Market Sector Update
- Many macro events drove volatility and uncertainty during the quarter.
- Europe slipped back into recession, China’s growth slowed and Japan’s economy contracted sharply. All of this occurred in conjunction with rising worldwide oil production, especially in the U.S., and falling oil prices.
- In addition to these issues, investors who were putting money in high-yielding names began to pull back on worries about the taxes and the fiscal cliff. Against these headwinds, however, are some positive signs, including growing corporate earnings, which are key drivers of longer-term equity performance, and equity prices that remain reasonably valued.
Portfolio Strategy*
- Although the Fund had strong absolute returns, it underperformed the benchmark (Russell 1000 Index) for the quarter.
- In absolute terms, the health care sector was the top contributor to performance, lead by pharmaceutical holdings Bristol Myers Squibb Co., Pfizer and Johnson & Johnson. Consumer discretionary names DR Horton Inc. and Home Depot Inc. also helped during the period as the housing recovery continued gaining momentum. Technology also helped performance on a relative basis as it held an underweight position in a weaker performing sector.
- Financials performed the worst on a relative basis. Disappointing stocks included Capital One Financial Corp., which reported weak fourth quarter 2012 earnings. Materials and energy were also weaker due to overweight positions in underperforming sectors. The worst performing sector on an absolute basis was telecommunications. In February, telecomm holding CenturyTel Inc., also known as CenturyLink, Inc. surprised the market by slashing its dividend in order to better allocate cash and implement a more flexible stock buyback plan.
- The Fund’s cash position was also a drag on performance.
Outlook
- We are cautiously optimistic about the months ahead. The U.S economy is showing continued momentum, with positive indicators in consumer confidence, employment, housing and several other areas. Inflation in most emerging markets seems to have reached a peak, allowing governments to move to stimulate their economic growth.
- U.S. corporate balance sheets are healthy and many companies are sitting on a lot of cash. We anticipate that the U.S. economy will continue to grow, provided we do not experience a major global crisis of some type, or unforeseen events.
- Other challenges remain; slow job creation in the U.S. continues to be a rock in our nation’s path to full economic recovery. On a brighter note, however, we are cautiously optimistic that European policymakers are finding ways to manage and contain the debt crisis, although we believe this problem will take some time to correct.
- Against this anticipated backdrop, we try to keep our eye on the macro situation but focus intently on individual ideas. We examine each potential holding to ensure that we are buying the right stocks at the right times and at the right price.
*Bristol-Myers Squibb Co., Pfizer, Johnson & Johnson, DR Horton Inc., Home Depot Inc. and Capital One (1.9%, 2.8%, 2.2%, 2.0%, 2.9% and 2.0% of net investments at 03/31/13, respectively.) CenturyTel Inc. is no longer a holding.
The opinions expressed in this commentary are those of the Fund's manager and are current through March 31, 2013. 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.
Russell 1000 is an unmanaged index comprised of securities that represent the large-cap sector of the stock market. 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. 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.