Waddell & Reed

Quarterly Fund Commentary

WRA Tax-Managed Equity Fund (prospectus)
December 31, 2015

Bradley M. Klapmeyer, CFA

Market Sector Update

    • A bounce in equities during 4Q fortunately saved 2015 from being one of disappointment. Large-caps performed well during the quarter and large-cap growth slightly outperformed large-cap value. • The strength in the equity markets during 4Q resulted in strong year-todate returns for the Russell 1000 Growth Index, the Fund’s benchmark. • The volatility in quarterly, and even monthly, returns continues to indicate that the market is without direction and lacking of confidence. Though the market rebounded from sharp equity declines in 3Q, concerns around macroeconomic growth has not subsided. • U.S. economic indicators during the quarter continued to aggregate into a mixed bag and also fit the theme of an “unsure” outlook. The defining point was the Federal Reserve’s (Fed) official move to a “less accommodative policy.” The market continues to question the pace of the rate hikes and if the U.S. economy can handle any potential ripple effects from the policy change.

Portfolio Strategy*

    • The Fund slightly outperformed the benchmark for the quarter, before the effects of sales charges. From an attribution standpoint, stock selection was the key contributor to the outperformance, while sector allocation erased the majority of the stock selection gains. • Consumer discretionary was a positive contributor mainly through stock selection with the standout performer being Amazon.com , a significant overweight for the Fund. Investors continue look forward to the potential of the company’s cloud computing business. • Technology was also another positive contributor, once again through stock selection. A material underweight in Apple, Inc., a poor performer in the quarter, was a benefit. Overweight positions in two fast-growing software companies – Adobe and salesforce.com – also positively contributed to performance. Both consumer staples and health care contributed to the outperformance as well. • Cash was the main detractor from performance. This was partly due to a strong benchmark return in the period but also a notable cash weighting. We intend to keep some exposure to cash given our managers cautious view on the environment. • Industrials was also a detractor of performance due to overweight positions in Kansas City Southern and Union Pacific. Sluggish rail volume continues to drive negative estimate revisions for these names.


    • Although the quarterly commentary is beginning to sound like a broken record, we think market volatility will likely remain in place for the coming 12 months as resolution to the sources of volatility remain unresolved. • These unresolved issues include: 1) the Fed’s pace of moving interest rates higher, 2) emerging-market growth slowdown and the impact it has on the sales growth of U.S.-based companies with global presence, 3) continued ripple effects from a step-down in energy investment, and 4) potential for layoffs in the domestic market as global U.S companies hesitate on investment. • The ISM Manufacturing Index continues to be a notable watch item as the inventory indicators in that index provide flashing concern and would not indicate a near-term turn in the industrial economy. • It is still possible that the weakness in industrials, inclusive of energy-related companies, will produce a big enough ripple to impact job growth. • Regarding valuations, the market strength in 4Q was not matched by positive revisions to earnings, meaning that once again market valuations are less attractive (measured by price-toearnings ratios). • The Fund will continue to seek strong, sustainable and defensible growth stocks that we believe can be owned to maturity value.


*Top 10 holdings (%) as of 12/31/2015: Amazon.com, Inc. 4.9, Actavis plc 4.6, Shire Pharmaceuticals Group 3.5, Salesforce.com, Inc. 3.5, Apple, Inc. 3.3, Google, Inc. 3.2, Alliance Data Systems Corp. 3.0, Facebook, Inc. 3.0, Adobe Systems, Inc. 2.8 and Verisk Analytics, Inc. 2.8.

The opinions expressed in this commentary are those of the Fund’s managers and are current through Dec. 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 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.

Risk factors. 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. While the Fund seeks to minimize tax distributions to shareholders, it may realize capital gains and earn some dividends. 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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