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    Quarterly Fund Commentary

    WRA Energy Fund (prospectus)
    June 30, 2016

    David P. Ginther, CPA

    Market Sector Update

    • U.S. equities closed a volatile quarter in positive territory. The energy sector posted strong gains and outpaced the broader equities market. Global equities also finished slightly higher. Crude oil prices were unsettled but began to trade at higher levels during the quarter.
    • U.K. voters surprised the world and world markets with a majority vote in late June to leave the European Union (EU) – the so-called Brexit. It is likely to take many months for all aspects of this issue to be resolved between the U.K. and EU member countries.
    • The market’s volatility reflected ongoing uncertainty about the U.S. Federal Reserve’s (Fed) next move with interest rates. The Brexit outcome only added uncertainty and is likely to mean the Fed will delay additional interest rate hikes for longer than previously anticipated.
    • Some of the largest effects of the Brexit vote were in the currency markets, with the pound falling by more than 10% against the U.S. dollar. Although the dollar had strengthened on the back of “safehaven” flows, the trade-weighted appreciation has been small.
    • Inflation expectations continue to look well contained, although the consumer price index has trended slightly higher because of energy prices.

    Portfolio Strategy

    • The Fund posted a strong positive return for the quarter and outperformed the positive return of its benchmark index.
    • The Fund’s performance relative to the index primarily was based on stock selections in the energy sector, which again was the largest sector allocation. The allocations to cash and to the financials sector were slight detractors from relative performance again this quarter.
    • The five largest contributors to performance relative to the benchmark index were holdings in Continental Resources, Inc.; Newfield Exploration Co.; U.S. Silica Holdings, Inc.; Cimarex Energy Co.; and Superior Energy Services. The five largest detractors to relative performance were Exxon Mobil Corp., Chevron Corp., Weatherford International Ltd., ConocoPhillips and the lack of a holding in Occidental Petroleum Corp., which has a noteworthy weighting in the benchmark index.
    • The Fund’s focus within Exploration & Production companies remains on firms that we think have the best balance sheets, best shale acreage and low-cost production. We have continued a theme related to upstream, onshore U.S. companies. We typically do not invest in companies that, in our view, do not hold either the best or second-best acreage in a given shale area.


    • We think steady economic growth and low inflation will continue in the U.S. this year, maintaining the country’s position as a bright spot among developed countries. In our view, global economic growth also is likely to remain slow overall.
    • We still believe U.S. shale oil offers opportunities, with much of our focus on the Permian Basin for continued production growth. Companies there continue to improve efficiency and productivity, and manage costs effectively.
    • We maintain our estimate that the world is oversupplied by about 1.5% on total consumption of 95 million barrels per day (bpd). However, we think the year-overyear increase in global supply is diminishing.
    • We believe oil prices still can trend higher in the longer term, with slowing production and stable demand leading to a supply/demand balance late this year. That could drive oil prices higher in coming years.


    The opinions expressed in this commentary are those of the Fund's manager and are current through June 30, 2016. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is not a guarantee of future results.

    Top 10 Equity Holdings as a percent of net assets as of 06/30/2016: Schlumberger Ltd., 5.13%; Halliburton Co., 4.82%; Continental Resources, Inc., 4.56%; Newfield Exploration Co., 4.28%; Parsley Energy, Inc., 4.01%; Pioneer Natural Resources Co., 3.95%; Cimarex Energy Co., 3.90%; EOG Resources, Inc., 3.84%; Anadarko Petroleum Corp., 3.69%; Concho Resources, Inc., 3.52%.

    Risk factors. The value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. Investing in the energy sector can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments, and the cost assumed by energy companies in complying with environmental safety regulations. These and other risks are more fully described in the Fund’s prospectus.

    Waddell & Reed Investments refers to the investment management services offered by Waddell & Reed Investment Management Company, the investment manager of the Waddell & Reed Advisors Funds, distributed by Waddell & Reed, Inc.

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