Waddell & Reed

Quarterly Fund Commentary


Ivy Real Estate Securities Fund (prospectus)
March 31, 2015


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

Market Sector Update

  • Real estate stocks seesawed through the quarter but in general ended with positive returns that were above broad equity market indices.
  • Markets fixated on the timing of potential interest rate increases by the U.S. Federal Reserve (Fed). Investors also were confronted with mixed economic data, persistent strength in the U.S. dollar and its impact on global growth, introduction of a bond-buying program by the European Central Bank and wild fluctuations in the 10-year U.S. Treasury yield.
  • About the only consistent theme throughout the quarter was the firming U.S. labor market. Although wages have yet to show material improvement, the economy has consistently created additional jobs across industries – typically a signal of continued real estate space demand
  • Record-high occupancy rates in selfstorage facilities and apartments allowed landlords to aggressively raise rental rates, which we think is likely to drive 2015 cash-flow growth above investors’ already high expectations.

Portfolio Strategy

  • The Fund had a positive return for the quarter and outperformed its benchmark index (before the effect of sales charges), driven by favorable stock selection and sector allocation across most property types.
  • An overweight to urban-centric and biotech/life science office owners was the strongest positive contributor to relative performance, as were overweight positions in apartment owners, particularly those with West Coast portfolio concentrations, and Class A regional mall owners.
  • The Fund currently features concentrations toward owners of apartments, high-density malls and shopping centers, urban/coastal office, and self-storage facilities. Owners of these property types have had fundamental tailwinds that we think will result in above-average, near-term cash-flow growth. We have limited exposure to sectors where we think cash-flow growth will be slower to develop or where expectations for growth are below average, such as in owners of healthcare facilities.

Outlook

  • Many of the same themes that influenced 2014 are carrying over into 2015, providing continued tailwinds for real estate stocks. The commercial real estate market is healthy, with occupancies and rental rates across all major property types showing steady improvement. Limited new construction sets the stage for a potentially longer and stronger than average recovery cycle.
  • We think upward volatility in the 10- year U.S. Treasury yield represents a risk to the sector. Share prices have recently shown a higher correlation with these yields than historically has been the case, but many investors are treating this near-term relationship as the norm. In today’s ultra-low-rate environment, many investment alternatives have become more highly correlated to interest rate movements.
  • As we watch for future rate increases by the Fed, it will be important to consider the influence any policy shift has on longer-dated Treasury yields. We continue to believe that the long end of the curve will remain near today’s low levels for an extended period of time. While mindful of present conditions, we believe that over time the returns of real estate investment trusts are influenced primarily by underlying economic and real estate operating conditions rather than by prevailing interest rate levels or movements.

 


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