Market Sector Update
- We began seeing outflows from municipal bond funds in the latter part of the second quarter due to continued concerns over Puerto Rico debt. Even with those concerns, demand for municipal bonds continued to be ample as a result of tax concerns and the sector’s relative attractiveness versus taxable equivalents.
- With continued moderate inflows in the second quarter of 2015, we have become less constructive on the highyield municipal space and view the new issue market as fully priced on an absolute basis. While we continue to participate selectively in the new issue market, attractively-priced deals can be difficult to find.
- Puerto Rico concerns reentered the market with continued talk of potential restructurings. We continue to believe any potential restructuring is already reflected in current bond prices. While we expect additional headlines in the near-term, we continue to believe municipals may provide high-net-worth investors with attractive levels of income over the long term.
- We will continue to purchase deals we feel offer above-market yields based on the underlying credit fundamentals of the projects or municipalities.
- We continue to favor revenue bonds over tax-backed debt as revenue bonds, in our view, provide diversification from the general tax revenue issues which affect states and local governments and offer more attractive yields for our investors.
- Going forward, we have begun to get more cautious and will look for opportunities in bonds with more defensive structures as interest rates rise. We believe these bonds represent greater value and will better protect the Fund from the potential of slightly higher rates as growth picks up.
- In the near term, we believe volatility will trend upward as negative headlines in Greece and Puerto Rico will potentially create a large amount of uncertainty in the market.
- We think it is important for investors to realize that we believe prudent fund managers diversify portfolios across states and sectors and do not put too many eggs in one basket. We believe that one bond should not materially affect the whole fund.
- We believe investors will continue to search for tax-exempt yield due to higher tax rates, which should benefit the municipal 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, 2015. 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.
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.
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.