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 12/31/2018
(Returns for periods of less than 1-yr are not annualized)


QTD YTD 1YR 3YR 5YR 10YR
Core Equity - Gross -14.27% -3.57% -3.57% 7.09% 6.42% 12.96%
Core Equity - Net -14.42% -4.24% -4.24% 6.34% 5.70% 12.25%
S&P 500 Index -13.52% -4.38% -4.38% 9.26% 8.49% 13.12%

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 7 accounts that had $4,933.7 million in total assets as of 12/31/18. 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 October 1, 2018 through December 31, 2018.

Data as of 12/31/2018

10 Largest Holdings

as a % of total assets

Microsoft Corp. 4.94%
UnitedHealth Group, Inc.
4.07%
Alphabet, Inc. Class A
4.02%
Medtronic plc
2.97%
Coca-Cola Co. (The) 2.74%
Verizon Communications, Inc. 2.53%
Lockheed Martin Corp. 2.52%
Citigroup, Inc. 2.45%
Apple, Inc. 2.42%
Visa, Inc. Class A
2.38%

Sector Diversification

as a % of equity assets

Information Technology 25.06%
Health Care
14.41%
Communication Services
13.08%
Industrials 11.98%
Financials 11.13%
Consumer Staples
9.15%
Consumer Discretionary 7.99%
Materials 3.53%
Energy 2.27%
Utilities  1.40%

Composite Composition1

Domestic Common Stock 89.93%
Foreign Common Stock 2.92%
Cash and Cash Equivalents 7.16%

Composite Total Assets1

Assets ($M) $4,933.7
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 $4,933.7 million in total assets as of 12/31/18. 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 October 1, 2018 through December 31, 2018.

As of 12/31/2018

Portfolio Manager:
Erik R. Becker, CFA

Market Update

The S&P 500 Index declined 13.5% and the Russell 1000 Index declined 13.8% for the fourth quarter. A sharp risk-off mentality drove negative returns across many asset markets in the U.S. We believe several factors led to the risk reduction. First, evidence of a synchronized global slowdown mounted with weaker economic data in Asia, Europe, and in certain parts of the U.S. economy. Growth momentum weakened in China throughout 2018 following efforts by the government to withdraw liquidity in 2017. Additionally, stepped-up tariffs are beginning to take a toll in China following pre-ordering that artificially held up reported industrial activity. The slowdown can be seen in Chinese auto sales, a great indicator of the health and confidence of the Chinese consumer, which fell 15% during the month of December. European industrial indicators are also weakening on slower global trade and concern around the U.K. exit from the European Union.

Within the U.S., data has weakened with housing starts moving from a 1.3 million pace in the first half of the year to a 1.2 million pace in the fall, as the lagged effects of higher interest rates took hold on consumers. Meanwhile, the ISM Manufacturing Index, a broad measure of industrial activity in the U.S., has fallen from 61.3 in late August to 54.1 in December. The second reason for risk reduction across financial markets has been political, namely the institution of tariffs and the threat of future measures to reduce the size of the U.S. trade deficit. The ongoing trade war has cast a level of uncertainty into markets and led to meaningful declines in corporate confidence. The near-term effect is likely to be felt through slower capital expenditures after strong growth in 2018. A final reason for the fourth quarter sell-off, in our view, stems from the belief that the Federal Reserve (Fed) will raise rates excessively, pushing the U.S. into a recession. The S&P 500 fell nearly 200 points or 8% in value shortly after the Fed’s December 19th decision to increase rates 0.25% and hint that another two rate hikes were on the table for 2019. As 2019 began, the S&P rallied somewhat off fourth quarter lows, partly due to more “dovish” Fed commentary about future interest rate increases.

Portfolio Review

The Ivy Core Equity strategy modestly underperformed both benchmarks. The markets’ worst performing sectors included Energy (-24%), Industrials (-17%), and Information Technology (-17%). The best performing sectors included Utilities (+1%), Real Estate (-4%) and Consumer Staples (-5%). All sectors other than Utilities posted negative returns for the quarter. The underperformance of specific securities in the Industrials sector, combined with a greater-than-market weighting in that underperforming sector, was a significant detracting factor. The strategy’s underweights of Utilities and Real Estate also had a negative effect on relative performance for the quarter. Offsetting these declines was a relatively high level of cash, which averaged above 6% in the quarter.

The current investment strategy is to take a conservative portfolio posture while building positions in companies that have been unduly punished by other market participants.

We firmly believe that during times of market stress, those investors with longer time horizons than a few weeks or a few quarters can take advantage of dislocations in valuations of good companies. For good reason, cyclical names appear the most attractive when considering a 2- or 3-year time horizon. We have selectively increased our weighting in semiconductors with the belief in long-term secular growth and highly defensible business models. We have modestly increased the weighting in Financials to take advantage of the current slowdown in capital market activities that is having a near-term effect but we believe temporary impact on earnings. Finally, we will look toward other hard-hit areas of Industrials, Information Technology, Financials and Energy as opportunities present themselves over the coming months and quarters, always with a longer-term eye on earnings and business model strength.

Outlook

We believe the outlook for the equity market over the next 12 months is highly uncertain given a litany of moving parts that may or may not be resolved favorably. We believe that the most important determinant for the direction of the equity market is ultimately the direction of the global economy. It’s no surprise that the Chinese market (Shanghai Composite) peaked in late January 2018, just one month before the Caixin China Manufacturing PMI (a broad measure of manufacturing activity in China) peaked. Similarly, the September U.S. market peak was followed closely by the first leg down in the U.S. ISM Manufacturing PMI (reported in early October). Conversely, we expect the next major move upward in the equity market will be to discount a bottoming and eventual re-acceleration in economic activity here and abroad. Given emerging markets (namely China) led the current downturn, we would expect that China bottoms before the U.S. China policymakers have taken a “whatever it takes” mantra to stabilizing economic growth, implementing numerous measures (e.g. record consumer tax cuts and reductions in bank reserves) to this end. Clearly, the trade spat with the U.S. is a key unknown variable, though most observers expect some sort of “deal” at the March 1st agreed deadline. With the U.S. a full nine months behind other economies in showing signs of weakness, we believe U.S. data is likely to get somewhat worse before it gets better. To date, housing and industrial activity has shown signs of weakness, while employment and wage trends, consumer confidence, and consumer spending data all remain at or near cycle highs. Some recent data on capital expenditure plans seem to foretell a further deceleration in economic activity. The pickup in capital expenditures along with the Tax Cuts and Jobs Act of 2017, we believe, were the underpinning for the acceleration in economic growth in 2018. Following a strong tax refund season this spring, the favorable tax-related stimulus to U.S. consumers will be largely complete.

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 December 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 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