Ivy LaSalle Global Risk-Managed Real Estate Fund

Ivy LaSalle Global Risk-Managed Real Estate Fund
12.31.17

Market Sector Update

  • Global real estate securities and the broader equity market enjoyed a strong finish to 2017, as both produced robust absolute returns in the fourth quarter. While real estate securities had a very healthy year of performance, the group trailed the broader equity market as broad market equity indices pushed all-time highs.
  • Risk asset performance has been supported by by sustained improvement in leading economic indicators and global growth expectations for most of the globe.
  • In the fourth quarter specifically, global real estate securities benefitted from healthy operating and earnings results, a flurry of merger and acquisition activity within the sector and continued accommodative monetary policy from world central banks.
  • Broader equities rallied in the quarter’s final weeks following news of U.S. tax reform with investors anticipating that the reduced tax burden will spur further business investment and heighten consumer spending.

Portfolio Strategy

  • The Fund outperformed its benchmark before the effect of sales charges for the quarter.
  • The Fund’s relative performance was negatively impacted by stock selection results in Hong Kong. The Fund's portfolio is tilted towards the Hong Kong’s office, which remains fundamentally strong, but had performance that lagged the recovery of Hong Kong’s residential and retail sectors.
  • A large portion of this underperformance was offset by strong stock selection results in the United States (U.S.) and Australia. This stemmed from a tilt toward the higher quality regional mall sector, which garnered significant investor attention in the wake of a rash of M&A activity and positive anecdotal holiday retail sales and traffic reports. Investor interest spiked near mid-quarter, as Brookfield Property Partners bid to acquire General Growth Properties, a U.S. regional mall Real Estate Investment Trust (REIT), and two activist investors took substantial positions in two additional U.S. regional mall REITs.
  • European companies joined in on the action as Unibail-Rodamco announced its acquisition offer of Westfield Corp., U.S. and United Kingdom (U.K.) mall owner. Also, Hammerson announced its acquisition of smaller U.K. retail peer. These proposed acquisitions and activist investments highlight the meaningful net asset value (NAV) discounts in the public mall companies, as well as the importance of higher quality retail assets in today’s retail landscape. The lowerrisk investment strategy of the Fund did not have a materially positive or negative impact during the quarter.
  • Several of the Fund’s regional allocations were adjusted during the quarter. The largest changes made were transitioning to an underweight position to Australia while increasing the Fund’s underweight position to the U.S. An overweight position to the U.K. and modest overweight position to Hong Kong were maintained, as were underweight positions to Japan, Singapore, Canada and Continental Europe.
  • The Fund’s risk profile tilted towards companies with what we believe are better quality assets, management teams capable of adding shareholder value, and lower leverage. Although they have less risk on average, we believe the companies in the Fund should have an earnings growth rate slightly higher than that of its index.

Outlook

  • Leading economic indicators remain positive and have shown sustained improvement across much of the globe, pointing towards synchronized global economic growth.
  • Despite the improvement in growth expectations, global monetary policy continues to be accommodative even as some policy tightening has commenced or been discussed in certain regions. As such, financial conditions have remained relatively unchanged and remain supportive of risk assets in general.
  • Real estate fundamentals are generally positive in most regions as has been noted in the most recent earnings reporting periods and operational updates.
  • We believe the health of real estate fundamentals in the current economic and capital market backdrop remains supportive for REIT earnings and dividend growth moving forward.
  • As previously note, real estate securities trailed the broader equity market for the quarter. We believe this underperformance has increased the relative attractiveness of real estate securities to the broader equity market in comparison to the two asset classes’ historical trading relationship. Global real estate securities also currently trade at a moderate discount to our assessment of their NAV.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through December 31, 2017, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The FTSE EPRA/NAREIT Developed Index is an unmanaged index that tracks the performance of listed real estate companies and REITs worldwide. It is not possible to invest directly in an index.

Top 10 holdings (%) as of 12/31/2017: Simon Property Group Inc. 7.0, Equity Residential 5.0, Welltower, Inc. 4.0, Public Storage, Inc. 3.9, Boston Properties, Inc. 3.8, Avalonbay Communities 3.8, Hong Kong Land Holdings Ltd. 3.6, Swire Properties, Inc. 3.5, Unibail-Rodamco 2.9, Vornado Realty Trust 2.9.

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 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. There is no guarantee that the Fund will not decline in value in comparison with funds that do not use a risk-managed approach. 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.