Institutional Strategies

International Core Equity

A flexible approach with the ability to invest in both growth- and value-oriented names. The strategy focuses on non-U.S. securities across the market capitalization spectrum, including exposure to emerging markets. A combination of top-down management techniques (theme identification/ business cycle analysis), with bottom-up fundamental research results in a portfolio of only the securities with the highest conviction.

Investment Philosophy

The following beliefs consistently shape the approach for the International Core Equity strategy:

  • Market inefficiencies and anomalies are frequent and the manager believes top-down research identifying themes combined with fundamental bottom-up research is optimal
  • Embrace the difference between a good company and a good stock. Incorporate the importance of price, and how the stock will react to the current environment – distill company knowledge into the two to four insights that the manager believes will impact market performance

So the strategy:

  • Focuses on global business cycles and product cycles in identifying strategies for country, sector and thematic exposures
  • Emphasizes valuation versus prospects for growth changes throughout business cycles. They look for relative value, versus just strong absolute level
  • Is highly opportunistic, early in recognizing catalysts, and takes advantage of dislocations across markets
  • Protects assets through a high quality bias and effective diversification

Investment Process

John Maxwell, CFA and Catherine Murray are co-portfolio managers of the International Core Equity strategy and have full discretion over all aspects of the investment process. Idea generation comes from several sources: John Maxwell and Catherine Murray as portfolio managers, internal research analysts and other portfolio managers, sell side research and company meetings.

1. Top-down / Theme Identification / Business Cycle Analysis

Macro-economic themes and analysis provides the framework for a majority of the securities within the portfolio. They identify high conviction themes that are intended to provide a backdrop for growth and have a duration ranging from one to ten years. Collaboration between all investment professionals in the firm is a significant part of the culture at Ivy Investments and starts with a daily morning meeting attended by all investment personnel. Specific items that are analyzed and followed include:

  • Economic growth and financial leverage
  • Money flows
  • Business cycle
  • Interest rates
  • Political climate
  • Currencies

In addition to the theme development, the macro level and top-down inputs from the firm's personnel are helpful to the team in understanding global markets and for identifying business cycles. The team will flex the portfolio towards cyclical or defensive, or growth versus value related stocks depending on their view of the global economies and the trajectory of the business cycle (for example: Slowdown, Recession, Recovery, Expansion).

2. Bottom-up Stock Selection

While the top down process helps the team identify themes and where economies exist in business cycles, the bottom-up selection process is equally important. Starting with a broad universe of all international securities that trade more than $20 million a day, they look for securities that meet their criteria and exposed to their proprietary themes identified earlier. They focus on fundamental criteria such as:

  • Strong and growing cash flow generation
  • Low debt levels and conservative accounting practices
  • Solid or improving competitive advantage
  • Under-appreciated growth prospects- attractive relative cash flow yields
  • Value relative to peers

The result of this extensive and rigorous analytical and qualitative process is a relatively concentrated portfolio of 60 to 80 securities of their highest conviction stocks. 

John C. Maxwell, CFA

Senior Vice President, Portfolio Manager

Mr. Maxwell is co-portfolio manager of the firm’s International Core Equity investment strategy. He has been associated with the firm’s international team since 2004. In 2006 he was named co-portfolio manager of International Core Equity and assumed sole management responsibilities in 2009. He joined the firm in 1998 as an equity investment analyst and covered industries in the Consumer Discretionary, Consumer Staples and Telecommunication sectors.

Prior to joining Waddell & Reed, Mr. Maxwell was affiliated with Fort Washington Investment Advisors from 1995 to 1998 as an equity research manager specializing in Consumer Staples. From 1992 to 1995 he gained industry experience in the finance division of Procter & Gamble.

Mr. Maxwell earned an MBA with an emphasis in Finance from The Johnson School at Cornell University and a BS in Mechanical Engineering from the University of Kentucky. He is a CFA charterholder.

Catherine L. Murray

Vice President, Portfolio Manager

Ms. Murray is co-portfolio manager of the firm’s International Core Equity investment strategy and was appointed this role in 2017. She was named assistant portfolio manager of the strategy in 2014. She is a member of the firm’s research division covering non U.S. financials. Ms. Murray joined the firm in 2011.

Prior to joining Waddell & Reed, Ms. Murray was the financial sector strategist at WJB Capital. Prior WJB Capital, Ms. Murray had significant roles as both a sell-side and buy-side financial sector analyst. She was a managing director of JP Morgan and a senior sell-side banking industry analyst at JP Morgan Securities. She also was a managing director and senior financial services analyst at Neuberger Berman.

Ms. Murray has an MBA from the Wharton School, University of Pennsylvania, majoring in Finance and a BA in French and Business Administration from the College of St. Catherine in St. Paul, Minnesota.

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
International Core Equity - Gross 6.03%  14.77% 23.52% 3.54% 11.45% 5.05%
International Core Equity - Net 5.81%  14.28% 22.47% 2.66% 10.51% 4.16%
MSCI EAFE Index 6.12%  13.81% 20.27% 1.15% 8.69% 1.03%

Calendar Year Returns1,2

  International Core Equity Gross International Core Equity Net MSCI EAFE Index
2016 2.57% 1.70% 1.00%
2015 0.25% -0.60% -0.81%
2014 2.46% 1.59% -4.90%
2013 26.30% 25.23% 22.78%
2012 14.91% 13.93% 17.32%
2011 -12.80% -13.54% -12.14%
2010 15.27% 14.30% 7.75%
2009 46.56% 45.32% 31.78%
2008 -40.50% -41.00% -43.38%
2007 20.17% 19.15% 11.17%

1International Core Equity composite is comprised of 3 accounts that had $7,093.1 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 EAFE is an unmanaged index comprised of securities that represent the securities markets in Europe, Australasia and the Far East. 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

Total S.A. (France) 2.20%
Bayer AG (Germany) 2.14%
Nestle S.A. Registered Shares (Switzerland) 2.11%
Danone S.A. (France) 1.99%
Isuzu Motors Ltd. (Japan) 1.95%
AIA Group Ltd. (Hong Kong) 1.86%
NTT Corp. (Japan) 1.85%
Orange S.A. (France) 1.83%
SoftBank Group Corp. (Japan) 1.70%
Teva Pharmaceutical Industries Ltd. ADR (Israel) 1.69%

Sector Diversification

as a % of equity assets

Industrials 18.01%
Financials 16.53%
Consumer Discretionary 14.81%
Consumer Staples 12.30%
Health Care 10.21%
Energy 10.13%
Materials 6.36%
Information Technology 6.11%
Telecommunication Services 5.54%

Country Allocation

as a % of equity assets

Japan 17.68%
United Kingdom 16.93%
France 13.56%
Germany 12.39%
Switzerland 7.85%
China 5.07%
Canada 3.80%
Netherlands 3.78%
Ireland 3.27%
Hong Kong 3.19%
Australia 2.50%
Israel 1.74%
Spain 1.52%
Norway 1.38%
India 1.21%
Brazil 1.12%
Korea 1.07%
South Africa 1.05%
Luxembourg 0.89%

Composite Composition1

Foreign Common Stock 97.04%
Other Equity Assets 0.03%
Cash and Cash Equivalents 2.93%

Composite Total Assets1

Assets ($M) $7,093.1
Number of Accounts 3

Supplemental data: The International Core Equity 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 International Core Equity composite as a whole or of any other International 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.

1International Core Equity composite is comprised of 3 accounts that had $7,093.1 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 EAFE is an unmanaged index comprised of securities that represent the securities markets in Europe, Australasia and the Far East. 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 6/30/2017

Portfolio Managers:
John C. Maxwell, CFA
Catherine L. Murray

Market Sector Update

  • Broad international markets were up about 6% in U.S. dollars, with the majority of the gain driven by currencies. Questions surrounding the Trump administration’s ability to enact agenda items, including fiscal stimulus, and mixed U.S. economic data drove the weaker U.S. dollar.
  • Geopolitical highlights remained center stage during the quarter – the victory of Emmanuel Macron in the French presidential election a notable highlight. He is pro-euro and wants to reform France in line with the German agenda. In Germany, the recent local election was soundly won by German Chancellor Angela Merkel’s party, with a poor showing from fringe parties. In the U.K., the snap election went poorly for Prime Minister Theresa May and the Conservative party. Rather than consolidating power (as anticipated) the Conservative party lost seats in Parliament and overall credibility. In Japan, Prime Minister Shinzo Abe is seeing his popularity decline and his party lost the Tokyo elections – something to monitor. North Korea and the Middle East continue to deteriorate, and risk remains in those markets.
  • The global economy remains synchronized, though U.S. economic data was slightly disappointing. Generally speaking, global economic expectations have caught up with reality. As in geopolitics, Europe stood out as a standout performer relative to expectations. This, and the elections, drove the euro stronger. In 2017, European earnings are expected to grow almost 20%, though our guess is aggregate revisions will struggle to keep rising from here and may turn slightly down with the stronger European currency and lower oil price. China slightly missed expectations in the quarter, but we believe the country should still see mid-single-digit real growth.
  • The U.S. Federal Reserve (Fed) raised rates in June and, at the end of the quarter, both the European Central Bank and the Bank of England suggested a turn to tightening. While rates remain extremely low, 10-year yields in Germany ended the quarter at 0.46%, up from 0.32% at the start of the quarter. We believe the tightening process will remain gradual as inflation remains benign – particularly with oil in the mid-$40s.

Portfolio Strategy

  • The Portfolio slightly underperformed the benchmark for the quarter, with positive stock selection offsetting negative sector allocations and currency effects. From a geographic standpoint, strong emerging-market performance offset poor performance in the developed world – particularly Japan.
  • Our weighting in automotives and energy detracted to performance for the quarter, though our overweight allocation to internet-related names offset a portion of the underperformance.
  • Short term, given the move in oil and little wage inflation in the U.S. labor market (despite full employment), we expect benign inflation. However, over the medium term, we believe inflation will accelerate and benefit nominal growth.
  • In the quarter, we did not enact significant moves on either a sector or regional basis. With a bifurcated market, we generally sold/trimmed companies that experienced significantly better-than-market appreciation, while adding/ building new positions in those that performed poorly.

Outlook

  • We believe real economic growth will remain muted longer term, but is in a sweet spot today. We do think tax relief in a number of countries (the U.S., France and Japan) as well as accelerating infrastructure spending globally will help to extend the cycle.
  • Global monetary policy remains at the extremes of easy and we do not see that changing materially unless inflation accelerates at a higher-than-expected rate. That said, the U.S., Europe and the U.K. have clearly indicated they are tightening or have a tightening bias. Long term, virtually all countries are struggling with high levels of debt and we believe they will attempt to keep rates below their own nominal growth in order to monetize the debt. As such, we believe there is a long-term cap on how high rates can go.
  • We think relative valuation remains supportive for international equities, while absolute valuations are less attractive. Equities, outside emerging markets, are trading at valuation levels above their historic averages (over the last 25 years), while bonds are trading at a dramatic historic premium to long-term averages. We believe emerging-market equities trade at reasonable valuations.
  • Long term, we believe emerging-market countries will try to improve their populations’ standards of living. To accomplish this feat, the countries will require solid real economic growth. Synchronized positive global growth should be good for emerging-market stocks. In most cases, their growth remains ahead of their developed-market counterparts. In the end, we believe maintaining our exposure to developing markets makes sense and believe they have attractive valuations.
  • We continue to seek opportunities that are in line with the Portfolio’s current investment themes: disproportionate growth of emerging-market consumers; believable and sustainable dividend yield; companies benefiting from mergers and acquisitions; and infrastructure development – including the internet.
The opinions expressed in this commentary are those of the portfolio managers and are current through June 30, 2017. The managers' 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 1/1/2005 
Benchmark MSCI EAFE Index
Style Fundamental, Core: Growth and Value
Target Alpha Outperform the MSCI EAFE Index after expenses and fees over a full market cycle
Peer Universe EAFE Large Cap Core Equity
Typical Tracking Error 300-600 bps
Holdings Range 60-80
Max Position Size 5%
Sectors/Countries

Directionally indicative ranges, based on weighting of sector or country.

Index - Sectors/Countries with approximately 20%
Portfolio - 0.5X to 1.5X Index

Index - Sectors/Countries with approximately 10%
Portfolio - 0.5X to 2.0X Index

Index - Sectors/Countries with approximately 5%
Portfolio - 0X to 3.0X Index

Emerging Markets Up to 15% 
Investment Vehicles Institutional Separate Account
Collective Investment Trust
U.S. Mutual Fund: Institutional Share Class
Variable Insurance Portfolio