Institutional Strategies

Global Growth

Portfolios within the composite primarily invest in common stocks of U.S. and foreign companies that the investment manager believes to have the potential for long-term growth and/or operate in regions or countries the manager believes to possess attractive growth characteristics. Portfolios primarily invest in securities issued by large capitalization companies, which are typically companies with market capitalization of at least $10 billion at time of acquisition.

Investment Philosophy

The underlying principles that form the foundation of the strategy include:

  • Growth companies typically have a natural high failure rate as competition enters markets, ultimately eroding growth and profitability
  • Focused on finding global growth businesses that can overcome competitive pressures due to unique business models that prevent erosion of growth and profits. These structurally advantaged businesses have more sustainable growth rates and tend to have higher margins as they mature
  • The market tends to overvalue short term earnings growth and undervalue long-term sustainable growth

The strategy focuses on the following possible sources of sustainable competitive advantage:

  • Brand equity
  • Patent protection / intellectual property
  • Control of distribution channels
  • Scale
  • Switching costs

Investment Process

The investment process is driven by fundamental bottom-up research with a macro overlay. The strategy strives to exploit opportunities where the market has not fully appreciated long term sustainable growth. The portfolio manager is supported by a global equity analyst team who conduct detailed fundamental analysis on securities around the globe. The process results in a concentrated portfolio of only 45 to 65 stocks of only the highest conviction and is constructed irrespective on the index. Portfolio manager Sarah Ross, CFA has full discretion over the entire investment process.

Initial Filters/Characteristics

A broad Global Equity universe (approximately 3,000 securities) is initially narrowed by looking for the following characteristics:

  • Above average earnings growth
  • Inflection in profit margins
  • High net profit margins
  • High return on capital or potential to reach with a large total addressable market

Core of the Investment Process
At the core of the investment process are two main elements; bottom-up selection and macro overlay.

I. Bottom-up Selection (Structural Assessment)

The cornerstone of the strategy is the identification of the competitive advantages or unique business models that will enable the company to sustain long-term growth. The portfolio manager is supported by a global equity analyst team who help conduct detailed fundamental analysis on securities around the globe and meet with executives from company management teams. They narrow the investment universe through fundamental analysis of:

  • Competitors
  • End markets/size of addressable market
  • Margin trends
  • Earnings quality
  • Sustainability of growth
  • Changing competitive landscape

Each name within the portfolio falls within a growth bucket (Accelerating Growth, Controlled Growth or Cyclical Growth) that is determined by the competitive advantage it holds and relative external factors that may enhance or hinder growth.

II. Macro Overlay

The second aspect of the fundamental research and screening process involves a macro overlay. The portfolio manager leverages the firm’s strong collaborative culture to capture macro-economic insight to determine factors affecting sustainable growth and to help mitigate risk. The firm has a daily morning meeting attended by all investment professionals including global economists, currency specialists, other international portfolio managers and global research analysts. Through these daily interactions and debates, the portfolio manager obtains proprietary insight on:

  • Geographical economic environments
  • Political environments
  • Regulatory policy
  • Geopolitical risks
  • Currency environments

Upon conclusion of the two fundamental research steps above, the portfolio manager selects the securities with the greatest superior business models, timeliness and capital discipline. The end result is a concentrated portfolio with generally 45-65 securities which are a by-product of the investment process and not constructed around the Index.

Sarah C. Ross, CFA

Senior Vice President, Portfolio Manager

Ms. Ross is portfolio manager for the firm’s Global Growth investment style. In August 2014 she was appointed portfolio manager of the firm’s International Growth style (which was later broadened to a Global Growth style). From 2006 to 2014 she was a member of the firm’s Large Cap Growth team as an assistant portfolio manager and helped with idea generation, research, portfolio construction and risk management efforts. She also held portfolio management responsibilities on the firm’s Tax-Managed Equity mutual funds from 2009 to 2014. She joined the firm in 2003 as an investment analyst focused on the Health Care sector.

Prior to joining Waddell & Reed, Ms. Ross was a senior health care analyst and vice president for Banc of America Capital Management from 2001 to 2003. From 1995 to 2001 she was with Edward Jones, during which time she was a senior health care analyst and limited partner.

Ms. Ross earned both a BS in Business Administration and a BA in French in 1995 from John M. Olin School of Business, Washington University, St. Louis, Missouri. She 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 6/30/2017
(Returns for periods of less than 1-yr are not annualized)


QTD YTD 1YR 3YR 5YR 10YR
Global Growth - Gross 4.13%  13.13% 17.34% N/A N/A N/A
Global Growth - Net 3.91%  12.65% 16.34% N/A N/A N/A
MSCI World Index 4.03%  10.66% 18.20% N/A N/A N/A

Calendar Year Returns1,2

  Global Growth Gross Global Growth Net MSCI World Index
2016 -1.89%  -2.72%  7.51% 
2015  4.76% 3.87% -0.87%

1Global Growth composite is comprised of 3 accounts that had $1,468.9 million in total assets as of 6/30/17. • 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.

2MSCI World is an unmanaged index comprised of securities that represent the securities markets around the world. It is not possible to invest directly in an index. The MSCI information may only be used for your internal use, may not be reproduced or repurposed in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, salability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com) Source: MSCI.

3QTD return from April 1, 2017 through June 30, 2017.

Data as of 6/30/2017

10 Largest Holdings

as a % of total assets

MasterCard, Inc. Class A (United States) 3.91%
Airbus SE (France) 3.61%
Facebook, Inc. Class A (United States) 3.54%
Koninklijke Philips Electronics N.V. Ordinary Shares (Netherlands) 3.49%
Alibaba Group Holding Ltd. ADR (China) 3.31%
Halliburton Co. (United States) 3.28%
Amazon.com, Inc. (United States) 3.22%
Philip Morris International, Inc. (United States) 3.12%
Visa, Inc. Class A (United States) 2.90%
Home Depot, Inc./The (United States) 2.78%

Sector Diversification

as a % of equity assets

Information Technology x.xx%
Industrials %
Consumer Discretionary %
Financials %
Health Care %
Energy %
Consumer Staples x.xx%

Country Allocation

as a % of equity assets

United States 54.29%
United Kingdom 8.07%
Germany 7.41%
France 7.23%
China 6.69%
Japan 6.03%
Netherlands 3.19%
Brazil 1.81%
Switzerland 1.76%
Korea 1.57%
Mexico 1.01%
Canada 0.94%

Composite Composition1

Domestic Common Stock 51.60%
Foreign Common Stock 44.18%
Cash and Cash Equivalents 4.22%

Composite Total Assets1

Assets ($M) $1,468.9
Number of Accounts 3

Supplemental data: The Global Growth holdings, sector diversification and country allocation data shown are 1 of the 3 composite accounts without client specific investment restrictions and may not be reflective of the Global Growth composite as a whole or of any other Global Growth 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.

1Global Growth composite is comprised of 3 accounts that had $1,468.9 million in total assets as of 6/30/17. • 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.

2MSCI World is an unmanaged index comprised of securities that represent the securities markets around the world. It is not possible to invest directly in an index. The MSCI information may only be used for your internal use, may not be reproduced or repurposed in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, salability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com) Source: MSCI.

3QTD return from April 1, 2017 through June 30, 2017.

As of 3/31/2017

Portfolio Manager:
Sarah C. Ross, CFA

Market Sector Update

  • Global equity markets moved higher during quarter, returning more than 6%. Developed markets generally underperformed emerging markets as investor sentiment improved and appetite for risk increased during the period.
  • Most European markets outperformed the U.S. and Japan. India, China, Mexico and Brazil all posted double digit returns in the period.
  • Growth outperformed value in a material reversal from the prior quarter. Energy was the standout underperformer as commodity prices weakened. Every sector, excluding energy, had solid positive absolute returns with information technology being the strongest sector in the quarter.

Portfolio Strategy

  • The portfolio outperformed the benchmark during the period primarily driven by strong stock selection. An overweight allocation to information technology along with strong stock selection in the sector drove positive returns. Exposure to internet firms were material contributors. Stock selection in consumer staples was a positive as well.
  • Detractors to performance included negative stock selection in financials along with a number of individual stock detractors. An overweight allocation to the poor performing energy sector detracted as well.
  • A handful of changes in the portfolio have occurred, a number of which began last fall. The most notable is in healthcare, where the overweight to the sector has been materially reduced and reallocated to financials, which had been a significant underweight. We increased financial exposure late in the fourth quarter following the U.S. elections due to the improving global economic backdrop and possibility of improving bank profitability with rising rates.

Outlook

  • Exiting what was a particularly challenging calendar year for quality growth stocks in 2016, we do think a better environment lies ahead. We expect modestly improving economic growth from Europe and the U.S. and stable growth from Japan.
  • A number of encouraging economic signs in recent history include improving manufacturing, capital spending and corporate earnings growth globally. Global gross domestic product (GDP) growth has modestly improved, and in the U.S., a slow path towards rising rates seems likely. A number of risks exist including some populist political movements gaining traction in Europe, Britain’s pending exit from the European Union and the recent increase in geopolitical tensions particularly with North Korea. However, it still feels like a better environment for corporate earnings growth going forward given positive consumer and business sentiment in the U.S., an improving growth outlook in Europe and the possibility of a higher rate environment going forward.
  • We continue to focus on businesses in markets we believe have long term secular growth and management teams we believe have created unique competitive advantages.
The opinions expressed in this commentary are those of the portfolio manager and are current through March 31, 2017. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results.  Any mention of investment performance refers to gross-of-fees performance, unless otherwise noted. 
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Key Features

Composite Performance History Since  1/1/2015
Benchmark MSCI World Index
Style Fundamental, Growth
Target Alpha 200 bps above Index
Over full market cycles (3-5 years)
Peer Universe Global Large Cap Growth, Global Equity
Holdings Range 45-65
Max Position Size 5% at purchase
Sectors 2X Index weight or 25% of the portfolio
Liquidity Majority of stocks will have >$25 million in daily average trading volume
Country Significant diversification, 15+ countries
Emerging Markets Up to 25% 
Investment Vehicles Institutional Separate Account
U.S. Mutual Fund: Institutional Share Class
Variable Insurance Portfolio