Market Sector Update
- Although global interest rates were close to where they started the year, concern about higher rates overcame improving economies and real estate fundamentals. Global property stocks lost ground and underperformed the global broad-market equity index.
- Recent interest rate hikes in several countries were consistent with expectations of better economic growth. Rates remained well below historic averages.
- We think higher rates will be joined by real economic growth that will increase tenant demand for real estate, enabling property owners to raise rents and offset increased financial costs and preserve property values.
- Inflation expectations still are muted but deflation fears have subsided. The U.S. and U.K. economies still show consistent economic growth. Continental Europe’s recovery is tempered by concern about the Greek debt crisis. Growth still is relatively weak in most of the Asia- Pacific region, with slowing growth in China and Japan performing somewhat better recently.
- The Fund had a negative return during the quarter and slightly underperformed the return of its benchmark index. Stock selections were the primary detractor from performance while regional allocations were contributors.
- We moved the overweight position in Canada relative to the benchmark to an underweight and reduced the underweight in both Japan and the U.S. We maintained the overweight positions to the U.K., Australia and Continental Europe, as well as the underweight to Singapore and Hong Kong.
- The Fund is underweight versus the index in companies that exhibit factors we believe tend to increase downside risk and drive volatility, such as higher leverage, higher business risk and higher-risk property types. We think the earnings of these companies are likely to grow at a rate close to that of the index
- We believe companies in the Fund offer favorable stock prices relative to our estimates of their intrinsic and net asset values. The portfolio is well diversified by country, currency and property type.
- The broad landscape still shows relatively slow growth and low interest rates, even with recent rate increases, and central bank policies still support global growth. Concerns remain about the stability of the eurozone and growth in emerging markets. We think rising real interest rates could slow the increase of real estate values.
- We think real estate fundamentals are positive, with economic growth spurring demand and occupancy rates firm or improving; rental rates are increasing in most markets. Public companies remain well positioned to grow, with favorable fundamentals driving solid organic growth. These include low leverage, access to capital on good terms and attractive external growth opportunities.
- We think there will be moderate growth in operating earnings, averaging 3%-4% over the next few years. We think global real estate companies can benefit from sound capital structures and produce earnings growth per share of about 7% per year on average through 2018. We still think dividend growth can grow in line with earnings growth.
The opinions expressed in this commentary are those of the Fund’s managers and are current through June 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.
Matthew Sgrizzi, CFA, became a portfolio manager on the Fund on May 15, 2015. He replaced Ernst-Jan de Leeuw.
Risk factors. 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 f uctuation, depreciation, property tax value changes and differences in real estate market values. Because the Fund invests more than 25% of its total assets l 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.