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    Quarterly Fund Commentary


    WRA Asset Strategy Fund (prospectus)
    March 31, 2016


    Manager(s):
    Michael L. Avery
    Cynthia P. Prince-Fox
    Chace Brundige, CFA

    Market Sector Update

    • The year 2016 got off to a volatile and somewhat unexpected start, with the S&P 500 Index correcting by over 10% and then ending the first quarter up 1.35%. The U.S. Treasury 10-year yield also was choppy, at one point rallying to yield 1.67% before ending the quarter at 1.98%, below where it started the year.
    • The gyrations in markets may in part be a response to the U.S. Federal Reserve (Fed)’s increase of short-term interest rates by 0.25% in December 2015 after seven years at zero, along with stimulative changes in China’s policy. Fed Chair Janet Yellen acknowledged the risks to the global economy, despite the Fed’s desire to normalize rates. Japan embarked on negative rates in January and the European Central Bank further cut interest rates and expanded its quantitative easing program again.
    • The world’s currency markets were unsteady as the U.S. dollar was broadly lower during the quarter versus its major trading partners and many emerging market currencies after Yellen’s comments. The weaker dollar is likely to reduce the currency headwind for U.S. multinational companies and allow emerging markets a respite from sustained weakness.

    Portfolio Strategy

    • The Fund had a negative return for the quarter and trailed the positive return of its all-equities benchmark index. The Fund outperformed the benchmark during the first half of the quarter as its more defensive posture helped during “risk-off” periods. However, when markets again began to accept more risk, the Fund underperformed.
    • The Fund’s largest allocation remained equities, ending the quarter at about 47%. It had about 19% in fixed-income securities (which includes the debt component of a private equity investment in addition to U.S. Treasury holdings), roughly 6% in gold bullion and about 28% in cash. The five largest sector allocations were information technology, consumer discretionary, health care, consumer staples and financials.
    • The Fund’s two remaining private holdings, Delta Topco and Media Group Holdings, were the largest detractors from performance in the quarter, followed by Citigroup, Alliance Data Systems and Allergan.
    • Gold was the Fund’s best performing asset in the quarter. 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.
    • Given our view of the risks to the global markets and economy, we increased the allocation to cash and fixed income, compared with the prior quarter, while identifying areas for growth in equities.
    • The market instability has allowed us the opportunity to purchase names we like at favorable prices, both domestically and globally.

    Outlook

    • We remain concerned about the fading effects of easier monetary policy combined with slow growth and mounting global leverage.
    • We recognize growth will be challenged for industries and companies. As such, we remain focused on where we think growth will occur. Many of our holdings from last year remain core holdings in 2016. Our highest conviction names fall into the secular growth category with strong balance sheets that offer optionality of share repurchases, dividends or acquisitions, along with certain cyclical energy companies.
    • We think the unintended consequences associated with global central bank policies are a primary risk and expect increased volatility as markets attempt to reconcile uncertainties. Those headwinds include a relatively stronger U.S. economy, but uncertainty on the timing of additional rate hikes as well as growing global debt. Questions around China’s growth prospects remain, although the country’s economic data have strengthened recently in response to policy changes to stimulate investment in housing and certain areas within infrastructure.

     


    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.

    Top 10 Equity Holdings as a percent of net assets as of 03/31/2016: Coca-Cola Co., 1.88%; Microsoft Corp., 1.87%; Kraft Foods Group, Inc., 1.68%; Chipotle Mexican Grill, Inc., Class A, 1.62%; Philip Morris International, Inc., 1.59%; Allergan plc, 1.53%; Home Depot, Inc., 1.47%; Citigroup, Inc., 1.45%; Cognizant Technology Solutions Corp., Class A, 1.39%; Adobe Systems, Inc., 1.38%.

    The S&P 500 Index is an unmanaged index of common stocks that generally represents the U.S. stock market. 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. 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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