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    Quarterly Fund Commentary

    Ivy Real Estate Securities Fund (prospectus)
    June 30, 2016

    Lowell R. Bolken, CFA
    Matthew K. Richmond

    Market Sector Update

    • Real estate investment trusts (REITs) moved sideways until the results of the U.K.’s referendum on European Union membership, or “Brexit.” Fears of sluggish employment growth, decelerating internal growth across many property sectors and uncertainty about U.S. Federal Reserve interest rate moves gave way to a post- Brexit rally, driven by investors search for safe-haven assets. U.S. REITs now appear to be in the sweet spot. The likelihood of the Fed delaying further rate hikes also was a tailwind.
    • Apartment owners began to lose the ability to aggressively increase rents. Weakening job growth, slowing household formation and peak supply deliveries in late 2016 and early 2017 were contributing factors. Demand and supply dynamics remain favorable, but the sector’s fundamentals are not as strong. Student housing and manufactured housing parks showed the strongest fundamentals and returns.
    • Demand for self-storage facilities has driven occupancy rates to all-time highs, but landlords no longer can raise rental rates at a similar pace as in the past. The market now questions whether valuations are sustainable and these stocks lagged the index.
    • Industrial warehouse companies had significant tailwinds from e-commerce businesses as demand continued to outstrip supply. The sector had broadbased demand from large, newly constructed distribution centers and properties in dense population centers, which help serve same-day delivery.
    • Data centers outperformed again as the appetite from data users and content providers continues to provide a tailwind, primarily from cloud adoption. Demand also accelerated from traditional “enterprise” users.

    Portfolio Strategy

    • The Fund had a positive return in the quarter and slightly outperformed its benchmark index.
    • We moved to a more defensive posture while still focusing on companies with what we believe are attractive cash flow growth prospects. We primarily shifted from coastal apartment companies to owners of student housing and manufactured housing. Purpose-built student housing is still in its infancy from converting aging dorms into modern, functional housing.
    • We increased the Fund’s weighting to industrial warehouse owners, where operating conditions remain strong, driven by e-commerce and general improvement in gross domestic product (GDP) growth. Valuations in this sector are no longer “cheap,” but we think the sector is one of a few where top-line revenue can accelerate.
    • We also increased the weighting to data centers, where continued robust demand is driving occupancies higher and the REITs are aggressively pursuing acquisitions across the globe.
    • We remain overweight in the Fund to urban office owners, although their yearto- date performance has been mixed. But speculation of a slowdown in San Francisco and New York office leasing has pressured sentiment and we think the stocks of such companies remain a strong relative value.
    • The Fund also is overweight what we believe are high-quality, high-productivity mall owners. We think these will get the majority of retailer demand.


    • We believe U.S. economic conditions remain favorable for commercial real estate and by extension REITs. Positive GDP growth, steady employment growth and low interest rates are fueling the current real estate cycle.
    • We think the primary risks to REIT stock performance include a Brexit-induced global economic slowdown. Should the U.S. slip into recession, tenant demand across many property types would be expected to decline, causing REIT cash flow growth to slow. In addition, it is hard to argue that Fed monetary policy has been favorable to financial asset valuations, including real estate. Although we see valuations today as justifiable, a sharp reversal in record-low interest rates would likely pressure REIT share prices.
    • Real estate is set to become its own sector within major indexes on Aug. 31, 2016. On the surface, we think this move is likely to result in greater demand from a broader group of investment managers and investors. The degree to which this will impact the sector is debatable, but we see the shift as validation of real estate as a stand-alone asset class in equities.


    The opinions expressed in this commentary are those of the portfolio managers and are current through June 30, 2016. 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 not a 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's prospectus.

    IVY INVESTMENTS ? refers to the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds, and those financial services offered by its affiliates.

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