Waddell & Reed

Quarterly Fund Commentary

WRA Small Cap Fund (prospectus)
December 31, 2013

Timothy J. Miller, CFA

Market Sector Update

  • The markets continued to rally in the fourth quarter, capping off an incredibly strong year. Small caps had a banner year; the Russell 2000 Growth Index, the Fund’s benchmark, posted one of its biggest annual gains in history. The fourth quarter maintained the upward pattern that existed throughout the year.
  • Small-cap stocks were the leaders for the year, but in the fourth quarter the mid- and large-cap stocks staged a strong year-end surge. Small-cap growth stocks also lagged small-cap value stocks for the quarter, but held on to their lead for the year.
  • The two smallest market capitalization quintiles were the best performing groups for the quarter and the year.
  • The quarter was characterized by steady improvement in economic momentum, which maintained the outperformance of the more cyclically oriented groups such as industrials.
  • The health care sector (led by biotechs) was the star and exhibited consistent outperformance throughout the year.

Portfolio Strategy*

  • The Fund slightly lagged the benchmark for the quarter because of its industrials and technology sector positioning. Performance was led by health care, financials and energy.
  • Insufficient cyclical exposure in industrials and technology was a drag for the quarter; a few of the highexpectation technology winners took a breather in the quarter.
  • Insufficient cyclical exposure in industrials and technology was a drag for the quarter; a few of the highexpectation technology winners took a breather in the quarter.
  • In financials, the Fund has been positioned with a combination of capital market plays and higher-growth domestic banks. Both categories outperformed in the quarter, led by SVB Financial Group, Affiliated Managers Group and Wisdom Tree Financial Inc. These gains were partially offset by a bear-sentiment run on Portfolio Recovery Associates, which is inconsistent with the favorable fundamental outlook for the company and attractive stock valuation.
  • Energy outperformance was driven by the Fund’s downstream investments in engineering services companies like Matrix Services Company.


  • We believe that most of the economic indicators for 2014 are promising. The focus will once again be to position the Fund to take advantage of the relative earnings winners in the growth universe.
  • It appears that valuation will be a more important factor for 2014 due to the gains that have been registered over the past year.


*Incyte Corp., DexCom Inc., HeartWare International, Cepheid, SVB Financial Group, Affiliated Managers Group, Wisdom Tree Investment Inc., Portfolio Recovery Associates, Matrix Services Company, Bank of the Ozarks, Inc., Lithia Motors, Inc., Asbury Automotive Group, Inc. and Aruba Networks, Inc. (2.1%, 1.8%, 1.5%, 2.0%, 2.8%, 2.5%, 0.9%, 2.1%, 1.7%, 1.9%, 1.6%, 1.5% and 0.4% of net investments at 12/31/2013), respectively.) Ixia is no longer a holding of the Fund.

The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 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.

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