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. He is a CFA charterholder.

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. He is a CFA charterholder.

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 6/30/2018
(Returns for periods of less than 1-yr are not annualized)


QTD YTD 1YR 3YR 5YR 10YR
Core Equity - Gross 4.46% 5.88% 20.87% 10.11% 12.66% 10.31%
Core Equity - Net 4.28% 5.51% 20.03% 9.34% 11.92% 9.62%
S&P 500 Index 3.43% 2.65% 14.37% 11.93% 13.42% 10.17%

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 8 accounts that had $6,017.4 million in total assets as of 6/30/18. 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 April 1, 2018 through June 30, 2018.

Data as of 6/30/2018

10 Largest Holdings

as a % of total assets

Microsoft Corp. 5.64%
UnitedHealth Group, Inc.
3.49%
Apple, Inc. 3.06%
Home Depot, Inc. (The) 2.87%
PayPal, Inc. 2.82%
JPMorgan Chase & Co. 2.75%
Airbus SE 2.72%
Amazon.com, Inc. 2.53%
Adobe Systems, Inc. 2.53%
CME Group, Inc. 2.48%

Sector Diversification

as a % of equity assets

Information Technology 36.11%
Financials 13.58%
Consumer Discretionary
12.31%
Industrials 12.11%
Health Care 9.15%
Energy 7.06%
Consumer Staples 4.64%
Materials 4.28%
Utilities  0.77%

Composite Composition1

Domestic Common Stock 85.96%
Foreign Common Stock 9.43%
Cash and Cash Equivalents 4.61%

Composite Total Assets1

Assets ($M) $6,017.4
Number of Accounts 8

Supplemental data: The Core Equity holdings and sector diversification data shown are 1 of the 8 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 8 accounts that had $6,017.4 million in total assets as of 6/30/18. 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 April 1, 2018 through June 30, 2018.

As of 3/31/2018

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

Market Update

The return of volatility in the equity markets was one of the main events of first quarter. To put this in context, the S&P 500, the Portfolio's benchmark, saw 23 daily moves of greater than +/-1% during the quarter, compared to just eight for all of 2017. The increase in volatility was due largely to a tug of war in the market: strong corporate earnings growth driven by tax reform and deregulation on one side, and fears around rising interest rates, elevated equity market valuations, and potential protectionist trade policies on the other.

An additional drag this quarter has been evolving U.S. trade policy, primarily focused on the North American Free Trade Agreement (NAFTA) and China. While there is good reason to modernize NAFTA and address trade fairness with China, especially around intellectual property protection, the recent headlines regarding the burgeoning trade tensions with China have not been well received by equity markets. In addition, we believe the recently enacted tax reform and continued moves on deregulation will aid the economy. As the paradigm of low interest rates, high regulation and low economic growth comes to a close, company management teams are less able to grow earnings through stock buybacks and welcome policy changes that incentivize them to increase capital spending. We are consistently hearing from companies across many sectors that significant portions of tax cut savings are being reinvested in their businesses, primarily technology initiatives.

Portfolio Review

The Portfolio outperformed the benchmark for the quarter. The top performing sectors were information technology, consumer staples, financials and industrials. Conversely, energy, health care and materials were among our largest sector detractors. The Portfolio did not hold positions in telecommunications, utilities or real estate, which actually contributed to overall positive performance.

Outlook

We believe the U.S. economic outlook provides a positive backdrop for the Portfolio. Global growth remains favorable as the U.S. economy generates solid growth, while overseas economies show continued signs of expansion.

The Portfolio has continued to benefit from having a tilt towards companies with stronger than average revenue growth combined with being on the right side of key secular trends. This is most obviously seen in the Portfolio’s overweight in information technology. This sector is also the area of the economy that is driving key secular trends like corporate technology adoption and changes to consumer behavior.

While no major positioning changes are planned in the near term, we are looking to take advantage of the increased volatility we have seen in recent months. This includes not only taking some profits in areas that have outperformed, but trying to find opportunities with companies that have recently underperformed. While most of these moves are “around the edges,” we are looking to bring more balance into the Portfolio. This will always be done in the context of owning companies where we feel that the multi-year earnings power is underappreciated.

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 March 31, 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