Waddell & Reed

Quarterly Fund Commentary

WRA High Income Fund (prospectus)
September 30, 2015

Chad Gunther

Market Sector Update

  • The high-yield sector saw a significant widening of both spreads and yields in the third quarter. The spread on the JP Morgan High Yield index widened 157 basis points from 549 basis points on 6/30/15 to 706 basis points on 9/30/15. Yields during the quarter widened roughly 143 basis points from 6.97% to 8.4%.
  • Concerns outside the U.S. continued to weigh on investor psychology and came to a crescendo on Aug. 24 when another “flash crash” was experienced in the equity markets with the Dow Jones Industrial Average opening down 1,000 points.
  • Sprint Corporation, which is the largest issuer in the high-yield sector, had its credit rating downgraded to CCC.

Portfolio Strategy

  • Our investment process is based on bottoms-up research of the individual opportunities. We seek good risk/reward characteristics, particularly related to companies that we believe the market does not understand or which generate outsize yield related to their risk.
  • We believe that credit selection is the basis for above-average performance through a credit cycle and believe it to be preferable versus attempting to time the market or place macro bets.


  • The Fund continues to be overweight loans compared to its peers and underweight energy, chemicals, telecommunications relative to the index. Overweight sectors include technology, retail and insurance.
  • With the widening of spreads to 706 basis points at quarter end, we continue to think there is value in high yield relative to other fixed income alternatives.
  • The current levels in the market have priced in an implied default rate of between 4% and 5% when in actuality we have only seen roughly 2.5% default rate, mainly dominated by energy & coal companies.
  • Whether or not the Fed increases its interest rate before year end remains unknown, but we are of the opinion any rate hike will be accompanied by language indicating a very slow and measured approach focused on data. With very little evidence of inflation increasing, we expect the current lowrate environment to persist for the foreseeable future.

The opinions expressed in this commentary are those of the Fund’s manager and are current through Sept. 30, 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.

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. 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. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. 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 f nancial advisor or visit us online at www.waddell.com. Please read the i prospectus or summary prospectus carefully before investing.

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