Market Sector Update
- U.S. equities delivered solid returns for the third quarter, even hitting a record high late in the period in one broad market index. Global equities also gained during the quarter, delivering even stronger returns.
- Stocks reacted positively in late September to the Federal Reserve’s decision to delay a reduction in its bondbuying program. Continued slow but steady growth in U.S. gross domestic product, jobs, housing and other economic indicators also supported equities.
- The U.S. Congress failed to reach a federal budget agreement at the end of the quarter, which unsettled markets late in the period and prompted fears of a similar impasse on the upcoming debate about increasing the debt ceiling. Fears of another downgrade on U.S. debt or even a default weighed on prices.
- China’s economy showed growth again in the quarter, although at the slower pace seen all year. Gains in retail sales and some improvement in manufacturing have supported the economy. China also has gained benefit from its trade with improving economies in the U.S., Europe and Japan.
- The Fund posted a strongly positive return (before the effect of sales charges) for the quarter, above the return of its allequities benchmark.
- We continued to focus on the Fund’s allocation to equities as the quarter unfolded, further diversifying the portfolio while reducing that allocation. The Fund at the end of the quarter had 70% of its gross assets in equities and 16% in cash. We intend to be opportunistic with the cash position, looking for investments that we consider attractive at the company, sector or country level.
- The Fund’s overweight position and stock selection in the consumer discretionary sector as well as its stock selection in the information technology and financials sectors contributed to relative performance.
- The Fund continues to invest in gold – which contributed to performance for the quarter – based on our view that aggressive monetary policy leads to a preference for a hard currency, such as gold, over fiat currencies that we think are more susceptible to a loss of value.
- The Fund continues to use a key central theme around the growth in consumption from the expanding middle class in emerging markets. We still believe there are select opportunities to participate in the rising prosperity of these individuals across Asia.
- The bull market in equities has run for more than four years, and we’re watching a multi-decade bull market in fixed income. We think it is important now to analyze the sources of future potential economic growth and the expectations already priced into the markets.
- In our view, the “easy money” has been made in equities and we think it will be more difficult from here, requiring careful security selection, risk management and attention to actions of policy makers worldwide.
The opinions expressed in this commentary are those of the Fund’s managers and are current through Sept. 30, 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.