Large Cap Value

For the Period Ending: 9/30/2018

Portfolio Manager:
Matthew T. Norris, CFA

Market Update

Equity markets continued the push higher with broad-based strength. Economic data points continue to show strong and stable growth in the U.S., and corporate earnings reflect that trend. The Russell 1000 Value Index return for the third quarter was +5.7%, which trailed both the broader S&P 500 Index as well as the growth style. Inflation and wage gains have appeared, although still very small. Interest rates rose at both the shorter and longer end of the treasury curve. Macro focus continues to be on the increasingly concerning trade environment, but so far the markets have anticipated a positive outcome.

Portfolio Review

In the third quarter, the Ivy Investments large cap value strategy strongly outperformed the Russell 1000 Value. The best relative sector was Energy. The next best relative sector was Health Care, where two of our holdings significantly outperformed the group.

Detracting from performance in the quarter was our ownership of a major semiconductor manufacturer and a company that produces and sells memory and storage solutions worldwide. Despite the underperformance of these stocks in the quarter, we still believe that both names are trading far enough below their intrinsic value to still warrant ownership.

For the quarter, the portfolio’s biggest overweights were in the Financials and Consumer Discretionary sectors.

We believe the U.S. banking system is strong and well-capitalized, with many equities attractively priced. The Federal Reserve’s recent Comprehensive Capital Analysis and Review (CCAR) gave most large banks the ability to raise dividends and repurchase shares, adding to their appeal. In other sectors, our overweights are more a function of incidental names than any overall theme. Industries held include HMOs, chemicals, airlines and pipelines.

The portfolio’s major underweights in the quarter were Utilities and Consumer Staples. Value names are hard to find amongst these sectors, and our lack of exposure there helped as the sectors trailed the broader value index in the quarter.


The rest of 2018 could be interesting for investors. We believe the U.S. economy will continue to plug along and other parts of the world will also grow, but at a slower pace. Corporate profits are solid, and we expect planned capital expenditures to continue through the year. The tightened job market appears to be stable, but consumers have yet to see real wage growth. Midterm elections could ratchet up volatility in stocks. On a macro level, we are cautiously optimistic for a continued supportive backdrop, with continued GDP growth, rising corporate profits, a tightening job market and the avoidance of a trade war. Given these conditions, we would expect small positive returns from the overall stock market.

While the economic forces listed above are clearly important factors, the first approach of the portfolio management team is from the company level. We seek to find quality, growing companies whose stocks are trading below what we consider their intrinsic value. Oftentimes this is due to short-term negative factors, and we become larger owners of a company if we feel those negatives are about to dissipate. We continue to search for and make investments one company at a time, to benefit clients over the long run.

The opinions expressed are those of the portfolio manager(s) and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through September 30, 2018 and are subject to change due to market conditions or other factors. Any mention of investment performance refers to gross-of-fees performance, unless otherwise noted.
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Investment Team

Matthew T. Norris, CFA

Senior Vice President, Portfolio Manager

Mr. Norris is portfolio manager of the firm’s Large Cap Value investment strategy and has been in this role since 2003 when he joined the firm. He was the Director of Equity Research and responsible for the firm’s equity research team from 2005 to 2010.

Mr. Norris was affiliated with Advantus Capital Management, Inc. in St. Paul, Minn. from 1997 to 2003. He joined Advantus as an equity analyst and was appointed portfolio manager in 2000. Prior to joining Advantus, he was an equity analyst and portfolio manager for Norwest Investment Management, Inc. from 1994 to 1997.

Mr. Norris earned an MBA from the University of Nebraska and a BS in Cellular Biology from the University of Kansas.

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