Market Sector Update
- Global REITs trailed the broad market in the quarter in an environment of generally improving economies and rising interest rates.
- Federal Reserve (Fed) policy dominated the investment conversation in the latter part of 2013, with significant increases in interest rates in anticipation of a cutback in stimulus. Investors were relieved at the relatively small reduction in bond buying and the Fed’s commitment to maintain interest rates near zero until employment conditions and inflation improve beyond target levels.
- Real estate fundamentals continued to improve. We think the positive absorption in most sectors and markets in recent months is likely to continue, driven by reasonable demand growth and limited supply.
- The Fund had a small negative return for the quarter (before the effect of sales charges), as did its benchmark index. The portfolio includes companies we think have favorable stock prices relative to our estimate of their intrinsic and net asset values, and is diversified by country, currency and property type. We think the earnings of these companies can grow in line with those in the benchmark index.
- We made several adjustments to the regional tilts of the Fund as stock market movements and our assessment of relative value shifted. We transitioned an underweight position in Canada into a slight overweight, increased underweight positions in Japan and the U.K. and increased an overweight position in Hong Kong. We also maintained overweight positions in the U.S., Europe and Australia, and an underweight position in Singapore.
- The risk profile of the portfolio remains broadly similar to the REIT investment universe. But it is tilted toward companies we consider to have better quality assets, management teams capable of adding shareholder value and somewhat less leverage. This provides the financial flexibility for their management teams to execute defined business plans.
- The risk profile of the portfolio is broadly similar to the REIT investment universe. But it is tilted toward companies we consider to have better quality assets, management teams capable of adding shareholder value and somewhat less leverage. These provide the management flexibility to execute their business plans.
- We believe improving real estate fundamentals will help earnings growth and support real estate values. We think earnings and dividend growth will be near 8% per year in 2014 and 2015, with the greatest strength in the U.S. and Asia, excluding Japan. This projection includes the recent interest-rate rise as well as the that represented by the forward rate curve.
- We think REIT valuations appear reasonable compared with capital market alternatives. REIT dividends at quarter end were about 1.0% over the 10-year government rate and 0.7% over the 5-Year BBB corporate bond rate, with an absolute yield of 3.7%.
- We believe the market has priced in much of the rising-rate scenario without fully considering the potential upside of an improved economic outlook. We consider the priceearnings ratios of REITs in the Fund to be more attractive than they were earlier this year. The stocks generally trade at discounts or negligible premiums to their net asset values.
The opinions expressed in this commentary are those of the Fund’s managers and are current through Dec. 30, 2013. 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.