Waddell & Reed

Quarterly Fund Commentary

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

Lowell R. Bolken, CFA
Matthew K. Richmond

Market Sector Update

  • The third-quarter economy showed signs of stable growth. Strong auto sales and back-to-school retail sales indicated positive consumer sentiment. Stocks, fixed income and real estate all remained strong, and the 10-year Treasury yield reached 2.6%, up from 2.4% last quarter. Housing, employment and capital expenditures all produced mixed signals.
  • Single-family housing sales stalled just below 1 million units, matching the bottom of the three prior recessions. We think key factors included student loan debt restricting first-time purchases; lender reluctance to make low-creditrating loans to first-time buyers; and a trend of marrying and having children later, which can mean renting longer. Demand for rental properties was particularly high in metro areas, even with increasing supply.
  • Unemployment remained at 6.1%, down from 7.2% a year ago, with 142,000 jobs created in the quarter. There was little wage growth from mainly lowpaying jobs. We do not think inflation will pick up and think the Federal Reserve (Fed) is unlikely to keep shortterm interest rates low.
  • The Fed did not raise short-term rates and continued tapering its bond purchase program, as expected, with little market effect. The Fed said it will continue to base its decisions on rate increases on the data, although mid- 2015 is the expected timeframe.


Portfolio Strategy

  • The Fund had a negative return for the quarter, although slightly less than the negative return of its benchmark index (before the effect of sales charges). Real estate stocks overall reacted negatively to the specter of a more hawkish Fed and were impacted by a spike in equity issuance in September.
  • We increased exposure to suburban office owners, primarily those with portfolios located in higher employment growth markets across the southern and southeastern U.S.
  • The Fund continues to focus its holdings in mid- to large-cap companies in major urban, coastal and Sunbelt markets. We also increased investments in owners of neighborhood shopping centers and hotels, two property sectors we think will further improve as the economic recovery matures.
  • Favorable debt pricing and availability propelled private real estate investors to focus on higher yielding properties in secondary markets. We think both trends could continue for some time and selectively added positions to the Fund that we think are likely to benefit from the changing market landscape.



  • The Fund remains positioned for modestly rising economic growth and interest rates. We think real estate investment trusts (REITs) with solid balance sheets, improving fundamentals and above-average cash flow growth can perform well. We think growth will increase in the second half. The Fund is overweight hotels, retail, apartment and self-storage versus its benchmark.
  • We think the economy will improve further as employment, consumer confidence and capital expenditures accelerate. We do not think inflation or long-term interest rates will spike higher in the near term. In our view, this environment will be favorable for commercial real estate valuations.
  • New commercial real estate supply remains in check as rental rates, moderate demand growth, increasing construction costs and financing availability remain headwinds for developers. We do not expect excess supply to become an impediment to further recovery but it may be an influence in the intermediate to long term.
  • A change in Fed monetary policy may cause short-term volatility as investors gauge the impact on real estate capitalization rates. If interest rates rise sharply and exert an upward bias on cap rates, we think REIT share prices would come under pressure. We think most companies can deliver solid cash flow growth through occupancy and rental rate increases, however, which can help offset price declines.


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