Macquarie High Income Fund Navigates Rising Rates with Disciplined Credit Selection

The Macquarie High Income Fund (IVHIX) has long been a bellwether for investors seeking income in the high-yield bond market. In Q1 2025, it faced headwinds from rising interest rates and policy uncertainty, yet its strategic focus on credit selection and defensive positioning offers clues to its resilience amid turbulent markets. By emphasizing issuers with improving fundamentals and maintaining a disciplined risk profile, the fund has positioned itself to capitalize on yield opportunities while navigating economic crosscurrents.

Performance in Context: Short-Term Struggles, Long-Term Resilience

The fund's NAV returned -1.35% year-to-date (YTD) through March 2025, underperforming its benchmark, the ICE BofA US High Yield Constrained Index, which rose 0.94% over the same period. Short-term underperformance is reflected in its dismal 1-year Morningstar ranking (611/618), but its 10-year track record—returning 4.01% versus the benchmark's 7.2%—suggests a strategy better suited to long-term investors.

This underperformance, however, may reflect broader market dynamics. High-yield bonds have faced pressure from rising inflation and policy uncertainty, with the Federal Reserve's hawkish stance contributing to volatility. The fund's defensive characteristics, however, offer reasons for cautious optimism.

Strategic Positioning for Rising Rates

The fund's effective duration of 3.02 years—moderate relative to the sector's average of 4.5 years—buffers it from interest rate shocks. This shorter duration aligns with a strategy of prioritizing credit quality over duration risk, a key advantage in an environment where rates could remain elevated.

Sector allocations further underscore this approach:
- 75.8% in U.S. credits, emphasizing issuers with improving fundamentals, such as energy and industrials.
- 23.7% in foreign bonds, including exposure to European issuers like Banco Santander and Deutsche Bank, which may benefit from diverging monetary policies (e.g., the ECB's slower rate hikes).

The foreign bond allocation, while small, provides diversification and exposure to regions with lower growth risks.

Credit Selection: Focusing on Turnaround Stories

The fund's top holdings reveal a focus on companies with turnaround potential or improving balance sheets:
1. Vistra Corp (1.41%): A leading U.S. energy provider benefiting from rising power demand and cost discipline.
2. Consolidated Communications Inc (1.34%): A telecom firm undergoing restructuring to improve cash flows.
3. Hilcorp Energy I LP (0.97%): A shale driller with a strong balance sheet and exposure to high-margin U.S. oil production.

These positions exemplify the fund's bottom-up credit research, favoring issuers with structural improvements over speculative bets. The portfolio's yield to maturity of 8.14% reflects a deliberate tilt toward higher-risk/higher-reward credits, but with a focus on issuers capable of weathering economic slowdowns.

Defensive Characteristics Amid Economic Uncertainty

The fund's defensive posture is evident in three areas:
1. Cost Efficiency: Its net expense ratio of 0.63%—among the lowest in its peer group—preserves returns in low-yield environments.
2. Portfolio Turnover (30%): A conservative rebalancing rate minimizes trading costs and tax inefficiencies.
3. Focus on Cash-Flow Stability: Issuers like CCO Holdings LLC (telecom infrastructure) and Bath & Body Works Inc (consumer staples) offer steady cash flows, critical in a slowing economy.

These traits align with the fund's stated goal of delivering “consistent income with downside protection,” a rarity in a high-yield market prone to volatility.

Investment Considerations: Risks and Opportunities

While the fund's short-term underperformance raises valid concerns, its strategy is designed for cycles, not quarters. Key risks include:
- Interest Rate Sensitivity: Even a 3-year duration could face pressure if rates rise further.
- Sector Concentration: Overweighting energy and industrials exposes it to commodity price swings.

However, the fund's high-yield cushion (8.14%) and active management provide a margin of safety. Investors seeking income in a low-growth world may find its disciplined approach appealing, particularly if they believe credit spreads will stabilize or narrow over the next 12–18 months.

Conclusion: A Fund for Patient Income Seekers

The Macquarie High Income Fund is not a get-rich-quick vehicle. Its Q1 2025 performance underscores the challenges of navigating a rate-sensitive high-yield market. Yet its focus on credit selection, defensive positioning, and cost discipline makes it a contender for investors willing to endure short-term turbulence for long-term yield. For those prioritizing downside protection in an uncertain economy, this fund remains a viable option to complement core fixed-income holdings.

Investment Thesis: Hold for investors with a 3–5 year horizon seeking high yield and willing to tolerate short-term volatility. Avoid if rates surge unexpectedly or credit markets face a liquidity crunch.

Data as of March 31, 2025. Past performance does not guarantee future results.