Waddell & Reed

Portfolio Perspectives


Uncovering growth potential through technological advancement

Story Highlights

  • We invest not only in health care and technology stocks, but also in companies that utilize science and technology to increase business efficiencies and improve our daily lives.
  • Today, the Fund has roughly 61% of its equity exposure in the IT sector and, in our view, includes several stocks positioned for growth.
  • We will tactically allocate cash in rough market environments when macroeconomic or political issues, and the risk associated with those concerns, trump our stock-picking capabilities.
  • Despite remaining risks around the globe, we are generally positive about the path of economic growth.
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Investment Team

Manager Name

Zachary Shafran

Portfolio Manager

"When we think about all the problems around the world, all the things we haven’t done yet, the things we can do a whole lot better – the common answer, more often than not, is well-rooted, deeply grounded somewhere in science and technology."

–Portfolio Manager Zachary Shafran

Navigating the global marketplace for innovation, progression

The world has faced widespread risk in recent years, including Europe’s sovereign debt crisis, sluggish U.S. economic growth, political tension in North Korea and aggressive monetary policy implementation in Japan. While these risks and other economic challenges remain, we think the global economy overall is stable and showing signs of improvement. Given the seeming stability, yet with some lingering concerns, we ask ourselves, “Where are the investment opportunities?”

The answer to this question often can be found in companies using or benefitting from science and technological advancement. As such, the Fund employs an investment philosophy that seeks out structural growth potential when selecting securities across geographic boundaries and market capitalization. We invest not only in health care and technology stocks, but also in companies that utilize science and technology to increase business efficiencies and improve daily lives – what we call “applied science and technology” companies.

Promising prospects we feel are poised for growth

We are excited about the innovation and growth that is taking place within certain companies around the world. In particular, we believe many of the stocks in the information technology space remain relatively inexpensive and are well-positioned going forward. As confidence is restored, we believe there will be an increase in capital expenditure in various markets as companies become more comfortable with the high-cost transitions related to changes to internal infrastructure. Today, the Fund has roughly 61% of its equity exposure in the IT sector and, in our view, includes several stocks positioned for growth. Two stocks that come to mind include iGATE Corporation1 (iGATE) and WNS Holdings Limited2 (WNS), two companies in the IT services space that we think are undervalued and misperceived by the market.

Information technology plays a vital role within organizations today. However, with increasing maintenance and upgrade costs, a large number of companies have turned to outsourcing firms to meet their IT organization needs. This rationale, and the expectation that this trend will continue, led us to outsourcing companies iGATE and WNS. In our view, the strategic rationale stemming from an acquisition completed by iGATE, and the resulting business efficiencies, has positioned the firm for accelerated organic growth. In the case of WNS, the company’s diverse range of outsourcing services – not only traditional IT services, but of ferings such as accounting and human resources – has expanded the company’s global reach. Paired in an industry with shortened sales cycles and increasing demand, we believe the company will grow its bottom line.

On the health care front, we have been incrementally increasing our exposure to this sector, and currently, approximately 20% of our equity holdings are in health care names. In our view, opportunities in the sector are arising both from managed-care companies in the U.S. set to benefit from the implementation of government initiatives, as well as rising demand for quality health care as standards of living increase in developing markets. Medical technology, biotechnology, medical records and pharmaceuticals are among the greatest innovators and early adopters of new science and technology, so we are paying particularly close attention to companies in those areas. ARIAD Pharmaceuticals,3 a recent addition to the portfolio, highlights this viewpoint. The company places great value on innovation, creativity and individual initiative in the development of medicines. Recently, the company brought to market a drug approved for the treatment of chronic myeloid leukemia. The prescriptions have been ramping up and we think the company is going to generate healthy revenue streams going forward. Furthermore, we consider the company to have advancing clinical research programs in a number of areas with major needs – meaning the company appears to have a strong pipeline of medicines with growing demand. With a market capitalization of approximately $3 billion, we think ARIAD Pharmaceuticals is a relatively small company with large growth potential.

Roughly 19%, or the remainder of the portfolio, is scattered about a variety of industries stemming from our applied science and technology investment theme, which is designed to identify investment opportunities that utilize science and/or technology as an agent for change. For example, Fund holding Monsanto, a company that provides agricultural products for farmers globally, genetically engineers seeds to be much more drought tolerant. In a world in which demand for quantity and quality of food continues in increase, we think Monsanto4 is poised to benefit and continues to transform its industry.

Clever with cash and caps

Two aspects of the Fund that are results of our investment philosophy are cash and market capitalization. Residual cash, generally maintained at less than 10% of portfolio assets, is typically utilized for purchase opportunities. However, we will tactically allocate cash in rough market environments when macroeconomic or political issues, and the risk associated with those concerns, trump our stock-picking capabilities. In these times, we believe it is better to wait and let cash build. For example, we consciously increased our cash weighting in both 2002 and 2008 to a level greater than 35% of Fund assets, which greatly benefited the Fund’s performance relative to its benchmark and peer group. Over the long term, we seek to follow a fully-invested mandate, but we enjoy the benefits derived from our cash flexibility, which has served us and our shareholders well.

In managing the Fund, we seek investment opportunities regardless of market capitalization, as we believe there is ample opportunity to add value across market cap, particularly in mid- and small-cap securities. We aim to identify the best opportunities that we believe have structural growth potential. As such, the flexibility that is achieved by a lack of cap restrictions, in our view, greatly benefits the Fund. The portfolio includes holdings such as Google Inc.5 and Apple Inc.,6 companies with market caps greater than $100 billion, as well as companies discussed above, such as WNS and iGATE, that have market caps in the single-digit, billion-dollar range. The median market cap of the portfolio is near $2.5 billion and the weighted average market cap is near $45 billion, the difference is notable and represents the range of the portfolio.

The view ahead

Despite remaining risks around the globe, we are generally positive about the path of economic growth. In mixed economic environments, we believe there are many potential investment opportunities – especially in scarce resources, mobility and health care – around the world. While technology stocks have lagged relative to many of the broad market indices year-to-date, we broadly expect technology stocks to perform well. As we look at the securities of such companies, we are attracted by what we believe are good growth prospects and sound capital structures. We believe there will be a modest improvement in capital spending trends, and we are looking for some restoration of mergers and acquisition activity as well. As always, we will carefully monitor the macroeconomic environment, but our focus remains primarily on security-specific fundamental research. Going forward, we believe this attention to bottom-up research, coupled with the innovation and transformation under way across the globe, will continue to provide investment opportunities.


1 1.2% of net assets as of 03/31/2013
2 1.7% of net assets as of 03/31/2013
3 1.3% of net assets as of 03/31/2013
4 2.0% of net assets as of 03/31/2013
5 3.5% of net assets as of 03/31/2013
6 3.7% of net assets as of 03/31/2013

Past performance is not a guarantee of future results. The opinions expressed are those of the Fund’s portfolio 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 June 7, 2013, and are subject to change due to market conditions or other factors.

Risk factors: As with any mutual fund, the value of the Fund’s shares will change, and you could lose money on your investment. The Fund may allocate from 0 to 100% of its assets between stocks, bonds and short-term instruments of issuers around the globe, as well as investments in precious metals and investments with exposure to various foreign securities. 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. Fixed-income securities are subject to interest-rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may focus its investments in certain regions or industries, thereby increasing its potential vulnerability to market volatility. The Fund may seek to hedge market risk on various securities, increase exposure to various markets, manage exposure to various foreign currencies, precious metals and various markets, and seek to hedge certain event risks on positions held by the Fund. Such hedging involves additional risks, as the fluctuations in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. Investing in commodities is generally considered speculative because of the significant potential for investment loss due to cyclical economic conditions, sudden political events, and adverse international monetary policies. Markets for commodities are likely to be volatile and the Fund may pay more to store and accurately value its commodity holdings than it does with the Fund’s other holdings. 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.

Diversification does not guarantee a profit or protect against loss in a declining market. It is a method to manage risk.

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 the mutual funds offered by Waddell & Reed, call your financial advisor or visit us online at www.waddell.com. Please read the prospectus or summary prospectus carefully before investing.

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