Waddell & Reed

Market Perspectives

Complexity of markets begets ever more comprehensive analysis

Hank Herrmann 
Chariman of the Investment Policy Committee


Waddell & Reed Advisors Market Perspective – July 2012


Troubled by the continued refrains of “European debt crisis,” “slowing growth in China,” and “U.S. fiscal cliff,” among others, it feels as though the financial markets have been in a bit of an inescapable morass for more than a year. But as we wade through the details of global macro developments, we cannot ignore the micro data. U.S. economic data, while not robust, has not signaled a pending U.S. recession.

While the S&P 500 Index declined 2.75 percent over the three-month period ending June 30, 2012, that index is up 5.45 percent over the 12 months ended June 30, 2012. Again, not robust, but not terrible. We are, to quote another familiar phrase, “muddling through.” For investors and for financial advisors, the daily news on global events cannot help but be distracting and concerning. But, for portfolio managers, analysts and economists, that news is part of the life blood of what we do every day.

Investment professionals feed on information, take it in, study it, discuss it, dissect it and use it to make decisions, while not being overly influenced or distracted by hyperbole, sensationalism and, in some cases, overwrought media reports. As the financial markets have become more and more complex, with relevant details circulating from nearly every part of the world, the demand for knowledge and talented analysis has dramatically increased. As problems change, equations change and solutions change.

Moving target

Over the last decade, the significance of market interdependence across the globe has increased by several multiples. The markets today are influenced by a much broader set of “inputs” than they were just a few years ago. For example, if you don’t understand growth and development in China, you might not be able to discern any impact to economic development or corporate profits in Germany. Or, if Brazil’s beet crop fails this year, what does that mean for ethanol prices in the U.S.? If the Bank of England changes its interest rate, does Hong Kong have to follow? Can it follow?

The amount of information, and the complexity of it, has altered the required skill set of investment management professionals in almost every respect. To be successful, you must respond quickly, thoughtfully and precisely. As we work for investors, we must understand the environment we are facing. And that environment, like the weather, is not always predictable. But across 45 years, I’ve found that even if you can’t always predict, you can certainly be prepared.

A funnel to focus on the right things

Is it really possible to focus on all global issues and come to an understanding of potential outcomes? We have cultivated a clearly defined process to help us do that to what we believe is the best possible degree.

Our process is much like a funnel: wide at the top and very narrow at the bottom. Every day, the world comes and dumps more stuff into the funnel. Our job as investment managers is to sift it all and catch what really matters at the bottom. Then, convert it to action.

To dissect all this input, we create responsibility segmentation. We have a staff of 80 investment professionals, including specific industry analysts, specialists who look at very granular information. Some analysts look at companies; some look at credit markets; ratings and rates; economists look at global and domestic data in many forms.

These analysts and economists amount to “sub funnels,” passing their knowledge and research on to portfolio managers. The portfolio managers then combine the information at a higher level, incorporating it, to help them put together a roadmap toward ideas and solutions. Output, of course, is highly dependent on the quality of input. So those funnels become very important.

Ongoing work goes into maintaining an in-depth understanding of the credit markets in Europe. We need fluency in Mandarin, to understand the culture in China, not just companies that operate there. We must understand the political processes in countries across Latin America, Asia and around the world where we are investing. What worked yesterday may not work today.

Daily, even hourly, we are looking at data points, news and market developments, combining them with key influencers, such as:

  • What companies are telling us;
  • What we’ve learned travelling around the world, visiting countries, governments and companies;
  • What we’ve learned from experts on politics, geopolitics, global economics.

These combine to provide the foundation from which we work; the output is seen in mutual fund and portfolio returns every quarter. While the market news can be distracting, and volatility can be exhausting, it is our belief that those facts alone cannot derail a properly researched and constructed portfolio.

It’s a calculated research process, over time, that can make all the difference.


The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered to represent the U.S. stock market. Investments cannot be made directly in an index.

Past performance is not a guarantee of future results. The opinions expressed in this article are those of Mr. Herrmann and are current through July 2012. Mr. Herrmann’s views are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. Waddell & Reed Financial, Inc. is the ultimate parent company of Waddell & Reed, Inc. and of Ivy Funds Distributor, Inc.

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 any of the Ivy Funds, call your financial advisor or visit www.waddell.com. Please read the prospectus or summary prospectus carefully before investing.

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