Waddell & Reed

Quarterly Fund Commentary

WRA Energy Fund (prospectus)
December 31, 2014

David P. Ginther, CPA

Market Sector Update

  • U.S. equities closed the year with gains across the broad market indexes, again reaching record-high levels late in the quarter. Global equities in general also finished the quarter slightly higher.
  • Crude oil prices plunged worldwide during the quarter, reaching levels not seen since 2009, on forecasts of reduced global demand along with OPEC’s unwillingness to cut production. The decline pressured stocks and raised concerns that the price tumble, if sustained, could stall economic growth in some regions.
  • U.S. economic indicators continued to show steady growth and the U.S. remained the leader among developed countries. Economic growth forecasts for Europe were revised lower in the quarter.

Portfolio Strategy

  • The Fund posted a negative return for the quarter and trailed the negative return of its benchmark index.
  • Underperformance for the quarter was due to security selection within the energy sector in a time of rapidly falling oil prices. The Fund’s underperformance primarily related to allocations in upstream energy companies versus the benchmark index. The index holds what we think is an outsized allocation to large integrated oil companies.
  • Historically, integrated companies often have underperformed when the sector performed well as a whole but have tended to do better when the sector has declined, as happened this quarter.
  • Mild contributors to performance were the cash allocation in a rapidly falling energy market, the industrials sector and a small allocation to the financials sector.
  • The five greatest relative contributors to performance in the quarter were MPLX LP, Tesoro, Phillips 66 Partners, Shell Midstream Partners and CME Group. The five greatest relative detractors were Exxon Mobil, Weatherford, Bonanza Creek Energy, Chevron and Basic Energy Services.


  • We think the U.S. will continue to have steady economic growth and low inflation in 2015, and we expect it to lead the developed countries. We believe economic growth will continue globally, although also at a mild rate.
  • We think global energy demand will continue to grow, although at a slower pace than previously forecast. In our view, lower oil prices will prompt cuts in capital expenditures that in turn will reduce the growth rate of global production. We also think the plunge in crude oil prices is unlikely to be sustainable in the long term.
  • We believe the U.S. will continue to increase oil and gas production but at a slower rate because of the price decline. We believe exploration & production companies, oil service companies and infrastructure providers will remain the main beneficiaries of this growth.
  • We remain concerned about heightened geopolitical risks related to the Mideast and Russia, and we believe these will continue to overhang markets and generate uncertainty.


The opinions expressed in this commentary are those of the Fund's manager and are current through Dec. 31, 2014. 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.

Top 10 Equity Holdings as a percent of net assets as of 12/31/2014: Schlumberger Ltd., 4.1%; Halliburton Co., 3.4%; Baker Hughes, Inc., 3.0%; EOG Resources, Inc., 3.0%; Cimarex Energy Co., 2.9%; Marathon Petroleum Corp., 2.4%; Anadarko Petroleum Corp., 2.3%; Phillips 66, 2.3%; Phillips 66 Partners L.P., 2.2%; Pioneer Natural Resources Co., 2.3%.

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 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.

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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