Waddell & Reed

Quarterly Fund Commentary

WRA Accumulative Fund (prospectus)
December 31, 2014

Barry M. Ogden, CFA , CPA

Market Sector Update

  • Well, the S&P 500 Index found yet another way to shake off all the doubters and naysayers and set an all-time, intraday record high on Dec. 29, 2014 of 2093.55. It closed the day at 2058.90, still up 10.06% for the year. All in all, that’s quite impressive considering the market was coming off a 32.58% total return in 2013, which was on top of a 16.15% total return in 2012.
  • Now, having said that, the fourth quarter had several more head fakes and sell offs than the prior three quarters. Early in the quarter, it appeared to many that the bull market, which began early in 2009 and was now well into its 5th year, was growing tired and sentiment seemed to shift to a glass half empty mentality.
  • The Federal Reserve (Fed) once again stepped in and reminded everybody that they were not going to stop the party too soon and despite the need to end the “never-ending” quantities easing (QE), it would be very slow to raise rates. The broader markets breathed a sigh of relief and all was good yet again as we marched to new highs late in the quarter.

Portfolio Strategy*

  • The Fund performed well in the quarter, slightly outpacing its benchmark before the effects of sales charges for the period ended Dec. 31, 2014.
  • Top holdings performed well as investors continued to reward those stocks that delivered solid results. The Fund’s largest holding, Apple Inc., started the quarter on a high note as the new iPhone 6 and 6 Plus launches surprised most investors. Demand for both was better than even the most optimistic prognosticators as consumers waited in long lines to get their hands on the phones, especially the iPhone 6 Plus, which was in short supply for the early part of the quarter.
  • Another strong performer, L Brands, which owns such brands as Victoria Secret and Bath and Body Works, really gained traction with investors during the quarter. After being steady for the first part of the year, the stock took off as comp trends improved and the inventory overhang that plagued the company for a few quarters waned. We expect to remain long-term investors of both of these names for the foreseeable future.
  • The Fund’s two largest areas of emphasis remained consumer discretionary and health care. Health care has been one of our top performing areas, thanks to ongoing consolidation and solid volume and pricing trends in the space. We are positively biased on the space as we head into 2015.


  • In our opinion, the million dollar question that has to be answered in 2015 is will the Fed raise rates too much too soon and how will the markets react when the Fed starts raising rates.
  • At this point, we think the Fed has made it crystal clear that they have full intentions of raising rates sometime in 2015. With QE over, the Fed is now trying to move to a more normalized rate environment over time that is consistent with a reasonably good economic backdrop. It probably doesn’t make sense for it to keep the Federal Funds rate at 0%, with the U.S. economy growing upwards of 3% and inflation is well under control. So, assuming the economy doesn’t sputter in the first part of 2015, we think the Fed will embark on a rate tightening cycle at a gradual pace.
  • We would also be remiss if we failed to highlight the positive impact that the lower oil prices and lower gas prices are going to have on the average consumer in 2015. This is a big event that will have far reaching positive implications for consumer spending, which still makes up nearly two-thirds of the U.S. gross domestic product. Consumers appear to be feeling much better today than they did a year ago and assuming oil and gas prices remain around these levels, we would expect to see a nice uplift to consumer spending beginning sometime in the first quarter of 2015.

*Top 10 holdings as of 12/31/2014: Apple, Inc. 5.4%, Kansas City Southern 3.1%, Allergan, Inc. 2.8%, L Brands, Inc. 2.5%, Canadian Pacific Railway Ltd. 2.4%, Harley-Davidson, Inc. 2.3%, Microsoft Corp. 2.2%, Applied Materials, Inc. 2.2%, Teva Pharmaceutical Industries Ltd. 2.1% and Vail Resorts, Inc. 2.0%.

The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 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. As with any mutual fund, the value of the Fund’s shares will change, and it is possible to lose money on your investment.

S&P 500 is unmanaged index of common stocks. It is not possible to invest directly in an index.

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.

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