Annual Report to Shareholders Deutsche Real Estate Securities Fund

Transcription

1 December 31, 2017 Annual Report to Shareholders Deutsche Real Estate Securities Fund

2 Contents 3 Letter to Shareholders 4 Portfolio Management Review 8 Performance Summary 11 Portfolio Summary 13 Investment Portfolio 16 Statement of Assets and Liabilities 18 Statement of Operations 19 Statements of Changes in Net Assets 21 Financial Highlights 28 Notes to Financial Statements 39 Report of Independent Registered Public Accounting Firm 41 Information About Your Fund s Expenses 43 Tax Information 44 Advisory Agreement Board Considerations and Fee Evaluation 49 Board Members and Officers 54 Account Management Resources This report must be preceded or accompanied by a prospectus. To obtain a summary prospectus, if available, or prospectus for any of our funds, refer to the Account Management Resources information provided in the back of this booklet. We advise you to consider the Fund s objectives, risks, charges and expenses carefully before investing. The summary prospectus and prospectus contain this and other important information about the Fund. Please read the prospectus carefully before you invest. Any fund that concentrates in a particular segment of the market will generally be more volatile than a fund that invests more broadly. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. This Fund is non-diversified and can take larger positions in fewer issues, increasing its potential risk. There are special risks associated with an investment in real estate, including REITS. These risks include credit risk, interest rate fluctuations and the impact of varied economic conditions. The Fund may lend securities to approved institutions. Stocks may decline in value. Please read the prospectus for details. Deutsche Asset Management represents the asset management activities conducted by Deutsche Bank AG or any of its subsidiaries. NOT FDIC/NCUA INSURED NO BANK GUARANTEE MAY LOSE VALUE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY 2 Deutsche Real Estate Securities Fund

3 Letter to Shareholders Dear Shareholder: Synchronous growth is the catchphrase for the current market environment positive momentum in the U.S. as well as for most of the major economies of the globe. Overseas, both developed and emerging markets continue to improve, marked by low inflation rates, growing corporate earnings and attractive valuations. Here in the U.S., activity remains solid with only limited signs of overheating. Given the notable gains of the past year, a short-term pullback would not be a surprise. Nevertheless, strong fundamentals remain supportive of this expansion. Solid income growth, improvements in net worth, manageable debt, elevated confidence and firm labor markets should continue to support consumer spending. Business investment is also showing signs of picking up, supported by improved confidence, favorable financial conditions and the recent tax reform bill. The full effect of the new tax policy remains to be seen. While markets can respond almost instantly, and seem to have done so, the economy itself takes time to respond. Our economists believe that the net benefit may be fairly modest with the main beneficiaries being consumption and business investment. All told, we believe this environment favors a long-term approach, with a focus on thoughtful asset, geographic and sector allocation, rather than market timing calls. As always, we invite you to visit our website deutschefunds.com where you will find the most current insights from our CIO, economists and investment specialists. Thank you for allowing us to help you address your investment needs. Best regards, Hepsen Uzcan President, Deutsche Funds Assumptions, estimates and opinions contained in this document constitute our judgment as of the date of the document and are subject to change without notice. Any projections are based on a number of assumptions as to market conditions and there can be no guarantee that any projected results will be achieved. Past performance is not a guarantee of future results. Deutsche Real Estate Securities Fund 3

4 Portfolio Management Review (Unaudited) Market Overview and Fund Performance All performance information below is historical and does not guarantee future results. Returns shown are for Class A shares, unadjusted for sales charges. Investment return and principal fluctuate, so your shares may be worth more or less when redeemed. Current performance may differ from performance data shown. Please visit deutschefunds.com for the most recent month-end performance of all share classes. Fund performance includes reinvestment of all distributions. Unadjusted returns do not reflect sales charges and would have been lower if they had. Please refer to pages 8 through 10 for more complete performance information. For the 12-month period ended December 31, 2017, Deutsche Real Estate Securities Fund returned 6.11%. In comparison, the Standard & Poor s 500 (S&P 500) Index returned 21.83% and the MSCI US REIT Index returned 5.07%. Investment Strategy The Fund seeks long-term capital appreciation and current income. The Fund normally invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of real estate investment trusts (REITs) and real estate companies. For 2017, despite a volatile start, U.S. REITs delivered a positive return, the ninth consecutive year of positive total returns for the asset class. However, REITs underperformed the broad stock market. Toward the end of the first quarter, a stronger labor market, healthy consumer data and a nudge upward in inflation contributed to a spike in 10-year U.S. Treasury yields. This resulted in a short-term sell-off in REITs, though Treasury yields soon retreated. In the second quarter, amid an uncertain geopolitical backdrop, the U.S. administration s unveiling of its much anticipated proposal for a significant federal tax overhaul as well as positive U.S. earnings results provided a boost for REITs. During the second half of 2017, the U.S. stock market powered to new highs based on healthy corporate results, positive economic news and receding geopolitical tensions. Over the course of the past 12 months, the U.S. Federal Reserve Board (the Fed) raised short-term interest rates three times. Within the REIT market, shorter-lease-duration sectors that are more economically sensitive generally posted the strongest returns during the 4 Deutsche Real Estate Securities Fund

5 year. These included data centers, industrials, hotels and apartments. Conversely, the retail and mall sectors encountered significant headwinds as store closings weighed on investor sentiment and growth. Positive Contributors to Fund Performance During the Fund s most recent fiscal year, overweight positions in CoreSite Realty Corp. and InterXion Holding NV were the largest individual contributors to performance. Overweight positions in DuPont Fabros Technology Inc.* and Rexford Industrial Realty, Inc. also added to returns. The Fund retains a bias toward property stocks with high quality assets or business models that operate in market segments with favorable supply/demand dynamics and, importantly, solid management teams with a track record of adding value for shareholders. Negative Contributors to Fund Performance Conversely, an overweight position in GGP, Inc. and an underweight in Ventas, Inc. detracted from performance. In addition, the Fund s underweight to Prologis, Inc. and overweight to Vornado Realty Trust* weighed on relative return. Outlook and Positioning We believe that a positive fundamental backdrop for property stocks combined with favorable supply/demand dynamics could potentially continue to drive ample cash flow growth for REITs in the coming months. Additionally, we believe that stock selection will be the key driver going forward in this market. We also expect REIT performance to be primarily dictated by underlying fundamentals rather than uncertainty surrounding future monetary policy and fluctuating Treasury yields. The Fund retains a bias toward property stocks with high quality assets or business models that operate in market segments with favorable supply/ demand dynamics and, importantly, solid management teams with a track record of adding value for shareholders. We tend to favor sectors with either shorter-lease-duration or economically-sensitive demand drivers. These include data centers, industrial REITs and hotels. While, in our opinion, overall growth has likely peaked within most property types, we Deutsche Real Estate Securities Fund 5

6 nonetheless believe that U.S. real estate markets remain poised for several years of income, cash flow and dividend expansion within the continued U.S. recovery. We also think that the strong bid for real estate assets coming from the private market, including sovereign wealth funds, pension funds and institutional advisors, is supportive of current asset values. The Fund remains focused on companies that are typically more able to withstand higher interest rates. Therefore, we think that minimal exposure to the health care REIT sector is warranted, as the sector tends to be viewed as more bond-like, and thus more sensitive to rate fluctuations. * Not held in the portfolio as of December 31, The views expressed reflect those of the portfolio management team only through the end of the period of the report as stated on the cover. The management team s views are subject to change at any time based on market and other conditions and should not be construed as a recommendation. Past performance is no guarantee of future results. Current and future portfolio holdings are subject to risk. Portfolio Management Team John W. Vojticek, Managing Director Portfolio Manager of the Fund. Began managing the Fund in Joined Deutsche Asset Management in 2004; previously worked as Principal at KG Redding and Associates, March 2004 September 2004; and previously Managing Director of Deutsche Asset Management from 1996 March Head and Chief Investment Officer of Liquid Real Assets for Deutsche Asset Management. BS, University of Southern California. David W. Zonavetch, CPA, Managing Director Portfolio Manager of the Fund. Began managing the Fund in Joined Deutsche Asset Management in 1998; previously worked as Senior Accountant in Corporate Finance; and as an Analyst at Cendant Mobility. Co-Head of Real Estate Securities, Americas and Co-Lead Portfolio Manager: Chicago. Investment industry experience began in BS, University of Illinois at Urbana-Champaign. Robert Thomas, Managing Director Portfolio Manager of the Fund. Began managing the Fund in Joined Deutsche Asset Management in 2017; previously served as the Head of North American Property Equities and Portfolio Manager at Henderson Global Investors; and previously was Co-Head of North American Listed Real Estate at AMP Capital Investors. Co-Head of Real Estate Securities, Americas and Co-Lead Portfolio Manager: Chicago. Investment industry experience began in BA in Economics, Duke University; MBA, Finance / Management and Strategy, Kellogg School of Management, Northwestern University. The views expressed reflect those of the portfolio management team only through the end of the period of the report as stated on the cover. The management team s views are 6 Deutsche Real Estate Securities Fund

7 subject to change at any time based on market and other conditions and should not be construed as a recommendation. Past performance is no guarantee of future results. Current and future portfolio holdings are subject to risk. Terms to Know The Standard and Poor s 500 (S&P 500) Index is an unmanaged, capitalizationweighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The MSCI US REIT Index is an unmanaged free-float-adjusted market capitalization index that is comprised of equity REITs. The index is based on the MSCI USA Investable Market Index, its parent index, which captures large-, mid- and small-cap securities. With 152 constituents, it represents approximately 99% of the U.S. REIT universe, and securities are classified in the equity REITs industry (under the real estate sector) according to the Global Industry Classification Standard (GICS ). However, it excludes mortgage REITs and selected specialized REITs. Index returns do not reflect fees or expenses and it is not possible to invest directly into an index. Overweight means the Fund holds a higher weighting in a given sector or security than the benchmark. Underweight means the Fund holds a lower weighting. Deutsche Real Estate Securities Fund 7

8 Performance Summary December 31, 2017 (Unaudited) Class A 1-Year 5-Year 10-Year Average Annual Total Returns as of 12/31/17 Unadjusted for Sales Charge 6.11% 8.73% 6.99% Adjusted for the Maximum Sales Charge (max 5.75% load) 0.01% 7.45% 6.36% S&P 500 Index 21.83% 15.79% 8.50% MSCI US REIT Index 5.07% 9.34% 7.44% Class T 1-Year 5-Year 10-Year Average Annual Total Returns as of 12/31/17 Unadjusted for Sales Charge 6.18% 8.76% 7.04% Adjusted for the Maximum Sales Charge (max 2.50% load) 3.53% 8.21% 6.77% S&P 500 Index 21.83% 15.79% 8.50% MSCI US REIT Index 5.07% 9.34% 7.44% Class C 1-Year 5-Year 10-Year Average Annual Total Returns as of 12/31/17 Unadjusted for Sales Charge 5.43% 7.97% 6.27% Adjusted for the Maximum Sales Charge (max 1.00% CDSC) 5.43% 7.97% 6.27% S&P 500 Index 21.83% 15.79% 8.50% MSCI US REIT Index 5.07% 9.34% 7.44% Class R 1-Year 5-Year 10-Year Average Annual Total Returns as of 12/31/17 No Sales Charges 5.77% 8.38% 6.69% S&P 500 Index 21.83% 15.79% 8.50% MSCI US REIT Index 5.07% 9.34% 7.44% Class R6 1-Year Life of Class* Average Annual Total Returns as of 12/31/17 No Sales Charges 6.62% 7.77% S&P 500 Index 21.83% 11.54% MSCI US REIT Index 5.07% 5.85% 8 Deutsche Real Estate Securities Fund

9 Class S 1-Year 5-Year 10-Year Average Annual Total Returns as of 12/31/17 No Sales Charges 6.43% 9.00% 7.25% S&P 500 Index 21.83% 15.79% 8.50% MSCI US REIT Index 5.07% 9.34% 7.44% Institutional Class 1-Year 5-Year 10-Year Average Annual Total Returns as of 12/31/17 No Sales Charges 6.50% 9.10% 7.37% S&P 500 Index 21.83% 15.79% 8.50% MSCI US REIT Index 5.07% 9.34% 7.44% Performance in the Average Annual Total Returns table above and the Growth of an Assumed $10,000 Investment line graph that follows is historical and does not guarantee future results. Investment return and principal fluctuate, so your shares may be worth more or less when redeemed. Current performance may differ from performance data shown. Please visit deutschefunds.com for the Fund s most recent month-end performance. Fund performance includes reinvestment of all distributions. Unadjusted returns do not reflect sales charges and would have been lower if they had. The gross expense ratios of the Fund, as stated in the fee table of the prospectus dated March 31, 2017 are 0.98%, 0.93%, 1.66%, 1.30%, 0.53%, 0.71% and 0.63% for Class A, Class T, Class C, Class R, Class R6, Class S and Institutional Class shares, respectively, and may differ from the expense ratios disclosed in the Financial Highlights tables in this report. Index returns do not reflect any fees or expenses and it is not possible to invest directly into an index. Performance figures do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Returns shown for Class T shares for the period prior to its inception on June 5, 2017 are derived from the historical performance of Institutional Class shares of Deutsche Real Estate Securities Fund during such periods and have been adjusted to reflect the higher total annual operating expenses. Any difference in expenses will affect performance. Generally accepted accounting principles require adjustments to be made to the net assets of the Fund at period end for financial reporting purposes only, and as such, the total return based on the unadjusted net asset value per share may differ from the total return reported in the financial highlights. Deutsche Real Estate Securities Fund 9

10 Growth of an Assumed $10,000 Investment (Adjusted for Maximum Sales Charge) Deutsche Real Estate Securities Fund Class A MSCI US REIT (Morgan Stanley US Real Estate Investment Trust) Index S&P 500 Index $25,000 $20,000 $22,603 $20,505 $18,531 $15,000 $10,000 $5,000 $0 '07 '08 '09 '10 '11 '12 '13 '14 Yearly periods ended December 31 '15 '16 '17 The Fund s growth of an assumed $10,000 investment is adjusted for the maximum sales charge of 5.75%. This results in a net initial investment of $9,425. The growth of $10,000 is cumulative. Performance of other share classes will vary based on the sales charges and the fee structure of those classes. * Class R6 shares commenced operations on August 25, The MSCI US REIT Index is an unmanaged free float-adjusted market capitalization index that is comprised of equity REITs. The index is based on MSCI USA Investable Market Index, its parent index, which captures large, mid and small caps securities. With 152 constituents, it represents about 99% of the US REIT universe and securities are classified in the Equity REITs Industry (under the Real Estate sector) according to the Global Industry Classification Standard (GICS ). It however excludes Mortgage REIT and selected Specialized REITs. The Standard and Poor s 500 (S&P 500) Index is an unmanaged, capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Class A Class T Class C Class R Class R6 Class S Institutional Class Net Asset Value 12/31/17 $20.39 $20.40 $20.65 $20.39 $20.37 $20.52 $ /5/17 (commencement of operations of Class T) $ $20.54 $ $ $ $ $ 12/31/16 $20.11 $ $20.35 $20.11 $20.09 $20.23 $20.08 Distribution Information as of 12/31/17 Income Dividends, Twelve Months $.35 $.27** $.21 $.28 $.45 $.41 $.42 Capital Gain Distributions, Twelve Months $.59 $ 59** $.59 $.59 $.59 $.59 $.59 ** For the period from June 5, 2017 (commencement of operations) to December 31, Deutsche Real Estate Securities Fund

11 Portfolio Summary (Unaudited) Asset Allocation (As a % of Investment Portfolio excluding Securities Lending Collateral) 12/31/17 12/31/16 Common Stocks 100% 100% Cash Equivalents 0% 0% 100% 100% Sector Diversification (As a % of Investment Portfolio excluding Cash Equivalents and Securities Lending Collateral) 12/31/17 12/31/16 Diversified 16% 12% Office 14% 14% Apartments 12% 14% Regional Malls 10% 12% Industrials 9% 8% Health Care 8% 12% Storage 8% 7% Hotels 7% 7% Shopping Centers 5% 8% Specialty Services 5% 5% Manufactured Homes 4% 1% Software 2% Telecommunications 0% 100% 100% Deutsche Real Estate Securities Fund 11

12 Ten Largest Equity Holdings at December 31, 2017 (39.0% of Net Assets) 1 Simon Property Group, Inc. 5.5% Owner and operator of regional shopping malls 2 Equinix, Inc. 4.8% Global company offering data center space and power to customers 3 Alexandria Real Estate Equities, Inc. 4.3% Acquirer, manager and developer of office and laboratory space properties 4 Camden Property Trust 4.1% Owner and manager of multifamily residential apartment communities 5 Boston Properties, Inc. 3.9% Developer of commercial and industrial real estate 6 Prologis, Inc. 3.7% Owner, operator and developer of industrial real estate 7 Equity LifeStyle Properties, Inc. 3.6% Owner of properties such as camping grounds and seasonal resort communities 8 Extra Space Storage, Inc. 3.3% Owner and operator of self-storage properties 9 Ventas, Inc. 2.9% Owns and leases long-term health care facilities 10 Sunstone Hotel Investors, Inc. 2.9% A hospitality and lodging real estate investment trust that owns primarily upper scale and upscale hotels in the United States Portfolio holdings and characteristics are subject to change. For more complete details about the Fund s investment portfolio, see page 13. A quarterly Fact Sheet is available on deutschefunds.com or upon request. Please see the Account Management Resources section on page 53 for contact information. 12 Deutsche Real Estate Securities Fund

13 Investment Portfolio as of December 31, 2017 Common Stocks 99.8% Real Estate Investment Trusts ( REITs ) 99.8% Shares Value ($) Apartments 12.1% Camden Property Trust 603,826 55,588,222 Equity Residential 521,371 33,247,829 Essex Property Trust, Inc. 124,542 30,060,702 Invitation Homes, Inc. 836,633 19,719,440 Mid-America Apartment Communities, Inc. 78,523 7,896,273 UDR, Inc. 439,364 16,924, ,436,767 Diversified 15.3% American Tower Corp. 218,483 31,170,970 CoreSite Realty Corp. 295,410 33,647,199 Duke Realty Corp. 532,369 14,485,760 Equinix, Inc. 144,564 65,519,296 Forest City Realty Trust, Inc. A 375,756 9,055,720 Four Corners Property Trust, Inc. 874,583 22,476,783 Weyerhaeuser Co. 876,119 30,891, ,247,684 Health Care 8.4% CareTrust REIT, Inc. 906,968 15,200,784 Healthcare Realty Trust, Inc. 922,036 29,615,796 Omega Healthcare Investors, Inc. (a) 351,398 9,677,501 Ventas, Inc. 651,601 39,102,576 Welltower, Inc. 310,569 19,804, ,401,642 Hotels 7.2% Extended Stay America, Inc. (Units) 1,695,134 32,207,546 Pebblebrook Hotel Trust (a) 723,108 26,877,924 Sunstone Hotel Investors, Inc. 2,339,801 38,676,911 97,762,381 Industrials 8.5% EastGroup Properties, Inc. 361,418 31,942,123 Prologis, Inc. 766,211 49,428,271 Rexford Industrial Realty, Inc. 1,146,129 33,421, ,791,516 The accompanying notes are an integral part of the financial statements. Deutsche Real Estate Securities Fund 13

14 Shares Value ($) Manufactured Homes 3.6% Equity LifeStyle Properties, Inc. 540,384 48,104,984 Office 14.0% Alexandria Real Estate Equities, Inc. 447,450 58,432,495 Boston Properties, Inc. 405,917 52,781,388 Douglas Emmett, Inc. 874,645 35,912,924 Empire State Realty Trust, Inc. A 951,595 19,536,245 Hudson Pacific Properties, Inc. 438,248 15,009,994 JBG SMITH Properties 204,920 7,116, ,789,918 Regional Malls 10.3% GGP, Inc. 994,581 23,263,249 Simon Property Group, Inc. 431,204 74,054,975 Taubman Centers, Inc. 180,869 11,834,259 The Macerich Co. 449,310 29,510, ,663,164 Shopping Centers 5.1% Regency Centers Corp. 376,051 26,015,208 Retail Properties of America, Inc. A 1,905,293 25,607,138 Urban Edge Properties 709,749 18,091,502 69,713,848 Software 2.3% InterXion Holding NV* 527,100 31,062,003 Specialty Services 4.5% Agree Realty Corp. 494,430 25,433,479 STORE Capital Corp. 1,360,906 35,437,992 60,871,471 Storage 8.1% CubeSmart 690,577 19,971,487 Extra Space Storage, Inc. 518,020 45,300,849 Iron Mountain, Inc. 606,331 22,876,868 Public Storage 99,353 20,764, ,913,981 Telecommunications 0.4% Switch, Inc. A (a) 272,859 4,963,305 Total Common Stocks (Cost $1,172,719,330) 1,347,722,664 The accompanying notes are an integral part of the financial statements. 14 Deutsche Real Estate Securities Fund

15 Securities Lending Collateral 2.9% Shares Value ($) Deutsche Government & Agency Securities Portfolio Deutsche Government Cash Institutional Shares, 1.21% (b) (c) (Cost $39,307,740) 39,307,740 39,307,740 Cash Equivalents 0.3% Deutsche Central Cash Management Government Fund, 1.30% (b) (Cost $4,573,346) 4,573,346 4,573,346 % of Net Assets Value ($) Total Investment Portfolio (Cost $1,216,600,416) ,391,603,750 Other Assets and Liabilities, Net (3.0) (40,448,084) Net Assets ,351,155,666 * Non-income producing security. (a) All or a portion of these securities were on loan. In addition, Other Assets and Liabilities, Net may include pending sales that are also on loan. The value of securities loaned at December 31, 2017 amounted to $37,930,521, which is 2.8% of net assets. (b) Affiliated fund managed by Deutsche Investment Management Americas Inc. The rate shown is the annualized seven-day yield at period end. (c) Represents collateral held in connection with securities lending. Income earned by the Fund is net of borrower rebates. Fair Value Measurements Various inputs are used in determining the value of the Fund s investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds and credit risk). Level 3 includes significant unobservable inputs (including the Fund s own assumptions in determining the fair value of investments). The level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities. The following is a summary of the inputs used as of December 31, 2017 in valuing the Fund s investments. For information on the Fund s policy regarding the valuation of investments, please refer to the Security Valuation section of Note A in the accompanying Notes to Financial Statements. Assets Level 1 Level 2 Level 3 Total Common Stocks (d) $1,347,722,664 $ $ $1,347,722,664 Short-Term Investments (d) 43,881,086 43,881,086 Total $1,391,603,750 $ $ $1,391,603,750 There have been no transfers between fair value measurement levels during the year ended December 31, (d) See Investment Portfolio for additional detailed categorizations. The accompanying notes are an integral part of the financial statements. Deutsche Real Estate Securities Fund 15

16 Statement of Assets and Liabilities as of December 31, 2017 Assets Investments in non-affiliated securities, at value (cost $1,172,719,330) including $37,930,521 of securities loaned $ 1,347,722,664 Investment in Government & Agency Securities Portfolio (cost $39,307,740)* 39,307,740 Investment in Deutsche Central Cash Management Government Fund (cost $4,573,346) 4,573,346 Cash 10,000 Receivable for investments sold 9,680,467 Receivable for Fund shares sold 3,007,563 Dividends receivable 7,040,141 Interest receivable 14,961 Other assets 58,976 Total assets 1,411,415,858 Liabilities Payable upon return of securities loaned 39,307,740 Payable for investments purchased 12,111,051 Payable for Fund shares redeemed 7,146,988 Accrued management fee 449,932 Accrued Trustees fees 24,742 Other accrued expenses and payables 1,219,739 Total liabilities 60,260,192 Net assets, at value $ 1,351,155,666 Net Assets Consist of Undistributed net investment income 6,481,537 Net unrealized appreciation (depreciation) on investments 175,003,334 Accumulated net realized gain (loss) (13,264,161) Paid-in capital 1,182,934,956 Net assets, at value $ 1,351,155,666 * Represents collateral on securities loaned. The accompanying notes are an integral part of the financial statements. 16 Deutsche Real Estate Securities Fund

17 Statement of Assets and Liabilities as of December 31, 2017 (continued) Net Asset Value Class A Net Asset Value and redemption price per share ($237,655,964 11,654,713 shares of beneficial interest, $.01 par value, unlimited number of shares authorized) $ Maximum offering price per share ( of $20.39) $ Class T Net Asset Value offering and redemption price per share ($10, shares of beneficial interest, $.01 par value, unlimited number of shares authorized) $ Maximum offering price per share ( of $20.40) $ Class C Net Asset Value offering and redemption price per share ($35,617,302 1,724,959 shares of beneficial interest, $.01 par value, unlimited number of shares authorized) $ Class R Net Asset Value offering and redemption price per share ($31,956,006 1,566,885 shares of beneficial interest, $.01 par value, unlimited number of shares authorized) $ Class R6 Net Asset Value offering and redemption price per share ($200,671,825 9,853,647 shares of beneficial interest, $.01 par value, unlimited number of shares authorized) $ Class S Net Asset Value offering and redemption price per share ($298,804,340 14,564,944 shares of beneficial interest, $.01 par value, unlimited number of shares authorized) $ Institutional Class Net Asset Value offering and redemption price per share ($546,439,876 26,835,831 shares of beneficial interest, $.01 par value, unlimited number of shares authorized) $ The accompanying notes are an integral part of the financial statements. Deutsche Real Estate Securities Fund 17

18 Statement of Operations for the year ended December 31, 2017 Investment Income Income: Dividends $ 38,748,228 Income distributions Deutsche Central Cash Management Government Fund 34,550 Securities lending income, net of borrower rebates 47,553 Total income 38,830,331 Expenses: Management fee 5,515,410 Administration fee 1,415,181 Services to shareholders 1,939,304 Distribution and service fees 1,212,300 Custodian fee 32,802 Professional fees 122,833 Reports to shareholders 118,644 Registration fees 112,386 Trustees fees and expenses 84,329 Other 96,769 Total expenses 10,649,958 Net investment income 28,180,373 Realized and Unrealized Gain (Loss) Net realized gain (loss) from investments 75,817,354 Change in net unrealized appreciation (depreciation) on investments (16,239,793) Net gain (loss) 59,577,561 Net increase (decrease) in net assets resulting from operations $ 87,757,934 The accompanying notes are an integral part of the financial statements. 18 Deutsche Real Estate Securities Fund

19 Statements of Changes in Net Assets Years Ended December 31, Increase (Decrease) in Net Assets Operations: Net investment income $ 28,180,373 $ 31,848,198 Net realized gain (loss) 75,817, ,023,598 Change in net unrealized appreciation (depreciation) (16,239,793) (48,455,477) Net increase (decrease) in net assets resulting from operations 87,757,934 89,416,319 Distributions to shareholders from: Net investment income: Class A (4,350,763) (7,099,023) Class T* (133) Class C (388,627) (839,258) Class R (460,051) (723,055) Class R6 (4,344,104) (5,234,725) Class S (6,222,391) (8,332,171) Institutional Class (11,266,245) (15,552,208) Net realized gain: Class A (6,759,098) (25,739,085) Class T* (289) Class C (981,727) (4,217,039) Class R (902,976) (3,113,877) Class R6 (5,612,944) (17,314,026) Class S (8,383,702) (27,660,190) Institutional Class (15,285,287) (49,781,021) Return of capital: Class A (717,926) Class C (84,875) Class R (73,123) Class R6 (529,390) Class S (842,636) Institutional Class (1,572,801) Total distributions (64,958,337) (169,426,429) * For the period from June 5, 2017 (commencement of operations of Class T) to December 31, The accompanying notes are an integral part of the financial statements. Deutsche Real Estate Securities Fund 19

20 Statements of Changes in Net Assets (continued) Years Ended December 31, Increase (Decrease) in Net Assets Fund share transactions: Proceeds from shares sold 379,140, ,356,346 Reinvestment of distributions 55,071, ,414,770 Payments for shares redeemed (552,964,032) (539,739,900) Redemption fees 4,464 39,031 Net increase (decrease) in net assets from Fund share transactions (118,748,197) 116,070,247 Increase (decrease) in net assets (95,948,600) 36,060,137 Net assets at beginning of period 1,447,104,266 1,411,044,129 Net assets at end of period (including undistributed net investment income of $6,481,537 and $4,791,699, respectively) $ 1,351,155,666 $ 1,447,104,266 The accompanying notes are an integral part of the financial statements. 20 Deutsche Real Estate Securities Fund

21 Financial Highlights Years Ended December 31, Class A Selected Per Share Data Net asset value, beginning of period $20.11 $21.20 $23.62 $19.55 $21.23 Income (loss) from investment operations: Net investment income a Net realized and unrealized gain (loss) (.49) Total from investment operations (.07) Less distributions from: Net investment income (.35) (.51) (.40) (.41) (.52) Net realized gains (.59) (1.94) (2.53) (1.60) (1.09) Return of capital (.06) Total distributions (.94) (2.51) (2.93) (2.01) (1.61) Redemption fees.00 *.00 *.00 *.00 *.00 * Net asset value, end of period $20.39 $20.11 $21.20 $23.62 $19.55 Total Return (%) b (.44) Ratios to Average Net Assets and Supplemental Data Net assets, end of period ($ millions) Ratio of expenses (%) Ratio of net investment income (%) Portfolio turnover rate (%) a Based on average shares outstanding during the period. b Total return does not reflect the effect of any sales charges. * Amount is less than $.005. Deutsche Real Estate Securities Fund 21

22 Class T Period Ended 12/31/17 a Selected Per Share Data Net asset value, beginning of period $ Income (loss) from investment operations: Net investment income b.24 Net realized and unrealized gain (loss).48 Total from investment operations.72 Less distributions from: Net investment income (.27) Net realized gains (.59) Total distributions (.86) Net asset value, end of period $ Total Return (%) c 3.54** Ratios to Average Net Assets and Supplemental Data Net assets, end of period ($ thousands) 10 Ratio of expenses (%).94* Ratio of net investment income (%) 1.98* Portfolio turnover rate (%) 168 d a For the period from June 5, 2017 (commencement of operations) to December 31, b Based on average shares outstanding during the period. c Total return does not reflect the effect of any sales charges. d Represents the Fund s turnover rate for the year ended December 31, * Annualized ** Not annualized 22 Deutsche Real Estate Securities Fund

23 Years Ended December 31, Class C Selected Per Share Data Net asset value, beginning of period $20.35 $21.44 $23.86 $19.73 $21.42 Income (loss) from investment operations: Net investment income a Net realized and unrealized gain (loss) (.50) Total from investment operations (.23) Less distributions from: Net investment income (.21) (.37) (.25) (.25) (.37) Net realized gains (.59) (1.94) (2.53) (1.60) (1.09) Return of capital (.06) Total distributions (.80) (2.37) (2.78) (1.85) (1.46) Redemption fees.00 *.00 *.00 *.00 *.00 * Net asset value, end of period $20.65 $20.35 $21.44 $23.86 $19.73 Total Return (%) b (1.16) Ratios to Average Net Assets and Supplemental Data Net assets, end of period ($ millions) Ratio of expenses (%) Ratio of net investment income (%) Portfolio turnover rate (%) a Based on average shares outstanding during the period. b Total return does not reflect the effect of any sales charges. * Amount is less than $.005. Deutsche Real Estate Securities Fund 23

24 Years Ended December 31, Class R Selected Per Share Data Net asset value, beginning of period $20.11 $21.21 $23.64 $19.56 $21.24 Income (loss) from investment operations: Net investment income a Net realized and unrealized gain (loss) (.50) Total from investment operations (.14) Less distributions from: Net investment income (.28) (.44) (.34) (.34) (.45) Net realized gains (.59) (1.94) (2.53) (1.60) (1.09) Return of capital (.06) Total distributions (.87) (2.44) (2.87) (1.94) (1.54) Redemption fees.00 *.00 *.00 *.00 *.00 * Net asset value, end of period $20.39 $20.11 $21.21 $23.64 $19.56 Total Return (%) (.74) Ratios to Average Net Assets and Supplemental Data Net assets, end of period ($ millions) Ratio of expenses (%) Ratio of net investment income (%) Portfolio turnover rate (%) a Based on average shares outstanding during the period. * Amount is less than $ Deutsche Real Estate Securities Fund

25 Years Ended December 31, Period Ended Class R /31/14 a Selected Per Share Data Net asset value, beginning of period $20.09 $21.18 $23.60 $ Income (loss) from investment operations: Net investment income b Net realized and unrealized gain (loss) Total from investment operations Less distributions from: Net investment income (.45) (.62) (.50) (.29) Net realized gains (.59) (1.94) (2.53) (1.50) Return of capital (.06) Total distributions (1.04) (2.62) (3.03) (1.79) Redemption fees.00 ***.00 ***.00 ***.00 *** Net asset value, end of period $20.37 $20.09 $21.18 $ Total Return (%) ** Ratios to Average Net Assets and Supplemental Data Net assets, end of period ($ millions) Ratio of expenses (%) * Ratio of net investment income (%) * Portfolio turnover rate (%) c a For the period from August 25, 2014 (commencement of operations) to December 31, b Based on average shares outstanding during the period. c Represents the Fund s portfolio turnover for the year ended December 31, * Annualized ** Not annualized *** Amount is less than $.005. Deutsche Real Estate Securities Fund 25

26 Years Ended December 31, Class S Selected Per Share Data Net asset value, beginning of period $20.23 $21.32 $23.74 $19.64 $21.33 Income (loss) from investment operations: Net investment income a Net realized and unrealized gain (loss) (.52) Total from investment operations (.04) Less distributions from: Net investment income (.41) (.58) (.47) (.46) (.56) Net realized gains (.59) (1.94) (2.53) (1.60) (1.09) Return of capital (.06) Total distributions (1.00) (2.58) (3.00) (2.06) (1.65) Redemption fees.00 *.00 *.00 *.00 *.00 * Net asset value, end of period $20.52 $20.23 $21.32 $23.74 $19.64 Total Return (%) (.26) Ratios to Average Net Assets and Supplemental Data Net assets, end of period ($ millions) Ratio of expenses (%) Ratio of net investment income (%) Portfolio turnover rate (%) a Based on average shares outstanding during the period. * Amount is less than $ Deutsche Real Estate Securities Fund

27 Years Ended December 31, Institutional Class Selected Per Share Data Net asset value, beginning of period $20.08 $21.18 $23.60 $19.54 $21.22 Income (loss) from investment operations: Net investment income a Net realized and unrealized gain (loss) (.48) Total from investment operations Less distributions from: Net investment income (.42) (.59) (.48) (.49) (.59) Net realized gains (.59) (1.94) (2.53) (1.60) (1.09) Return of capital (.06) Total distributions (1.01) (2.59) (3.01) (2.09) (1.68) Redemption fees.00 *.00 *.00 *.00 *.00 * Net asset value, end of period $20.36 $20.08 $21.18 $23.60 $19.54 Total Return (%) (.09) Ratios to Average Net Assets and Supplemental Data Net assets, end of period ($ millions) Ratio of expenses (%) Ratio of net investment income (%) Portfolio turnover rate (%) a Based on average shares outstanding during the period. * Amount is less than $.005. Deutsche Real Estate Securities Fund 27

28 Notes to Financial Statements A. Organization and Significant Accounting Policies Deutsche Real Estate Securities Fund (the Fund ) is a non-diversified series of Deutsche Securities Trust (the Trust ), which is registered under the Investment Company Act of 1940, as amended (the 1940 Act ), as an open-end management investment company organized as a Massachusetts business trust. The Fund offers multiple classes of shares which provide investors with different purchase options. Class A shares are subject to an initial sales charge. Class B shares automatically converted to Class A shares on February 10, 2016 and are no longer offered. Class B shares were not subject to an initial sales charge and were subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions. Class C shares are not subject to an initial sales charge but are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions within one year of purchase. Class R shares are not subject to initial or contingent deferred sales charges and are generally available only to certain retirement plans. Class R6 shares are not subject to initial or contingent deferred sales charges and are generally available only to certain retirement plans. Class S shares are not subject to initial or contingent deferred sales charges and are only available to a limited group of investors. Institutional Class shares are not subject to initial or contingent deferred sales charges and are generally available only to qualified institutions. Class T shares commenced operations on June 5, Class T shares are subject to an initial sales charge and are only available through certain financial intermediaries. Investment income, realized and unrealized gains and losses, and certain fund-level expenses and expense reductions, if any, are borne pro rata on the basis of relative net assets by the holders of all classes of shares, except that each class bears certain expenses unique to that class such as distribution and service fees, services to shareholders and certain other class-specific expenses. Differences in class-level expenses may result in payment of different per share dividends by class. All shares of the Fund have equal rights with respect to voting subject to class-specific arrangements. The Fund s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ( U.S. GAAP ) which require the use of management estimates. Actual results could differ from those estimates. The Fund qualifies as an investment company under Topic 946 of Accounting Standards Codification of U.S. GAAP. The policies described below are followed consistently by the Fund in the preparation of its financial statements. 28 Deutsche Real Estate Securities Fund

29 Security Valuation. Investments are stated at value determined as of the close of regular trading on the New York Stock Exchange on each day the exchange is open for trading. Various inputs are used in determining the value of the Fund s investments. These inputs are summarized in three broad levels. Level 1 includes quoted prices in active markets for identical securities. Level 2 includes other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds and credit risk). Level 3 includes significant unobservable inputs (including the Fund s own assumptions in determining the fair value of investments). The level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities. Equity securities are valued at the most recent sale price or official closing price reported on the exchange (U.S. or foreign) or over-the-counter market on which they trade. Securities for which no sales are reported are valued at the calculated mean between the most recent bid and asked quotations on the relevant market or, if a mean cannot be determined, at the most recent bid quotation. Equity securities are generally categorized as Level 1. Investments in open-end investment companies are valued at their net asset value each business day and are categorized as Level 1. Securities and other assets for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value are valued in a manner that is intended to reflect their fair value as determined in accordance with procedures approved by the Board and are generally categorized as Level 3. In accordance with the Fund s valuation procedures, factors considered in determining value may include, but are not limited to, the type of the security; the size of the holding; the initial cost of the security; the existence of any contractual restrictions on the security s disposition; the price and extent of public trading in similar securities of the issuer or of comparable companies; quotations or evaluated prices from broker-dealers and/or pricing services; information obtained from the issuer, analysts, and/or the appropriate stock exchange (for exchange-traded securities); an analysis of the company s or issuer s financial statements; an evaluation of the forces that influence the issuer and the market(s) in which the security is purchased and sold; and with respect to debt securities, the maturity, coupon, creditworthiness, currency denomination and the movement of the market in which the security is normally traded. The value determined under these procedures may differ from published values for the same securities. Disclosure about the classification of fair value measurements is included in a table following the Fund s Investment Portfolio. Deutsche Real Estate Securities Fund 29

30 Securities Lending. Deutsche Bank AG, as security lending agent, lends securities of the Fund to certain financial institutions under the terms of its securities lending agreement. During the term of the loans, the Fund continues to receive interest and dividends generated by the securities and to participate in any changes in their market value. The Fund requires the borrowers of the securities to maintain collateral with the Fund consisting of either cash or liquid, unencumbered assets having a value at least equal to the value of the securities loaned. When the collateral falls below specified amounts, the lending agent will use its best effort to obtain additional collateral on the next business day to meet required amounts under the securities lending agreement. As of period end, any securities on loan were collateralized by cash. During the year ended December 31, 2017 the Fund invested the cash collateral into a joint trading account in affiliated money market funds, managed by Deutsche Investment Management Americas Inc. As of December 31, 2017 the Fund invested the cash collateral in Deutsche Government & Agency Securities Portfolio. Deutsche Investment Management Americas Inc. receives a management/administration fee (0.13% annualized effective rate as of December 31, 2017) on the cash collateral invested in Deutsche Government & Agency Securities Portfolio. The Fund receives compensation for lending its securities either in the form of fees or by earning interest on invested cash collateral net of borrower rebates and fees paid to a lending agent. Either the Fund or the borrower may terminate the loan at any time, and the borrower, after notice, is required to return borrowed securities within a standard time period. There may be risks of delay and costs in recovery of securities or even loss of rights in the collateral should the borrower of the securities fail financially. If the Fund is not able to recover securities lent, the Fund may sell the collateral and purchase a replacement investment in the market, incurring the risk that the value of the replacement security is greater than the value of the collateral. The Fund is also subject to all investment risks associated with the reinvestment of any cash collateral received, including, but not limited to, interest rate, credit and liquidity risk associated with such investments. As of December 31, 2017, the Fund had securities on loan, which were classified as common stock in the Investment Portfolio. The value of the related collateral exceeded the value of the securities loaned at period end. As of period end, the remaining contractual maturity of the collateral agreements was overnight and continuous. Federal Income Taxes. The Fund s policy is to comply with the requirements of the Internal Revenue Code, as amended, which are applicable to regulated investment companies, and to distribute all of its taxable income to its shareholders. 30 Deutsche Real Estate Securities Fund

31 The Fund has reviewed the tax positions for the open tax years as of December 31, 2017 and has determined that no provision for income tax and/or uncertain tax positions is required in the Fund s financial statements. The Fund s federal tax returns for the prior three fiscal years remain open subject to examination by the Internal Revenue Service. Distribution of Income and Gains. Distributions from net investment income of the Fund are declared and distributed to shareholders quarterly. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed, and, therefore, will be distributed to shareholders at least annually. The Fund may also make additional distributions for tax purposes if necessary. The timing and characterization of certain income and capital gain distributions are determined annually in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences primarily relate to certain securities sold at a loss. As a result, net investment income and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund. At December 31, 2017, the Fund s components of distributable earnings (accumulated losses) on a tax basis were as follows: Undistributed Ordinary Income $ 2,939,833 Undistributed long-term capital gains $ 5,675,285 Unrealized appreciation (depreciation) on investments $ 156,063,888 At December 31, 2017, the aggregate cost of investments for federal income tax purposes was $1,235,539,862. The net unrealized appreciation for all investments based on tax cost was $156,063,888. This consisted of aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost of $187,934,582 and aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value of $31,870,694. In addition, the tax character of distributions paid to shareholders by the Fund is summarized as follows: Years Ended December 31, Distributions from ordinary income* $ 27,032,314 $ 95,987,458 Distributions from long-term capital gains $ 37,926,023 $ 69,618,220 Return of capital distributions $ $ 3,820,751 * For tax purposes, short-term capital gain distributions are considered ordinary income distributions. Deutsche Real Estate Securities Fund 31