realized capital gains, a portion of the total distribution may be treated as a tax return of capital.
It is the policy of the Fund to distribute all of its taxable income and capital gains to its shareholders and otherwise qualify as a regulated investment company under Subchapter M of the Internal Revenue Code. In addition, the Fund intends to pay distributions as required to avoid imposition of excise tax. Accordingly, no provision has been made for Federal income taxes. Management of the Fund periodically reviews all tax positions to assess that it is more likely than not that the position would be sustained upon examination by the relevant tax authority based on the technical merits of each position. As of and for the period ended September 30, 2013, management believes that no liability for unrecognized tax positions is required.
Segregation and Collateralization. In cases in which the 1940 Act and the interpretive positions of the Securities and Exchange Commission (“SEC”) require that the Fund either deliver collateral or segregate assets in connection with certain investments (e.g., borrowings, dollar rolls, financial futures contracts, foreign currency exchange contracts, options written, securities with extended settlement periods and swaps), the Fund will segregate collateral or designate on its books and records cash or other liquid securities having a value at least equal to the amount that is required to be physically segregated for the benefit of the counterparty. Furthermore, based on requirements and agreements with certain exchanges and third party broker-dealers, each party has requirements to deliver/deposit cash or securities as collateral for certain investments. Certain countries require that cash reserves be held while investing in companies incorporated in that country. These cash reserves and cash collateral that have been pledged to cover obligations of the Fund under borrowings or derivative contracts, if any, will be reported separately on the Statement of Assets and Liabilities as “Restricted cash.” Securities collateral pledged for the same purpose, if any, is noted on the Schedule of Investments.
Concentration of Market and Credit Risk. In the normal course of business, the Fund invests in securities and enters into transactions where risks exist due to fluctuations in the market (market risk) or failure of the issuer of a security to meet all its obligations (issuer credit risk). The value of securities held by the Fund may decline in response to certain events, including those directly involving the issuers whose securities are owned by the Fund; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and currency and interest rate and price fluctuations. Similar to issuer credit risk, the Fund may be exposed to counterparty credit risk, or the risk that an entity with which the Fund has unsettled or open transactions may fail to or be unable to perform on its commitments. The Fund manages counterparty credit risk by entering into transactions only with counterparties that it believes have the financial resources to honor their obligations and by
| 2013 | ANNUAL REPORT | 17 |
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monitoring the financial stability of those counterparties. Financial assets, which potentially expose the Fund to market, issuer and counterparty credit risks, consist principally of financial instruments and receivables due from counterparties. The extent of the Fund’s exposure to market, issuer and counterparty credit risks with respect to these financial assets is generally approximated by their value recorded on the Fund’s Statement of Assets and Liabilities, less any collateral held by the Fund.
The Fund may hold high-yield and/or non-investment-grade bonds, which may be subject to a greater degree of credit risk. Credit risk relates to the ability of the issuer to meet interest or principal payments or both as they become due. While the Fund may not invest in issues (such as secured debt issues and/or corporate debt issues) that are in default at the time of purchase, issuers in which the Fund may invest may become subject to a bankruptcy reorganization proceeding, subject to some other form of a public or private debt restructuring or otherwise become in default or in significant risk of default in the payment of interest or repayment of principal or trading at prices substantially below other below-investment grade debt securities of companies in similar industries.
The Fund may enter into financial instrument transactions (such as swaps, futures, options and other derivatives) that may have off-balance sheet market risk. Off-balance sheet market risk exists when the maximum potential loss on a particular financial instrument is greater than the value of such financial instrument, as reflected on the Statement of Assets and Liabilities.
If the Fund invests directly in foreign currencies or in securities that trade in, and receive revenues in, foreign currencies, or in financial derivatives that provide exposure to foreign currencies, it will be subject to the risk that those currencies will decline in value relative to the base currency of the Fund, or, in the case of hedging positions, that the Fund’s base currency will decline in value relative to the currency being hedged. Currency rates in foreign countries may fluctuate significantly over short periods of time for a number of reasons, including changes in interest rates, intervention (or the failure to intervene) by U.S. or foreign governments, central banks or supranational entities such as the International Monetary Fund, or by the imposition of currency controls or other political developments in the United States or abroad.
Leverage Risk. The Fund’s use of leverage creates the possibility of higher volatility for the Fund’s Net Asset Value (“NAV”), share price and distributions. Leverage risk can be introduced through regulatory leverage (borrowings) or through certain derivative instruments held in the Fund’s portfolio. Leverage typically magnifies the total return of the Fund’s portfolio, whether that return is positive or negative. The use of leverage creates an opportunity for increased net income per share, but there is no assurance that the Fund’s leveraging strategy will be successful.
Payment In-Kind Securities. The Fund may invest in payment in-kind securities (“PIKs”). PIKs give the issuer the option at each interest payment date of making interest payments in either cash or additional debt securities. Those additional debt securities usually have the same terms, including maturity dates and interest rates, and associated risks as the original bonds. The daily market quotations of the original bonds may include the accrued interest (referred to as a dirty price) and require a pro-rata adjustment from the unrealized appreciation or depreciation on investments to interest receivable on the Statement of Assets and Liabilities.
Securities on a When-Issued or Delayed Delivery Basis. The Fund may purchase securities on a “when-issued” basis, and may purchase or sell securities on a “delayed delivery” basis. “When-issued” or “delayed delivery” refers to securities whose terms and indenture are available and for which a market exists, but which are not available for immediate delivery. Delivery and payment for securities that have been purchased by the Fund on a when-issued basis normally take place within six months and possibly as long as two years or more after the trade date. During this period, such securities do not earn interest, are subject to market fluctuation and may increase or decrease in value prior to their delivery. The purchase of securities on a when-issued basis may increase the volatility of the Fund’s net asset value to the extent the Fund executes such transactions while remaining substantially fully invested. When the Fund engages in when-issued or delayed delivery transactions, it relies on the buyer or seller, as the case may be, to complete the transaction. Their failure to do so may cause the Fund to lose the opportunity to obtain or dispose of the security at a price and yield IICO considers advantageous. The Fund maintains internally designated assets with a value equal to or greater than the amount of its purchase commitments. The Fund may also sell securities that it purchased on a when-issued or delayed delivery basis prior to settlement of the original purchase.
Loans. The Fund may invest in loans. Loans are generally made to U.S. and foreign borrowers that are corporations, partnerships, or other business entities. Loans are generally readily marketable, but some loans may be illiquid or may be subject to some restrictions on resale. Certain loans contain provisions that obligate the Fund to fund future commitments at the borrower’s discretion. See Note 9 in the Notes to the Financial Statements for more information regarding commitments.
Custodian Fees. “Custodian fees” on the Statement of Operations may include interest expense incurred by the Fund on any cash overdrafts of its custodian account during the period. Such cash overdrafts may result from the effects of failed trades in portfolio securities and from cash outflows resulting from unanticipated shareholder redemption activity. The Fund pays interest to its custodian on such cash overdrafts, to the extent they are not offset by positive cash balances maintained by the Fund. The “Earnings credit” line item, if shown, represents earnings on cash balances maintained by the Fund during the period. Such interest expense and other custodian fees may be paid with these earnings.
Trustees and Chief Compliance Officer Fees. Fees paid to the Trustees can be paid in cash or deferred to a later date, at the election of the Trustee according to the Trust’s Deferred Fee Agreement entered into between the Fund and the Trustee(s). The Fund records the deferred fees as a liability on the Statement of Assets and Liabilities. All fees paid in cash plus any appreciation (depreciation) in the underlying deferred plan are shown on the Statement of Operations. Additionally, fees paid to the office of the Chief Compliance Officer of the Fund are shown on the Statement of Operations.
Indemnifications. The Fund’s organizational documents provide current and former Trustees and Officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into
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contracts that provide general indemnification. The Fund’s maximum exposure under these arrangements is unknown and is dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Estimates. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Statement of Cash Flows. U.S. GAAP requires entities providing financial statements that report both financial position and results of operations to also provide a statement of cash flows for each period for which results of operations are provided, but exempts investment companies meeting certain conditions. One of the conditions is that the enterprise had little or no debt, based on the average debt outstanding during the period, in relation to average total assets. Funds with certain degrees of borrowing activity, typically through the use of borrowing arrangements, have been determined to be at a level requiring a Statement of Cash Flows. The Statement of Cash Flows has been prepared using the indirect method which requires net increase in net assets resulting from operations to be adjusted to reconcile to net cash flows from operating activities.
Subsequent Events. Management has performed a review for subsequent events through the date this report was issued.
| 3. | INVESTMENT VALUATION AND FAIR VALUE MEASUREMENTS |
The Fund’s investments are reported at fair value. Fair value is defined as the price that the Fund would receive upon selling an asset or would pay upon satisfying a liability in an orderly transaction between market participants at the measurement date. The Fund calculates the NAV of its shares as of the close of the NYSE, normally 4:00 P.M. Eastern time, on each day the NYSE is open for trading.
For purposes of calculating the NAV, the portfolio securities and other assets are valued on each business day using pricing and valuation methods as adopted by the Board. Where market quotes are readily available, fair value is generally determined on the basis of last reported sales prices, or if no sales are reported, based on quotes obtained from a quotation reporting system, established market makers, or pricing services.
Prices for fixed-income securities are typically based on quotes that are obtained from an independent pricing service authorized by the Board. To determine values of fixed-income securities, the independent pricing service utilizes such factors as current quotations by broker/dealers, coupon, maturity, quality, type of issue, trading characteristics, and other yield and risk factors it deems relevant in determining valuations. Securities that cannot be valued by the independent pricing service may be valued using quotes obtained from dealers that make markets in the securities.
Short-term securities with maturities of 60 days or less are valued on the basis of amortized cost (which approximates value), whereby a portfolio security is valued at its cost initially, and thereafter valued to reflect a constant amortization to maturity of any discount or premium.
Because many foreign markets close before the NYSE, events may occur between the close of the foreign market and the close of the NYSE that could have a material impact on the valuation of foreign securities. Waddell & Reed Services Company (“WRSCO”), pursuant to procedures adopted by the Board, evaluates the impact of these events and may adjust the valuation of foreign securities to reflect the fair value as of the close of the NYSE. In addition, all securities for which values are not readily available or are deemed unreliable are appraised at fair value as determined in good faith under the supervision of the Board.
Where market quotes are not readily available, portfolio securities or assets are valued at fair value, as determined in good faith by the Board or WRSCO pursuant to instructions from the Board.
Market quotes are considered not readily available in circumstances where there is an absence of current or reliable market-based data (e.g., trade information or broker quotes), including where events occur after the close of the relevant market, but prior to the NYSE close, that materially affect the values of the Fund’s securities or assets. In addition, market quotes are considered not readily available when, due to extraordinary circumstances, the exchanges or markets on which the securities trade do not open for trading for the entire day and no other market prices are available.
The Board has delegated to WRSCO, the responsibility for monitoring significant events that may materially affect the values of the Fund’s securities or assets and for determining whether the value of the applicable securities or assets should be re-evaluated in light of such significant events. WRSCO has established a Valuation Committee to administer and oversee the valuation process, including the use of third party pricing vendors.
The Board has adopted methods for valuing securities and other assets in circumstances where market quotes are not readily available. For instances in which daily market quotes are not readily available, investments may be valued, pursuant to guidelines established by the Board, with reference to other securities or indices. In the event that the security or asset cannot be valued pursuant to one of the valuation methods established by the Board, the value of the security or asset will be determined in good faith by the Valuation Committee and appropriate consultation with the Board.
When the Fund uses these fair valuation methods applied by WRSCO that use significant unobservable inputs to determine its NAV, securities will be priced by a method that the Board or persons acting at their direction believe accurately reflects fair value and are categorized as Level 3 of the fair value hierarchy. These methods may require subjective determinations about the value of a security. The prices used by the Fund may differ from the value that will ultimately realized at the time if the securities were sold.
WRSCO is responsible for monitoring the implementation of the pricing and valuation policies through a series of activities to provide reasonable comfort of the accuracy of prices including: 1) periodic vendor due diligence meetings to review methodologies, new developments, and process at vendors, 2) daily and monthly multi-source pricing comparisons reviewed and submitted to the Valuation Committee, and 3) daily review of unpriced, stale, and variance reports with exceptions reviewed by management and the Valuation Committee.
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Accounting standards establish a framework for measuring fair value and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity’s own assumptions about the factors that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
An individual investment’s fair value measurement is assigned a level based upon the observability of the inputs which are significant to the overall valuation.
The three-tier hierarchy of inputs is summarized as follows:
Level 1 – Observable input such as quoted prices, available in active markets, for identical assets or liabilities.
Level 2 – Significant other observable inputs, which may include, but are not limited to, quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs.
Level 3 – Significant unobservable inputs based on the best information available in the circumstances, to the extent observable inputs are not available, which may include assumptions made by the Board or persons acting at their direction that are used in determining the fair value of investments.
A description of the valuation techniques applied to the Fund’s major classes of assets and liabilities measured at fair value on a recurring basis follows:
Loans. Loans are valued using a price or composite price from one or more brokers or dealers as obtained from an independent pricing service. The fair value of loans is estimated using recently executed transactions, market price quotations, credit/market events, and cross-asset pricing. Inputs are generally observable market inputs obtained from independent sources. Loans are generally categorized in Level 2 of the fair value hierarchy, unless key inputs are unobservable in which case they would be categorized as Level 3.
Corporate Bonds. The fair value of corporate bonds is estimated using various techniques, which consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads, fundamental data relating to the issuer, and credit default swap spreads adjusted for any basis difference between cash and derivative instruments. While most corporate bonds are categorized in Level 2 of the fair value hierarchy, in instances where lower relative weight is placed on transaction prices, quotations, or similar observable inputs, they are categorized in Level 3 of the fair value hierarchy.
Derivative Instruments. Forward foreign currency contracts are valued based upon the closing prices of the forward currency rates determined at the close of the NYSE and are categorized in Level 2 of the fair value hierarchy.
Municipal Bonds. Municipal bonds are fair valued based on pricing models that take into account, among other factors, information received from market makers and broker-dealers, current trades, bid-wants lists, offerings, market movements, the callability of the bond, state of issuance, benchmark yield curves, and bond insurance. To the extent that these inputs are observable and timely, the fair values of municipal bonds would be categorized as Level 2; otherwise the fair values would be categorized as Level 3.
Restricted Securities. Restricted securities that are deemed to be both Rule 144A securities and illiquid, as well as restricted securities held in non-public entities are included in Level 3 of the fair value hierarchy because they trade infrequently, and, therefore, the inputs are unobservable. Restricted securities that are valued at a discount to similar publicly traded securities may be categorized as Level 2 of the fair value hierarchy to the extent that the discount is considered to be insignificant to the fair value measurement in its entirety; otherwise they may be categorized as Level 3.
Borrowings. The carrying amount approximates fair value due to the relatively short-term maturity of these financial instruments, and are classified as Level 2 under the three-tier fair valuation hierarchy. The Fund may use market transactions for identical or similar instruments or a market yield approach, which utilizes expected future cash flows that are discounted using estimated current market rates. Discounted cash flow calculations may be adjusted to reflect current market conditions and/or the perceived credit risk of the Fund as applicable. Consideration may also include an evaluation of collateral.
Transfers from Level 2 to Level 3 occurred generally due to the lack of observable market data due to decreased market activity or information for these securities. Transfers from Level 3 to Level 2 occurred generally due to the increased availability of observable market data due to increased market activity or information. Transfers between levels represent the values as of the beginning of the reporting period.
For fair valuations using unobservable inputs, U.S. GAAP requires a reconciliation of the beginning to ending balances for reported fair values that presents changes attributable to total realized and unrealized gains or losses, purchases and sales, and transfers in or out of the Level 3 category during the period. The beginning of period timing recognition is used for the transfers between Levels of the Fund’s assets and liabilities. In accordance with the requirements of U.S. GAAP, a fair value hierarchy and Level 3 reconciliation, if any, have been included in the Notes to the Schedule of Investments for the Fund.
Net realized gain (loss) and net unrealized appreciation (depreciation), shown on the reconciliation of Level 3 investments if applicable, are included on the Statement of Operations in net realized gain (loss) on investments in unaffiliated securities and in net change in unrealized appreciation
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(depreciation) on investments in unaffiliated securities, respectively. Additionally, the net change in unrealized appreciation for all Level 3 investments still held as of September 30, 2013, if applicable, is included on the Statement of Operations in net change in unrealized appreciation (depreciation) on investments in unaffiliated securities.
The Fund may own different types of assets that are classified as Level 2 or Level 3. Assets classified as Level 2 can have a variety of observable inputs, including, but not limited to, benchmark yields, reported trades, broker quotes, benchmark securities, and bid/offer quotations. These observable inputs are collected and utilized, primarily by an independent pricing service, in different evaluated pricing approaches depending upon the specific asset to determine a value.
| 4. | DERIVATIVE INSTRUMENTS ($ amounts in thousands unless indicated otherwise) |
The following disclosures contain information on why and how the Fund uses derivative instruments, the associated risks of investing in derivative instruments, and how derivative instruments affect the Fund’s financial positions and results of operations when presented by primary underlying risk exposure.
Forward Foreign Currency Contracts. The Fund may enter into forward foreign currency contracts (“forward contracts”) for the purchase or sale of a foreign currency at a negotiated rate at a future date. Forward contracts are reported on a schedule following the Schedule of Investments. Forward contracts will be valued daily based upon the closing prices of the forward currency rates determined at the close of the NYSE as provided by a bank, dealer or independent pricing service. The resulting unrealized appreciation and depreciation is reported on the Statement of Assets and Liabilities as a receivable or payable and on the Statement of Operations within the change in unrealized appreciation (depreciation). At contract close, the difference between the original cost of the contract and the value at the close date is recorded as a realized gain (loss) on the Statement of Operations.
Risks to the Fund related to the use of such contracts include both market and credit risk. Market risk is the risk that the value of the forward contract will depreciate due to unfavorable changes in the exchange rates. Credit risk arises from the possibility that the counterparty will default. If the counterparty defaults, the Fund’s maximum loss will consist of the aggregate unrealized gain on appreciated contracts that is not collateralized.
Collateral and rights of offset. The Fund may mitigate credit risk with respect to OTC derivative counterparties through credit support annexes (“CSA”) included with an International Swaps and Derivatives Association, Inc. (“ISDA”) Master Agreement which is the standard contract governing most derivative transactions between the Fund and each of its counterparties. The CSA allows the Fund and its counterparty to offset certain derivative financial instruments’ payables and/or receivables against each other and/or with collateral, which is generally held by the Fund’s custodian. The amount of collateral moved to/from applicable counterparties is based upon minimum transfer amounts specified in the CSA. To the extent amounts due to the Fund from its counterparties are not fully collateralized contractually or otherwise, the Fund bears the risk of loss from counterparty non-performance. See Note 2 “Segregation and Collateralization” for additional information with respect to collateral practices.
Offsetting of Assets and Liabilities. Financial Accounting Standards Board (“FASB”) Accounting Standards Update 2011-11, Disclosures about Offsetting Assets and Liabilities, requires an entity that has financial instruments that are either (1) offset or (2) subject to an enforceable master netting arrangement or similar agreement to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position.
The following tables present the offsetting of assets and liabilities as of September 30, 2013:
Liabilities
| Gross Amounts Not Offset on the Statement of Assets and Liabilities | ||||||||||||||
| Gross Amounts of Recognized Liabilities |
Gross Amounts Offset on the Statement of Assets and Liabilities |
Net Amounts of Liabilities Presented on the Statement of Assets and Liabilities |
Financial Instruments and Derivatives Available for Offset |
Non-Cash Collateral Pledged |
Cash Collateral Pledged |
Net Amount | ||||||||
| Ivy High Income Opportunities Fund | ||||||||||||||
| Unrealized depreciation on forward foreign currency | $99 | $— | $99 | $— | $— | $— | $99 | |||||||
Additional Disclosure Related to Derivative Instruments
Fair values of derivative instruments as of period ended September 30, 2013:
| Assets |
Liabilities |
|||||||||||||
| Type of Risk Exposure |
Statement of Assets & Liabilities Location |
Value | Statement of Assets & Liabilities Location |
Value | ||||||||||
| Ivy High Income Opportunities Fund | Foreign currency | $— | Unrealized depreciation on forward foreign currency contracts |
$99 | ||||||||||
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Amount of realized gain (loss) on derivatives recognized on the Statement of Operations for the period ended September 30, 2013:
| Net realized gain (loss) on: | ||||||||||||||
| Type of Risk Exposure |
Investments in unaffiliated securities* |
Swap agreements |
Futures contracts |
Written options |
Forward foreign currency contracts |
Total | ||||||||
| Ivy High Income Opportunities Fund | Foreign currency | $— | $— | $— | $— | $(942) | $(942) | |||||||
Change in unrealized appreciation (depreciation) on derivatives recognized on the Statement of Operations for the period ended September 30, 2013:
| Net change in unrealized appreciation (depreciation) on: | ||||||||||||||
| Type of Risk Exposure |
Investments in unaffiliated securities* |
Swap agreements |
Futures contracts |
Written options |
Forward foreign currency contracts |
Total | ||||||||
| Ivy High Income Opportunities Fund | Foreign currency | $— | $— | $— | $— | $(99) | $(99) | |||||||
During the period ended September 30, 2013, the average derivative volume was as follows:
| Long
forward contracts(1) |
Short
forward contracts(1) |
Long
futures contracts(1) |
Short
futures contracts(1) |
Swap agreements(2) |
Purchased options(1) |
Written options(1) |
||||||||||||||||||||||
| Ivy High Income Opportunities Fund |
$ | 11,441 | $ | 11,403 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
| (1) | Average value outstanding during the period. |
| (2) | Average notional amount outstanding during the period. |
Objective and Strategy
Ivy High Income Opportunities Fund. The Fund’s objective in using derivatives during the period was to hedge the exposure to foreign currencies of securities held in the Fund. To achieve this objective, the Fund utilized forward contracts.
| 5. | INVESTMENT MANAGEMENT AND PAYMENTS TO AFFILIATED PERSONS ($ amounts in thousands unless indicated otherwise) |
Management Fees. IICO, a wholly owned subsidiary of Waddell & Reed Financial, Inc. (“WDR”), serves as the Fund’s investment manager. The Fund has agreed to pay the Adviser a management fee at an annual rate 1.00% of the average daily value of the Fund’s “Managed Assets”. Managed Assets means the Fund’s total assets, including the assets attributable to the proceeds from any borrowings or other forms of structural leverage, minus liabilities other than the aggregate indebtedness entered into for purposes of leverage.
Accounting Services Fees. The Fund has an Accounting Services Agreement with WRSCO, doing business as WI Services Company (“WISC”), an indirect subsidiary of WDR. Under the agreement, WISC acts as the agent in providing bookkeeping and accounting services and assistance to the Fund, including maintenance of Fund records, pricing of Fund shares and preparation of certain shareholder reports. For these services, the Fund pays WISC a monthly fee of one-twelfth of the annual fee based on the average managed asset levels shown in the following table:
| (M - Millions) | $0 to $10M |
$10 to $25M |
$25 to $50M |
$50 to $100M |
$100 to $200M |
$200 to $350M |
$350 to $550M |
$550 to $750M |
$750 to $1,000M |
Over $1,000M |
||||||||||||||||||||||||||||||
| Annual Fee Rate |
$ | 0.00 | $ | 11.50 | $ | 23.10 | $ | 35.50 | $ | 48.40 | $ | 63.20 | $ | 82.50 | $ | 96.30 | $ | 121.60 | $ | 148.50 | ||||||||||||||||||||
Administrative Fee. The Fund also pays WISC a monthly fee at the annual rate of 0.01%, or one basis point, for the first $1 billion of net managed assets with no fee charged for net managed assets in excess of $1 billion. This fee is voluntarily waived by WISC until the Fund’s net managed assets are at least $10 million and is included in “Accounting services fee” on the Statement of Operations.
Other Fees. The Fund pays all costs and expenses of its operations, including, but not limited to, compensation of its trustees (other than those affiliated with the Adviser), custodian, administrator, leveraging expenses, transfer and dividend disbursing agent expenses, legal fees, rating agency fees, listing fees and expenses, expenses of independent auditors, expenses of repurchasing shares, expenses of preparing, printing and distributing shareholder reports, notices, proxy statements and reports to governmental agencies and taxes, if any.
| 6. | INVESTMENT SECURITIES TRANSACTIONS ($ amounts in thousands) |
The cost of purchases and the proceeds from maturities and sales of investment securities (excluding short-term securities) for the period ended September 30, 2013, were as follows:
| Purchases | Sales | |||||||||||||||
| U.S. Government | Other Issuers | U.S. Government | Other Issuers | |||||||||||||
| Ivy High Income Opportunities Fund |
$ | — | $ | 622,126 | $ | — | $ | 165,668 | ||||||||
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| 7. | BORROWINGS |
The Fund has entered into a $160 million (“Facility Limit”) prime brokerage facility (“Borrowings”) with Bank of America, N.A. as a means of financial leverage. Interest is charged on the Borrowings at the British Bankers Association London Interbank Offered Rate (“BBA LIBOR”) plus 0.75% on the amount borrowed. The Fund also accrues a commitment fee of 0.25% on the daily undrawn portion of the Facility Limit. The commitment fee shall be calculated monthly in arrears and be due and payable monthly in arrears on each interest payment date and maturity date. No commitment fee shall be due on any interest payment date where the average daily undrawn portion of the Facility Limit during the month for which payment would otherwise be due on such interest payment date is less than 20% of the Facility Limit.
During the period ended September 30, 2013, the average daily balance outstanding and weighted interest rate on the Borrowings were $120,729,729 and 0.935%, respectively.
In order to maintain the Borrowings, the Fund must meet certain collateral, asset coverage and other requirements. Borrowings outstanding are secured by securities held by the Fund.
Borrowings outstanding are recognized as “Payable for borrowing” on the Statement of Assets and Liabilities. Interest charged on the amount borrowed and undrawn balance are each recognized as a component of “Interest expense for borrowing” on the Statement of Operations.
| 8. | CAPITAL SHARE TRANSACTIONS ($ amounts in thousands) |
The Fund has authorized 18,750,000 of $0.001 par value common shares of beneficial interest. Transactions in shares of beneficial interest were as follows:
| Ivy High Income Opportunities Fund |
||||||||
| Period from 5-29-13 to 9-30-13 |
||||||||
| Shares | Value | |||||||
| Shares issued from sale of shares |
16,562 | $ | 316,331 | |||||
| Offering costs charged to paid-in capital in excess of par |
— | (662 | ) | |||||
| Net increase |
16,562 | $ | 315,669 | |||||
The Fund paid all of its offering costs up to $0.04 per common share and the Adviser paid (i) all of the Fund’s organizational expenses and (ii) the Fund’s offering costs (other than the sales load) in excess of $0.04 per common share.
| 9. | COMMITMENTS ($ amounts in thousands) |
Bridge loan commitments may obligate the Fund to furnish temporary financing to a borrower until permanent financing can be arranged. At period ended September 30, 2013, the Fund had outstanding bridge loan commitments of $2,605. In connection with these commitments, the Fund earns a commitment fee, typically set as a percentage of the commitment amount. Such fee income is included in interest income on the Statement of Operations.
| 10. | FEDERAL INCOME TAX MATTERS ($ amounts in thousands) |
For Federal income tax purposes, cost of investments owned at September 30, 2013 and the related unrealized appreciation (depreciation) were as follows:
| Fund | Cost of Investments |
Gross Appreciation |
Gross Depreciation |
Net Unrealized Appreciation |
||||||||||||
| Ivy High Income Opportunities Fund |
$ | 465,934 | $ | 5,378 | $ | 4,146 | $ | 1,232 | ||||||||
For Federal income tax purposes, the Fund’s distributed and undistributed earnings and profit for the period ended September 30, 2013 and the post-October and late-year ordinary activity were as follows:
| Fund | Distributed Ordinary Income |
Undistributed Ordinary Income |
Distributed Long-Term Capital Gains |
Undistributed Long-Term Capital Gains |
Tax Return of Capital |
Post-October Capital Losses Deferred |
Late-Year Ordinary Losses Deferred |
|||||||||||||||||||||
| Ivy High Income Opportunities Fund |
$ | 4,142 | $ | 4,663 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Internal Revenue Code regulations permit the Fund to elect to defer into its next fiscal year capital losses incurred between each November 1 and the end of its fiscal year. The Fund is also permitted to defer into its next fiscal year late-year ordinary losses that arise from the netting of activity generated between each November 1 and the end of its fiscal year on certain specified ordinary items.
Net investment income dividends and capital gains distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are due to differing treatments for items such as deferral of wash sales, post-October losses, late-year ordinary losses, foreign currency transactions, net operating losses, income from passive foreign investment companies (PFICs), partnership transactions, and expiring capital loss carryovers. At September 30, 2013, the following reclassifications were made:
| Fund | Undistributed Net Investment Income |
Accumulated Net Realized Gain (Loss) |
Paid-In Capital |
|||||||||
| Ivy High Income Opportunities Fund |
$ | 315 | $ | (315 | ) | $ | — | |||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
| Ivy High Income Opportunities Fund |
To the Shareholders and Board of Trustees of Ivy High Income Opportunities Fund:
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Ivy High Income Opportunities Fund, as of September 30, 2013, and the related statements of operations, changes in net assets, cash flows, and the financial highlights for the period from May 29, 2013 through September 30, 2013. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of September 30, 2013, by correspondence with the custodian, agent banks, and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Ivy High Income Opportunities Fund as of September 30, 2013, the results of its operations and its cash flows, the changes in its net assets, and the financial highlights for the period from May 29, 2013 through September 30, 2013, in conformity with accounting principles generally accepted in the United States of America.
Kansas City, Missouri
November 15, 2013
| 24 | ANNUAL REPORT | 2013 |
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| Ivy High Income Opportunities Fund |
Pursuant to the Fund’s Dividend Reinvestment Plan (the “DRIP”), unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends, on your common shares will be automatically reinvested by Computershare Trust Company, N.A., as agent for the shareholders (the “DRIP Agent”), in additional common shares under the DRIP. You may elect not to participate in the DRIP by contacting the DRIP Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by Computershare, Inc. as dividend paying agent.
If you participate in the DRIP, the number of common shares you will receive will be determined as follows:
(1) If the market price of the common shares on the record date (or, if the record date is not a New York Stock Exchange (“NYSE”) trading day, the immediately preceding trading day) for determining shareholders eligible to receive the relevant dividend or distribution (the “determination date”) is equal to or exceeds 98% of the net asset value per share of the common shares, the Fund will issue new common shares at a price equal to the greater of:
(a) 98% of the net asset value per share at the close of trading on the NYSE on the determination date or
(b) 95% of the market price of the common shares on the determination date.
(2) If 98% of the net asset value per share of the common shares exceeds the market price of the common shares on the determination date, the DRIP Agent will receive the dividend or distribution in cash and will buy common shares in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading day following the determination date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date, or (b) the record date for the next succeeding dividend or distribution to be made to the shareholders; except when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price rises so that it equals or exceeds 98% of the net asset value per share of the common shares at the close of trading on the NYSE on the determination date before the DRIP Agent has completed the open market purchases or (ii) if the DRIP Agent is unable to invest the full amount eligible to be reinvested in open market purchases, the DRIP Agent will cease purchasing common shares in the open market and the Fund shall issue the remaining common shares at a price per share equal to the greater of (a) 98% of the net asset value per share at the close of trading on the NYSE on the determination date or (b) 95% of the then-current market price per share.
Common shares in your account will be held by the DRIP Agent in non-certificated form. Any proxy you receive will include all shares of common shares you have received under the DRIP.
You may withdraw from the DRIP (i.e., opt-out) by notifying the DRIP Agent in writing at P.O. Box 43078, Providence, Rhode Island 02940-3078. Such withdrawal will be effective immediately if notice is received by the DRIP Agent prior to any dividend or distribution record date; otherwise such withdrawal will be effective as soon as practicable after the DRIP Agent’s investment of the most recently declared dividend or distribution on the common shares. The DRIP may be amended or supplemented by the Fund upon notice in writing mailed to shareholders at least 30 days prior to the record date for the payment of any dividend or distribution by the Fund for which the termination is to be effective. Upon any termination, the DRIP Agent will continue to hold whole shares for you in non-certificated form until otherwise notified by you, and will cause a cash adjustment for any fractional shares to be delivered to you after deducting brokerage commissions actually incurred. You may elect to notify the DRIP Agent in advance of such termination, or at any time following termination, to have the DRIP Agent sell part or all of your common shares on your behalf. You will be charged a service charge and the DRIP Agent is authorized to deduct brokerage charges actually incurred for this transaction from the proceeds.
There is no service charge for reinvestment of your dividends or distributions in common shares. However, all participants will pay a per share processing fee, which includes any brokerage commissions incurred by the DRIP Agent when it makes open market purchases. Because all dividends and distributions will be automatically reinvested in additional common shares, this allows you to add to your investment through dollar cost averaging, which may lower the average cost of your common shares over time. Dollar cost averaging is a technique for lowering the average cost per share over time if the Fund’s net asset value declines. While dollar cost averaging has definite advantages, it cannot assure profit or protect against loss in declining markets.
Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. Investors will be subject to income tax on amounts reinvested under the DRIP.
The Fund reserves the right to amend or terminate the DRIP if, in the judgment of the Board, the change is warranted. There is no direct service charge to participants in the DRIP; however, the Fund reserves the right to amend the DRIP to include a service charge payable by the participants.
Additional information about the DRIP and your account may be obtained from the DRIP Agent at P.O. Box 43078, Providence, Rhode Island 02940-3078 or by calling the DRIP Agent at (800)-426-5523.
| 2013 | ANNUAL REPORT | 25 |
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BOARD OF TRUSTEES AND OFFICERS
| Ivy High Income Opportunities Fund |
The Fund is governed by the Board of Trustees (the Board). A majority of the Board members are not “interested persons” as defined in Section 2(a)(19) of the 1940 Act and therefore qualify as Disinterested Trustees. The Board elects the officers who are responsible for administering the Fund’s day-to-day operations. The Trustees of the Fund are also trustees of 34 portfolios within the Ivy Funds (the “Ivy Trust”), an open-end management investment company. The Waddell & Reed Fund Complex (the “Fund Complex”) is comprised of the Fund, the Ivy Trust and the “Advisors Fund Complex” (Waddell & Reed Advisors Funds, Ivy Funds Variable Insurance Portfolios and InvestEd Portfolios). Jarold W. Boettcher, Joseph Harroz, Jr., Henry J. Herrmann and Eleanor B. Schwartz also serve as trustees of the Waddell & Reed Advisors Fund Complex.
Joseph Harroz, Jr. serves as Independent Chair of the Trust’s Board and of the Board of Trustees of Ivy Funds.
The Board is classified into three classes—Class I, Class II and Class III—as nearly equal in number as reasonably possible, with the trustees in each class to hold office until their successors are elected and qualified. At each succeeding annual meeting of shareholders, the successors to the class of trustees whose terms expire at that meeting shall be elected to hold office for terms expiring at the later of the annual meeting of shareholders held in the third year following the year of their election or the election and qualification of their successors.
Under the Fund’s Amended and Restated Agreement and Declaration of Trust (the “Declaration of Trust”) and its Amended and Restated By-Laws (the “Bylaws”), a Trustee may serve as a Trustee until his or her term expires, or until he or she dies, resigns, bankruptcy, adjudicated incompetence or other incapacity to perform the duties of the office, or removal. The Fund intends to hold annual meetings of shareholders so long as the Common Shares are listed on a national securities exchange and such meetings are required as a condition to such listing. Delaware law permits shareowners to remove Trustees under certain circumstances and requires the Trust to assist in shareowner communications.
The Statement of Additional Information (SAI) for the Fund includes additional information about the Trustees. The SAI is available without charge, upon request by calling 1.800.777.6472. It is also available on the Ivy Funds website, www.ivyfunds.com.
Independent Trustees
The following table provides information regarding each Independent Trustee.
| Name, Address and Year of Birth |
Position(s) Held with The Fund |
Length of Time Served with the Fund and Term of Office |
Principal Occupation(s) During Past 5 Years |
Number of Funds in Fund Complex Overseen by Trustee |
Other Directorships Held During Past 5 Years | |||||
| Jarold W. Boettcher, CFA 6300 Lamar Avenue Overland Park, KS 66202 1940 |
Trustee | Since Inception Term – Class III |
President of Boettcher Enterprises, Inc. (agriculture products and services) (1979 to present), Boettcher Supply, Inc. (electrical and plumbing supplies distributor) (1979 to present), Boettcher Aerial, Inc. (Aerial Ag Applicator) (1982 to present) | 84 | Director of Guaranty State Bank & Trust Co. (financial services) (1981 to present); Director of Guaranty, Inc. (financial services)(1985 to present); Member of Kansas Board of Regents (2007 to 2011); Trustee and Governance Committee Member of Kansas State University Foundation (1981 to present); Audit Committee Chairperson, Kansas Bioscience Authority (2009 to present); Member of Kansas Foundation for Medical Care (until 2011); Trustee of Advisors Fund Complex (49 portfolios overseen) | |||||
| James D. Gressett 6300 Lamar Avenue Overland Park, KS 66202 1950 |
Trustee | Since Inception Term – Class I |
Chief Executive Officer (CEO) of CalPac Pizza LLC (2011 to present); CEO of CalPac Pizza II LLC (2012 to present); CEO of PacPizza LLC (Pizza Hut franchise) (1999 to present); Partner, Century Bridge Partners (real estate investments) (2007 to present); Manager, Premium Gold Foods (2006 to present) | 35 | None |
| 26 | ANNUAL REPORT | 2013 |
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| Name, Address and Year of Birth |
Position(s) Held with The Fund |
Length of Time Served with the Fund and Term of Office |
Principal Occupation(s) During Past 5 Years |
Number of Funds in Fund Complex Overseen by Trustee |
Other Directorships Held During Past 5 Years | |||||
| Joseph Harroz, Jr. 6300 Lamar Avenue Overland Park, KS 66202 1967 |
Trustee
Independent Chairman |
Since Inception
Since Inception Term – Class I |
Dean of the College of Law, Vice President, University of Oklahoma (2010 to present); President of Graymark HealthCare (a NASDAQ listed company) (2008 to 2010); Adjunct Professor, University of Oklahoma Law School (1997 to 2010); Managing Member, Harroz Investments, LLC, (commercial enterprise investments) (1998 to present) | 84 | Director and Investor, Valliance Bank (2004 to present); Director, Graymark HealthCare (2008 to present); Trustee, the Mewbourne Family Support Organization (2003 to present) (non-profit); Trustee of Advisors Fund Complex (49 portfolios overseen) | |||||
| Glendon E. Johnson, Jr. 6300 Lamar Avenue Overland Park, KS 66202 1951 |
Trustee | Since Inception Term – Class I |
Of Counsel, Lee & Smith, PC (law firm, emphasis on finance, securities and acquisition law) (1996 to present); Owner and Manager, Castle Valley Ranches, LLC (ranching) and Castle Valley Outdoors, LLC (hunting, fishing, outdoor recreation, lodging and corporate retreats) (1995 to present) Formerly, Partner, Kelly, Drye & Warren LLP (law firm) (1989- 1996); Partner, Lane & Edson PC (law firm) (1987-1989) | 35 | Director, Thomas Foundation for Cancer Research (2005 to present) | |||||
| Eleanor B. Schwartz 6300 Lamar Avenue Overland Park, KS 66202 1937 |
Trustee | Since Inception Term – Class III |
Professor Emeritus, University of Missouri at Kansas City (2003 to present); Chancellor Emeritus, University of Missouri at Kansas City (1999 to present) | 84 | Trustee of Advisors Fund Complex (49 portfolios overseen) | |||||
| Michael G. Smith 920 York Road Suite 350 Hinsdale IL 60521 1944 |
Trustee | Since Inception Term – Class II |
Retired; formerly, with Merrill Lynch as Managing Director of Global Investor Client Strategy (1996-1998), Head of Regional Institutional Sales (1995-1996) and of U.S. Central Region (1986-1995, 1999). | 35 | Director of Executive Board, Cox Business School, Southern Methodist University; Lead Director of Northwestern Mutual Funds (29 portfolios overseen) (2003 to present); Director, d-bx Target Date Funds (2007 to present); Chairman, CTMG, Inc. (clinical testing) (2008 to present) | |||||
| Edward M. Tighe 6300 Lamar Avenue Overland Park, KS 66202 1942 |
Trustee | Since Inception Term – Class II |
Retired; formerly, CEO and Director of Asgard Holding, LLC (computer network and security services) (2002 to 2004); President, Citco Technology Management (1995-2000); CEO, Global Mutual Fund Services (1993-2000); Sr. Vice President, Templeton Global Investors (1988-1992) | 35 | Director, The Research Coast Principium Foundation, Inc. (non-profit) (2012 to present) |
| 2013 | ANNUAL REPORT | 27 |
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Interested Trustee
Mr. Herrmann is “interested” by virtue of his current or former engagement as an officer of Waddell & Reed Financial, Inc. (“WDR”) or its wholly owned subsidiaries, including the Fund’s investment adviser, IICO.
| Name, Address and Year of Birth |
Position(s) Held with The Fund |
Length of Time Served with the Fund and Term of Office |
Principal Occupation(s) During Past 5 Years |
Number of Funds in Fund Complex Overseen by Trustee |
Other Directorships Held | |||||
| Henry J. Herrmann 6300 Lamar Avenue Overland Park, KS 66202 1942 |
President
Trustee |
Since Inception
Term – Class II |
Chairman of WDR (January 2010 to present); CEO of WDR (2005 to present); President, CEO and Chairman of IICO (2002 to present); President, CEO and Chairman of Waddell & Reed Investment Management Company (WRIMCO) (1993 to present); President and Trustee of each of the funds in the Fund Complex | 84 | Director of WDR, IICO, WRIMCO, WI Services Company (WISC), W&R Capital Management Group, Inc., and Waddell & Reed, Inc.; Trustee of each of the funds in the Advisors Fund Complex (49 portfolios overseen); Director, Blue Cross Blue Shield of Kansas City |
Officers
The Board has appointed officers who are responsible for the day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the Board. In addition to Mr. Herrmann, who is President, the Fund’s principal officers are:
| Name, Address and Year of Birth |
Position(s) Held with the Fund |
Length of Time Served with the Fund and Term of Office |
Principal Occupation(s) During Past 5 Years | |||
| Mara D. Herrington 6300 Lamar Avenue Overland Park KS 66202 1964 |
Vice President Secretary |
Since Inception | Vice President and Secretary of each of the funds in the Fund Complex (2006 to present); Vice President of WRIMCO and IICO (2006 to present) | |||
| Joseph W. Kauten 6300 Lamar Avenue Overland Park KS 66202 1969 |
Vice President Treasurer Principal Accounting Officer Principal Financial Officer |
Since Inception | Principal Financial Officer of each of the funds in the Fund Complex (2007 to present); Vice President, Treasurer and Principal Accounting Officer of each of the funds in the Fund Complex (2006 to present); Assistant Treasurer of each of the funds in the Fund Complex (2003 to 2006) | |||
| Scott J. Schneider 6300 Lamar Avenue Overland Park KS 66202 1968 |
Vice President Chief Compliance Officer |
Since Inception | Chief Compliance Officer (2004 to present) and Vice President (2006 to present) of each of the funds in the Fund Complex | |||
| Daniel C. Schulte 6300 Lamar Avenue Overland Park KS 66202 1965 |
Vice President General Counsel Assistant Secretary |
Since Inception | Senior Vice President and General Counsel of WDR, Waddell & Reed, WRIMCO and WISC (2000 to present); Senior Vice President and General Counsel of IICO (2002 to present); Vice President, General Counsel and Assistant Secretary for each of the funds in the Fund Complex (2000 to present) | |||
| Philip A. Shipp 6300 Lamar Avenue Overland Park, KS 66202 1969 |
Assistant Secretary | Since Inception | Assistant Secretary of each of the funds in the Fund Complex (2012 to present) |
| 28 | ANNUAL REPORT | 2013 |
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APPROVAL OF INVESTMENT MANAGEMENT AGREEMENT
| Ivy High Income Opportunities Fund |
At a meeting of the Board of Trustees (the “Board”) of Ivy High Income Opportunities Fund (the “Fund”) held on February 25, 2013, the trustees, including all of the trustees who are not “interested persons” as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended (“Independent Trustees”), considered and approved the Investment Management Agreement (the “Agreement”) between Ivy Investment Management Company (“IICO”) and the Fund.
The Independent Trustees were assisted in their consideration of the Agreement by independent legal counsel, and met with such counsel separately from representatives of IICO and the interested trustee. Independent legal counsel had provided the Board with a memorandum that discussed the various factors that the Board should consider as part of its consideration of the Agreement, including, among other things, the nature and the quality of the services proposed to be provided to the Fund by IICO, IICO’s potential profitability (including any fall-out benefits) from its proposed relationship with the Fund, projected economies of scale, the role played by the Independent Trustees and information on comparative fees and expenses. The material factors and conclusions that formed the basis for the Board’s determination to approve the Agreement are discussed below.
In considering the Agreement, the Board discussed the extensive presentation that Mr. Bryan Krug, an employee of IICO and the proposed portfolio manager of the Fund, had made on the manner by which he would manage the Fund, including its use of leverage. Although the Fund had not yet commenced operations and therefore the Board did not have specific information to examine, the Board concluded that the Fund appeared to be designed to be able to achieve acceptable performance. The Board also considered the proposed expenses of the Fund and the cost of the services proposed to be provided by IICO, including as compared to the other funds in the Ivy Funds family as well as comparable closed-end funds, and concluded that the proposed expenses of IICO were acceptable. The Board, however, did not discuss the projected profitability of IICO in managing the Fund because the Fund had not yet commenced operations, but noted that they would monitor profitability once the Fund begins operations and considered IICO’s agreement to cap organizational expenses and initial offering expenses of the Fund. The Board considered the nature, extent and quality of services proposed to be provided to the Fund by IICO, taking into account the investment objective and strategy of the Fund, their experience with IICO and Mr. Krug’s management of the Ivy High Income Fund, as well as the materials previously provided to the Board on the Fund. In addition, the Board reviewed the resources and key personnel of IICO, especially those proposed to provide investment management services to the Fund. The Board also considered other services proposed to be provided to the Fund by IICO, based upon their current experiences with IICO, such as monitoring adherence to the Fund’s investment restrictions, producing reports, providing support services for the Board and Board committees, communicating with shareholders and overseeing the activities of other service providers, including monitoring compliance with various policies and procedures and with applicable securities laws and regulations. The Board concluded that the nature and extent of the services proposed to be provided by IICO are reasonable, considering the quality of the services currently provided by IICO to the other funds in the Ivy Funds family, on whose board each Board member serves. The Board also discussed whether IICO would derive any other direct or indirect benefits from serving as investment adviser to the Fund. After consideration of these and other factors, the Board concluded that neither IICO nor its affiliates would receive any additional direct benefits that would preclude the Board from approving the Agreement with IICO. The Board did not discuss possible economies of scale because the Fund had not commenced operations, but took note of the Fund’s proposed advisory fee schedule.
| 2013 | ANNUAL REPORT | 29 |
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| Ivy High Income Opportunities Fund |
The following privacy notice is issued by Ivy High Income Opportunities Fund (the “Fund”) and Ivy Investment Management Company (IICO).
Information Collected
We collect nonpublic personal information about you from your account application and other forms that you may deliver to us, and from your transactions with us and our affiliates. This is information that regulators consider necessary for the proper servicing of your account. In order to effect your transactions and service your account properly, we may disclose all of the information that we collect, as described above, to firms that assist us in servicing your account, such as our transfer agent.
Confidentiality of Information Collected
All records containing your nonpublic personal information are kept at our various service providers. These entities include IICO and our transfer agent and administrative services provider. We require these affiliates, and any non-affiliated service providers, to protect the confidentiality of your information and to use the information only for the purposes for which disclosure to them is made. The Funds, IICO and other service providers restrict access to nonpublic personal information about you to those employees who need to know that information to provide products and services to you and maintain physical, electronic, and procedural safeguards that comply with federal standards to maintain the security of your nonpublic personal information.
Disclosure of Information in Limited Circumstances
We do not disclose nonpublic personal information about present or former customers to nonaffiliated third parties, except as permitted or required by law. In connection with servicing your account, your nonpublic personal information may be shared among the entities named in this notice, their affiliates, and non-affiliates, including a transfer agent or other service companies. We will adhere to the policies and practices above for both current and former customers.
| 30 | ANNUAL REPORT | 2013 |
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Proxy Voting Guidelines
A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is available (i) without charge, upon request, by calling 1.800.777.6472 and (ii) on the Securities and Exchange Commission’s (SEC) website at www.sec.gov.
Proxy Voting Records
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on Form N-PX through the Ivy Funds’ website at www.ivyfunds.com and on the SEC’s website at www.sec.gov.
QUARTERLY PORTFOLIO SCHEDULE INFORMATION
Portfolio holdings can be found on the Fund’s website at www.ivyfunds.com. Alternatively, a complete schedule of portfolio holdings of the Fund for the first and third quarters of each fiscal year is filed with the SEC and can be found on the Fund’s Form N-Q. These holdings may be viewed in the following ways:
| • | On the SEC’s website at www.sec.gov. |
| • | For review and copy at the SEC’s Public Reference Room in Washington, DC. Information on the operations of the Public Reference Room may be obtained by calling 1.800.SEC.0330. |
If you currently receive one copy of the shareholder reports and prospectus for your household (even if more than one person in your household owns shares of the Fund) and you would prefer to receive separate shareholder reports and prospectuses for each account holder living at your address, you can do either of the following:
Fax your request to 800.532.2749.
Write to us at the address listed on the back cover.
Please list each account for which you would like to receive separate shareholder reports and prospectus mailings. We will resume sending separate documents within 30 days of receiving your request.
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ANN-IVH (9-13)
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ITEM 2. CODE OF ETHICS
| (a) | As of September 30, 2013, the Registrant has adopted a code of ethics (the “Code”), as defined in Item 2 of Form N-CSR, that applies to the Principal Executive Officer and Principal Financial Officer or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. A copy of this code of ethics is filed as an exhibit to this Form N-CSR. |
| (b) | There have been no amendments, during the period covered by this report, to a provision of the Code that applies to the registrant’s Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer or Controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, and that relates to any element of the Code. |
| (c) | During the period covered by this report, the registrant did not grant any waivers, including an implicit waiver, from a provision of the Code that applies to the registrant’s Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer or Controller, or persons performing similar functions, regardless of whether those individuals were employed by the registrant or a third party, that related to one or more of the items set forth in paragraph (b) of this item’s instructions. |
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Trustees of the Registrant has determined that each of Jarold W. Boettcher, James D. Gressett, and Edward M. Tighe is an audit committee financial expert, as defined in Item 3 of Form N-CSR, serving on its audit committee. Each of Mr. Boettcher, Mr. Gressett and Mr. Tighe is independent for purposes of Item 3 of Form N-CSR. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an “expert” for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liability that are greater than the duties, obligations, and liability imposed on such person as a member of the audit committee and board of trustees in the absence of such designation or identification. The designation or identification of a person as an audit committee financial expert does not affect the duties, obligations, or liability of any other member of the audit committee or board of trustees.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
| (a) | Audit Fees |
The aggregate fees billed for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for each of the last two fiscal years are as follows:
| 2013 |
$ | 60,000 | ||
| 2012 |
0 |
| (b) | Audit-Related Fees |
The aggregate fees billed for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant’s annual financial statements and are not reported under paragraph (a) of this Item are as follows:
| 2013 |
$ | 0 | ||
| 2012 |
0 |
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| (c) | Tax Fees |
The aggregate fees billed for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning are as follows:
| 2013 |
$ | 0 | ||
| 2012 |
0 |
These fees are related to the review of the registrant’s tax returns.
| (d) | All Other Fees |
The aggregate fees billed for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this item are as follows:
| 2013 |
$ | 0 | ||
| 2012 |
0 |
These fees are related to the review of internal control.
| (e) |
(1) | Registrant’s audit committee considers with the principal accountants all audit services to be provided by the principal accountants and pre-approves all such audit services. |
The audit committee shall pre-approve all non-audit services to be provided by the principal accountants to the registrant; provided that the pre-approval requirement does not apply to non-audit services that (i) were not identified as such at the time of the pre-approval and (ii) do not aggregate more than 5% of total fees paid to the principal accountants by the registrant during the fiscal year in which the services are provided, if the audit committee approves the provision of such non-audit services prior to the completion of the audit.
The audit committee shall pre-approve all non-audit services to be provided by the principal accountants to the investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted and overseen by the investment advisor) or any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant if the engagement relates directly to the operations or financial reporting of the registrant; provided that the pre-approval requirement does not apply to non-audit services that (i) were not identified as such at the time of the pre-approval and (ii) do not aggregate more than 5% of total fees paid to the principal accountants by the registrant for all services and by the registrant’s investment adviser for non-audit services if the engagement relates directly to the operations or financial reporting of the registrant during the fiscal year in which those services are provided, if the audit committee approves the provision of such non-audit services prior to the completion of the audit.
| (e) |
(2) | None of the services described in each of paragraphs (b) through (d) of this Item were approved by the audit committee pursuant to the waiver provisions of paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. |
| (f) | Not applicable |
| (g) | $0 and $0 are the aggregate non-audit fees billed in each of the last two fiscal years for services rendered by the principal accountant to the registrant. $179,149 and $147,801 are the aggregate |
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| non-audit fees billed in each of the last two fiscal years for services rendered by the principal accountant to the investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser) and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant. |
| (h) | Not Applicable. |
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
The Registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(58)(A)), and is comprised of Jarold W. Boettcher, James D. Gressett, and Edward M. Tighe.
ITEM 6. SCHEDULE OF INVESTMENTS.
| (a) | See Item 1 Shareholder Report. |
| (b) | Not Applicable. |
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Proxy Voting Policy
Ivy High Income Opportunities Fund (the “Fund”) has delegated all proxy voting responsibilities to Ivy Investment Management Company, the Fund’s investment adviser (the “Adviser”). The Adviser has established guidelines that reflect what it believes are desirable principles of corporate governance.
Listed below are several reoccurring issues and the Adviser’s corresponding positions.
Board of Directors Issues:
The Adviser generally supports proposals requiring that a majority of the board of directors consist of outside, or independent, directors.
The Adviser generally votes against proposals to limit or eliminate liability for monetary damages for violating the duty of care.
The Adviser generally votes against indemnification proposals that would expand coverage to more serious acts such as negligence, willful or intentional misconduct, derivation of improper personal benefit, absence of good faith, reckless disregard for duty, and unexcused pattern of inattention. The success of a corporation in attracting and retaining qualified directors and officers, in the best interest of shareholders, is partially dependent on its ability to provide some satisfactory level of protection from personal financial risk. The Adviser will support such protection so long as it does not exceed reasonable standards.
The Adviser generally votes against proposals requiring the provision for cumulative voting in the election of directors as cumulative voting may allow a minority group of shareholders to cause the election of one or more directors.
Corporate Governance Issues:
The Adviser generally supports proposals to ratify the appointment of independent accountants/auditors unless reasons exist which cause it to vote against the appointment.
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The Adviser generally votes against proposals to restrict or prohibit the right of shareholders to call special meetings.
The Adviser generally votes against proposals which include a provision to require a supermajority vote to amend any charter or bylaw provision, or to approve mergers or other significant business combinations.
The Adviser generally votes for proposals to authorize an increase in the number of authorized shares of common stock.
The Adviser generally votes against proposals for the adoption of a Shareholder Rights Plan (sometimes referred to as “Purchase Rights Plan”). It believes that anti-takeover proposals are generally not in the best interest of shareholders. Such a Plan gives the board of directors virtual veto power over acquisition offers which may well offer material benefits to shareholders.
Executive/Employee Issues:
The Adviser will generally vote for proposals to establish an Employee Stock Ownership Plan (ESOP) as long as the size of the ESOP is reasonably limited.
Political Activity:
The Adviser will generally vote against proposals relating to corporate political activity or contributions, or requiring the publication of reports on political activity or contributions made by political action committees (PACs) sponsored or supported by the corporation. PAC contributions are generally made with funds contributed voluntarily by employees, and provide positive individual participation in the political process of a democratic society. In addition, Federal and most state laws require full disclosure of political contributions made by PACs. This is public information and available to all interested parties. Requiring reports in newspaper publications results in added expense without commensurate benefit to shareholders.
Conflicts of Interest Between the Adviser and the Fund:
The Adviser will use the following three-step process to address conflicts of interest: (1) the Adviser will attempt to identify any potential conflicts of interest; (2) the Adviser will then determine if the conflict as identified is material; and (3) the Adviser will follow established procedures, as described generally below, to ensure that its proxy voting decisions are based on the best interests of the Fund and not the product of a material conflict.
| (1) | Identifying Conflicts of Interest: The Adviser will evaluate the nature of its relationships to assess which, if any, might place its interests, as well as those of its affiliates, in conflict with those of the Fund’s shareholders on a proxy voting matter. The Adviser will review any potential conflicts that involve the following three general categories to determine if there is a conflict and if so, if the conflict is material: |
| • | Business Relationships – The Adviser will review any situation for a material conflict where the Adviser provides investment advisory services for a company or an employee group, manages pension assets, administers employee benefit plans, leases office space from a company, or provides brokerage, underwriting, insurance, banking or consulting services to a company or if it is determined that the Adviser (or an affiliate) otherwise has a similar significant relationship with a third party such that the third party might have an incentive to encourage the Adviser to vote in favor of management. |
| • | Personal Relationships – The Adviser will review any situation where it (or an affiliate) has a personal relationship with other proponents of proxy proposals, participants in proxy contests, corporate directors, or candidates for directorships to determine if a material conflict exists. |
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| • | Familial Relationships – The Adviser will review any situation where it (or an affiliate) has a known familial relationship relating to a company (for example, a spouse or other relative who serves as a director of a public company or is employed by the company) to determine if a material conflict exists. |
The Adviser will designate an individual or committee to review and identify proxies for potential conflicts of interest on an ongoing basis.
| (2) | “Material Conflicts”: The Adviser will review each relationship identified as having a potential conflict based on the individual facts and circumstances. For purposes of this review, the Adviser will attempt to detect those relationships deemed material based on the reasonable likelihood that they would be viewed as important by the average shareholder. |
| (3) | Procedures to Address Material Conflicts: The Adviser will use the following techniques to vote proxies that have been determined to present a “Material Conflict.” |
| • | Use a Proxy Voting Service for Specific Proposals – As a primary means of voting material conflicts, the Adviser will vote in accordance with the recommendation of an independent proxy voting service (Institutional Shareholder Services (ISS) or another independent third party if a recommendation from ISS is unavailable). |
| • | Use a Predetermined Voting Policy – If no directives are provided by either ISS or the client, the Adviser may vote material conflicts pursuant to the pre-determined Proxy Voting Policies, established herein, should such subject matter fall sufficiently within the identified subject matter. |
If the issue involves a material conflict and the Adviser chooses to use a predetermined voting policy, the Adviser will not be permitted to vary from the established voting policies established herein.
| • | Seek Board of Trustees Guidance – If the Material Conflict does not fall within one of the situations referenced above, the Adviser may seek guidance from the Fund’s Board of Trustees (the “Board”) on matters involving a conflict. Under this method, the Adviser will disclose the nature of the conflict to the Board and obtain the Board’s consent or direction to vote the proxies. The Adviser may use the Board guidance to vote proxies for its non-mutual fund clients. |
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
| (a) |
(1) | Portfolio Manager |
As of the date of this filing, William M. Nelson is primarily responsible for the day-to-day management of Ivy High Income Opportunities Fund (the “Fund”) and has served in that position since November 2013. Mr. Nelson is Senior Vice President of Ivy Investment Management Company, the Fund’s investment adviser (the “Adviser”) and its affiliate, Waddell & Reed Investment Management Company (“WRIMCO”) and portfolio manager for other investment companies for which the Adviser or WRIMCO serve as investment manager. He has been an employee of WRIMCO since January 1995. Mr. Nelson earned a BS in business administration from Bucknell University in Lewisburg, Pennsylvania, and an MBA in finance and marketing from the University of Connecticut.
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| (a) |
(2) | Other Accounts |
The following table provides information relating to William M. Nelson as of October 31, 2013:
William M. Nelson*
| Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
||||||||||
| Number of Accounts Managed** |
2 | 0 | 0 | |||||||||
| Number of Accounts Managed with Performance-Based Advisory Fees |
0 | 0 | 0 | |||||||||
| Assets Managed (in millions)** |
$ | 2,821.2 | $ | 0 | $ | 0 | ||||||
| Assets Managed with Performance-Based Advisory Fees (in millions) |
$ | 0 | $ | 0 | $ | 0 | ||||||
| * | Mr. Nelson assumed investment management responsibilities for Ivy High Income Opportunities Fund effective November 21, 2013. |
| ** | This data does not include Ivy High Income Opportunities Fund. |
Conflicts of Interest
Actual or apparent conflicts of interest may arise when the portfolio manager has day-to-day management responsibilities with respect to more than one fund or account, such as the following:
| • | The management of multiple funds and/or other accounts may result in the portfolio manager devoting unequal time and attention to the management of each fund and/or other account. The Adviser seeks to manage such competing interests for the time and attention of portfolio managers by having a portfolio manager focus on a particular investment discipline. Most other accounts managed by the portfolio manager are managed using the same investment models that are used in connection with the management of the Fund. |
| • | The portfolio manager might execute transactions for another fund or account that may adversely impact the value of securities held by the Fund. Securities selected for funds or accounts other than the Fund might outperform the securities selected for the Fund. The Adviser seeks to manage this potential conflict by requiring all portfolio transactions to be allocated pursuant to the Adviser’s Allocation Procedures. |
The Adviser and the Fund have adopted certain compliance procedures, including the Code of Ethics, which are designed to address certain types of conflicts. However, there is no guarantee that such procedures will detect each and every situation in which a conflict arises.
| (a) |
(3) | Portfolio Manager Compensation (as of October 31, 2013) |
The Adviser believes that integral to the retention of investment professionals are: a) a competitive base salary, that is commensurate with the individual’s level of experience and responsibility; b) an attractive bonus structure linked to investment performance, described below; c) eligibility for a stock incentive plan in shares of Waddell & Reed Financial, Inc. (“WDR”), the Adviser’s publicly traded parent company, that rewards teamwork (awards of equity-based compensation typically vest over time, so as to create an incentive to retain key talent); and d) to the extent a portfolio manager also manages institutional separate accounts, a percentage of the revenues earned, on behalf of such accounts, by the Adviser.
The portfolio manager may receive compensation based on the amount of the Fund’s assets and can receive significant annual performance-based bonuses. The better the pre-tax performance of the portfolio relative to an appropriate benchmark, the more bonus compensation the manager receives. The
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primary benchmark is the portfolio manager’s percentile ranking against the performance of managers of the same investment style at other firms. Half of the portfolio manager’s bonus is based upon a three-year period, and half is based upon a one-year period. For truly exceptional results, bonuses can be several multiples of base salary. In cases where the portfolio manager has more than one portfolio to manage, all the portfolios of similar investment style are taken into account in determining bonuses. With limited exceptions, thirty percent of annual performance-based bonuses is deferred for a three-year period. During that time, the deferred portion of bonuses is deemed invested in one or more mutual funds managed by the Adviser (or its affiliate), with a minimum of 50% of the deferred bonus required to be deemed invested in a mutual fund managed by the portfolio manager. In addition to the deferred portion of bonuses being deemed invested in mutual funds managed by the Adviser (or its affiliate), WDR’s 401(k) plan offers mutual funds managed by the Adviser (or its affiliate) as investment options.
| (a) |
(4) | Securities Ownership of Portfolio Manager (as of October 31, 2013) |
| Manager |
Dollar Range of Equity Securities Beneficially Owned in Fund | |||
| William M. Nelson |
None |
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANIES AND AFFILIATED PURCHASERS
| Period* |
(a) TOTAL NUMBER OF SHARES (OR UNITS) PURCHASED |
(b) AVERAGE PRICE PAID PER SHARE (OR UNIT) |
(c) TOTAL NUMBER OF SHARES (OR UNITS) PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS |
(d)* MAXIMUM NUMBER (OR APPROXIMATE DOLLAR VALUE) OF SHARES (OR UNITS) THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS |
||||||||||||
| 5-29-13 – 5-31-13 |
0 | 0 | 2,182,912 | |||||||||||||
| 6-1-13 – 6-30-13 |
0 | 0 | 2,182,912 | |||||||||||||
| 7-1-13 – 7-31-13 |
0 | 0 | 2,182,912 | |||||||||||||
| 8-1-13 – 8-31-13 |
8,104 | $ | 16.97 | 8,104 | 2,174,808 | |||||||||||
| 9-1-13 – 9-30-13 |
10,598 | $ | 17.45 | 10,598 | 2,164,210 | |||||||||||
| TOTAL |
18,702 | |||||||||||||||
| * | The registrant’s repurchase program, for the repurchase of 2,182,912 shares, was authorized May 29, 2013. Any repurchases made by the registrant pursuant to the program were made through open-market transactions. |
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrant’s board of trustees.
ITEM 11. CONTROLS AND PROCEDURES.
| (a) | The Registrant’s Principal Executive Officer and Principal Financial Officer, or persons performing similar functions, based on their evaluation of the Registrant’s disclosure controls and procedures as of a date within 90 days of the filing date of this report, have concluded that such controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended) are effective and adequately designed to ensure that information required to be disclosed by the Registrant in its reports that it files or submits is accumulated and communicated to the Registrant’s management, including the Principal Executive Officer and Principal Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. |
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| (b) | There were no significant changes in the registrant’s internal controls over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940, as amended) that occurred during the registrant’s second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
ITEM 12. EXHIBITS.
(a)(1) The Code described in Item 2 of this Form N-CSR.
Attached hereto as Exhibit 99.CODE.
(a)(2) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)).
Attached hereto as Exhibit 99.CERT.
(a)(3) None
(b) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(b) under the Investment Company Act of 1940 (17 CFR 270.30a-2(b)).
Attached hereto as Exhibit 99.906CERT.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Ivy High Income Opportunities Fund | ||
| (Registrant) | ||
| By | /s/ Mara D. Herrington | |
| Mara D. Herrington, Vice President and Secretary | ||
Date: December 6, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By | /s/ Henry J. Herrmann | |
| Henry J. Herrmann, President and Principal Executive Officer | ||
| Date: December 6, 2013 | ||
| By | /s/ Joseph W. Kauten | |
| Joseph W. Kauten, Vice President and Principal Financial Officer | ||
| Date: December 6, 2013 | ||