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    Quarterly Fund Commentary


    Delaware Ivy Securian Real Estate Securities Fund (prospectus)
    September 30, 2016


    Manager(s):
    Lowell R. Bolken, CFA
    Matthew K. Richmond
    Josh Klaetsch

    Market Sector Update

    • Real estate investment trusts (REITs) remained range-bound during the quarter, finishing lower in an environment of broad uncertainty about the U.S. election, pace of economic growth and interest rate policies by global central banks.
    • Central bank policies have not spurred the level of intended growth while an increasingly hawkish tone from U.S. Federal Reserve (Fed) led investors to focus on a potential rate increase. Coupled with a series of weaker-thanexpected economic reports, REITs began to sell off late in the quarter and ultimately produced negative returns.
    • Real estate fundamentals continue to show signs of topping, with near-record occupancy leaving little room for further revenue enhancement. Rental rate growth also has been less robust this cycle, given subdued economic and employment growth. We believe there is selected overbuilding in hotels, apartments and possibly self-storage, although their stock prices traded late in the quarter at what we consider attractive valuations.
    • Returns in industrial warehouse companies led the sector. E-commerce has been a significant tailwind as demand remains robust. Office remained one of the few property sectors where cash flow was accelerating. Owners of healthcare facilities performed well, although not consistently across the group. Hotel REITs slightly outperformed, with weak operating results beating very low expectations. Apartment owners’ ability to aggressively increase rents continued to wane. Self-storage companies had a very difficult quarter and fell across the sector.

    Portfolio Strategy

    • The Fund had a negative return during the quarter and underperformed the negative return of its benchmark index.
    • Small-cap companies who trade at high dividend yields again outperformed the index, which has not historically been the case in the REIT sector. This factor was a detractor from Fund performance. Such companies often own lower-thanaverage quality properties and have above-average balance sheet risk. Investors seeking yield have caused many of these stocks to trade at valuations we believe are too high.
    • We continued to move to a slightly more defensive position, increasing the weighting to selected higher dividend paying stocks, principally in the net lease and healthcare sectors. This represents a slight shift away from companies with higher cash flow growth prospects, which continue to lag.
    • We further reduced exposure to coastal apartment companies and urban office properties, but remained overweight student housing and manufactured housing. The latter have featured defensive, steady growth without decelerating revenue.
    • We remained overweight to industrial warehouse owners, based on what we believe are strong operating conditions driven by e-commerce businesses and general improvement in gross domestic product. We believe top-line revenue can increase.
    • We increased the weighting to selfstorage. After a period of substantial underperformance, the sector’s valuation has become compelling with solid longterm cash flow growth potential.
    • We remained overweight Class A regional malls with limited exposure to lower quality malls. We remain concerned about lower quality malls for the long term.

    Outlook

    • Slow, steady economic and employment growth have been enough to sustain the current real estate cycle. While we expect a prolonged low-growth environment, we believe a near-term recession is unlikely. Similarly, we expect more of the same for interest rates.
    • While the Fed may raise rates before the end of the year, it will do so in opposition to the trends in growth, inflation and monetary policy around the world. Therefore, we don’t expect much follow through on further rate rises.
    • Despite signs of decelerating cash flow growth, we think the landscape for commercial real estate and REITs remains constructive. In a low-rate, low-growth world, we believe REITs are likely to remain attractive to many investors because they feature U.S. assets with a dependable earnings stream and aboveaverage dividend yield. We believe the REIT sector is still poised for cash flow growth in 2016 and 2017 of 8% and 6%, respectively, which offers the potential for dividend growth.
    • Among the primary risks to REIT stock performance is a broad, global economic slowdown. Should the U.S. slip into recession, tenant demand across many property types would decline, causing REIT cash flow growth to slow. In addition, it is hard to argue that Fed monetary policy has not been favorable to financial asset valuations, including real estate. Although we see valuations today as justifiable, a sharp reversal in record-low interest rates (particularly in the long-end of the curve) would be likely to pressure REIT share prices.

    The opinions expressed in this commentary are those of the portfolio managers and are current through Sept. 30, 2016. 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 not a 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's prospectus.

    IVY INVESTMENTSSM refers to the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds, and those financial services offered by its affiliates.

    Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a mutual fund. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from a financial advisor or at www.ivyinvestments.com. Read it carefully before investing.

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