Waddell & Reed

Quarterly Fund Commentary

WRA Vanguard Fund (prospectus)
September 30, 2014

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

Market Sector Update

  • Despite experiencing some notable volatility, the broad equity market continued to trend modestly higher during the third quarter. Not all stocks participated equally, however, as sector performance was quite diverse and largecap stocks meaningfully outperformed their small-cap brethren.
  • Macroeconomic and geopolitical concerns continue to cloud visibility, thereby wreaking havoc on anyone professing to have a clear “crystal ball.”
  • Primary issues of investor concern include a faltering economic recovery in Europe, slowing growth in China and other emerging markets, ongoing turmoil in Russia/Ukraine and the Middle East, and renewed currency volatility. Furthermore, falling bond yields which continue to defy market expectations, along with weakening commodity prices, have resurrected fears of potential deflation.
  • As has been the case for some time now, individual company news seems considerably more upbeat than the broad market headlines. Corporate balance sheets and cash flows remain strong and overall profit growth continues to grind higher. We expect the current environment of a slow global economic expansion and sluggish profit growth to be with us for some time to come.

Portfolio Strategy*

  • The Fund posted a modest positive return for the quarter, outperforming the benchmark before the effects of sales charges.
  • Performance was led by the Fund’s overweighting in the relatively strong performing health care sector and, in particular, its exposure to Gilead Sciences. HCA Holdings also performed well. Other notable contributors included Facebook.
  • Finally, the portfolio benefited from its exposure to select railroad companies, where streamlined cost structures and steadily improving volumes from the North American recovery in the energy, agriculture and industrial markets are resulting in record high profits for the industry.
  • Partially offsetting these positive factors were disappointing returns for some of the Fund’s consumer discretionary holdings. In particular, Las Vegas Sands and Wynn Resorts lagged due to a significant slowdown in Macau gaming revenues, and shares of CBS Corp. were hurt by a weak advertising environment.


  • Despite recent indications of weakening growth in foreign economies, the U.S. outlook has remained relatively stable and continues to be supported by a steadily improving labor market. However, these divergent regional growth prospects and monetary policies have resulted in a recent strengthening of the U.S. dollar, which could pose potential headwinds for U.S. multinational companies.
  • Consequently, we have modestly reduced exposure to global industrials where we see increasing risks of earnings disappointments, even though lower input commodity costs could help cushion the downside.
  • We continue to seek attractive investment opportunities in biotechnology, railroads, aerospace and select areas of technology driven by company-specific factors such as new product launches and/or market opportunities.
  • Even in this uncertain economic environment, we remain underweighted in traditionally defensive consumer staples stocks due to their relatively rich valuations and limited growth prospects. In our view, the price of safety remains very high in today’s market. All in all, we expect the favorable backdrop for growth investing to continue.


*Top ten holdings as of 09/30/2014: Gilead Sciences, Inc. 5.2%, Apple, Inc. 4.9%, Biogen Idec, Inc. 4.3%, Canadian Pacific Railway Ltd. 4.0%, MasterCard, Inc. 3.9%, Celgene Corp. 3.9%, Facebook, Inc. 3.7%,&br;Applied Materials 3.1%, Union Pacific Corp. 3.0% and Home Depot, Inc. 3.0%.

The opinions expressed in this commentary are those of the Fund’s managers and are current through Sept. 30, 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 Ivy Funds, 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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