Waddell & Reed

Quarterly Fund Commentary

WRA Asset Strategy Fund (prospectus)
December 31, 2015

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

Market Sector Update

  • The S&P 500 Index recorded its first annual decline since 2008. The U.S. Treasury 20-year yield reached 2.27% by quarter end.
  • The U.S. Federal Reserve (Fed) increased short-term rates in December and stated its intent for more rate hikes in 2016 if economic data allow. Many other central banks remained in an easing, economic-stimulus mode as the year ended. We remain concerned about the market and economic impact when central bankers face the possibility that the policy tools relied upon historically to support and stimulate growth have lost their potency.
  • China’s currency was granted Special Drawing Rights status by the International Monetary Fund. China also announced it will adjust its currency from a dollar peg to a trade-weighted “basket” of currencies, believing it was a better reflection of the yuan’s valuation. China gradually weakened the currency further during December.
  • Commodity prices fell again, with oil unable to hold brief moves higher.

Portfolio Strategy

  • The Fund had a positive return for the quarter (before the effect of sales charges) but trailed the positive return of its all-equities benchmark index.
  • The largest allocation was to equities at about 65%. The Fund had about 9.9% in fixed-income securities, about 3.3% in gold bullion and about 22% in cash. Top sectors were consumer discretionary, information technology and health care.
  • Microsoft was the largest contributor to performance followed by Galaxy Entertainment and AIA Group. We exited Galaxy Entertainment in the quarter. The largest detractor was our total investment in Formula One (parent company listed as Delta Topco Ltd.), based on updated forecasts; followed by Media Group Holdings (lower valuation for boxing investment); and Plains Group Holdings (energy).
  • We increased cash and maintained the fixed-income allocation. We think a more defensive position and more liquidity are prudent. We kept exposure to companies we think have stronger prospects for growth and increased it to those tied to the U.S. economy.
  • We may hold a higher level of cash now than over the past several years, as we need to be increasingly selective and confident in a truly unique fundamental catalyst.


  • We think the unintended consequences of global central bank policies are a primary risk and expect increased market volatility as a result. The headwinds include a relatively stronger U.S. economy, tighter Fed and stronger U.S. dollar; increasing leverage; slowing growth in China and the government’s market intervention; geopolitical events; low inflation; and questions around fixed-income liquidity, particularly in high yield.
  • The collapse in commodity prices produced a manufacturing recession, but the duration is uncertain. WTI crude oil, the U.S. benchmark, has fallen 40% in the last six months. Oil demand was strong in 2015 and supply fell from producers outside the Organization of Petroleum Exporting Countries. We think supply and demand are likely to begin to balance later in 2016.
  • We think corporate growth will be challenged and focus where we think growth will occur. Many 2015 holdings remain core holdings in 2016. Our highest conviction names are in secular growth, with strong balance sheets and the option of share repurchases, dividends or acquisitions.


The opinions expressed in this commentary are those of the Fund's managers and are current through Dec. 31, 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 12/31/2015: AIA Group Ltd., 2.34%; Microsoft Corp., 2.30%; Home Depot, Inc., 2.25%; Citigroup, Inc., 2.19%; Actavis plc, 2.18%; Coca-Cola Co., 2.12%; Kraft Foods Group, Inc., 1.90%; Cognizant Technology Solutions Corp., Class A, 1.87%; JPMorgan Chase & Co., 1.80%; Philip Morris International, Inc., 1.74%.

The S&P 500 Index is composed of 500 selected common stocks chosen for market size, liquidity, and industry grouping, among other factors. It is not possible to invest directly in an index.

Investors should consider the investment objectives, risks, charges and expenses of a portfolio and the variable insurance product carefully before investing. The portfolio and variable insurance product prospectuses contain this and other information, available by calling your financial advisor, visiting www.ivyfunds.com or contacting the applicable insurance company. Please read the prospectuses or summary prospectuses carefully before investing.

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 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.

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