Waddell & Reed

Quarterly Fund Commentary

WRA Value Fund (prospectus)
March 31, 2015

Matthew T. Norris, CFA

Market Sector Update

  • Equity markets had a slight positive return for the quarter, as economic conditions in the U.S. stayed stable. However, the S&P 500 Index’s return masked a lot of underlying volatility.
  • The large-cap value (Russell 1000 Value Index) segment trailed the S&P 500 Index for the quarter. On the contrary, the Russell Large Cap Growth Index was up over the period.
  • This type of return stream is often seen toward the end of an economic cycle, as valuation differentials are small and investors chase a small grouping of stocks they believe have sustainable growth characteristics. Investors usually always end up disappointed, as in 2000- 2003, and in 2008. However, while the time frame of this trend is unknown, we believe growth will continue to outperform value in the near term. Sign posts to watch for a change from growth to value include rising interest rates or slowing gross domestic product growth.

Portfolio Strategy

  • The Fund trailed its benchmark (Russell 1000 Value Index) during the quarter ended March 31, 2015, primarily due to holdings within the technology sector. A majority of underperformance came from SanDisk Corp., a technology holding, that fell sharply due to what we believe are management blunders around producing the correct product for the holiday season. However, the demand for flash memory continues to grow and SanDisk is a leader in this space. We continue to believe this company has the potential to be a longterm winner.
  • Sector and holding contributors for the period included energy (refinery Marathon Petroleum) and health care (Humana and Aetna).
  • The Fund has reduced its total number of names as we have fewer solid ideas in the current environment. The market has more than tripled from the lows set in March 2009, and high-quality value ideas are scarce at this time.
  • Cash holdings have been slightly higher than normal, but we continue to search diligently for areas offering returns.
  • The portfolio is overweight insurance, media and technology. All of these areas share certain characteristics that we like. All include good companies with repeatable business models that generate high rates of free-cash-flow, and have low stock prices relative to our estimation of each company’s true intrinsic value.


  • After seven years and some stops and starts, it appears that the U.S. economy has recovered from the 2008 recession and seems to have settled into a low, single-digit growth area. The Federal Reserve (Fed) was instrumental in providing liquidity to the markets and economy, which helped facilitate the recovery. However, this can have other, undesired side effects. The next challenge will be for the Fed to tighten money policy back up, and that is something we will watch carefully. We believe the Fed’s guidance suggests interest rate increases will begin later this calendar year.
  • While the economic forces listed above are clearly important factors, the Fund’s first approach is at the company level. We seek to find quality, growing companies whose stocks are trading below what we consider their intrinsic value. Often, this is due to short-term negative factors. If this is the case, the Fund may choose to become a larger owner of a company if the management teams feels any negative factors are about to dissipate
  • We continue to search for and make investments one company at a time, to benefit shareholders over the long term.


Top 10 holdings (%) as of 03/31/2015: American International Group Inc. 5.5, Time Warner Cable, Inc. 5.4, Citigroup, Inc. 4.8, Capital One Financial Corp. 4.7, Teva Pharmaceutical Industries Ltd. 4.4, Western Digital Corp. 4.2, MetLife Inc. 3.5, Philip Morris International, Inc. 3.5, Magna International, Inc. 3.1 and Reinsurance Group of America, Inc. 3.1.

The opinions expressed in this commentary are those of the Fund’s manager and are current through March 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 S&P 500 Index is composed of 500 selected common stocks chosen for market size, liquidity, and industry grouping, among other factors. The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. 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. . 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 f nancial advisor or visit us online at www.waddell.com. Please read the prospectus or summary i prospectus carefully before investing.

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