Waddell & Reed

Quarterly Fund Commentary


WRA Vanguard Fund (prospectus)
December 31, 2014


Manager(s):
Philip J. Sanders, CFA
Daniel P. Becker, CFA

Market Sector Update

  • U.S. stocks exhibited broad-based strength in the fourth quarter, finishing off another strong year for the equity market.
  • Although all major indexes participated in the rally, small caps were particularly strong after lagging their large-cap counterparts for much of the year.
  • Most sectors participated in the rally, with the primary exceptions being energy due to the collapse in oil prices and telecommunications due to rising fears of price competition.
  • Utilities led the way driven by a notable decline in Treasury yields.
  • The U.S. economy remains a relative standout on the global stage. At a time when growth has proved disappointing in Europe, Japan, China and most emerging markets, we believe the U.S. economic growth remains on solid footing.

Portfolio Strategy

  • The Fund posted a solid absolute return for the quarter but lagged its benchmark. On a positive note, performance was aided by favorable stock selection in the technology sector.
  • While the Fund’s underweighting in the weak performing energy sector proved beneficial to performance, this was basically offset by some industrial holdings that have a portion of their business tied to this sector.
  • Other negative factors impacting performance included a sell-off by one of our top holdings, due to fears of pricing pressure, as well as an underweight position in the relatively strong performing consumer staples sector.
  • Portfolio repositioning during the quarter focused on reducing energy and industrial exposure amid weakening end markets and unfavorable currency headwinds, with the proceeds being reinvested primarily in the health care, technology and consumer discretionary sectors.

Outlook

  • We continue to be mindful of the various global macroeconomic risks.
  • From a domestic perspective, we believe lower energy prices will ultimately prove to be a net benefit to economic growth.
  • However, the rapidity of the price decline is already having a short term disruptive effect on certain industries and regions of the U.S.
  • Adding to this is the eventual normalization of Federal Reserve monetary policy, the faltering European recovery, slowing growth in emerging markets and the neverending geopolitical risks. However, we will remain focused on individual company fundamentals.
  • We believe most corporate balance sheets, cash flows and profitability levels remain in great shape.
  • Furthermore, we think the current slow global growth environment, where true sustainable growth and prosperity is becoming more challenging, will continue to provide a favorable backdrop for the large-cap growth asset class.
  • In our view, strong market leaders possessing defensible structural advantages have never been better equipped to defend and strengthen their competitive positions.

The opinions expressed in this commentary are those of the Fund’s managers and are current through Dec. 31, 2014. The managers' 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. Investing in companies involved primarily in a single asset class (large cap) may be more risky and volatile than an investment with great diversification. 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. 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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