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 6/30/2018

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

Market Update

After a lackluster start to the year, the S&P 500, the strategy’s benchmark, posted positive returns for the second quarter with a mix of gains in offensive sectors (Energy, Consumer Discretionary and Information Technology) and more traditionally defensive ones (Utilities and Real Estate), marking a modest change in sentiment within the equity market. Energy prices rose meaningfully during the quarter, with prices of Brent crude rising from $68 per barrel to $79. Strong global demand, declining production in troubled regions like Venezuela and Libya, and production caps maintain by the Organization of Oil Producing Countries (OPEC) all conspired to increase prices. Energy stocks increased but not as much as oil prices.

All indications suggest the U.S. economy is healthy as gross domestic product (GDP) accelerated an estimated 3.5% for the quarter. Consumer confidence remained at high levels, while small business confidence soared to record levels. In addition, inflation remains tame, although it is in line with the U.S. Federal Reserve’s target of a 2% annual rate. There are a number of factors contributing to this optimism, including lower corporate tax rates, a strong labor market and signs of wage growth, as well as more business-friendly environment regarding regulation.

Conditions outside of the U.S. have cooled down after somewhat unsustainable levels of 2017. Following a year of 2.5-3.0% GDP growth last year, we believe the eurozone growth trajectory has slowed to around 2% for 2018. In addition, we are seeing evidence in China the tightening monetary policy over the last year is already moderating growth levels, even before the effects that trade tariffs may bring. And a recent bout of U.S. dollar strength (after the USD bottomed in mid-February) caused investors to reign in risk, particularly related to emerging market currencies and equities. As U.S. growth GDP rates have improved relative to global rates and monetary policies remain on divergent paths, it can be expected that global financial markets experience a heightened level of volatility, which we saw in the second quarter.

However, the quarter saw notable changes that have the potential to impact the markets, including a heightened risk around tariffs and global trade and a continuing flattening of the yield curve, which historically has been a precursor to every recession since 1955. While we are not suggesting this is a signal the business cycle is ending, it is noteworthy that the yield on the 10-Year U.S. Treasury note declined from 3.11% mid-May and ended the quarter at 2.86%, which created a demand for yield sensitive, more defensive sectors toward end the quarter.

Portfolio Review

The Ivy core equity strategy performed well in the strong market, outperforming its benchmark. The top performing sectors for the quarter were Information Technology, Energy, Consumer Discretionary and Health Care. Conversely, Financials, Consumer Staples and Industrials were among our largest sector from a negative performance perspective. We moderated our overweight positions in Information Technology (although this remains our most significant sector position) and Consumer Discretionary.

Outlook

We believe the current environment is a relatively fertile one for our strategy as global growth rates and monetary policies continue to diverge, broadening the opportunity set for a strategy that focuses on unexpected future earnings growth and uncovering longer-term themes within the market.

However, geopolitical issues in the U.S. and other economies appear more unpredictable than the recent past, causing real business consequences, both positive and negative. Case in point: the rising tension between the U.S. and many of its trading partners.

We believe an extended trade war is unlikely to trigger a dramatic slowdown in GDP and/or a meaningful acceleration in inflation. Trade has a greater impact to S&P 500 earnings levels than to aggregate U.S. economic statistics like GDP. As such, we believe unanticipated trade actions will continue to impact individual stock valuations in the near term. Trade tensions to date have hurt the future growth expectations of many cyclical holdings, including Industrials, Materials and even U.S.-based Financials. With more value emerging in cyclical sectors, we are likely to pick and choose from those affected names with powerful market positions and few substitutes.

As always, we will continue to search for competitively advantaged companies that we believe have an ability to meaningfully exceed future earnings and cash flow 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 June 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