Waddell & Reed

Quarterly Fund Commentary

WRA Asset Strategy Fund (prospectus)
March 31, 2014

Michael L. Avery
Ryan F. Caldwell

Market Sector Update

  • U.S. equities marked the fifth anniversary of the bull market during the quarter with the broad market indexes again at or near record highs. Global equities in general also gained during the quarter.
  • Stocks again reacted positively to continued accommodative Federal Reserve (Fed) monetary policy as well as slow but steady U.S. economic growth, which was affected somewhat by severe winter weather. Moderate gains in consumer spending and business investment contributed to the recovery.
  • The Fed in March dropped the firm quantitative link between lower interest rates and 6.5% unemployment, saying it would consider several factors in deciding when rates will increase. It again reduced its bond-buying program, lowering it to $55 billion per month in another step toward reducing economic stimulus while maintaining easy monetary policy.
  • Protests in Ukraine led to violence and a leadership change. Russia then annexed Crimea via a referendum vote. The U.S. and European Union responded with economic sanctions on Russia. The markets reacted initially with increased volatility, but soon settled.


Portfolio Strategy

  • The Fund posted a slightly negative return in the quarter (before the effect of sales charges), underperforming its allequities benchmark.
  • We have slowly been reducing the allocation to equities in the past year, based on our views of the market cycle and fundamental metrics such as the equity risk premium, correlations and price-earnings (P/E) ratios. The Fund ended the quarter with about 84% of assets in equities and 4% in cash.
  • The largest sector in the Fund remains consumer discretionary with about 40% of assets, a by-product of our investments in gaming and media, followed by financials and information technology. Consumer discretionary contributed to performance while selections in financials were detractors. We think active management and careful stock selection are critical now.
  • We have kept the Fund’s position in gold as a hedge against the continued use of aggressive monetary policy worldwide. It was a slight detractor for the quarter. We think central banks are likely to stay accommodative as long as forecasts for economic growth and inflation remain low.



  • Given the strong gains in equities during 2013, we think expectations for this year and beyond must start from a new point. We think there will be rising volatility across markets and we will continue to carefully assess the risk/reward of Fund investments. We also think investors should adjust their overall return expectations for 2014, especially versus the past three years.
  • We continue to focus on companies that are growing, innovating, improving margins, returning capital through dividend growth or share buybacks, and offering what we consider sustainable high free cash flow. We still think the opportunity for return in fixed income is limited, particularly in investment grade.
  • We think investors have become somewhat complacent in their risk-return expectations, as shown by the rise in equity markets on relatively low volume and expanding P/E ratios, with little revenue growth; and the growth and pricing in initial public offerings. These all come at a time of low rates and general confidence the Fed can gradually pull back on aggressive monetary policy without damaging financial markets.
  • We think there will be continued slow improvement in economic growth and low inflation in the U.S. this year.


The opinions expressed in this commentary are those of the Fund’s managers and are current through March 31, 2014. 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 Ivy Funds, call your financial advisor or visit us online at www.waddell.com. Please read the prospectus or summary prospectus carefully before investing.

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