Market Sector Update
- First quarter 2015 continued the upward
trend for small-cap growth stocks that
was triggered by the unprecedented
decline in domestic interest rates and an
improving U.S. economy.
- Small caps outperformed both mid caps
and large caps, and small-cap growth
was much stronger than small-cap
- The risk-on, low-interest rate
environment sparked another surge in
the biotech stocks, as they more than
doubled the performance of the rest of
- It is somewhat unusual for small caps to
outperform this late in the cycle, but the
macro factors of low interest rates and a
sharply rising dollar were the drivers. The
U.S. dollar issue has created an
earnings headwind for mid- and large cap
companies and is minimized for
mostly domestic small caps.
- On a sector level, the best performing
groups in the benchmark this quarter
were utilities, health care and energy.
*Top 10 holdings (%) as of 03/31/2015: Vail Resorts Inc. 3.4,
Ultimate Software Group Inc. 3.4, DexCom, Inc. 3.3, Cepheid
2.6, SVB Financial Group 2.5, Jack Henry & Associates, Inc.
2.5, Watsco Inc. 2.4, Bank of the Ozarks Inc. 2.2, Sonic Corp.
2.1 and HNI Corp. 2.1.
- The Fund modestly lagged the
benchmark (Russell 2000 Growth Index)
for the quarter as the drag from
underexposure to biotechs was not fully
offset by the other sectors.
- Outperformance occurred in consumer
discretionary, consumer staples and
technology; with modest
underperformance from energy,
financials and industrials.
- Energy had a nice recovery bounce in
the quarter after the sharp correction in
the second half of 2014. The Fund’s
exploration and production companies
participated, but were slightly offset by
losses at Matrix Service Corp. In
industrials, another energy-related
construction company, Primoris
Services, also fell sharply. In both cases
earnings have been revised downward
but we believe the stocks have been
- Consumer discretionary continues to
perform well given the favorable trends
of low interest rates, rising employment,
rising wages and low gas prices. Among
the contributors were Vail Resorts,
Burlington Stores, and Sonic Corp.
- Financials was boosted by a big gain
from WisdomTree Investments, but the
banks continue to languish facing the
overhang of low rates. Outperformance
in the technology was driven by
Ultimate Software, Manhattan
Associates and Jack Henry.
- The strategy for 2015 will lean a bit
more conservatively and focus on the
strongest core positions in the Fund.
Small caps tend to be primarily
domestic businesses, and as such
should benefit from the strength of the
U.S. economy and be less impacted by
the rising dollar.
- The factors favoring the consumer
sector remain in place and could be
favorably boosted by a rising wage
trend as well.
- The software sector will also remain
an area of focus, with an emphasis on
the growth companies that are
showing progress in the profitability
and cash generating characteristics of
their model. Health care device
companies and service companies
also remain an area of focus.
- We believe the most dominant variable
over 2015 will be the direction of
interest rates. The market’s perception
that the bottom has been reached and
a rising trend is forthcoming will shake
up the highest valued, riskiest portion
of the market and favor the better
quality core positions in the portfolio.
The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 2015. 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.
The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.
Risk factors. As with any fund, the value of the Fund’s shares will change, and you could lose money on your investment. Investing in small-cap stocks may carry more risk than investing in stocks of
larger, more well-established companies. 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.
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.
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 i prospectus or summary
prospectus carefully before investing.