Market Sector Update
- U.S. and global equity markets closed a volatile quarter with negative returns.
- China surprised markets in August by devaluing its currency in an attempt to be more “market based” and as a step toward internationalization of the yuan, although it remains tied to the dollar. The move added to concerns about the magnitude of the economic slowdown in China and the implications for the rest of the globe.
- The U.S. Federal Reserve in September decided to leave interest rates unchanged at near zero, citing market volatility and global economic uncertainty. Markets continued to focus on any indicators about the timing of an eventual rate hike.
- Late in the quarter, India surprised markets by cutting its key interest rate by 0.50 percentage point to 6.75%, seeking to boost growth as inflation there eases. Higher real interest rates in the country suggest the central bank has room for further cuts.
- The Fund had a negative return for the quarter, as did its all-equities benchmark index. The relative performance mainly was driven by security selection and exposure to emerging markets, particularly China.
- The Fund's allocation to equities ended the quarter at about 67%, with about 10.8% in fixed income, about 3.4% in gold bullion and about 18.7% in cash. The top sectors were consumer discretionary, information technology and consumer staples.
- Stock selections in consumer discretionary and information technology were the largest relative detractors, followed by industrials and financials. The largest individual relative detractor was Galaxy Entertainment Group. It again was hurt by China’s anti-graft campaign. We reduced exposure to Galaxy throughout the year and exited some information technology exposure in the quarter: Micron Technology, Inc.; Baidu.com, Inc.; and Tencent Holdings Ltd.
- We increased allocations to cash and fixed income late in the quarter, as we believe additional liquidity is prudent in the uncertain market environment and allows us to be opportunistic.
- We believe the U.S. remains the relative bright spot in the global economy and continues to show improvement in key indicators. We expect continued slow growth elsewhere in the global economy.
- Overall, we expect economic growth rates, interest rates and inflation to stay low for the foreseeable future and believe that should translate to a market environment that favors careful security selection.
- We think equities continue to provide the best relative opportunity for return among asset classes in a market supported by global central banks. We also still believe that the increase in emerging market middle-class consumers means they will spend more on financial services, technology, premium brands and other areas. We think these areas offer opportunities and are investing in them.
- In general, we are focusing on companies that, no matter where they are in the world, have pricing power, high free-cash flow and the ability to grow at a time of market uncertainty.
The opinions expressed in this commentary are those of the Fund's managers and are current through Sept. 30, 2015. 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.
Top 10 Equity Holdings as a percent of net assets as of 09/30/2015: SABMiller plc, 2.31%; AIA Group Ltd., 2.25%; Phillips 66, 2.19%; Citigroup, Inc., 2.19%; Coca-Cola Co., 2.07%; Home Depot, 2.06%; Cognizant Technology Solutions Corp., Class A, 2.04%; Kraft Foods Group, Inc., 1.93%; Microsoft Corp., 1.92%; Adobe Systems, Inc., 1.91%.
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 f uctuations, l 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 interestrate 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.
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.