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 manager believes 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. The manager's focus is on companies with a 2-3 year earnings power believed to be significantly better than market expectations. Attractive stocks are identified when the manager has 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 manager focuses on two distinct groups of companies that are felt 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 manager believes 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 manager 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 manager 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 manager's 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 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.

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 3/31/2019
(Returns for periods of less than 1-yr are not annualized)


QTD YTD 1YR 3YR 5YR 10YR
Core Equity - Gross 12.09% 12.09% 6.64% 11.88% 8.59% 15.63%
Core Equity - Net 11.89% 11.89% 5.89% 11.10% 7.86% 14.90%
S&P 500 Index 13.65% 13.65% 9.50% 13.51% 10.91% 15.92%

Calendar Year Returns1,2

  Core Equity Gross Core Equity Net S&P 500 Index
2018 -3.57% -4.24% -4.38%
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%

1Core Equity composite is comprised of 6 accounts that had $5,251.0 million in total assets as of 3/31/19. 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 January 1, 2019 through March 31, 2019.

Data as of 3/31/2019

10 Largest Holdings

as a % of total assets

Microsoft Corp. 5.28%
Boeing Co. (The) 3.61%
UnitedHealth Group, Inc.
3.60%
Citigroup, Inc. 2.75%
Amazon.com, Inc. 2.73%
Analog Devices, Inc. 2.70%
Lockheed Martin Corp. 2.58%
MasterCard, Inc. Class A 2.54%
Alphabet, Inc. Class A
2.51%
Nike, Inc. Class B 2.39%

Sector Diversification

as a % of equity assets

Information Technology 25.59%
Consumer Discretionary
14.32%
Health Care 12.85%
Industrials 12.63%
Financials 11.73%
Communication Services
7.92%
Consumer Staples 7.30%
Energy 3.37%
Materials 3.28%
Utilities  1.01%

Composite Composition1

Domestic Common Stock 93.40%
Foreign Common Stock 6.10%
Cash and Cash Equivalents 0.49%

Composite Total Assets1

Assets ($M) $5,251.0
Number of Accounts 6

Supplemental data: The Core Equity holdings and sector diversification data shown are 1 of the 6 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 6 accounts that had $5,251.0 million in total assets as of 3/31/19. 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 January 1, 2019 through March 31, 2019.

As of 3/31/2019

Portfolio Manager:
Erik R. Becker, CFA

Market Update

Equity markets surged during the first quarter of 2019, with both the S&P 500 Index (13%) and the Russell 1000 Index (14%) delivering positive gains. This follows a dismal fourth quarter of 2018 where both indexes posted double-digit declines. The most significant catalyst for the strong rebound in the equity market was the late January “pivot” by the Federal Reserve (Fed) to suggest successive rate increases were no longer necessary to forestall inflation. This came after the fourth quarter volatility in financial markets, a period marked by significant declines in equity prices and an uptick in fixed income credit spreads which had the effect of tightening financial conditions across the economy.

We believe that the Fed’s move was in response to slowing growth in the U.S. as well as in key international geographies. The slowing occurred both from tightening financial conditions as well as trade and tariff uncertainty, which combined to restrict economic activity. The best performing sectors in the S&P 500 Index for the quarter included Information Technology, Real Estate, Industrials and Energy as the market took a decidedly pro-cyclical turn. Real Estate, while not typically pro-cyclical, performed well thanks to the downward move in 10-year interest rates from 2.7% to 2.4% in late March. The worst performing sectors for the quarter included Health Care and Financials.

Portfolio Review

Our strategy delivered a positive return for the quarter, but underperformed both the S&P 500 Index and the Russell 1000 Index during the period. The largest detractor from relative performance was the larger-than-normal cash balance (accounting for approximately 40% of the underperformance). Additional negatives included stock selection in the Communication Services sector. The strategy’s underweight in Energy also detracted from relative performance.

From a style perspective, it should be noted that over the past nine months we have materially decreased the strategy’s weighting of high growth stocks as their valuation levels have increased relative to the broad market. For example, the Russell 1000 Growth Index outperformed the Russell 1000 Value Index by over 4% during the fourth quarter and by almost 12% going back to the start of 2018. And since the third quarter of 2009, the growth index has outperformed the value index by 98%.

We have boosted our Consumer Discretionary weighting, now the largest sector overweight. Information Technology also continues to be an area of emphasis, especially to segments of the sector with more reasonable valuation characteristics, like semiconductors and components. The strategy continues to be underweight expensive bond proxy groups, including Real Estate and Utilities. Cash levels are down from fourth quarter 2018 as we saw large opportunities to invest in companies well off their highs following the recent correction. As always, we focus on the prospects for future earnings and cash flows of the companies we invest in to exceed market expectations over a two-year time horizon.

Outlook

Ten years into the current U.S. economic cycle, investors appear to be piling into a select group of high-momentum and rapid growth companies that are commanding ever higher valuation levels relative to the overall market. Granted, it’s not uncommon for growth to lead value late in a cycle, given that value usually leads early in the acceleration phase when growth is plentiful, accelerating both top and bottom line momentum. As growth becomes scarcer later in the cycle, secular growers tend to outperform traditional value companies. In our view, however, the valuation disparities are becoming extreme.

These market dynamics are occurring against a backdrop of slowing global growth. U.S. growth moderated in the fourth quarter (after a tax-stimulus induced acceleration in 2018) while China and Europe are reporting some of their worst growth rates since the Financial Crisis. According to the International Monetary Fund (IMF), global GDP growth is estimated to fall to 3.3% in 2019, the lowest level since the crisis. While the U.S. should grow in the 2-3% range, the rest of the world is expected to slow in 2019. It should be noted that many of Europe’s problems are tied to China, as Europe exports many more capital goods into the Chinese market than does the U.S. Thus, as China goes, very often so goes Europe, albeit with a lag.

There are now many signs that policy makers globally are responding to slowing growth and a lack of inflation. Chinese policymakers are stimulating, European officials are continuing their policy of negative interest rates (nearly $10 trillion in global bonds trade at negative interest rates), and the Fed’s signaling of no further near-term rate hikes. These moves may benefit traditional value names, which currently look cheap versus the market and their growth counterparts. We anticipate that through the course of 2019, investors will feel somewhat better about growth prospects outside of the U.S. based on the aforementioned stimulus efforts, and more value-oriented investments could see a good tactical run. We have and will continue to pivot the strategy to companies with valuation characteristics that are more favorable.

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, 2019 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 2x 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