Waddell & Reed

Quarterly Fund Commentary

WRA Continental Income Fund (prospectus)
March 31, 2015

Matthew A. Hekman

Market Sector Update

  • Equity and fixed income markets advanced modestly in the first quarter.
  • The S&P 500 Index’s advance was driven by particularly strong returns in health care and consumer discretionary. Sectors that weighed on index performance were utilities, energy and financials.
  • The 10 year Treasury yield fell over the course of the quarter as inflation in the U.S. and abroad came in below expectations.
  • The domestic economy continues to exhibit stable growth, albeit at low levels, with persistently encouraging trends in employment statistics and growing optimism that personal consumption will accelerate.
  • The Federal Reserve (Fed) provided an outlook on future fed funds rate increases that caused some concern over medium-term economic growth potential.

Portfolio Strategy

  • The Fund outperformed its benchmarks for the quarter ended March 31, 2015, before the effects of sales charges.
  • The equity portfolio materially outperformed the S&P 500 Index benchmark. Health care, consumer staples, consumer discretionary and technology were the primary contributors to Fund performance. Offsetting this strength was weak performance in financials and materials.
  • The fixed-income portfolio outperformed the Barclays U.S. Govt/Credit Index benchmark driven by extra carry from credit spreads and a small amount of spread tightening. The Fund’s short duration position continued to hamper performance as long-term interest rates declined but was overwhelmed during the quarter by our overweight in credit. The yield curve had a parallel shift downward as short rates declined given reduced expectations of a Fed rate hike this summer.


  • We believe global growth will improve modestly in 2015 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 continue to be encouraged by modest inflation rates and subdued inflation expectations, which provide an environment conducive for central banks to provide support to their local economies, if needed. In addition, we see encouraging signs from the U.S. housing market as well as growing evidence of an acceleration in consumer spending as significant positives for our economy.
  • As the domestic economy gradually improves, the Fed will begin to raise interest rates, though the timing of that inflection point is elusive.
  • 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 March 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 f xed-rate and non-convertible securities. It is not possible to invest i directly in an index.

Risk factors. As with any mutual fund, 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 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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