Market Sector Update
- U.S. equities gained in the fourth quarter, with one broad index closing the year at a record high. Global equities also gained for the quarter and year.
- Stocks continued to react positively to U.S. economic growth, largely driven by consumer spending and the energy, industrials and housing sectors. A budget pact between House and Senate negotiators helped reduce market uncertainty.
- The Federal Reserve (Fed) announced late in the year that it would reduce its bond-buying program from $85 billion to $75 billion per month -- a small step toward reducing economic stimulus while keeping its aggressive monetary policy. The Fed added it will not raise interest rates until after unemployment falls well below 6.5%, emphasizing that is not a trigger level.
- China announced a major economic plan with reforms in 16 key areas and a target of 2020 for “decisive” results. Its gross domestic product (GDP) grew an estimated 7.6% in 2013. We're now closely watching the impact of its aggressive lending policies and the effect on GDP. China also continued to benefit from trade with the U.S., Europe and Japan.
- The Fund posted a strongly positive return for the quarter (before the effect of sales charges), although it slightly trailed its all-equities benchmark.
- We continued to focus on the allocation to equities, as we have for much of the year, to further diversify and broaden the Fund. We have increased the number of holdings and worked to decrease some of the single-name risk. The Fund closed the quarter with 75% of gross assets in equities and 15% in cash. The cash allows us to pursue opportunities we find attractive at the company, sector or country level and reflects our views on the increase over time in equities valuations.
- The largest sector in the Fund continues to be consumer discretionary, which is about one-third of the portfolio. That overweight position and stock selection in the sector contributed to relative performance. We look at the Fund's holdings in the sector as allocations to three distinct sub-sectors: gaming, especially in Asia, media and autos. The first two in particular contributed to performance this quarter.
- We have maintained a position in gold based on our long-held belief that it is a hedge against aggressive monetary policy. We think such policy is likely to continue around the world, given the tepid growth of the global economy.
- We expect slow growth and low inflation in the U.S. in 2014 with continued aggressive monetary policy. We think U.S. policy makers will maintain loose monetary policy, given continued high unemployment and the outlook for inflation.
- In the face of ongoing monetary stimulus, stock markets also have continued to re-price risk. We think that is evident in rising valuations, decreasing correlations, decreasing volatility and other metrics. While equities may be a less compelling investment choice now because of valuations and the low-growth economic environment, we still prefer them in relative value terms.
- As we analyze where growth will come from in the mid to long term, we have maintained a theme related to the growth in consumer consumption in emerging markets. We believe there still are opportunities to participate in the rising prosperity of these individuals, especially across Asia.
The opinions expressed in this commentary are those of the Fund’s managers and are current through Dec. 31, 2013. 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. 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. Such hedging involves 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.
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.