Waddell & Reed

Quarterly Fund Commentary


WRA Continental Income Fund (prospectus)
June 30, 2015


Manager(s):
Matthew A. Hekman

Market Sector Update

  • Equity and fixed-income markets were essentially flat in 2Q2015.
  • S&P 500 Index advanced, driven by strong returns in health care and consumer discretionary. Utilities, energy and industrials weighed on index performance. 10-year Treasury yield rose as the outlook for growth and inflation in the U.S. improved modestly.
  • The U.S. 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. During the quarter, backward-looking economic statistics saw modest downward revisions and the current quarter economic growth outlook consistently deteriorated.
  • Ongoing geopolitical events in Eurasia and the Middle East; weak economic data from Europe, Asia and Latin America; and ongoing weakness in the price of oil conspired to temper enthusiasm for risk assets.
  • Federal Reserve (Fed) provided an outlook on future federal funds rate increases that caused some concern over medium-term economic growth potential.

Portfolio Strategy

  • The Fund modestly underperformed in 2Q2015. The equity portfolio declined and underperformed the S&P 500.
  • Health care, consumer discretionary and technology were the primary detractors to fund performance after a very strong 1Q. Positions in Limited Brands Inc., Applied Materials, Autodesk, Kohls, and GlaxoSmithKline exhibited poor returns. Offsetting this weakness was stock selection in financials and a long-standing underweight of utilities. Positions in JP Morgan, AIG and Citigroup were notable positive drivers.
  • The fixed-income portion of the Fund modestly declined yet performed in line with the Barclays U.S. Government/Credit Index during 2Q. Our short duration position aided performance as long-term interest rates rose. The yield curve steepened during the quarter given growing expectations of a Fed rate hike this fall and growing evidence of a modestly improving U.S. economy.
  • The portfolio continues to be short duration. We prefer 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.

Outlook

  • Looking ahead, 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.
  • 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.
  • *Top 10 holdings (%) as of 06/30/2015: Limited Brands, Inc. 2.2, PNC Financial Services Group, Inc. 2.2, Home Depot, Inc., 2.1, Boeing Co. (The) 1.9, JPMorgan Chase & Co. 1.8, Union Pacific Corp. 1.8, Carnival Corp. 1.6, Broadcom Corp. 1.6, Cognizant Technology Solutions Corp. 1.6 and Citigroup, Inc. 1.5.


The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 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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