Waddell & Reed

Quarterly Fund Commentary

WRA Asset Strategy Fund (prospectus)
September 30, 2014

Michael L. Avery
Cynthia P. Prince-Fox
Chace Brundige, CFA

Market Sector Update

  • U.S. equities paused during the quarter, recording only a small gain in broad market indexes. Global equities also retreated, based on concerns about global economic weakness and geopolitical tension.
  • After a weak start to 2014, we think U.S. gross domestic product (GDP) will be about 3% in both the third and fourth quarters. We think consumer spending will increase as job and wage growth continues, supported by lower gasoline prices. Capital expenditures also are showing signs of improving.
  • The eurozone and Japan continue to struggle. The European Central Bank is facing the prospect of recession in some areas and very low inflation. We think its plans for quantitative easing may be inadequate. The Bank of Japan continues to buy assets to stimulate demand, but it has not been enough to get GDP and inflation to their targets.
  • By many indications, China’s economic growth is slowing, in part due to a government anti-corruption campaign. We still think the growing middle class will keep spending on goods and services.

Portfolio Strategy

  • The Fund had a negative return in the quarter, compared with a small positive return for its all-equities benchmark.
  • There were about 65 equity holdings in the Fund at quarter end, which the portfolio managers consider investments that can take advantage of a stock picker’s market. We have reconcentrated the Fund’s equity exposure in the face of concerns that the broad market run, now in its fifth year, may begin to taper and make stock selection more critical at this point in the economic cycle.
  • The Fund ended the quarter with about 72% of its assets in equities, mainly in the U.S.; about 6% in gold; slightly more than 4% in fixed income; and 18% in cash.
  • The largest sector in the Fund remained consumer discretionary followed by information technology, materials, industrials and financials. In general, consumer discretionary holdings were detractors from performance for the period, especially related to Macaubased gaming stocks. By contrast, some of the holdings in information technology, health care and financials generally contributed to performance.


  • We think macroeconomic issues will remain key factors for markets and the Fund. Markets now expect interest rates to begin rising some time in 2015, and possibly as soon as June.
  • We think a period of interest-rate fluctuations is likely as the bond market tries to anticipate moves by the U.S. Federal Reserve, with rates trading toward the lower end of a 2.5 to 3.5% range.
  • We think the U.S. is unlikely to have the sharper growth upturn that has occurred in previous cycles, but believe the pace of real GDP is poised to move faster. Given slower global growth, it is unclear how sustainable this faster pace will be.
  • We think India has potential, given government reforms under new leader Narendra Modi, and will continue to watch for opportunities.
  • Geopolitical risks in areas such as the Mideast and Russia/Ukraine have affected market sentiment and made “safe harbor” markets attractive. We believe this has supported valuations above levels that fundamental factors might have indicated -- another factor behind steady gains in U.S. equity and credit markets.


The opinions expressed in this commentary are those of the Fund’s manager and are current through Sept. 30, 2014. 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.

Cynthia Prince-Fox and Chace Brundige, CFA, became portfolio managers on the Fund on Aug. 4, 2014.

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 Ivy Funds, call your financial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully before investing.

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