Market Sector Update
- The municipal bond market continued to be one of the asset classes of choice in the second quarter of 2016. The Fund’s positive flows and a continued concern over global growth and geopolitical risk - most notably the British vote to exit the European Union - led bond prices higher. Flows for the last twelve months were solidly positive and with the lack of supply, the municipal bond market once again offered positive returns. Higher taxes and the relative attractiveness versus taxable equivalents have continued to drive demand for tax-exempt income.
- We have become less constructive on the high-yield municipal space as new issues have been coming to market fully priced and offering very little in the way of security provisions for the investor. We continue to participate selectively in the new issue market, however, attractive deals can be difficult to find.
- Britain’s vote to exit the European Union and negative global bond yields continue to roil capital markets. We feel slow global growth and geopolitical risks will keep interest rates low for the foreseeable future. We continue to believe municipal bonds will provide high-net worth investors with attractive levels of income over the long term.
- We continue to purchase deals we feel offer above-market yields based on the underlying credit fundamentals of the projects or municipalities.
- We favor revenue bonds over tax-backed debt as revenue bonds, in our view, provide higher yields and better diversification from general tax and pension issues currently affecting many municipalities.
- Going forward, we are more cautious and will look for opportunities in bonds with more defensive structures as interest rates rise. We feel strongly these bonds represent a greater value and will better protect the Fund from the potential of slightly higher rates when growth begins to pick up. We will continue to allow bonds to be refinanced to shorter call dates, which will provide ample liquidity to exploit potential opportunities.
- In the near term, we believe volatility will continue, as choppy economic data continues to globally create large amounts of uncertainty for markets. It is important that investors realize the value in diversifying across states and sectors. Portfolio managers work to limit the amount of exposure to such variables as well as watching for over-investment in any individual bond.
- We believe investors will continue to search for tax-exempt yield due to higher tax rates, which should benefit the municipal bond market. In our view, patient investors should be rewarded over the long haul.
The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 2016. 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 not a guarantee of future results.
Diversification is an investment strategy that attempts to manage risk within your portfolio but it does not guarantee profits or protect against loss in declining markets.
Risk factors. The value of the Fund's shares will change, and you could lose money by investing. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may include a significant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax (AMT). Exempt-interest dividends the Fund pays may be subject to state and local income taxes. The portion of the dividends the Fund pays that is attributable to interest earned on U.S. government securities generally is not subject to those taxes, although distributions by the Fund to its shareholders of net realized gains on the sale of those securities are fully subject to those taxes. The municipal securities market generally, or certain municipal securities in particular, may be significantly affected by adverse political, legislative or regulatory changes or litigation at the Federal or state level. 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.
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.