Waddell & Reed

Quarterly Fund Commentary

WRA Value Fund (prospectus)
December 31, 2015

Matthew T. Norris, CFA

Market Sector Update

  • Although it may not have felt like it, 4Q2015 saw the market rise nicely. The quarter also showed high volatility, as a number of factors concerned equity investors, including the future of U.S. interest rates, falling oil and commodity prices, the growth rate of Chinese gross domestic product data and inconsistent U.S. economic statistics.
  • Concerns over global economic growth and a strengthening U.S. dollar led the energy sector to be flat for the quarter. However, the worst performing sector was consumer cyclicals, primarily in the retail space. Investors continued to worry that rising rates and potential inflation will crimp consumer spending. On the positive side, capital equipment and technology were the best performers, bouncing back after underperforming most of the year.

Portfolio Strategy *

  • The Fund underperformed its benchmark, the Russell 1000 Value Index, for the period ended Dec. 31, 2015. The underperformance was led by a few specific names, chiefly Macy’s as same store sales decelerated. Western Digital was the largest negative contributor, as it acquired Sandisk. Since the portfolio owned both names, the net contribution was a wash. On the positive side, Microsoft continued to add value.
  • Growth investing ended the year substantially outperforming value. As economic cycles age, growth investing often outperforms value for a period as investors search for growth amongst an aging expansion.
  • Valuation spreads have now widened out to the top 20% of history. History shows this is unsustainable over the long run, and value will catch up in performance over time. We believe value investing will begin to outperform again as interest rates rise or as the U.S. economy slows.
  • We continue to focus on investing by researching one company at a time, seeking names that we believe are trading substantially below our estimate of their true value.
  • An example would be the recent purchase Duke Energy. We have found little value in utilities over the past few years, so a new name in this sector is notable. A well-run, regulated utility, Duke Energy is a straight-forward company with slow, steady growth and a large dividend yield.


  • 2016 appears to be interesting. The Federal Reserve has now entered a rate-raising cycle of uncertain timing and duration. Commodity prices are at multi-year lows and the market is much nearer all-time highs. Global economic patterns also appear uncertain, specifically China.
  • While the economic forces listed above are clearly important factors, our first approach is always at the company level. We seek to find quality, growing companies whose stocks are trading notably below what we consider fair value. Often times this is due to short-term negative factors, and we become larger owners of a company, if we feel those negatives are about to dissipate.
  • Areas of emphasis at this time include insurance, technology and media. We are currently finding little to no opportunities in real estate, telecommunications and industrials. Energy is an area where the Fund has been notably underweight, but we are now starting to sense potential opportunities within that sector.


*Top 10 holdings (%) as of 12/31/2015: American International Group Inc. 5.2, Citigroup, Inc. 4.9, Microsoft Corp. 4.8, JPMorgan Chase & Co. 4.7, Capital One Financial Corp. 4.3, Exelon Corp. 3.9, Allstate Corp. 3.3, Marathon Petroleum Corp. 3.3, MetLife, Inc. 3.2 and State Street Corp. 3.2.

The opinions expressed in this commentary are those of the Fund’s manager 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 Value Index measures the performance of the large-cap value segment of the U.S. equity universe.

Risk factors. The value of the Fund’s shares will change, and you could lose money on your investment. The value of a security believed by the Fund’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. 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 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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