Waddell & Reed

Quarterly Fund Commentary

Ivy Real Estate Securities Fund (prospectus)
September 30, 2015

Lowell R. Bolken, CFA
Matthew K. Richmond

Market Sector Update

  • Volatility defined the quarter as capital markets dealt with the timing of a U.S. Federal Reserve (Fed) interest rate hike, China’s economic slowing and the prospect that the U.S. economy may not accelerate from its current 2% growth rate.
  • Bond markets pushed yield spreads higher, causing widespread concern among bond and equity investors who remember the 2007-08 market collapse
  • Real estate investment trust (REIT) share prices also were volatile but produced positive returns overall. An early-quarter rally was stopped in August and early September, but returned as investors embraced discounted valuations.
  • Real estate fundamentals continued to improve and there was no slowdown in private market demand for commercial real estate. Occupancies and rental rates rose, pushing REIT cash flow expectations higher and prompting forecasts of attractive dividend growth. Although construction activity began to pick up across property sectors, speculative activity from builders remains largely absent. Merger and acquisition activity slowed.

Portfolio Strategy

  • The Fund had a positive return for the quarter, above the return of its benchmark index (before the effect of sales charges). We took advantage of a market sell-off to selectively add to positions in what we consider highquality companies at discounted valuations.
  • The key contributor to performance versus the index was favorable stock selection within hotel owners, avoiding underperformers in what was the worstperforming property sector. U.S. dollar strength has limited foreign travel to some major markets, which hurt several companies’ forecasts for near-term cash flow growth.
  • Other contributors included stock selections within the self-storage, retail and apartment sectors. Urban office stocks were modest detractors from relative performance. We have long favored office companies with urban/coastal market concentrations. While these in general outperformed suburban counterparts, the entire office group trailed the index. Given improving space demand, rising rental rates and current valuations, we remain favorable toward the urban segment.
  • We continue to favor owners of apartments, high-quality malls and shopping centers, urban/coastal office and self-storage facilities. These property sectors are experiencing fundamental tailwinds that we think will result in above-average near-term cash flow growth.


  • We believe the commercial real estate market is healthy, with occupancies and rental rates across all major property types showing steady increases. Many property sectors have reached or surpassed record occupancy levels. In addition, we think limited new construction sets the stage for a potentially longer and stronger than average recovery cycle.
  • Overall, we have few concerns about operating fundamentals within commercial real estate. We continue to believe that current conditions may produce 2015 cash flow growth from REITs of 8-10%, which would allow above-average dividend increases.
  • We think bond market volatility is the primary risk to REIT performance now. REITs recently have been more highly correlated to 10-Year U.S. Treasury yields than has historically been the case. But we still believe REITs over time are influenced primarily by underlying economic and real estate operating conditions, not prevailing interest rate levels or movements.


The opinions expressed in this commentary are those of the Fund managers and are current through Sept. 30, 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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