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    Quarterly Fund Commentary

    Ivy Real Estate Securities Fund (prospectus)
    March 31, 2016

    Lowell R. Bolken, CFA
    Matthew K. Richmond

    Market Sector Update

    • U.S. real estate securities fell more than 7% in the first three weeks of the year amid turmoil in the oil markets and fears of a recession. The sector rallied briefly, but collapsed again as oil prices sank further.
    • Capital markets recovered by mid-quarter after major global central banks vowed to do whatever it took to prop up growth across the developed world. Real estate securities and U.S. equities joined the recovery to post gains in broad market indexes.
    • The sharp ebb and flow of macro sentiment and stubbornly low interest rates caused investors to gravitate toward the most defensively postured real estate companies.
    • Office companies, despite offering accelerating earnings growth, were among the sector's worst performers. Retail companies, particularly those with high-quality, urban focused shopping centers and high productivity malls generally fared well. Multi-family underperformed the benchmark index, largely because of weak early-quarter performance. Investors became nervous that earnings growth levels were likely to subside after several strong years. Health care and hotels both underperformed the index for the quarter overall but had periods of strength.
    • Data center owners also had a strong quarter. As cloud adoption and cross connection becomes increasingly the norm across society and business, data centers are experiencing unprecedented demand.

    Portfolio Strategy

    • The Fund had a positive return for the quarter (before the effects of sales charges) but underperformed its benchmark index. Performance primarily was the result of growth-oriented holdings in the Fund versus a defensive market environment.
    • Office sector stock selections were the most notable detractors, as urbanfocused office holdings lagged the benchmark index. Stock selection and a modest underweighting to data centers was also a detractor from relative performance. In addition, multi-family holdings also hampered performance, especially those related to west coast apartments.
    • The Fund remains overweight in multifamily properties. Operating conditions still are robust in that sector and valuations remain attractive relative to other property sectors. Holdings are concentrated in coastal markets, where job growth and apartment demand are particularly strong.
    • We also are concentrated in owners of warehouse properties, where occupancy is nearing record levels for public real estate investment trusts (REITs) and rental rates are climbing, and recently increased the weighting to data center owners. We remain underweight to owners of health care facilities amid operating pressures across health care property types.


    • Real estate stocks continue to offer an attractive dividend yield with a stable earnings growth profile relative to broader equities. However, volatility appears to be here to stay as markets deal with weak global growth and unprecedented monetary policy actions to stimulate demand. This backdrop can lead to shortterm dislocations in REIT share prices relative to their underlying property values.
    • Absent the U.S. slipping into recession or even a stall-speed environment, we believe commercial real estate properties will deliver another year of solid cash flow growth. Occupancy and rental rates across major property types are at or near equilibrium levels, and we think the current environment can sustain itself with the proper macro backdrop. Few, if any, of the typical forces behind previous corrections are present today.
    • We believe U.S. real estate conditions at the property level remain favorable, although the cycle appears to be in the later stages. The primary determination of whether the cycle continues is the pace of economic growth and the health of credit markets. Demand still exceeds new supply across the major property types and speculative construction activity is minimal.
    • In an environment of positive gross domestic product growth and 1.5-2.0% employment growth, we think real estate operating conditions will remain favorable and support cash flow growth for REITs. We currently forecast cash flow growth of 6-8% across the sector, with similar levels of dividend growth.


    The opinions expressed in this commentary are those of the portfolio managers and are current through March 31, 2016. 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 not a 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's prospectus.

    Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a mutual fund. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from a financial advisor or at www.ivyinvestments.com. Read it carefully before investing.

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