Market Sector Update
- Continued turmoil in the Middle East, largely because of the unrest in Syria and the change in leadership in Iran, added to uncertainty in global markets during the quarter. But steady growth in the U.S. economy, continued growth in China and indications of new growth in Japan and portions of Europe provided some support.
- Worldwide oil and gas production continued to increase. Further expansion of shale output raised the potential that the U.S. soon will overtake Russia among world global energy producers. The increased energy production continues to help a wide range of supporting industries.
- The price differential between West Texas Intermediate (WTI) and Brent crude – the key crude oil benchmarks – again was volatile this quarter. Among other factors, the Brent price felt the effects of the ongoing turmoil in Libya. WTI generally represents the price to U.S. oil producers and Brent generally represents the international price.
- The Fund turned in a sold quarter with a strong positive return (before the effects of sales charges), well above its benchmark index.
- We continue to pursue companies in the exploration & production, equipment & services and transportation industries in particular. Holdings in these segments were key positive contributors to the Fund's performance for the quarter.
- Securities selection across the energy sector also helped the Fund's performance, compared with the benchmark. Continental Resources, Inc. (4.5% of net assets as of 09/30/2013) was the top contributor, followed by Schlumberger Ltd. (4.3% of net assets as of 09/30/2013) and EOG Resources, Inc. (3.4% of net assets as of 09/30/2013). Forum Energy Technologies (1.9% of net assets as of 09/30/2013), a company in the industrials sector, was the top detractor.
- We continue to see offshore/deepwater production as a major factor in future world energy output. We still think this may provide ongoing opportunities in exploration, drilling, production, services and other companies.
- We think there will be continued growth in U.S. oil and gas production, especially through the expansion in shale fields. In our view, this trend can provide further opportunities for investment, especially in equipment & services providers.
- We believe the supply/demand factors for natural gas and current inventories indicate prices are likely to continue in the current range for the near term.
- We think the economies of emerging markets generally are slowing and we do not expect a meaningful pickup in global economic growth soon. This may lead governments in those countries to introduce further stimulus to boost growth.
The opinions expressed in this commentary are those of the Fund's manager and are current through Sept. 30, 2013. 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 no guarantee of future results.
Risk Factors. As with any mutual fund, 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 specif ed sector may be more risky and volatile i 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.
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.