Waddell & Reed

Quarterly Fund Commentary

WRA Continental Income Fund (prospectus)
December 31, 2015

Matthew A. Hekman

Market Sector Update

  • Equity and fixed-income markets moved in opposite directions in 4Q. The S&P 500 Index (equity benchmark) rose a little more than 7%, driven by materials, health care, technology and industrials.
  • The 10 year Treasury yield rose 23 basis points over 4Q to 2.27% as the Federal Reserve (Fed) embarked on a long anticipated interest rate cycle, raising the Fed Funds rate by 25 basis points in December.
  • During 4Q, backward-looking economic statistics saw modest upward revisions, however, the current quarter economic growth outlook consistently deteriorated.
  • Despite ongoing weakness in commodities and disappointing trends from retailers, the equity market recovered from a dramatic August selloff to close 2015 near its previous highs.
  • The fixed-income markets diverged with the equity market as total returns were modestly negative for the quarter due to rising Treasury yields. Spreads tighten in investment grade bonds but were particularly weak in December.

Portfolio Strategy

  • We believe global growth will decelerate but stay positive in 2016. As a result, the target equity allocation was reduced modestly to 65%, the fixed-income target allocation was maintained at 25% and cash was raised to approximately 10%.
  • During the quarter, the equity portfolio outperformed the S&P 500. Consumer discretionary, consumer staples and technology were the primary drivers of Fund performance. In addition, the Fund is significantly underweight utilities, which meaningfully underperformed the benchmark average. Offsetting this strength was poor stock selection in energy and materials. Over the quarter, sector weights were adjusted to reflect a more cautious outlook. Both materials and industrials sector weights were reduced while the consumer staples weight increased materially.
  • The fixed-income portion of the Fund declined, yet outperformed its Barclays U.S. Gov’t/Credit Index benchmark during the quarter.
  • The portfolio continues to be short duration with an emphasis in highgrade bonds, preferring to make our bets on the credit side as solid corporate balance sheets and ample liquidity make the risk/reward more favorable than making an interest rate bet, in our opinion.


  • Persistent weakness in the prices of commodities and the associated weakness of both equity and fixed income assets in these sectors are a growing concern.
  • Despite this weakness, we believe global growth will continue albeit at a very modest rate in 2016 as clarity around fiscal spending and monetary policy improve; strengthened balance sheets and higher consumer and corporate confidence readings begin to translate into higher consumer and corporate spending; and the lagged effect of historical stimulus continues to provide a persistent tailwind to growth.
  • We see encouraging signs from the U.S. housing market as well as growing evidence of wage inflation, which should translate into acceleration in consumer spending, as significant positives for the U.S. economy.
  • While we continue to monitor macroeconomic forces and trends, we maintain an emphasis on finding highquality, growing companies whose securities are trading at a reasonable valuation with visible catalysts to drive relative outperformance over the next 12 months.


The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 31, 2015. 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.

The S&P 500 Index is composed of 500 selected common stocks chosen for market size, liquidity, and industry grouping, among other factors. The Barclays U.S. Govt/Credit index measures the performance of U.S. dollar-denominated United States Treasuries, government-related, and investment-grade U.S. corporate securities that have a remaining maturity of greater than or equal to one year. In addition, the securities have $250 million or more of outstanding face value and are fixed-rate and non-convertible securities. It is not possible to invest directly in an index.

Risk factors. The value of the Fund’s shares will change, and you could lose money on your investment. 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. The lower-rated securities in which the Fund may invest may carry greater risk of nonpayment of interest or principal than higher-rated bonds. In addition to the risks typically associated with fixed-income securities, loan participations in which the Fund may invest carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loan participations may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. Dividend-paying investments may not experience the same price appreciation as non-dividend-paying instruments. Dividend-issuing companies may choose not to pay a dividend, or its dividend may be less than what is anticipated. The value of a security believed by the Fund’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. 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. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.

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.

Financial Advisor Opportunities
Corporate Careers