Market Sector Update
- Small caps started off the year in good fashion, with the Russell 2000 Growth Index advancing 12% for the quarter.
- Overall equity market conditions were favorable, reflecting the slow but steady progress in U.S. economic activity and continued Federal Reserve monetary stimulus.
- The Russell 2000 slightly outperformed the value index in spite of another disappointing return from technology. Leading the index were health care, financial and industrial stocks.
- Laggards included the technology, consumer discretionary and consumer staples sectors.
- Overall optimism prevails because a strong first quarter has historically portended a strong year in small caps.
Portfolio Strategy*
- The Fund outperformed the Russell 2000 Growth Index benchmark (before the effects of sales charges) for the quarter in spite of an overweight in technology.
- The financials, health care, consumer discretionary and energy sectors contributed to the gains in the quarter. The Fund’s overweight position in financials also contributed, along with strong stock performance from two banks (SVB Financial Group and Bank of the Ozarks, Inc.) and one asset manager (Affiliated Managers Group, Inc.).
- In consumer discretionary, the Fund’s positions in auto dealer retailers, particularly Lithia Motors, Inc., boosted that sector’s performance, along with Cabela’s Inc. and Quicksilver, Inc.
- Energy was led by one of the Fund’s high-growth oil and gas exploration and production companies, Bonanza Creek Energy Inc., and by a “downstream” energy play from Matrix Service Company.
- Health care stocks that were strongest included Community Health Systems, Incyte Corp. and Ironwood Pharmaceuticals, Inc.
Outlook
- The Fund’s focus remains with the domestic-oriented industries and companies that are outperforming the slow-growth economy. These include the software and services groups within technology; logistics, distributors and services within industrials; banks and asset managers in financial services; housing and auto-related companies in the consumer sector; and midstream and downstream companies in the energy sector.
*SVB Financial Group, Bank of the Ozarks, Inc., Affiliated Managers Group, Inc., Lithia Motors, Inc., Cabela’s Inc., Quicksilver, Inc., Bonanza Creek Energy Inc., Matrix Service Company, Community Health Systems, Incyte Corp. and Ironwood Pharmaceuticals, Inc. (3.5%, 1.9%, 3.2%, 1.8%, 1.1%, 0.5%, 1.1%, 1.0%, 2.1%, 2.0% and 1.0% of net investments at 03/31/2013), respectively.)
The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 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.
Russell 2000 Growth Index is an unmanaged index comprised of securities that represent the small-cap sector of the stock market. 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 prospectus or summary prospectus carefully before investing.