Waddell & Reed

Quarterly Fund Commentary


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


Manager(s):
Lowell R. Bolken, CFA
Matthew K. Richmond

Market Sector Update

  • U.S. real estate securities performed positively in the quarter. Improving economic growth, strengthening labor markets and low interest rates plus rapidly improving consumer sentiment were strong supports. Occupancies and rental rates across all major property types in commercial real estate showed improvement.
  • The sector was buoyed by strong capital flows from foreign institutional investors looking for relatively “safe haven” investments in a stable and growing economy.
  • All major property sectors had positive performance in the quarter, led by healthcare facilities and apartments. The sharp downward trend of 10-Year Treasury yields helped healthcare real estate investment trusts (REITs), while better-than-expected demand trends and potential for merger and acquisition activity supported the apartments sector.
  • Hotel stocks drew investor interest again, in part because of their accelerating revenues and a resurgent group business calendar.
  • Demand by retailers for high-quality, well-located space is accelerating and REIT-owned properties are benefitting. The improving U.S. economy indicates potential for near-term leasing opportunities in this property sector.

Portfolio Strategy

  • The Fund had a strong positive return in the quarter (before the effect of sales charges), although it slightly trailed its benchmark index.
  • The Fund is positioned to potentially benefit from an improving economic environment with stable to modestly rising interest rates. We are focused on REITs with solid balance sheets, improving property fundamentals and above-average cash flow growth.
  • The Fund has concentrations toward owners of high-quality malls and shopping centers, hotels, apartments and self-storage facilities. It continues to focus on mid- to large-capitalization companies with a bias toward major urban, coastal and sunbelt markets.
  • We modestly reduced healthcare REITs, particularly one large company which we think will experience near-term tenancy disruption.
  • U.S. commercial real estate has been favored by large, often foreign capital sources, with many of these “institutional” buyers focused on some of the largest urban areas. This added competition for highly desirable assets has caused many private real estate investors to focus on secondary markets. We think the trends could continue and have selectively added positions that we think will benefit.

Outlook

  • We think many 2014 themes will carry into 2015 and support real estate stocks. In our view, the recent plunge in gasoline prices will be positive for U.S. consumer confidence and spending. We do not believe growth or inflation will be strong enough to trigger a spike in long-term interest rates. We think continued moderate economic growth coupled with generally benign interest rates will provide a favorable backdrop for commercial real estate.
  • We continue to believe investors seeking yield will favor commercial real estate assets in the private market place, with several recent large transactions suggesting that certain public REITs are trading below the private market value of their assets. We think this theme is likely to be magnified through public-to-private buyout activity as well as public-topublic mergers in 2015.
  • We think steady job growth will support space demand and rental rate escalations across commercial property. In our view, companies with shorter lease duration assets, such as hotels, apartments, industrial and selfstorage facilities, will be able to more quickly reset rental rates to current market levels than owners of other property types.
  • We also believe that an improving labor market will provide support for consumer spending patterns and result in higher occupancies at community shopping centers.

The opinions expressed in this commentary are those of the Fund managers and are current through Dec. 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.

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 l 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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