Waddell & Reed

Portfolio Perspectives


U.S. corporate revival: The time may now be at hand

Kimberly A. Scott, CFA
Portfolio Manager

 

Waddell & Reed Advisors New Concepts Fund – April 2012

Download PDF


During her 11-year tenure at the helm of the Waddell & Reed Advisors New Concepts Fund, portfolio manager Kimberly Scott has stayed focused on a bottom-up, fundamental stock-picker strategy. In light of recent developments, she also believes that a domestic corporate revival may be on the horizon. The following is her view of the current market environment.
 
Sticking with a belief
By the end of 2011, we had transitioned to the middle part of an economic expansion and, although it continued to be moderate, it was still an expansion. Even with this positive news, there was still a lot of concern among investors that the environment could deteriorate. Investor psyche continued to be very fragile and was shaped by the memory of the market drop in 2008 and early 2009. There were concerns around the world, particularly in Europe, that financial markets were subject to the same sorts of issues that we had gone through in the past. However, after taking a closer look, it appeared that the U.S. economy had reached a point of sustainability.
 
Moving toward expansion and growth
We now believe that the U.S. economy has moved beyond a recovery phase into an expansion phase that has developed real traction. We’re seeing this move reflected several indicators … from employment to consumer spending. We are also beginning to see glimmers of hope in housing and autos. This expansion phase hinges upon continued improvement in U.S. housing and increased demand in automobiles, both domestically and globally. These are two sectors that we believe, if they can gain traction along with the rest of the economy, will reinforce the type of sustainability that can breed even better results down the road.
 
While U.S. economic news remains positive, and a significant economic decline in China seems unlikely, we do view Europe as possible ongoing problem. However, we are now seeing signs of cooperation and potential progress regarding the sovereign debt issues the European Union is facing.
 
With corporate earnings being a concern across the financial markets, we see the dynamics of 2012 being the reverse of last year. We think that earnings growth for this year may be a little bit slower than 2011, but the potential exists for price to earnings ratios (P/Es) to continue to expand and drive the market. In fact, even though earnings expectations are anticipated to be somewhat muted, we think there is a possibility that earnings growth may be a bit better than is broadly expected. With the combination of this upside potential and expanding P/Es, we think a pretty good market may be on tap this year.
 
Breeding opportunities
We continue to stay the course as fundamental stock pickers first and foremost. As the market has evolved over the past few years, we’ve transitioned to what we see as a necessary stock-picking environment, and that’s where we tend to find good opportunities to invest.
 
We believe that the environment for domestic equities is good based on the positive economic signals and the fact that the Federal Reserve remains very accommodating. Even if the Fed were to raise rates before 2014, we believe that could be a good thing. While we don’t want to see a sharp increase in rates, if rates rise sooner rather than later, it is indicative of more strength in the economy.
 
Corporate profitability is also very high. Throughout this expansion, companies that have had the wherewithal to invest are beginning to show the confidence to invest. This confidence is exhibiting itself through increased commercial and industrial loans, merger and acquisition activity, and hiring. These companies also appear willing to increase their dividends and return capital to shareholders. Corporate managements that had been quite tightfisted with company dollars in the past few years are now beginning to let go of some cash.
 
It appears that the U.S. is becoming more competitive on a global basis. For example, the U.S. labor force’s views on wages and benefits have become more liberal. As labor in other countries gets more expensive, relative to what it has been in the past, and U.S. labor becomes more affordable, that could translate into a domestic positive. Innovation in the areas of production and distribution in the U.S. allow companies to pursue less expensive alternatives domestically. Oil and natural gas derived from U.S. exploration and production is also becoming more competitively priced.
 
Given all of the issues we’ve seen from a global supply chain perspective in the past year, especially in light of the natural disasters of 2011, there has been some rethinking about supply and how close availability should be to large customer bases like the U.S. We’re seeing some changes in where things are being manufactured based on concerns about availability of supply.
 
We feel strongly that positive change is developing, not only from an immediate economic recovery standpoint, but from a larger structural and potentially secular change in what may happen in the U.S. economy.
 
As we consistently review the Fund’s portfolio, we want to continue to invest across the growth spectrum, which includes: stable-demand companies, innovative growth companies, and companies with growth that could be overlooked in a lot of investors’ minds, misunderstood or distrusted. We try to balance out the growth and valuation opportunity across these three areas. We are seeing many exciting domestic growth companies in which to invest, and the valuations for many of these companies are quite attractive.
 
Interesting sectors
One current area of focus is information technology, where we’re seeing several growth opportunities with companies across many sub-industries, and where we can find ideas that may be viable for up to three, four or even five-year time horizons. We also continue to look for ideas in industrials, and specifically industrials that have strong technology components to enhance the products these companies are producing or innovating. We also have interest in several different consumer discretionary names where we see a lot of innovation and growth opportunity.
 
Viewing the horizon
Our outlook continues to be for slow, steady growth in the U.S. economy, when compared against relative weakness in international economies, particularly the developed markets. While macro issues will continue to drive investor perception and thinking, we continue to believe returns will be driven by high-quality domestic stocks. We will look for such companies across all sectors, but particularly in the information technology, industrials, consumer discretionary, health care, financial, and consumer staples sectors, staying true to our quality growth perspective and maintaining valuation sensitivity in what the Fund pays to own these stocks.
 
Past performance is not a guarantee of future results. The opinions expressed are those of the Fund manager and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through April 2, 2012, and are subject to change due to market conditions or other factors.
 
Investment return and principal value will fluctuate, and it is possible to lose money by investing. Investing in mid-cap stocks may carry more risk than investing in stocks of larger, more well-established companies. These and other risks can be found in the Fund’s prospectus.
 
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 Waddell & Reed Advisors Funds, call your financial advisor or visit www.waddell.com. Please read the prospectus or summary prospectus carefully before investing.

Financial Advisor Opportunities
Corporate Careers