Core Equity Style
Second Quarter 2010
Waddell & Reed Asset Management Group
a division of waddell & reed investment management company 3 -15% -10% -5% 0% 5% 10% 15% 20% 10 Years 5 Years 3 Years 1 Year YTD 1 2 1 Net Gross S&P 500 % of Equity
Capital One Financial Corp. 5.8% Hewlett-Packard Co. 4.6 Wells Fargo Co. 4.6 Amgen, Inc. 4.5 CBS Corp. Cl B 3.9 Union Pacifi c Corp. 3.9 General Mills, Inc. 3.8 Intel Corp. 3.4 DIRECTV 3.3 Dow Chemical Co. 3.3
10 LARGEST HOLDINGS
4(as of June 30, 2010)
LARGEST SECTORS
(as of June 30, 2010)
Core Equity1 / S&P 5005
Information Technology 21.9 / 18.8 Financials 18.6 / 16.3 Consumer Discretionary 15.1 / 10.1 Consumer Staples 12.8 / 11.5
TOTAL RETURNS
(as of June 30, 2010)YTD3 1 Year 3 Years 5 Years 10 Years
Gross1 -3.89 17.11 -5.87 2.52 0.96
Net1 -4.18 16.43 -6.45 1.91 0.35
S&P 5002 -6.65 14.43 -9.81 -0.79 -1.59
Returns are presented on a dollar-weighted basis and may be impacted by ongoing market volatility. Past performance is no guarantee of future results. Please inquire for more current performance information.
Annualized
The Core Equity style’s investment process is driven by the core belief that changes in expectations for long-term earnings power drive stock prices. Therefore, the goal is a concentrated portfolio of companies expected to produce long-term earnings power above expectations.
The managers focus on two distinct groups of companies that the managers feel are likely to produce long-term earnings in excess of expectations. The fi rst group of companies participate in a specifi c and underappreciated, investable theme. Companies that are the dominant participants in an underappreciated theme are expected to produce long term earnings power in excess of market expectations.
The second group of companies benefi t from company-specifi c drivers that the managers believe are likely to cause the fi rm to exceed earnings forecasts on a multi-year basis. Company-specifi c drivers include, but are not limited to new products, cost restructuring, improved management execution, or a positive cyclical infl ection in business trends.
The managers believe that they employ
a repeatable process to develop themes. The managers utilize analysis from daily morning meetings with the entire equity staff to assist in idea generation and new opportunities. In addition, research analysts prepare formal action reports for the portfolio management team to assist in company-specifi c research.
The result is a relatively concentrated portfolio of approximately 40-50 securities expected to produce long-term earnings power above expectations.
The majority of the securities which are selected as a result of the investment process have higher quality characteristics. The team defi nes such characteristics as high barriers to entry, superior competitive position, high normalized returns, capital suffi ciency/generation and high margins.
Characteristics of portfolio construction include, but are not limited to, the following:
• Minimum market capitalization generally $5 billion
• Generally 40-50 stocks
• Initial position sizes of <2%, generally trimmed if they reach 7%
• Moderate turnover
• Sector weights generally range from ½ to 2 times the benchmark weights and are typically highly dependent on emphasized themes
• International companies may compose up to 10% of portfolio holdings
INVESTMENT FIRM
Core Equity Style
Second Quarter 2010
Waddell & Reed Asset Management Group
a division of waddell & reed investment management company
6300 Lamar Avenue, Overland Park, KS 66202 913.236.1740 www.institutional.waddell.com
SECTOR DIVERSIFICATION
(as of June 30, 2010)
Gross1 Net1 S&P 5002
2Q105 -10.52 -10.67 -11.43 YTD3 -3.89 -4.18 -6.65 2009 23.47 22.75 26.47 2008 -33.70 -34.15 -37.00 2007 15.23 14.59 5.50 2006 17.09 16.43 15.80 2005 10.16 9.51 4.92 2004 11.49 10.84 10.88 2003 16.15 15.51 28.72 2002 -19.36 -19.88 -22.10 2001 -11.91 -12.45 -11.91 2000 16.69 16.01 -9.18
HISTORICAL
RETURNS
0% 5% 10% 15% 20% 25% Utilities Telecom Service Information Tech Financials Healthcare Cnsmr Staples Cnsmr Disc Industrials Materials Energy 1 5 Core Equity S&P 500 0715PORTFOLIO
MANAGEMENT TEAM
Erik R. Becker, CFA
Mr. Becker is a Senior Vice President and co-portfolio manager of core equity separately managed institutional accounts for Waddell & Reed Investment
Management Company. He joined Waddell & Reed in 1999.
Gus C. Zinn, CFA
Mr. Zinn is a Senior Vice President and co-portfolio manager of core equity separately managed institutional accounts for Waddell & Reed Investment
Core Equity Style
Second Quarter 2010
Waddell & Reed Asset Management Group
a division of waddell & reed investment management company
6300 Lamar Avenue, Overland Park, KS 66202 913.236.1740 www.institutional.waddell.com
1Core Equity composite is comprised of 12 separately managed institutional accounts that had $325.4 million in total assets as of 6/30/10.
The assets included in the composite represent 4.3% of the total institutional assets under the management of Waddell & Reed Investment Management Company (WRIMCO) and its investment management affi liate. One of the accounts in this composite is managed by an
affi liate of WRIMCO with common portfolio management.
•
Annual returns refl ect yearly changes with all dividends and other earningsreinvested. Returns shown gross of fees refl ect commissions paid, but are gross of all expenses. A client’s returns will be reduced by investment management fees and other expenses incurred in the management of a client’s account. Returns shown net of fees refl ect all advisory fees, commissions and other expenses a client would have paid based on the minimum account size for the style. This results in the largest possible expense ratio in the calculation. Larger accounts will generally have a lower associated expense ratio. WRIMCO’s standard fee schedule for institutional advisory accounts is provided in Part II of WRIMCO’s Form ADV. Past performance is no guarantee of future results. Investment returns and the actual value of each client account will fl uctuate, and at any given time an account could be worth more or less than the
amount invested.
•
The benchmark selected for the composite is intended to provide a method to compare the composite’s performanceto an index including securities that are generally similar to those that are included in the composite. However, composite holdings (and, accordingly, risk and volatility) may differ signifi cantly from the securities tracked by its benchmark.
2S&P 500 Index data has been derived from Vestek Systems, Inc.
3As of June 30, 2010.
4Data regarding holdings refl ects current ownership information only and is not intended to represent any past, present or future investment
recommendation.
5Data has been derived from Standard & Poor’s.
WADDELL & REED CORE EQUITY
WADDELL & REED INVESTMENT MANAGEMENT COMPANY CORE EQUITY COMPOSITE
Composite Non-Fee Total Percent Composite Total
Total Total Number of Dispersion- Composite Composite Carve-out Assets as Firm Return Return Portfolios Equal Assets Assets from Percent of Assets
(gross of (net of Benchmark at End of Weighted (End of (End of Balanced Total Firm (End of Period fees) fees) Return* Period Std Dev** Period) Period) Portfolios Assets Period)
(%) (%) ($MM) (%) (%) ($MM) 1996 23.26% 22.54% 23.11% 19 0.37% 0.00% $607 0.00% 24.18% $2,510 1997 30.66% 29.90% 33.29% 22 0.51% 0.00% $716 2.14% 24.35% $2,939 1998 26.54% 25.83% 28.71% 16 0.83% 0.00% $789 2.28% 24.58% $3,211 1999 18.89% 18.20% 21.07% 19 1.14% 0.00% $926 2.71% 24.69% $3,752 2000 16.69% 16.01% -9.18% 19 1.14% 0.00% $812 3.17% 26.18% $3,102 2001 -11.91% -12.45% -11.91% 22 0.93% 0.00% $731 3.94% 20.10% $3,638 2002 -19.36% -19.88% -22.10% 19 0.68% 0.00% $566 4.37% 13.62% $4,158 2003 16.15% 15.51% 28.72% 20 1.58% 0.00% $857 3.57% 12.33% $6,949 2004 11.49% 10.84% 10.88% 14 0.59% 0.00% $694 1.70% 9.68% $7,167 2005 10.16% 9.51% 4.92% 14 0.60% 0.00% $683 2.02% 9.86% $6,927 2006 17.09% 16.43% 15.80% 18 0.53% 0.00% $644 2.62% 9.03% $7,128 2007 15.23% 14.59% 5.50% 10 0.91% 0.00% $431 3.43% 5.19% $8,296 2008 -33.70% -34.15% -37.00% 10 0.73% 0.00% $284 4.27% 4.62% $6,141 2009 23.47% 22.75% 26.47% 12 1.16% 0.00% $334 0.00% 4.40% $7,593 1Q10 7.42% 7.27% 5.39% 12 0.17% 0.00% $368 0.00% 4.47% $8,233 2Q10 -10.52% -10.67% -11.43% 12 0.34% 0.00% $325 0.00% 4.26% $7,642 * Benchmark Index = S&P 500 Index
** Equal Weighted Standard Deviation
ORGANIZATION: Waddell and Reed Investment Management Company (“WRIMCO” or the “Company”) is an investment
advisor registered with the Securities and Exchange Commission (“SEC”) that provides investment management and advisory services to institutional separate accounts over multiple investment styles. WRIMCO is a subsidiary of Waddell and Reed, Inc., a subsidiary of Waddell and Reed Financial Services, Inc., a subsidiary of Waddell and Reed Financial, Inc. Certain offi cers and investment staff of WRIMCO also hold offi ces with Ivy Investment Management Company (“IICO”), another investment advisor registered with the SEC that is also a subsidiary of Waddell and Reed Financial, Inc., with minimal separate account responsibilities.
For purposes of compliance with the Global Investment Performance Standards (“GIPS®”), the Company has defi ned
the fi rm as all institutional separate accounts managed by WRIMCO and IICO.
DESCRIPTION OF COMPOSITE: The Core Equity composite invests in a portfolio of high quality Large Capitalization
securities that have the potential for capital growth or that may be expected to resist market declines. The composite employs a top-down rotational strategy with a fundamental approach to stock selection. For comparative purposes, this composite uses the S&P 500 Index as the benchmark. Composite returns are available beginning 1/1/95. The composite was created on March 28, 2005 and includes all fee paying, discretionary portfolios managed following the fi rm’s Core Equity discipline. The performance presentation is in U.S. dollars.
The Core Equity composite contains carved out equity segments of balanced portfolios that are maintained in the Balanced 5% - 34% Equities Composite, and the Balanced 35% - 64% Equities Composite. The cash allocation policy is described as the cash fi lled to the maximum equity allocation, i.e., if the account is being described as being 60% equity and 40% fi xed income, the equity carve out would have cash allocated to it to bring its percentage of the total up to the asset allocation of 60% with the balance of the cash being allocated to the fi xed income segment of the portfolio. Allocated cash cannot exceed total portfolio cash. In other words, if the cash that needs to be allocated to the equity segment is greater than the total cash of the portfolio, only the total cash gets allocated to the equity segment and no cash gets allocated to the fi xed income segment.
WADDELL & REED CORE EQUITY
PERFORMANCE RESULTS: Waddell & Reed Investment Management Company has prepared and presented this report
in compliance with the Global Investment Performance Standards (GIPS®). The CFA Institute has not been involved in
the preparation or review of this report.
As of January 1, 1997, all portfolios are valued daily based on principal market values plus accrued income. Daily returns are geometrically linked to determine monthly, quarterly and annual returns. Prior to January 1, 1997, portfolio returns were calculated utilizing the Modifi ed Dietz method which is a time-weighted rate of return methodology that adjusts for cash fl ows by the amount of time they are held in the portfolio. Dividends and interest income are recorded on an accrual basis. Additional information regarding policies for calculating and reporting returns is available upon request.
FEES: The schedule outlined below represents fees charged as of June 30, 2010 for account management according
to the Core Equity discipline. The fees refl ected below are not necessarily the same as those charged to portfolios included in the composite during the periods presented:
0.60% on the fi rst $25 million 0.50% on the next $25 million
0.40% on the balances above $50 million
MEASURES OF DISPERSION: Composite dispersion measures represent the consistency of a fi rm’s composite
performance results with respect to the individual portfolio returns within a composite.
Standard deviations across equal-weighted accounts are calculated in accordance with the methodology set forth by
the GIPS®. The standard deviations of the accounts that make up the composite’s returns are calculated from the
accounts’ annual return variance from the mean annual returns.
Only portfolios that have been managed within the composite style for a full year are included in the dispersion calculation.
BENCHMARK: The Composite uses the S&P 500 Index as a comparable benchmark to evaluate composite performance.
The S&P 500 Index has been taken from published sources.
OTHER MATTERS: The current rates of return may not be indicative of future rates of return; other methods of
performance calculation may produce different results and the results for individual accounts and for different periods may vary.
A complete list and description of all composites maintained by the Company and the related performance results are available upon request.
The composite was managed by Russ Thompson from inception through June of 1997 and co-managed with Jim Wineland beginning in July of 1997. From July of 1999 to July 2006, the composite was managed solely by Jim Wineland. Upon Jim Wineland’s retirement in July 2006, Erik Becker and Gus Zinn have assumed co-management of the composite. The composite does not utilize leverage and derivatives.
During the third quarter of 2006, the largest account in the composite was removed due to securities prohibitions which meaningfully impacted the ability of the account to be managed in line with the stated composite style. As of 10/03/06, a change in the prohibitions subsequently allowed the purchase of several of the aforementioned prohibited securities and the account was placed back in the composite on 11/01/06.
IMPORTANT PERFORMANCE INFORMATION: Past performance is no guarantee of future results. Returns may
be impacted by ongoing market volatility. Please inquire for more current performance information.
