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.
- 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
- 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
- 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
- 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
- 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.