Waddell & Reed

Quarterly Fund Commentary

WRA Value Fund (prospectus)
June 30, 2014

Matthew T. Norris, CFA

Market Sector Update

  • Equity markets posted modest increases in the second quarter as weather in North America normalized and near-term economic fundamentals proved resilient.
  • The index advanced in the quarter, driven by particularly strong returns in technology, energy and utilities. Sectors that weighed on index performance were consumer staples, financials, telecommunications and health care.
  • The domestic economy continues to exhibit stable growth, albeit at low levels, with persistently encouraging trends in employment statistics and the housing industry.
  • During the quarter, backward-looking economic statistics came in surprisingly weak in large part due to adverse weather conditions. Geopolitical events in Eurasia and the Middle East also sparked a rally in energy prices which added to anxiety levels over the economy’s near-term growth outlook. With these overhangs and others as a backdrop, equity markets advanced modestly.

Portfolio Strategy*

  • The Fund underperformed the benchmark in the second quarter ended June 30, 2014. Energy was the primary detractor to performance as positions in Marathon Petroleum and HollyFrontier exhibited particularly poor returns. Aetna and JPMorgan Chase were also notable detractors.
  • Offsetting this weakness was strong relative performance in health care and materials as positions in Humana and LyondellBasell Industries performed well. Fund positions in SanDisk Corp. and Regency Energy Partners were positive contributors to portfolio return.
  • We continue to focus on identifying companies that we believe are trading substantially below their intrinsic value. We see compelling value in energy and financial sectors and increased Fund weighting in each during the quarter. We also reduced exposure to consumer discretionary during the quarter.
  • We continue to search for companies where we believe the cash flows of the business are underappreciated by the market with visible catalysts to recognize that disparity over the next 12 months.


  • Looking ahead, we believe global growth will improve modestly in 2014 as clarity around fiscal spending and monetary policy improve; balance sheets strengthen and higher consumer and corporate confidence readings begin to translate into higher consumer and corporate spending; and the lagged effect of historical stimulus continues to provide a persistent tailwind to growth.
  • We continue to be encouraged by modest inflation rates and subdued inflation expectations which provide an environment conducive for central banks to provide support to their local economies if needed.
  • In addition, we see encouraging signs from the U.S. housing market as well as growing domestic energy production as significant positives for the economy.
  • While we continue to monitor macroeconomic forces and trends, we maintain an emphasis on finding high quality, growing companies whose stock is trading materially below what we consider fair value. This approach has served investors well over time, and our confidence in it has not waned.

*Marathon Petroleum Corp., HollyFrontier Corp., JPMorgan Chase & Co., Humana, Inc., LyondellBasell Industries N.V., SanDisk Corp. and Regency Energy Partners L.P. (3.3%, 1.9%, 4.2%, 3.2%, 3.1%, 4.1% and 2.7% of net investments as of 06/30/2014, respectively). Aetna is no longer a holding.

The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 2014. 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. 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 financial advisor or visit us online at www.waddell.com. Please read the prospectus or summary prospectus carefully before investing.

Financial Advisor Opportunities
Corporate Careers