Market Sector Update
- Despite ongoing policy debates in Washington and relatively slow global growth, equity markets posted very strong results for the first three months of the year and ended the quarter near all-time highs.
- The recent market rally has been primarily driven by price-to-earnings (P/E) multiple expansion due to receding tail risks and improving investor confidence, as earnings growth expectations have remained modest at best.
- It is notable that traditional defensive growth sectors such as health care and consumer staples led the market advance. Both sectors have benefited from their less volatile earnings profile and above-average dividend yields.
- During the quarter, value-oriented strategies outperformed growth strategies and small-cap stocks generally outperformed large caps. Also, low-quality stocks modestly outperformed, which was a slight headwind to our style of investing in quality growth companies. Reversing a trend from the previous quarter, U.S. stocks broadly outperformed most international stocks with a key exception being Japan.
Portfolio Strategy*
- The Fund posted strong absolute returns for the quarter, but modestly lagged its Russell 1000 Growth Index benchmark. The consumer staples sector was a key detractor, as an underweighted position along with weaker-than-expected stock selection hampered relative performance.
- Stock selection in energy and telecommunications was also a drag to performance. Specifically, Intuitive Surgical, VMware Inc., Time Warner Cable Inc. and Crown Castle International Corp. were the largest relative detractors for the period.
- Stock selection in health care was positive in the quarter with strength from Gilead Sciences Inc., Biogen Idec Inc. and Allergan Inc. Materials also outperformed the benchmark, driven by strong performance from Monsanto Company.
Outlook
- Our investment objective remains the same, finding companies that can establish competitive advantages in large, growing markets and generate superior levels of profitability and growth over the long term.
- We believe top-line secular growth companies should be favored in today’s slow-growth environment.
- Currently, we are finding opportunities in key areas of technology, consumer discretionary and health care. We are currently de-emphasizing more cyclical industrials due to the lack of strong economic tailwinds and consumer staples due to limited growth potential and unattractive valuations.
*VMware Inc., Time Warner Cable Inc., Crown Castle International Corp., Gilead Sciences Inc., Biogen Idec Inc., Allergan Inc. and Monsanto Company (0.43%, 0.44%, 2.0%, 4.6%, 3.7%, 2.2% and 4.2% of net assets as of 03/31/2013.) Intuitive Surgical in no longer a holding of the Fund.
The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 2013. 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. As with any mutual fund, the value of the Fund’s shares will change, and it is possible to lose money on your investment.
Russell 1000 Growth is an unmanaged index comprised of securities that represent the large-cap sector of the stock market. It is not possible to invest directly in an index.
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. While the Fund seeks to minimize tax distributions to shareholders, it may realize capital gains and earn some dividends. 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.