Waddell & Reed

Quarterly Fund Commentary


WRA Accumulative Fund (prospectus)
March 31, 2013


Manager(s):
Barry M. Ogden, CFA , CPA

Market Sector Update

  • What a start to 2013! After a fairly nonspectacular fourth quarter, as measured by total return, the first quarter was very impressive. The broader markets, as measured often times by the S&P 500, marched to new multi-year highs despite a handful of potholes and headwinds facing investors. Other than a very short sell off at the end of February, the proper investment decision was to be fully invested.
  • Much of the move higher in the equity markets was sentiment and multiple driven, with modest positive estimate revisions as well, but predominately we saw investors much more willing to pay up despite estimates remaining relatively stagnant. Equity inflows improved as investors sought out total return investment opportunities in consumer staples and health care, two of the best performing industries during the quarter. New highs in equity markets could further “tempt” market participants to shift more money into equities and away from fixed income and other underperforming assets.
  • The situation in Europe is bad and in some ways may get worse before it gets better as it deals with a slow- to nogrowth environment and various austerity measures along the way. Deleveraging, high unemployment and anemic growth could be significant headwinds for that part of the globe for quite a while.


Portfolio Strategy

  • The Fund modestly underperformed its S&P 500 Index benchmark in the quarter. Our largest exposure, consumer discretionary, which accounted for more than 30% of the portfolio at the end of the quarter, detracted from performance. The Fund’s cash position was also a drag to performance in the quarter.
  • Compared to just a few years ago, we believe the average consumer is feeling much, much better about their current financial position for a variety of reasons. Consumer net worth has improved measurably in the past 18 to 24 months in our opinion. With record low mortgage rates and historically low inventory of homes for sale, supply and demand appear conducive to modest improvements in pricing for the rest of 2013.
  • The job market has also gradually gotten better and with that, job security has seemingly improved. The Fund is positioned to take advantage of what we think will be another good year for our consumer discretionary holdings.
  • Our second largest weighting is consumer staples, which has seen significant multiple expansion over the past six months, as investors have sought out companies with stable, predictable earnings and cash flows that are able to return cash back to shareholders through share repurchase plans but even more importantly, dividends. We are approximately 400 basis points overweight this group versus the benchmark.


Outlook

  • In our last quarterly report, we highlighted that we thought 2013 could be setting up for a reasonably good year for equities. What we didn’t suspect was that we would see all of it happen in the first quarter of the year. With the S&P 500 up more than 10% in the first quarter, it appears that we may be on pace for some kind of crazy good year if that were to continue. While we’d be extremely happy for all of our shareholders if that were the case, we don’t think that will happen.
  • In a best-case scenario, we’ll get some type of a consolidation period as we move through the upcoming earnings season and from there we could march higher. It’s likely that given the move in the first quarter, expectations are running slightly ahead of reality and the market could sell off a bit. We will be focusing our efforts on the commentary coming out of the first quarter conference calls to gauge the management's pulse on the economy.
  • We believe that any measurable signs of a slowdown could lead to a more pronounced correction, which although painful near-term, could be good for the longer term.

 

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

The S&P 500 is an unmanaged index that track the stocks of 500 primarily large-cap U.S. companies. It is not available for purchase.

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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