Waddell & Reed

Quarterly Fund Commentary

Ivy Real Estate Securities Fund (prospectus)
June 30, 2014

Matthew K. Richmond
Lowell R. Bolken, CFA

Market Sector Update

  • U.S. markets in the quarter showed a calm summer mood that was unfazed by outside events. Stocks rose to record levels, interest rates fell and credit spreads tightened. Markets all but ignored the lowest quarterly U.S. growth rate outside of recession in the last 50 years, the rapid pace of a new crisis in Iraq and the ongoing turmoil between Russia and Ukraine.
  • The 10-year Treasury yield fell dramatically, reaching a low in late May of 2.44% before ending at 2.53%. While the revision of first-quarter gross domestic product (GDP) growth dominated headlines, the 10-year yield decline was somewhat surprising in light of several positive economic indicators. Those included housing, auto sales, business sentiment, consumer confidence and an uptick in inflation.
  • The Federal Reserve (Fed) continued to reduce its quantitative easing program purchases. The Fed is holding to its view that the economy is steadily improving but is not strong enough to justify significantly withdrawing federal support. We think it continues to walk a fine line between promoting growth and employment without overheating markets.
  • The real estate sector continued to perform well in the quarter, driven by strong investor demand for yieldoriented investments in a low-rate, lowinflation environment.


Portfolio Strategy

  • The Fund had a positive return for the quarter (before the effects of sales charges), slightly below the return of its benchmark index.
  • The Fund continues to be positioned for an environment of modestly rising GDP growth and interest rates, in which real estate investment trusts (REITs) with solid balance sheets, improving fundamentals and above-average cash flow growth typically perform well.
  • We think accelerating economic growth will take hold in the second half and have positioned the Fund accordingly. We are overweight versus the index in apartment, industrial, retail and selfstorage properties.
  • We also have begun to increase exposure to suburban office properties, primarily those with portfolios located in higher employment growth markets across the South and Southeastern U.S. We continue to focus the majority of holdings in mid- to large-cap companies with a focus on major urban, coastal and sunbelt markets.
  • Favorable debt pricing and availability prompted private real estate investors to focus on higher yielding properties in secondary markets. Small-cap stocks began to outperform large caps in May and June. REITs with these characteristics were outperformers. We think both trends could continue for some time and have selectively added positions to take advantage of the changing market landscape.



  • Recent economic growth, although lackluster, has fueled a commercial real estate recovery. We think the economy will improve in the second half as employment and capital spending accelerate, and think GDP growth will reach 2.5% or more. We don’t expect growth to be strong enough or inflation to increase enough to trigger a spike in long-term rates.
  • We think improving employment this year will support further space demand across the commercial property sector. In our view, companies that own shorter lease duration assets such as hotels, apartments, industrial and self-storage facilities will be able to more quickly reset rental rates to current market levels. We also believe an improving labor market will support consumer spending and result in higher occupancies at community shopping centers.
  • New supply of commercial real estate remains in check as market rental rates, moderate demand growth, increasing construction costs and financing availability remain headwinds for developers. We do not think excess supply will impede the sector’s further recovery.
  • If interest rates rise sharply and exert an upward bias on real estate capitalization rates, we think REIT share prices may come under pressure. We think most companies in this sector, however, can have solid 2014 cash flow growth through occupancy and rental rate increases.


The opinions expressed in this commentary are those of the Fund’s managers and are current through June 30, 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.

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 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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