Waddell & Reed

Quarterly Fund Commentary

Ivy Municipal High Income Fund (prospectus)
June 30, 2015

Michael J. Walls

Market Sector Update

  • Although real estate investment trusts (REITs) have not historically been among the most interest-rate sensitive investments, many investors continue to hold that perception. Despite accelerating industry fundamentals, the group languished in the quarter.
  • The market spent the quarter watching the U.S. Federal Reserve for indications of a rate hike. U.S. Treasury yields moved higher and economic data shows steady improvement. Investors still fretted about the divergence in central bank policy across the globe, with many developed countries pursuing looser monetary policy. China’s stock market volatility and debt problems in Greece and Puerto Rico added uncertainty.
  • Merger and acquisition (M&A) activity again took center stage, with a pair of apartment REITs and a shopping center REIT agreeing to be privatized. We think M&A activity will continue to be a primary theme, primarily via privatizations. Most REIT prices are trading below the value of their properties, making them attractive targets for institutions seeking immediate scale in a particular property sector.

Portfolio Strategy

  • The Fund had a negative return for the quarter, underperforming the negative return of its benchmark index. Results were driven primarily by the market’s rotation away from larger, more liquid stocks, which had significant outperformance in the previous quarter.
  • Investors fled real estate investment trusts (REITs) amid fears of rising interest rates and the highest profile companies suffered. Many of the companies that performed poorly feature attributes our investment process highly regards: desirable properties, respected management teams, below-average debt levels and above-average growth prospects.
  • The most significant detractor from relative performance was an underweight to data centers. Leasing conditions have improved in that space and stock prices have recovered sharply in the past 18 months. Urban office stocks also were detractors. We continue to favor urban/coastal market concentrations while adding exposure to suburban-oriented companies as the real estate cycle matures.
  • We also increased the weighting to hotel REITs, as we think recent underperformance has created attractive opportunities. Our investment strategy continues to feature concentrations toward owners of apartments, high-quality malls and shopping centers, urban/coastal office, and self-storage facilities.


  • We believe the commercial real estate market is healthy, with occupancies and rental rates across all major property types showing steady improvement and new construction still largely absent.
  • Overall, we are encouraged by operating fundamentals within commercial real estate. If current conditions persist, we believe 2015 cash flow growth from REITs will average 8-10% and can lead to aboveaverage dividend increases.
  • In our view, upward volatility in the 10- year Treasury yield continues to represent the primary risk to REIT performance. REIT share prices have shown a much higher correlation recently with 10-year Treasury yields than had been the case. Historically the relationship has been modest, at best. We think REIT returns over time are influenced primarily by underlying economic and real estate operating conditions rather than by prevailing interest rate levels or movements.
  • As we look toward the potential for the Fed to raise rates, we think it will be important to consider the influence of any policy shift on longer-dated Treasury yields. We continue to believe that the long end of the curve will remain near recent levels for an extended period of time.


The opinions expressed in this commentary are those of the Fund managers and are current through June 30, 2015. The managers' views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results.

Risk factors. The value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Investment risks associated with investing in real estate securities, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes and differences in real estate market values. Because the Fund invests more than 25% of its total assets in the real estate industry, the Fund may be more susceptible to a single economic, regulatory, or technical occurrence than a fund that does not concentrate its investments in this industry. These and other risks are more fully described in the Fund prospectus.

Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus, or if available a summary prospectus, containing this and other information for the Ivy Funds, call your financial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully before investing.

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