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    Quarterly Fund Commentary

    WRA Vanguard Fund (prospectus)
    March 31, 2016

    Philip J. Sanders, CFA
    Daniel P. Becker, CFA

    Market Sector Update

    • First quarter of 2016 was one of the most volatile periods for the global capital markets in many years.
    • Significant uncertainty surrounding the state of global fixed income and currency markets, combined with meaningful potential political and policy risk, created great lurches both down and then back up in the equity markets.
    • Active management equity performance across most styles and capitalization ranges suffered some of the worst relative returns witnessed in many years.
    • Value stocks generally performed much better than growth stocks, and recent “winners,” the stocks that had performed the best over the past few years, suffered the most during the period.
    • Health care holdings, most notably stocks of companies where pricing power is and has been evident, performed the worst during the very manic quarter.

    Portfolio Strategy*

    • Unfortunately, the Fund was not immune to the pressures noted, and after a recent strong multi-year run of positive relative returns, performance meaningfully trailed the Russell 1000 Growth Index, the Fund’s benchmark, for the period ended March 31, 2016.
    • Health care sector exposure contributed significantly to the recent underperformance. Major detractors include Celgene, Allergan, Vertex and several other health-care companies.
    • Outside of health care, technology holdings such as LinkedIn and Alliance Data Systems performed very poorly as their profit outlooks were revised lower. Amazon.com was also a detractor as the stock gave back some of its exceptional gains from the prior 12 months.
    • Facebook, HCA Holdings and Phillip Morris International positively contributed to the recent quarter’s performance.


    • Looking ahead, we continue to expect a slow rate of economic growth, limited profit growth and low inflation, conditions which usually support growth stocks.
    • In the short term, value stocks may continue to outperform; however, many of these value stocks were priced for significant economic distress, especially if their revenues are exposed to global commodity market tends. After these distressed valuations improve, we expect the growth stock cycle to resume, as many of the Fund’s growth stocks are now supported by attractive valuations and profit outlooks.
    • We will focus on taking advantage of sudden swings investor risk appetite and more proactively adding exposure to long-term investments as inevitable stock price dislocations occur relative to minimal actual fundamental changes.
    • 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 03/31/2016: MasterCard, Inc. 4.2, Visa, Inc. 4.1, Microsoft Corp. 4.1, Home Depot, Inc. 4.1, Facebook Inc. 3.9, Alphabet, Inc. 3.4, Celgene Corp. 3.3, Gilead Sciences, Inc. 3.2, Lam Research Corp. 3.1 and Cognizant Technology Solutions Corp. 3.0%.

    The opinions expressed in this commentary are those of the Fund’s managers and are current through March 31, 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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