Market Sector Update
- Equities rallied strongly in 4Q, largely
regaining ground lost in 3Q. Concerns
regarding ongoing global growth and the
impact of spastic policies in China on the
global economy led to a weak quarter.
These issues haven’t been resolved per
se, but investors appear to have become
comfortable that the magnitude impact
on economic growth and earnings is not
sufficiently dramatic to warrant a steep
- Overall, this set of factors provided
sufficient relief to drive an increase in the
Russell 1000 Index, the Fund’s
benchmark, in the quarter, with all
sectors performing positively except
- Positive performance in the quarter was
quite broad. Utilities were up slightly, but
substantially underperformed the
broader index as investors were less
sanguine about the sector in an
environment of interest rates rising –
with lift-off finally occurring at the
Federal Reserve’s December 2015
- Materials, technology and health care
were the strongest performing sectors.
- The Fund outperformed its benchmark
and peer group in the quarter, before the
effect of sales charges.
- Sector allocation did not have a
meaningful performance effect on
results with the exception of the Fund’s
underweight in technology relative to
the index and holdings of cash in a
rising market environment.
- Stock selection during the quarter was a
strong contributor to returns and
performance was positive in all sectors
except energy. Stock selection in
technology, consumer discretionary and
health care had the substantial positive
impact on performance.
- From an individual stock perspective
Applied Materials, Teva
Pharmaceuticals, McDonald’s Corp.,
Microsoft and Medtronic were the
greatest positive contributors. Energy
Transfer Equity, Union Pacific, Anadarko
Petroleum, Abbvie and Corrections
Corp of America all were notable
detractors from relative performance.
- Our outlook for equities overall is
cautious. As of year-end, valuations for
most sectors were somewhat elevated
relative to history. In spite of only
modest appreciation in equities, most
valuation metrics have not substantially
improved as overall earnings have been
anemic over the past year.
- A combination of a more sluggish
than expected global economy,
pressures from both the accounting
and competitive impact of an
appreciating dollar, along with the
diminishing ability of corporations to
realize operating leverage at low levels
of revenue growth have combined to
fuel minimal earnings growth –
earnings are expected to fall for the
- The outlook for U.S. economic growth
remains subdued as the impact of a
stronger dollar, and lower spending in
the energy is expected to persist in the
next few quarters. Further, we believe
the likelihood that central bankers in
either China and/or the U.S. have
made a policy error is a non-trivial
matter. Such an error may not be a
major headwind to domestic earnings
growth, but in our view would lower
the odds of a broad re-acceleration in
U.S. economic growth and corporate
earnings growth needed to drive
equity markets considerably higher.
*Top 10 Holdings (%) as of 12/31/2015: Teva Pharmaceutical
Industries Ltd. 4.5, Pfizer, Inc. 4.5, Citigroup, Inc. 3.9,
Medtronic Inc. 3.8, Microsoft Corp. 3.8, JPMorgan Chase &
Co. 3.8, McDonald's Corp. 3.3, CVS Caremark Corp. 2.7,
Applied Materials Inc. 2.8 and Bristol-Myers Squibb Co. 2.9.
The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 31, 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 Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. 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. Dividend-paying investments may not experience the same price appreciation as non-dividend paying instruments. 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.