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    Quarterly Fund Commentary

    WRA Asset Strategy Fund (prospectus)
    June 30, 2016

    Cynthia P. Prince-Fox
    Chace Brundige, CFA

    Market Sector Update

    • The result of the second quarter's most anticipated event – the U.K.'s June 23 vote to leave the European Union, or “Brexit” – was unexpected and caused a large, brief sell-off in equity markets and the British pound. The U.S. Treasury yield hit its lows of the quarter, although spreads in global credits were remarkably well behaved.
    • The persistent theme of market “riskon/ risk-off” with broad selloffs followed by record high equity prices and lows on global sovereign bond yields signals a market that lacks direction. The global growth scares during the last 12 months typically have gained potency in a highly levered, low-growth world such as our current environment.
    • Global central banks seem to be acutely aware of the precarious position of the worlds’ markets and economies. The U.S. Federal Reserve has delayed further interest-rate increases, saying future rate hikes would be dependent on U.S. economic data and international developments.
    • After softening in the first quarter, the U.S. dollar reaccelerated somewhat against commodity-related currencies. Compared to the Japanese yen, the dollar weakened to levels not seen since 2014 in spite of Japan’s negative rate policy and anticipation of further stimulus. The euro had a much more volatile quarter versus the dollar, but ended June slightly stronger. This occurred within the backdrop of the European Central Bank implementing its Corporate Sector Purchase Program in early June as a way to drive credit spreads tighter.

    Portfolio Strategy

    • The Fund had a positive return in the quarter (before the effect of sales charges), but trailed the positive return of its allequities benchmark index.
    • Equities remained the Fund's largest allocation by asset class, ending the quarter at nearly 50%. About 19% of the Fund was in fixed-income securities, roughly 7% was in gold bullion and around 24% was in cash. The five largest sector allocations were information technology, consumer discretionary, health care, consumer staples and financials.
    • Gold was again the Fund's best performing asset. We think this may be a response to the extended period of low and negative global interest rates as well as appreciation for the magnitude of leverage built across the global economy since the financial crisis. The increased talk of “helicopter money,” otherwise known as central bank funding of government spending, underscores this point.
    • The largest equity contributors to performance relative to the benchmark were Halliburton Co.; Kraft Heinz Co.; Larsen & Toubro Ltd.; Axis Bank Ltd.; and AIA Group Ltd. The largest relative detractors were Media Group Holdings, one of the two remaining private holdings; Chipotle Mexican Grill, Inc.; Delta Topco Ltd., the other private holding; Intesa Sanpaolo; and Allergan plc.


    • We continue to experience the effects of an emphasis on low-volatility strategies and the outperformance of “bond proxies” within U.S. equities – those stocks most correlated with the 10-year U.S. Treasury yield. We believe the relative tailwind of bond proxy names cannot continue indefinitely.
    • We are hesitant to capitulate at these rare valuations of “safe” names, while those with greater growth prospects continue to get cheaper by comparison. We see greater relative value in solid growth stocks with attractive free cash flow yields.
    • Absent a perceived policy mistake (monetary or fiscal) or a global shock, we think the search for yield in a low and negative interest rate environment is likely to persist. Equity markets could continue to experience volatility as flows move from active to passive strategies or into fixed income.
    • We believe the record low yield on the U.S. Treasury 10-year note in June is not an indication of imminent economic collapse, but rather of the massive movement in flows. In our view, spread compression within fixed income is an indication of overvalue in this backdrop.


    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.

    Michael L. Avery retired from the company effective June 30, 2016.

    Top 10 Equity Holdings as a percent of net assets as of 06/30/2016: Kraft Foods Group, Inc., 1.94%; Microsoft Corp., 1.78%; Halliburton Co., 1.70%; Adobe Systems, Inc., 1.44%; Home Depot, Inc., 1.44%; Pfizer, Inc., 1.44%; Intuit, Inc., 1.44%; JPMorgan Chase & Co., 1.43%; Chipotle Mexican Grill, Inc., Class A, 1.42%; Allergan plc, 1.35%.

    Risk factors. 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. The Fund may allocate from 0 to 100% of its assets between stocks, bonds and short-term instruments of issuers around the globe, as well as investments in precious metals and investments with exposure to various foreign securities. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed-income securities are subject to interest-rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may focus its investments in certain regions or industries, thereby increasing its potential vulnerability to market volatility. The Fund may seek to hedge market risk on various securities, increase exposure to various markets, manage exposure to various foreign currencies, precious metals and various markets, and seek to hedge certain event risks on positions held by the Fund via the use of derivative instruments. Such investments involve additional risks, as the fluctuations in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. Investing in commodities is generally considered speculative because of the significant potential for investment loss due to cyclical economic conditions, sudden political events, and adverse international monetary policies. Markets for commodities are likely to be volatile and the Fund may pay more to store and accurately value its commodity holdings than it does with the Fund’s other holdings. 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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