Waddell & Reed

Quarterly Fund Commentary

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

Lowell R. Bolken, CFA
Matthew K. Richmond

Market Sector Update

  • U.S. real estate stocks posted gains in the quarter. A combination of favorable earnings outlooks, discounted valuations relative to private market real estate values and enhanced clarity on the U.S. Federal Reserve (Fed) policy road map were contributors to the sector’s performance.
  • Conditions within commercial real estate remained in recovery mode, with occupancies and rental rates continuing to rise across the majority of property types. This backdrop has created a favorable environment for real estate investment trusts (REITs) to increase cash flows and dividends. While operating conditions were strong for existing properties and new construction activity remained muted, occupancies were nearing peak levels.
  • With many REITs’ stock prices trading below the value of their properties, merger and acquisition activity remained at the forefront of discussions. Recent volatility in the capital markets and growing geopolitical fears have caused a slowdown in transaction activity, but we believe privatizations of REITs will pick up in 2016. Institutional capital for commercial real estate remains plentiful. We believe REIT portfolios provide an attractive alternative for large investors looking for immediate scale in a particular property sector.

Portfolio Strategy

  • The Fund had a positive return for the quarter that was consistent with its benchmark index (before the effect of sales charges). Performance was driven in large part to an underweight to healthcare REITs and an overweight to self-storage REITs. Stock selection within regional malls and an overweight to warehouse owners also were contributors.
  • Healthcare REITs had positive but lackluster returns and finished near the bottom among property sectors. The healthcare owners felt the threat of higher interest rates and further regulatory risk related to the Affordable Care Act. We remain lukewarm on the group despite the potential demand benefits of an aging population.
  • Self storage was the top-performing sector. A steadily growing economy, demand for extra space from the burgeoning rental population and sector specific new supply barriers provided support. Regional malls lagged the broader REIT space but contributed to performance from solid stock selection. The portfolio bias towards mall REITs that own the highest quality assets was beneficial.
  • The largest detractor was hotels, with most companies in the space noting a sudden slowing in fundamentals. International travel, difficult year-overyear comparisons and competing supply from both Airbnb and newly developed properties all were factors.


  • The commercial real estate market is healthy, with occupancies and rental rates across all major property types showing steady improvement. Several property sectors are at or near record high occupancy. We think limited new construction should allow landlords to command higher rental rates in the coming year. However, the sustainability of U.S. economic growth is in question, particularly against the backdrop of weak global growth. If growth forecasts slow or employment gains moderate, landlord pricing power is likely to moderate.
  • Upward volatility in the 10-year U.S. Treasury yield continues to represent the primary risk to REIT performance. REIT share prices have recently shown a much higher than normal correlation with the 10-year Treasury yields. We believe REIT returns over time are influenced primarily by underlying economic and real estate operating conditions rather than prevailing interest rate levels or movements.
  • In today’s ultra-low-rate environment, many investment alternatives (not just REITs) have become more highly correlated to interest rate movements. Thus, as the Fed moves from its zero interest rate policy, we think 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 recent levels for an extended period of time.


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