Waddell & Reed

Quarterly Fund Commentary

WRA Value Fund (prospectus)
March 31, 2014

Matthew T. Norris, CFA

Market Sector Update

  • Equity markets started the year on a solid note despite adverse weather in North America, which disrupted economic activity and dampened enthusiasm for near-term economic fundamentals.
  • The Russell 1000 Value advanced in the quarter, driven by particularly strong returns in utilities and health care. Sectors that are traditionally considered more cyclical such as consumer discretionary, energy and industrials were relative underperformers.
  • The domestic economy continues to exhibit stable growth albeit at low levels with persistently encouraging trends in employment statistics and the housing industry.


Portfolio Strategy*

  • The Fund underperformed the benchmark in the first quarter. Financials and energy were large detractors to the strategy’s performance as positions in Citigroup, Inc., Atlas Energy, L.P. and Atlas Pipeline Partners exhibited particularly poor returns. Xerox Corp. was also a notable detractor.
  • Offsetting this weakness was strong relative performance in health care and materials as positions in Teva Pharmaceutical Industries Ltd., Aetna Inc., Dow Chemical Co. (The) and LyondellBasell Industries performed well. Western Digital Corp. continued its positive contribution 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 financials based on our proprietary intrinsic value work though we modestly reduced weighting in each during the quarter.
  • We also reduced the weighting in health care again this quarter, which is now a modest underweight relative to the benchmark, and increased exposure to consumer staples by initiating a position in Philip Morris International, Inc.
  • 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; strengthened balance sheets 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.
  • We also 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 highquality, growing companies whose stocks are trading materially below what we consider fair value.


*Citigroup, Inc., Atlas Energy, L.P., Atlas Pipeline Partners, L.P., Xerox Corp., Teva Pharmaceutical Industries Ltd., Aetna Inc., Dow Chemical Co.(The), LyondellBasell Industries, Western Digital Corp. and Philip Morris International, Inc. (4.4%, 3.0%, 3.0%, 4.0%, 2.5%, 2.8%, 3.2%, 3.8%, 5.0% and 3.1% of net investments as of 03-31-2014).

The opinions expressed in this commentary are those of the Fund's manager and are current through March 31, 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.

Russell 1000 Value Index is an unmanaged index comprised of securities that represent the large-cap sector of the stock market. It is not possible to invest directly in an index.

Risk Factors. As with any mutual fund, 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. 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. 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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