Market Sector Update
- The S&P 500 Index increased during the fourth quarter of 2014. The ride was bumpy as fears around the Ebola outbreak and Russian aggression in Ukraine sent stocks into negative territory in mid-October, only to see a strong rally back to new highs toward the end of the year.
- The major story was the significant correction in the price of oil from more than $90 a barrel at the end of Q3 to less than $50 a barrel currently. Stronger than expected North American production throughout 2014, weak demand globally and OPEC’s decision not to support oil markets through reduced output all factored into the steep sell-off.
- Continued weakness in the European and Japanese economies led to expectations of aggressive central bank policies in those nations whereby the ECB and Bank of Japan engaged in widespread purchases of fixed-income assets in order to reduce interest rates and the value of their respective currencies.
- While policymakers are sounding more alarms at the slow rate of growth in Europe and Asia, the Federal Reserve (Fed) appears more confident in U.S. prospects given lower unemployment and signs that wage growth may finally be nearing an inflection point.
- The Fund underperformed the benchmark for the period ended Dec. 31, 2014. Negative security selection drove the underperformance and was specific to a few issues.
- First, energy exposed industrial names such as Flowserve and Canadian Pacific led weak stock selection within industrials.
- Second, Fund holdings in the Financials sector failed to keep up with the benchmark as investors continued to reward the nominal income potential and safety of real estate investment trust (REIT) investments.
- Finally, the failed merger with Abbvie led to a significant reduction in the share price of Shire Pharmaceuticals.
- As we discussed last quarter, we continue to have a number of “catalyst rich” investments within the portfolio that should benefit from the closing of several major acquisitions in 2015.
- We believe the outlook for the U.S. economy has improved modestly since our last update. Our research indicates final third quarter growth at 5%, which surprised to the upside, and all indications point to 2.5-3% growth in fourth quarter, which would make for strong consecutive quarter growth.
- The decline in gasoline prices should serve as a meaningful stimulus, perhaps as much as $150 billion domestically and over $1 trillion globally. Along with better wages, we expect to see a broadening of economic prosperity this year to segments of the population that have experienced little benefit this cycle. We have structured Fund exposure to the consumer discretionary, consumer staples and financials sector accordingly.
- Over the past three months, we have decreased the cyclicality of the portfolio by reducing exposure to the energy sector and companies exposed to the general level of capital investment in and around the energy patch. This also translates into reduced investments in industrials and materials, and reduced exposure to the North American manufacturing renaissance theme, at least temporarily.
*Top 10 holdings as of 12/31/2014: Applied Materials, Inc. 4.7%, Citigroup, Inc. 3.9%, Bank of America Corp. 3.3%, Medtronic, Inc. 3.2%, MasterCard, Inc. 3.2%, Canadian Pacific Railway Ltd. 3.3%, Dollar General Corp. 2.8%, American International Group, Inc. 2.8%, Shire Pharmaceuticals Group 2.8% and Anheuser-Busch InBev S.A. 2.67%.
The opinions expressed in this commentary are those of the Fund’s managers and are current through Dec. 31, 2014. The managers’ 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. Because the Fund is generally invested in a small number of stocks, the performance of any one security held by the Fund will have a greater impact than if the Fund were invested in a larger number of securities. Although larger companies tend to be less volatile than companies with smaller market capitalizations, returns on investments in securities of large capitalization companies could trail the returns on investments in securities of smaller companies. 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. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.
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.