Market Sector Update
- The positive equity market performance of the recent past continued during third quarter. Although the market advance was relatively broad-based, it is notable that growth stocks outperformed value stocks by the widest margin in several years.
- Many stocks with slow earnings growth rates, large dividend yields, and high correlations to bond prices suffered weak relative performance during the period. These “bond surrogates” were some of the best relative performers of the past few years in a uniquely low interest rate environment, as investors sought out yield alternatives. The higher concentration of these types of securities in value benchmarks was undoubtedly one contributor to growth outperformance during the quarter.
- In addition, early signs of global growth stabilization continue to emerge, benefiting growth stocks. We are encouraged that top-line driven secular growth companies have garnered particular favor in the recent environment and expect that the current slow global growth outlook will continue to provide a favorable backdrop for our investment style.
- The Fund outperformed the benchmark in the period, before the effects of sales charges. The Fund benefited from avoiding ownership of some of the benchmark’s slower-growth companies that underperformed. Most of the outperformance came from stocks the Fund owned, as many of the secular growth companies posted strong gains.
- Stock selection in consumer discretionary, health care and technology were all material positive contributors.
- Consumer discretionary benefited from stabilizing global growth, as companies such as Las Vegas Sands Inc. and Wynn Resorts Ltd. rebounded from weakness.
- Strong brands such as Under Armour Inc. and Starbucks Corp. also experienced continued top-line growth, which drove shares higher.
- In health care, the Fund’s biotech holdings continued to benefit from new product innovations, and HCA Holdings Inc., a hospital company, appreciated in anticipation of new coverage expansion and a reduction in bad debt associated with the Affordable Care Act.
- Technology outperformance was driven by Mastercard Inc., as well as Fund exposure to providers of semiconductor manufacturing equipment, which are benefiting from increased demand and technological complexity of semiconductor manufacturing. The Fund also benefited from a significant underweight in consumer staples, which underperformed during the period.
- Negative contributors included stock selection in industrials.
- As we head toward the end of 2013, we believe the economic environment in the U.S. continues on its recent trajectory of very low, but sustainable 2% real GDP (gross domestic product) growth.
- We think sales of big ticket, durable items such as autos and homes will continue to do well. We also anticipate that inflation will remain low, and the job market will continues its very slow improvement.
- Corporate profits may grow slowly into 2014, while corporate hiring and capital spending remain restrained. Many of the companies we follow and invest in are still in great financial shape with low levels of debt, high profit margins, and large cash balances that are being used to increase dividends and repurchase stock.
- In general, we think the economic environment is constructive for equities. We are consistently reminded, however, that gridlock in Washington, economic developments in Europe or China or a sudden shift in U.S. monetary or tax policy can jolt the markets at any time.
- Despite the potential for external shocks, we remain disciplined in our approach and continue to emphasize growth companies that operate in large markets, can maintain a unique competitive edge over their competition, and can generate high margins and returns on equity and assets.
*Las Vegas Sands Inc., Wynn Resorts Ltd., Under Armour Inc., Starbucks Corp., HCA Holdings Inc. and Mastercard Inc. (4.1%, 3.1%, 0.7%, 1.8%, 1.5% and 4.4% of net investments at 09/30/2013, respectively.)
The opinions expressed in this commentary are those of the Fund’s manager and are current through Sept. 30, 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.
Risk Factors.As with any mutual fund, the value of the Fund’s shares will change, and you could lose money on your investment. Investing in companies involved primarily in a single asset class (large cap) may be more risky and volatile than an investment with great diversif cation. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal i 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.