Waddell & Reed

Quarterly Fund Commentary

WRA Continental Income Fund (prospectus)
December 31, 2014

Matthew A. Hekman

Market Sector Update

  • Equity and fixed-income markets moved higher in the fourth quarter. The S&P 500 Index advanced driven by double-digit returns in utilities and high single-digit returns in consumer discretionary and consumer staples. Sectors that weighed on S&P 500 Index performance were energy, telecommunications and materials.
  • The 10 year Treasury yield declined 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.
  • During the quarter, backward-looking economic statistics, particularly third quarter domestic product data, came in surprisingly strong driven by personal consumption, government spending and trade. Ongoing geopolitical events, weak economic statistics from Europe, Asia and Latin America and a dramatic decline in the price of oil conspired to temper enthusiasm for risk assets.

Portfolio Strategy

  • This quarter the Fund was adjusted slightly in reaction to the growing risks to economic growth and potential economic disruption resulting from the dramatic decline in oil prices. The equity allocation was reduced from 70% to 67% with the remaining 33% allocated to fixed income and cash.
  • The equity portion modestly underperformed the benchmark primarily due to the adverse stock selection in energy. Several energy holdings exhibited poor returns. Strong relative performance in technology, consumer discretionary and industrials was enough to offset the weakness in the energy sector.
  • The fixed-income portion of the portfolio underperformed its benchmark as the Fund’s shorter duration detracted from performance and the overweight in credit was not able to fully compensate. While longerterm interest rates declined, two-year yields actually rose as expectations of a 2015 federal funds rate hike increased. As a result, the yield curve flattened, which is a trend that could persist as falling inflation expectations and the prospect of quantities easing abroad pressure longer-term interest rates lower. Overall the Fund's duration remains well short of the benchmark.


  • 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.
  • As the U.S. economy gradually improves, the Fed should begin to raise 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.

The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 31, 2014. 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.

S&P 500 is an unmanaged index of common stocks. It is not possible to invest 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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