Market Sector Update
- Let the band play on and on and on! Don’t stop believing! Too much is never a bad thing! Drink the Kool-Aid! There are many sayings that could explain the excitement surrounding the march to alltime highs in both major market indices during the quarter. This bull market, which began in March of 2009, is starting to make even the staunchest “bears” capitulate and cross over as they are running out of reasons to be negative. If they haven’t already, they are crying “uncle” in unison.
- Resiliency is the word that comes to mind as we wrap up the quarter as nothing was able to slow the momentum that has been building throughout 2013. The fundamentals underpinning the stock market are far from perfect and growth by many historical standards is still sub-optimal, but that has not and does not seem to matter for investors. If anything, the appetite for equities is improving as we head into 2014.
- Overall, small cap outperformed large cap and growth outperformed value throughout most of the year and this trend continued in the fourth quarter.
- The Fund had a strong absolute return during the fourth quarter. The return would have been even stronger had it not been for a few hedges we put on in the period to protect against a pullback in the equity markets. Clearly, the market really never adjusted and these two hedges were a drag on our performance.
- Our largest sector weights were consumer discretionary, health care, industrials, technology and consumer staples. The biggest change in our sector weighting during the quarter was our increased exposure to health care and corresponding decrease to consumer staples. Two of our larger positions, Canadian Pacific and Harmin International were strong performers for the Fund.
- Our largest holding, Apple had a solid fourth quarter after languishing for the first three quarters of 2013. We are optimistic that, having just launched globally a much improved iPhone 5S and 5C, the stock will continue to work. The company’s valuation relative to its fundamentals, market positioning, balance sheet strength, free cash flow generation and its ability to “connect” with the consumers warrant sticking with the name, in my opinion.
- So, where do we go from here? That’s the million dollar question I think many of us are struggling with. I think 2014 sets up well at this point for equities to have another positive year. There are many investors that feel they have missed the move in equities 2012 and 2013 and are looking for any kind of a pullback to put some money to work. This will naturally provide some level of support throughout the year.
- Furthermore, although in the very early stages it would seem, we could be on the cusp of seeing a fairly large shift away from fixed income into equities. If this trend truly manifests itself and gains momentum, it would provide an even a bigger lift to the equity markets.
- Much of the move higher this past quarter, and throughout 2013, was from multiple expansion. Some of the upside came from positive earnings revisions, but most of it came from investors' willingness to “pay up” for growth and equities. With rates being at historically low levels and the Federal Reserve (Fed) communicating that the rate environment would stay benign for the foreseeable future, multiple expansion was warranted.
- As we head into 2014, the rate environment is changing, the Fed’s tapering program is slowly coming to a close and from this point forward, more of the upside will be more balanced between true earnings growth with some modest expansion of the multiples. Stay tuned!
*Canadian Pacific Railway Ltd. and Harmin International Industries Inc. (2.8% and 2.0% of net investments at 12/31/2013, respectively).
The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 31, 2013. 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. As with any mutual fund, the value of the Fund’s shares will change, and it is possible to lose money on your investment.
Risk Factors. 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.
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.