Waddell & Reed

Quarterly Fund Commentary

Ivy Real Estate Securities Fund (prospectus)
March 31, 2014

Matthew K. Richmond
Lowell R. Bolken, CFA

Market Sector Update

  • The U.S. economy slowed in the first quarter. Business sentiment waned and overall housing activity disappointed, although housing prices continued to rise. Retail sales, auto sales and industrial activity all fell below expectations as the economy felt the impact of severe winter weather.
  • Interest rates moved down from late- 2013 highs. The Federal Reserve (Fed) continued to taper its bond-buying program and removed the 6.5% unemployment threshold for raising short-term interest rates, calming fears of a rate increase. The unemployment rate has fallen faster than the Fed expected but without strong job growth.
  • Stocks wavered on emerging markets concerns and mixed economic numbers. Industrial and consumer cyclical stocks performed poorly in light of slower growth prospects. Commercial real estate, however, performed well thanks to strong investor demand for yieldoriented investments in a low-rate, lowinflation environment.
  • Real estate sectors more sensitive to economic growth registered the strongest performance. Urban and coastal office properties also outperformed amid strengthening demand, rising rental rates and aggressive bidding from private investors.


Portfolio Strategy

  • The Fund had a strong return in the quarter (before the effect of sales charges), slightly below but in line with its benchmark index. We shifted holdings in anticipation of stronger economic growth and to take advantage of accelerating demand in the apartment, industrial and office sectors. We capitalized on what we considered attractive valuations, particularly in coastal-focused apartment and central business district office property owners.
  • We eliminated exposure to non-REIT holdings in the land/timber, cell tower and data center sectors, preferring to concentrate on traditional commercial real estate holdings. We also eliminated the holdings in Canadian companies, as we believe the growth prospects for U.S. companies offer better potential. We reduced holdings in REITs that are the most interest-rate sensitive by reducing ownership in both the net lease and healthcare sectors..
  • The Fund is positioned for an environment of modestly rising economic growth and interest rates. We think REITs with solid balance sheets, improving fundamentals and aboveaverage cash flow growth can perform well in such conditions. We believe this will develop in the coming quarters as the economic impact of the difficult winter dissipates. We have moved holdings toward more economically sensitive companies and property sectors as we seek to capitalize on economic improvement.



  • Recent economic growth has fueled a commercial real estate recovery. We think the economy will improve in the second quarter as weather becomes less of a factor, but do not think it will be strong enough to trigger a spike in long-term rates. Such conditions provide a favorable backdrop for commercial real estate valuations.
  • We think employment gains will support further demand across commercial property. We believe companies with assets with shorter lease duration – such as hotels, apartments, industrial and self-storage facilities – can more quickly reset rental rates to current market levels vs. owners of other property types. We also think more employment will support consumer spending and higher shopping-center occupancies.
  • The recovery in commercial real estate continues on a lack of new supply pressure in most sectors. New supply is in check as market rental rates, moderate demand growth, increasing construction costs and financing availability are headwinds for developers.
  • If interest rates rise sharply and push real estate capitalization rates up, we think REIT share prices may come under pressure. But we think most companies can deliver solid 2014 cash flow growth through occupancy and rental rate increases. We also think REITs can show another year of dividend growth above historic levels.


The opinions expressed in this commentary are those of the Fund managers and are current through March 31, 2014. 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.

Matthew K. Richmond of Advantus Capital Management, Inc. (subadvisor) was named a portfolio manager on Jan. 2, 2014, replacing Joseph R. Betlej.

Risk Factors. As with any mutual fund, 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 f uctuation, 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 l 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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