Institutional Strategies

Core Equity

A concentrated portfolio of primarily U.S. domestic companies that generally invests across the valuation and large- to mid-cap spectrum opportunistically. The goal is a portfolio of companies expected to produce long-term earnings power above expectations. As an actively managed approach, the strategy strives to outperform the S&P 500 Index over full market cycles.

Investment Philosophy

The Core Equity 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 relatively concentrated portfolio of companies expected to produce long-term earnings power above expectations and stable to improving competitive advantages. Sources of competitive advantage include, but are not limited to, superior technology, brand, scale and capital advantages. The managers believe that focusing on companies with such advantages increases the likelihood that an earnings catalyst is likely to materialize and helps to manage downside risk.

Investment Process

The selection process begins with a broad universe of all securities above $5 billion in market capitalization. They focus on companies with a 2-3 year earnings power that they believe is significantly better than market expectations. Attractive stocks are identified when they have an earnings power story that is thought to be underappreciated and have a strong competitive position which increases the probability that these forecasts can be achieved.
 
The managers focus on two distinct groups of companies that they feel are likely to produce long-term earnings in excess of expectations.

The first group of companies are the dominant participants in an underappreciated theme and are expected to produce long-term earnings power in excess of market expectations. Examples of such themes include industries at cyclical inflection points, major macro-economic/political forces, changes in consumer behavior and shifts in technology.

The second group of companies benefit from company-specific drivers which the managers believe are likely to cause the firm to exceed earnings forecasts on a multi-year basis. Company-specific drivers include, but are not limited to, new products, cost restructuring, improved management execution and positive cyclical changes in business trends.

The team utilizes analysis from daily morning meetings with the entire equity staff to assist in idea generation and identification of new opportunities. In addition, research analysts prepare formal action reports for the portfolio management team to assist in company-specific research.

Regardless of whether ideas come from company specific stories or thematic views, each company in the portfolio will have an expected long-term (2 to 3 year) earnings forecast that in the managers’ view is a significant premium to market.

The result is a relatively concentrated portfolio of approximately 40-50 securities expected to produce long-term earnings power above expectations.

Erik R. Becker, CFA

Senior Vice President, Portfolio Manager

Mr. Becker is co-portfolio manager of the firm’s Core Equity investment strategy and has served in this role since 2006. He has been affiliated with the strategy since 2003 when he assumed assistant portfolio manager responsibilities. He joined the organization in 1999 as an equity investment analyst, covering industries in the consumer discretionary and industrials sectors.

Mr. Becker earned a MS in Finance and a BBA in Finance from the University of Wisconsin-Madison.

Gus Zinn, CFA

Senior Vice President, Portfolio Manager

Mr. Zinn is co-portfolio manager of the firm’s Core Equity investment strategy and has served in this role since 2006. He joined the organization in 1998 as an equity investment analyst, covering industries in the consumer discretionary, industrials and information technology sectors. Mr. Zinn was assistant portfolio manager of the firm’s Science and Technology mutual funds from 2003 to mid-2006.

Mr. Zinn earned a Masters in Finance and a BBA in Finance from the University of Wisconsin-Madison.

3 years, 5 years, 10 years annualized. 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.

Total Returns1,2,3

Average Annual Total Returns as of 9/30/2018
(Returns for periods of less than 1-yr are not annualized)


QTD YTD 1YR 3YR 5YR 10YR
Core Equity - Gross 6.23% 12.48% 19.89% 15.40% 12.07% 12.20%
Core Equity - Net 6.05% 11.89% 19.05% 14.60% 11.33% 11.49%
S&P 500 Index 7.71% 10.56% 17.91% 17.31% 13.95% 11.97%

Calendar Year Returns1,2

  Core Equity Gross Core Equity Net S&P 500 Index
2017 21.85%  21.00%   21.83%  
2016 4.51% 3.79% 11.96%
2015 0.46% -0.19% 1.38%
2014 10.61% 9.95% 13.69%
2013 35.42% 34.61% 32.39%
2012 19.61% 18.90% 16.00%
2011 1.90% 1.29% 2.11%
2010 21.63% 20.91% 15.06%
2009 23.47% 22.74% 26.46%
2008 -33.70% -34.11% -37.00%

1Core Equity composite is comprised of 7 accounts that had $6,047.8 million in total assets as of 9/30/18. Returns reflect the reinvestment of all dividends and other earnings. Portfolio returns are net of all foreign reclaimable and nonreclaimable withholding taxes, if applicable. Withholding taxes are recognized on an accrual basis or cash basis depending on client and/or account type. Additional information regarding treatment of withholding taxes is available upon request. Returns shown gross of fees reflect the deduction of commissions paid, but are gross of all other expenses. Net-of-fees returns are calculated by deducting the highest applicable advisory fee from the monthly gross composite return. The actual fees paid by a client may vary based on assets under management and other factors. A client’s return will be reduced by investment management fees and other expenses incurred in the management of a client’s account. Investment advisory fees are described in Part 2 of the ADV. Investment returns and the actual value of each client account will fluctuate, 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 performance to 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 significantly from the securities tracked by its benchmark.

2The S&P 500 Index is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Ivy Investment Management Company (IICO). Standard & Poor’s®, S&P® and S&P 500 Index are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by IICO. IICO's products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index.

3QTD return from July 1, 2018 through September 30, 2018.

Data as of 9/30/2018

10 Largest Holdings

as a % of total assets

Microsoft Corp. 6.15%
Apple, Inc. 3.93%
UnitedHealth Group, Inc.
3.56%
JPMorgan Chase & Co.
3.15%
Amazon.com, Inc.
3.15%
Airbus SE
2.75%
Alphabet, Inc. Class A 2.58%
Medtronic plc 2.57%
Visa, Inc. Class A 2.49%
CME Group, Inc. 2.43%

Sector Diversification

as a % of equity assets

Information Technology 25.19%
Financials 13.15%
Industrials 12.06%
Health Care 12.04%
Consumer Discretionary
9.57%
Communication Services 9.41%
Energy 6.54%
Consumer Staples 6.30%
Materials 4.66%
Utilities  1.07%

Composite Composition1

Domestic Common Stock 91.83%
Foreign Common Stock 6.10%
Cash and Cash Equivalents 2.08%

Composite Total Assets1

Assets ($M) $6,047.8
Number of Accounts 7

Supplemental data: The Core Equity holdings and sector diversification data shown are 1 of the 7 composite accounts without client specific investment restrictions and may not be reflective of the Core Equity composite as a whole or of any other Core Equity account currently, or in the future, included in such composite. The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.

1Core Equity composite is comprised of 7 accounts that had $6,047.8 million in total assets as of 9/30/18. Returns reflect the reinvestment of all dividends and other earnings. Portfolio returns are net of all foreign reclaimable and nonreclaimable withholding taxes, if applicable. Withholding taxes are recognized on an accrual basis or cash basis depending on client and/or account type. Additional information regarding treatment of withholding taxes is available upon request. Returns shown gross of fees reflect the deduction of commissions paid, but are gross of all other expenses. Net-of-fees returns are calculated by deducting the highest applicable advisory fee from the monthly gross composite return. The actual fees paid by a client may vary based on assets under management and other factors. A client’s return will be reduced by investment management fees and other expenses incurred in the management of a client’s account. Investment advisory fees are described in Part 2 of the ADV. Investment returns and the actual value of each client account will fluctuate, 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 performance to 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 significantly from the securities tracked by its benchmark.

2The S&P 500 Index is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Ivy Investment Management Company (IICO). Standard & Poor’s®, S&P® and S&P 500 Index are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by IICO. IICO's products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index.

3QTD return from July 1, 2018 through September 30, 2018.

As of 9/30/2018

Portfolio Managers:
Erik R. Becker, CFA
Gus C. Zinn, CFA

Market Update

The third quarter was an extremely strong quarter for the U.S. equity market with the S&P returning 7.7% for the period. Recent market leadership from the Information Technology sector continued, but the leadership did broaden a bit with the Health Care sector showing particularly strong performance (over 14%) in the quarter. Areas that underperformed were either hurt by rising bond yields or fears of a significant slowdown in emerging markets driven by trade war escalation between the U.S. and China. This combination caused both defensive areas of the market (Real Estate and Utilities sectors) as well as economically sensitive areas (Energy and Materials sectors) to significantly lag market averages. Companies more exposed to domestic growth did best in the quarter.

Portfolio Review

The Ivy core equity strategy underperformed during the quarter as stock selection within Information Technology and Consumer Discretionary was the primary detractor. Despite some cyclical weakness in the semiconductor area, the Information Technology sector in aggregate continues to perform well as the push across industries to serve customers in a digitally connected world remains strong. The sustainability of Health Care outperformance will likely be affected by the political environment with midterm elections approaching. Outside of politics, the outlook for Health Care remains positive as the companies are less economically sensitive and valuations remain reasonable.

As it relates to portfolio positioning, we continue to work towards a more balanced strategy by shifting some of our growth exposure (primarily Information Technology) into more stable areas of the market that are reasonably valued. Despite being later in the economic cycle, we may see opportunity in cyclical stocks if they show signs of a dramatic downturn in earnings power. Our current economic outlook is that growth will decelerate in 2019, but no recession. For the time being, “balance” across value and growth, as well as stability and cyclicality is where we are working to position the portfolio.

Outlook

Looking forward, the market environment is at a tricky juncture. The valuation gap between growth and value looks extreme. The market has continued to reward companies with strong growth outlooks thinking that their revenues can continue to grow even in a more difficult economic climate. Companies more sensitive to the economy have seen their stocks suffer as the market continues to worry that the economic good news is nearing an end. Trade war rhetoric with China has exacerbated the cyclical fears in the market as global growth would likely decline if tariffs continue to escalate. Companies are beginning to sound the alarm that all the trade war rhetoric and tariff implementation is causing some pause in decision-making that is affecting business activity. At the other end of the spectrum, rising interest rates in the U.S. speak to the strength of the domestic economy. The 10-year U.S. Treasury increased 20 basis points to 3.2% during the quarter to, breaking a multi-decade downtrend. If this rise in rates continues, it would likely be a headwind to growth stocks with high valuations. Understanding where the greatest stock risk lies, however, is a more difficult question than in recent years. We believe the sustainability of domestic and global economic growth will be most important factor in answering the growth versus value debate.

On the positive front, the domestic equity market remains supported by a very strong U.S. economy. Employment is robust with unemployment rate under 4%, wages are increasing at a controlled 2.5-3% rate and corporate earnings in aggregate are growing over 20%. We remain optimistic on the U.S. outlook.

How the trade war rhetoric with China is either resolved or continues to escalate is probably most important in determining whether a more significant change in market leadership is ahead. Predicting government politics is not a game we feel very confident playing, which is why we currently don’t have the portfolio tilted towards one side of the debate. Regardless of how things unfold, our focus remains finding companies which we think have long-term future earnings power above market expectations.

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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Key Features

Composite Performance History Since 1/1/1995
Benchmark S&P 500 Index
Style Fundamental, Core: Growth and Value
Target Alpha 200 bps above Index
Over full market cycles (3-5 years)
Peer Universe U.S. Large Cap Core Equity
Typical Tracking Error 300-500 bps
Holdings Range 40-50
Max Position Size Greater of 6% or 2.5x Index
Sectors Generally range from 1/2 to 2x the Index weights and are highly dependent on emphasized themes
Investment Vehicles Institutional Separate Account
Collective Investment Trust
U.S. Mutual Fund: Institutional Share Class
Variable Insurance Portfolio