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    Quarterly Fund Commentary

    WRA Continental Income Fund (prospectus)
    June 30, 2016

    Matthew A. Hekman

    Market Sector Update

    • 2Q 2016 exhibited modest appreciation in asset markets despite a vote by the U.K.to leave the European Union, which prompted another round of volatility late in the quarter.
    • Looking back over the past two quarters, despite the worst start to a new year in financial market history; a double-digit percentage decline in the S&P 500 Index (Fund’s equities benchmark) January through February coinciding with doubledigit credit spreads in the high yield fixedincome market; asset markets rallied to finish the first half of 2016 modestly higher.
    • During 2Q 2016, the S&P 500 rose led by the following sectors: energy, telecommunications, utilities, and health care. Technology and consumer discretionary exposure weighed on the index’s return during the period.
    • The 10 year Treasury yield dropped over the course of the quarter as the Federal Reserve (Fed) retreated from its previous (more aggressive) interest rate forecast.
    • The Barclays U.S. Gov’t/Credit Index (Fund’s fixed-income benchmark) rose during the quarter largely as a result of falling Treasury yields.
    • Spreads tighten modestly in Investment Grade bonds over the course of the quarter predominately driven by the energy and metals sectors.

    Portfolio Strategy

    • During the quarter, the equity portfolio was positive, outpacing the S&P 500.
    • Technology, financials and consumer staples were the primary drivers of the Fund’s performance. Positions in Newfield Exploration, Crown Castle, Johnson & Johnson, J.M. Smucker and Medtronic exhibited strong returns.
    • Offsetting this strength was poor stock selection in consumer discretionary and health care. Positions in Carnival Corp., Allergan plc., Las Vegas Sands and Teva Pharmaceutical were notable detractors.
    • Over the course 2Q, sector weights were modestly adjusted with small decreases in consumer discretionary, financials and technology and small increases in health care, energy and consumer staples. In particular, positions in Northern Trust, McDonald’s and Boeing were eliminated. The Fund initiated positions in DexCom and WestRock.
    • The fixed-income portion of the Fund rose modestly trailing the Barclays benchmark. Our short duration position hurt performance as long-term interest rates dropped.
    • The yield curve flattened during 2Q as the Fed signaled fewer interest rate increases in 2016; global bond yields continued to decline; and expectations for future economic growth and inflation remain subdued. Credit spreads narrowed in both the Investment Grade and High Yield debt markets, continuing the recovery from a dramatic widening that climaxed in February, which benefited Fund performance in 2Q.
    • The portfolio continues to be short duration with an emphasis in high grade bonds. We prefer to focus 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.


    • With multiple economic and political crosswinds buffeting global asset markets, it seems volatility is likely to remain at an elevated level.
    • In the end, asset markets will follow corporate earnings and cash flows and unfortunately, the trends and outlook there have been disappointing. In fact, S&P 500 revenues have been declining on a year-over-year basis for the past five quarters and earnings have been declining for the past three quarters.
    • The June 30, 2016 quarter will be reported over the next several weeks is expected to continue this downward trend with consensus expectations persistently declining through period. It’s this backdrop that explains the sub-par returns produced by risk assets over the past year. It’s also this anemic growth environment, coupled with recessionary economic conditions in several emerging market countries that have motivated central bankers around the globe to pursue unprecedented levels of monetary stimulus including various forms of Quantitative Easing and negative interest rates.
    • 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. This approach has served investors well over time, and our confidence in it has not waned.


    *Top 10 holdings (%) as of 06/30/2016: Carnival Corp. 1.9, Shire Pharmaceuticals Group 1.8, Comcast Corp. 1.6, Johnson & Johnson 1.5, JP Morgan Chase & Co. 1.5, Allergan plc. 1.5, Broadcom Corp. 1.4, Crown Castel International Corp. 1.4, Mead Johnson Nutrition Co. 1.4 and Teva Pharmaceutical Industries 1.4.

    The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 2016. 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 not a 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. Gov’t/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. 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. 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 then 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. The Fund’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform non-dividend paying stocks and the market as a whole over any period of time. In addition, there is no guarantee that the companies in which the Fund invests will declare dividends in the future or that dividends, if declared, will remain at current levels or increase over time. The amount of any dividend the company may pay may fluctuate significantly. In addition, the value of dividend-paying common stocks can decline when interest rates rise as fixed-income investments become more attractive to investors. This risk may be greater due to the current period of historically low interest rates. The Fund typically holds a limited number of stocks (generally 50 to 65). As a result, the appreciation or depreciation of any one security held by the Fund will have a greater impact on the Fund’s net asset value than it would if the Fund invested in a large number of securities. 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. 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.

    Waddell & Reed Investments refers to the investment management services offered by Waddell & Reed Investment Management Company, the investment manager of the Waddell & Reed Advisors Funds, distributed by Waddell & Reed, Inc.

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