Waddell & Reed

Quarterly Fund Commentary

WRA Continental Income Fund (prospectus)
December 31, 2013

Cynthia P. Prince-Fox

Market Sector Update

  • While the partial shutdown of the federal government halted the flow of official economic statistics, markets marched upward as investors anticipated the shutdown would be short-lived and the debt ceiling would be lifted.
  • After months of speculation about the timing of reducing quantitative easing, the Federal Reserve (Fed) finally began the process of slowing its balance sheet growth. Stocks reacted quickly after the “taper” turned out to be just as dovish as it could have been, nudging down from $85 billion to $75 billion per month.
  • The Fed’s tapering decision would appear to be supported by data that suggests the economy has strong underlying momentum. Most important would be employment gains of 200,000 per month in October and November, strong retail sales, a large rebound in October home sales and industrial production returning to its pre-recession peak.

Portfolio Strategy*

  • The Fund underperformed the benchmark for the period. It remained heavily weighted in equities with more than a 72% allocation. Within the equity portfolio, performance lagged the benchmark primarily due to adverse stock selection in technology.
  • A notable underperformer was Cisco Systems, Inc. The company announced earnings in November and noted that it had experienced a sudden broad-based slowdown across its entire business, which resulted in a significant guide down for the coming quarter. While a number of macro issues were cited, the magnitude was particularly surprising given that global growth had been weak, but not disastrous.
  • For now, we have reduced the position size in Cisco and look for price support given a strong capitol return program in the form of dividends and share repurchases. From a longer term standpoint, Cisco is refocused and wellpositioned to capitalize on the major secular technology trends such as, cloud, mobility and virtualization.
  • The fixed-income portion generated a small positive return for the quarter where most high-quality, fixed-income benchmarks experienced negative returns. The Fund has long been short duration to its benchmark given the absolute low level of interest rates.


  • As we look forward, profit growth will ultimately be the driver of market performance. We remain constructive in our outlook with an accommodative fiscal policy mixed with strong corporate balance sheets. This should be a good recipe for growth. As always, we look to position the portfolio accordingly as new inputs become available.
  • We will continue to target a maximum allocation in equities. This is based primarily on the absolute low level of interest rates where we believe equities will offer more compelling long-term performance than bonds. Portfolio positioning remains focused on Fund themes and geared toward what we consider to be dominant, high-quality companies that are exposed to positive secular trends.
  • On the fixed-income side, the Fund has long been short duration to its benchmark given the absolute low level of interest rates. Given the uncertainty surrounding the pace of the Fed’s exit program and its effects on longer-term interest rates, we prefer to avoid making substantial bets on the future rate levels. We are, however, pursuing strategies that focus on generating outperformance from the steepness exhibited in the intermediate part of the yield curve and credit markets.


*Cisco Corporation, 1.1% of net investments at 12/31/2013.

The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 31, 2013. 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.

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 it 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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