Waddell & Reed

Quarterly Fund Commentary


Ivy Global Risk-Managed Real Estate Fund (prospectus)
September 30, 2014


Manager(s):
Stanley J Kraska, Jr
Keith R Pauley, CFA
George J Noon, CFA
Ernst-Jan de Leeuw

Market Sector Update

  • Global property stocks gained in the first two months of the quarter but pulled back in September as increases in interest rates diverted investors’ focus from real estate fundamentals. Year to date, real estate stocks in general have had strong absolute and relative performance.
  • Recent economic and business indicators in the U.S. generally have been positive, in contrast to Continental Europe and most Asia-Pacific countries. The U.S. Federal Reserve’s planned end to its asset purchase program in October comes as the European Central Bank initiates a program that could total as much as $1.3 trillion.
  • Moderate global economic growth and healthy capital markets provided a favorable environment for global real estate securities. Real estate fundamentals remain positive and generally improved during the quarter. New supply is subdued in most markets and sectors, and an improved economic outlook may drive incremental leasing demand.

Portfolio Strategy

  • The Fund posted a negative return for the quarter, although its performance was better than the negative return of its benchmark index (before the effect of sales charges).
  • We adjust the Fund’s regional allocations in the quarter, moving from overweight to underweight in Continental Europe and underweight to market weight in the U.S. We increased an overweight to Canada and reduced overweights in Australia and the U.K. We maintained underweights in Japan and Singapore and the market weight position in Hong Kong.
  • We have identified factors that we believe tend to increase downside risk and drive volatility, such as higher leverage, higher business risk (too much development and not enough ownership) and higher-risk property types (such as hotels and home builders). The portfolio is underweight in companies with these higher risk factors.
  • The Fund’s portfolio includes companies we believe offer favorable stock prices relative to our estimates of their intrinsic and net asset values (NAV). It is well diversified by country, currency and property type. We think the earnings of the companies in the Fund can grow in line with those in its index.

Outlook

  • We think global gross domestic product growth will expand from 2.6% in 2014 to more than 3% per year in 2015- 2018. We think interest rates will rise gradually during the next few years, in conjunction with an improving global economy.
  • Our projections call for an economic environment that is favorable for moderate growth in property operating-level earnings and incorporates modest increases in interest rates. We think this can lead to an earnings growth rate averaging 6% or more over the next four years.
  • We expect dividend growth for real estate investment trusts (REITs) will be in line with earnings growth over the next few years, and we believe the earnings of the companies in the portfolio can grow at a somewhat faster rate than those in the index.
  • REIT valuation levels reached levels we considered more attractive in September, compared with private real estate values and capital market alternatives. At the end of the quarter, REIT stocks traded at a 2% discount to our estimates of their NAVs and below historical NAV premiums.

 


The opinions expressed in this commentary are those of the Fund’s 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. 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, it may be more susceptible to a single economic, regulatory, or technical occurrence than a fund that does not concentrate its investments in this industry. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. The Fund is non-diversified, meaning that it may invest a significant portion of its total assets in a limited number of issuers, and a decline in value of those investments would cause the Fund's overall value to decline greater than that of a more diversified portfolio. These and other risks are more fully described in the Fund's prospectus. Not all funds or fund classes may be offered at all broker/dealers.

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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