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    Quarterly Fund Commentary

    WRA Accumulative Fund (prospectus)
    March 31, 2016

    Barry M. Ogden, CFA , CPA

    Market Sector Update

    • Just when we thought maybe things had quieted down a bit in the stock market, the roller coaster ride continued during 1Q2016. It was really a tale of two halves. From pretty much the first trading day of 2016, the broader markets, as measured by the S&P500 Index (Fund’s benchmark), began its slide slower. This one directional move lower continued into early February, where the markets retested some lows set back in January. After a successful retest, however, we’ve been marching steadily higher and higher through the end of 1Q.
    • Once again, the stock market grinded it’s way high enough to put up another positive, albeit small total return in the first quarter. This now markets 23 of the past 28 quarters where the index has generated positive returns, a fairly impressive streak during this bull market that began back in early 2009.
    • The early read on the economy for 2016 has been a little weaker than expected and is now looking like we may have a sub 1% real gross domestic product print for 1Q. There is some noise in the numbers and some inventory destocking that is depressing this number a bit, but regardless, growth has decelerated and this is something the Federal Reserve (Fed) is paying close attention to.
    • On the positive side of things, the job environment continues to remain fairly robust as we’ve added approximately 200,000 jobs during 1Q, a very modest slowdown from 4Q2015.

    Portfolio Strategy*

    • The Fund modestly underperformed its benchmark during the quarter ended March 31, 2016 and can be explained by three things. First, our overweight in health care, which up to recently had been a strong absolute and relative performer for the Fund. We have seen sentiment change for the worse during recent months and are watching closely to see if this is temporary or more of a permanent headwind that could persist for the remainder of the year.
    • The second sector that hurt performance was our stock selection within financials. The big banks underperformed as the expectations for additional rate hikes by the Fed were pushed out until the middle of the year or even later. Stocks were discounting some chance of an early year rate hike following the Fed’s rate hike back in December.
    • Lastly, our underweight in energy turned against us in the quarter. Once again, our underweight for all of 2015, which helped our relative and absolute performance during that time frame, abruptly changed during 1Q. We have since added some names and increased our weighting modestly as it’s very possible that the lows for energy have been reached.
    • A new name for the Fund’s top 10 holdings group is Facebook, a social, mobile powerhouse that we are expecting will further capitalize on its market leading position in both mobile and social interactions with customers. Facebook is just starting to monetize a variety of businesses and we expect it to be a strong performer for the Fund in 2016.


    • As we see it, we think the current environment for equities is likely to remain choppy and volatile. We suspect that unless the U.S. economy strengthens materially, we might be in a holding pattern so to speak. By this we mean that we’re going to have some periods where things look a little better, consumer confidence improves and the equity markets may go up a bit, but at this point, we do not expect things to run away from us from here.
    • We suspect that the Fed will continue to be “data dependent” and will be likely to err on the side of conservatism as long as inflation remains in check, which we think it will. There was some differing opinions and messages coming from the Fed’s board members on the timing of future rate hikes, but Chairwomen Janet Yellen recently squashed those and has made it clear that she is leaning more on the side of fewer rate hikes for 2016.
    • We think the consumer is in pretty good shape financially, helped by the ongoing lower energy prices, a solid housing market and a stock market that is back to near record levels. In addition, the job environment has been strong enough for long enough that we’re finally seeing some rise in wages.
    • Overall, we suspect that we may look back at year’s end and realize that a lot has happened but we really haven’t moved very far. We’re likely to see some big swings in investor sentiment and stocks and we will look to take advantage of this, but we think the right strategy for now is to err on the side of being a bit more defensive until fundamentals improve or equity prices adjust lower.


    *Top 10 holdings (%) as of 03/31/2016: Apple, Inc. 3.5, Microsoft Corp. 2.9, Facebook, Inc. 2.2, Allergan 2.0, Exxon Mobil Corp. 1.8, Walt Disney Co. 1.8, Shire Pharmaceuticals Group 1.7, General Electric Co. 1.7, McDonald’s Corp. 1.6 and Home Depot, Inc. 1.6.

    The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 2016. The manager’s view is subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is not a 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. It is not possible to invest directly in an index..

    Risk factors. 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. These and other risks are more fully described in the Fund’s prospectus.

    Waddell & Reed Investments refers to the investment management services offered by Waddell & Reed Investment Management Company, the investment manager of the Waddell & Reed Advisors Funds, distributed by Waddell & Reed, Inc.

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