Waddell & Reed

Quarterly Fund Commentary

WRA Tax-Managed Equity Fund (prospectus)
June 30, 2015

Bradley M. Klapmeyer, CFA

Market Sector Update

  • 2Q 2015 equity performance saw continued strength out of the small-cap stocks, neutral performance from large cap and underperformance from midcap growth indices. Within large caps, the growth and value indices performance similarly.
  • Despite the equity indices being up yearto- date, the markets appear a little lost. This confusion stems from an unsteady economic start to the year that has remained somewhat sluggish throughout 2Q 2015.
  • Renewed concerns around stability in the Eurozone, particularly within Greece, have reminded investors of the historical systemic troubles of the past decade. Furthermore, the Federal Reserve (Fed) still hasn’t move interest rates higher, but the market is starting to appreciate a move higher is inevitable..

Portfolio Strategy*

  • The Fund outperformed its Russell 1000 Growth Index benchmark for the quarter, before the effects of sales charges.
  • From an attribution standpoint, both stock selection and sector allocation were contributors to performance, with stock selection being the more significant contributor.
  • Stock selection in health care, technology, consumer discretionary and industrials added to relative performance. An overweight position in health care also contributed materially.
  • No sector was a material detractor from performance due to either security selection or weighting. Health care strength was driven by strength in hospitals (HCA Holdings and Universal Health), but also continued strength in specific biotech names, including ACADIA Pharmaceuticals.
  • Consumer discretionary benefited from continued strength from Amazon.com as investors continue to become more comfortable with companies long-term earnings profile. Time Warner Cable was also a material contributor as the company agreed to be acquired by Charter Communications.
  • Industrials strength is mainly attributed to a strong move higher in Pall Corp. as it agreed to be acquired by Danaher.


  • Coming off a 1Q 2015 hit by a number of exogenous variables, investors were hoping for something stronger in the 2Q 2015 but that has yet to materialize in a convincing way. Moving past these “transient” issues – port disruptions, weather and an energy slowdown – has not resulted in a strong bounce, implying other gating factors to growth.
  • The market hesitation will likely remain as numerous other items continue to cast a shadow, namely, 1) timing of the Fed’s move to a “less accommodative” monetary policy, 2) the strength of the U.S. dollar and how that flows through to earnings of domestic equities and global competitive positioning, 3) the ripple effects from a step-down in energy investment, and 4) continued economic volatility in global economies.
  • As the market works through the transient issues, other macro indications continue to support a slow, sustained level of underlying growth in the U.S.
  • Despite strong ISM manufacturing index data, other indicators such as domestic truck and rail shipping volumes remain depressed.
  • Market valuations are less attractive as negative earnings revisions to earnings have taken place due to the stronger U.S. dollar and also the cutbacks in the energy sector. 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 06/30/2015: Apple, Inc. 4.2, Actavis plc 3.9, Amazon.com, Inc. 3.8, Limited Brands Inc. 3.2, Visa, Inc. 2.8, Salesforce.com, Inc. 2.8, Shire Pharmaceuticals Group 2.8, MasterCard, Inc. 2.8, Adobe Systems, Inc. 2.8 and Verisk Analytics, Inc. 2.7.

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 f nancial advisor or visit us online at www.waddell.com. Please read the i prospectus or summary prospectus carefully before investing.

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