Waddell & Reed

Quarterly Fund Commentary


WRA Municipal High Income Fund (prospectus)
September 30, 2014


Manager(s):
Michael J. Walls

Market Sector Update

  • We continued to see solid inflows into municipal bond funds in the third quarter of 2014. Although nowhere near the record inflows of 2012, they were consistently positive. This was not unexpected after the record outflows in 2013.
  • With higher tax rates moving into 2014, we believe demand for high yield municipal bonds should remain strong. We believe issuance will continue to hover near record lows which should be positive for municipal bond prices.
  • With the solid inflows in the first two quarters of 2014, we have become less constructive on the high yield municipal space and view the new issue market as fully priced on an absolute basis. We believe the lack of new issue supply will allow returns in the space to remain stable.
  • As headlines about Puerto Rico waned, we have seen a decrease in volatility in the asset class. We expect this will continue in the near term and should provide high-net-worth investors with attractive levels of income over the long term.

 

Portfolio Strategy

  • We will continue purchasing 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 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.

 

Outlook

  • In the near term, we believe volatility will remain low as negative headlines are a thing of the past. It is important for investors to realize that prudent managers diversify across states and sectors and would never put too many eggs in one basket. 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 September 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.

Risk factors. As with any mutual fund, 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. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higherrated bonds. 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. The Fund may include a significant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax. 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.

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