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    Quarterly Fund Commentary


    WRA Vanguard Fund (prospectus)
    June 30, 2016


    Manager(s):
    Daniel P. Becker, CFA
    Bradley M. Klapmeyer, CFA

    Market Sector Update

    • Financial markets continued their recent trend of swift and volatile intra-quarter moves during 2Q 2016. Coming off 1Q 2016 where the Federal Reserve signaled a much more gradual move upward in short-term interest rates, it seemed like global currency and fixed-income markets were set to improve, which would have provided a calming effect on the equity markets.
    • The potential for a reduction in capital market volatility came to an abrupt end in late June with the surprise negative U.K. referendum result, which will likely result in the country leaving the European Union. This event, commonly referred to as “Brexit,” produced a huge performance shock to almost all equity market participants.
    • Perhaps the most significant experience of the quarter was the degree of investor panic and movement into assets perceived as safe. Government bond yield curves moved further into negative interest rate territory throughout Europe and Asia, and at the end of the period, almost $14 trillion of government bond principal value had negative interest rates, a very astounding and anomalous figure.
    • Active managers have not performed well given current market anomalies, with less than 10% of large-cap growth managers outperforming year-to-date.

    Portfolio Strategy*

    • While the Fund performed well versus its benchmark, the Russell 1000 Growth Index, for most of the quarter, the shock of the Brexit vote caused a flight to safety and the portfolio underperformed for the period ended June 30, 2016.
    • Fund performance was significantly impacted by market events due to an under representation in the defensive sectors of the market and high dividend yield stocks. At the stock characteristics level, we have been underexposed to low beta stocks, throughout various growth sectors and industries.
    • On the individual company stock level, several holdings such as MasterCard Inc., Visa, Inc., Charles Schwab, Home Depot, PPG Industries, Cognizant and Allergan did not perform well during the quarter. Phillip Morris International, American Tower, Ulta Salon, Cosmetics & Fragrance, Bristol Myers, Lockheed Martin and Northrup Grumman performed well during the period.
    • Biotechnology stocks as a group did not perform well, while energy, materials and food and consumer products companies outperformed.

    Outlook

    • We see a large disconnect between global government yield curves and forecasts for economic growth and corporate profits. We expect continued slow, uninspiring gross domestic product growth but nowhere near recession levels.
    • Economic bright spots include low inflation, a peak in the U.S. dollar, and stable or improving conditions in housing, employment and wages. The flight to safety and global search for yield is stronger and more enduring than anticipated, resulting in valuation distortions not seen since 2000. The valuations of yield, low beta and low volatility are all excessive in our view.
    • Conversely, we see opportunities in the characteristics of beta, high growth, value, and dividend growth. We have used the current conditions to add to Fund positions in Allergan, Lam Research Corp., Microchip Technology and FleetCor. The prospect of buying low-growth stocks at lofty valuations does not appeal to us as long as the economy stays out of recession.
    • We continue to pursue a strategy that focuses on the smaller subset of companies with strong business models that originate and are maintained by a high and sustainable level of competitive advantage within their served addressable markets.

    Top 10 holdings (%) as of 06/30/2016: Visa, Inc. 4.2, Lam Research Corp. 4.1, Home Depot, Inc. (The) 4.0, MasterCard, Inc. 3.9, Allergan plc 3.7, Amazon.com, Inc. 3.5, Philip Morris International, Inc. 3.5, Facebook, Inc. 3.4, Bristol-Myers Squibb Co. 3.4 and Alphabet, Inc. 3.0.

    The opinions expressed in this commentary are those of the Fund’s managers and are current through June 30, 2016. 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 not a guarantee of future results.

    The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.

    Risk factors.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 greater 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.

    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.

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