Market Sector Update
- In a period of generally more favorable economic prospects and market expectations for reduced fiscal easing and rising interest rates, global real estate companies underperformed the broad market index in the quarter.
- Government fiscal stimulus has been an important factor over the past year, and indications the Fed might cut back on stimulus had triggered interest rate increases and stock declines in recent months. Stocks recovered in September as rate concerns lessened somewhat after the Federal Reserve (Fed) took no action to “taper” its quantitative easing program.
- The Fed’s decision provided temporary respite before concerns returned because of Congress’ failure to reach a budget agreement. That in turn prompted fears of a similar impasse on the October debate about increasing the debt ceiling, which could lead to a downgrade of U.S. debt or even default.
- The Fund had a slightly positive return (before the effect of sales charges), as did its benchmark. The Fund holds companies we believe offer favorable stock prices and is broadly allocated across country, currency and property type. The weighted average yield of the Fund's holdings is slightly below that of the index, while we think the earnings of those companies can grow at a faster rate than those in the index.
- We adjusted the regional tilts of the Fund, based on stock market movements and our assessment of relative value. Although it shifted during the period, the Fund was overweight in the U.S. at quarter end. We moved from an underweight to an overweight in Europe and from market weight to underweight in the U.K. and Canada. We reduced the overweight in Hong Kong, reduced underweights in Japan and Singapore, and moved to a slight overweight in Australia.
- We think the U.S. has the highest expected earnings growth, still think Hong Kong has attractive relative value and see an improving economy in Europe.
- The Fund’s risk profile remains similar to the investment universe of real estate investment trusts, but is tilted toward companies we think have better quality assets, management teams capable of adding shareholder value and less leverage.
- We think the global economy will continue a moderate recovery, with some emerging markets slowing and developed markets improving. We also think real estate fundamentals generally are favorable, although variable among markets.
- There is strong demand for real estate and acquisitions remain difficult because of competition for quality assets. Property values in several markets are above pre-recession 2007 levels and capitalization rates continue to compress for prime property.
- The recent interest rate rise has not had a material impact on overall real estate values, although we think rate rises may begin to impact pricing of secondary, low-growth assets. We think rate volatility poses risks, particularly to more highly leveraged owners. Longer term, we think rates will rise with a more robust economy.
- We think growth in internal operating income, acquisitions and new development can combine to produce mid-single-digit earnings growth for public property companies in the next few years. We think they offer an attractive dividend yield and are well positioned to grow in the sector. The companies in general have reduced debt levels, upgraded asset quality and diversified sources of capital. We think these factors mean they are well positioned for a rising rate environment.
The opinions expressed in this commentary are those of the Fund’s managers and are current through Sept. 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 f uctuation, depreciation, property tax value changes and differences in real estate market values. Because the Fund invests l 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.