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    Quarterly Fund Commentary


    WRA High Income Fund (prospectus)
    June 30, 2016


    Manager(s):
    Chad Gunther

    Market Sector Update

    • The second quarter resulted in a rebound across high-yield sectors driven by a dovish global central bank policy narrative, a recovery in oil prices, incremental improvements across a broad range of global issues and an influx of cash into the asset class. Sectors hit the hardest towards then end of 2015 and in the first two months of 2016 rallied back as commodity prices rebounded. Metals and mining (up 27.5% year to date) and energy (up 22.4% year to date) led the way.
    • Interest rates ended the second quarter much lower than they started, driven by U.S. Federal Reserve’s (Fed) dovish tilt and more aggressive monetary policy by global central banks. Crude oil was in the $40-$50 barrel range for most of the quarter, helping to alleviate some of the panic seen in the first quarter in the equity and credit markets.
    • The Federal Open Market Committee (FOMC) declined to raise rates in June partly because of the weak non-farm payroll numbers and partly because the polls were showing a relatively close vote on the Brexit referendum. The “leave” vote on June 23 caused a huge flight to quality in sovereign developed markets, sending U.S. Treasuries to their lowest yields of the year.

    Portfolio Strategy

    • The Fund slightly underperformed the benchmark for the quarter, with the Fund’s relative overweight to CCC-rated securities benefitting performance. CCCrated securities were up more than 15% for the quarter. The Fund’s cash allocation, which averaged 6.5% over the timeframe, materially detracted in a rising market. Additionally, the allocation to loans (an approximate 15% allocation and a credit type not included in the benchmark) was a slight drag to performance.
    • From a sector allocation standpoint, the Fund’s relative underweight to the strong-performing energy sector was a noteworthy driver of underperformance. That said, our underweight allocation to financials, particularly the banking subsector, benefited performance.
    • A large contributor to performance for the quarter was the Fund’s credit selection within the services sector. Subsector support-services performed particularly well. Additionally, strong credit selection within specialty retail aided Fund results.

    Outlook

    • Recent economic data is pointing to continued slowing in manufacturing activity. There are also few signs of inflation, and companies continue to struggle to exhibit top-line growth. Finally, instability in China continues to weigh on the markets. Given this environment, we think the Fed could have a hard time making the case for any additional rate increases throughout 2016.
    • Given market uncertainties, we believe it is prudent to maintain a higher cash balance going forward as well as to maintain a more balanced portfolio in regards to liquidity and risk.
    • Our goal of finding businesses that offer the best risk-adjusted return characteristics will continue as it is our belief that bottom-up fundamental credit analysis should produce better relative performance in both up and down credit cycles.

    The opinions expressed in this commentary are those of the Fund’s manager and are current through June 30, 2016. 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 not a guarantee of future results.

    Risk factors. 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 high-income securities 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. These and other risks are more fully described in the Fund’s prospectus.

    Waddell & Reed Investments refers to the investment management services offered by Waddell & Reed Investment Management Company, the investment manager of the Waddell & Reed Advisors Funds, distributed by Waddell & Reed, Inc.

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