Institutional Strategies

Large Cap Growth

Strategy focuses on large capitalization U.S. growth-oriented companies believed to have dominant market positions and established competitive advantages. Through a primarily bottom up investment process, the portfolio managers adhere to a disciplined three step process to build a focused portfolio of only the securities with the highest conviction.

The Large Cap Growth investment philosophy is centered on the following beliefs:

Generic growth stock investing is inherently challenging

  • Failure rate of growth companies is very high
  • Risk is often underestimated
  • Most growth investors overpay for short-term earnings growth and underpay for enduring, structural earnings power

Significant, long-term excess returns can potentially be achieved by:

  • Focusing on a smaller subset of unique business franchises, which typically increases the odds for success
  • Having a mindset geared to methodically avoiding common mistakes by emphasizing franchise power and earnings sustainability over earnings growth rates

The stock selection process is based primarily on fundamental research, but does use some quantitative analysis during the screening process. From a quantitative standpoint, the team concentrates on profitability, capital intensity, cash flow and valuation measures, and earnings growth rates. Once the quantitative research is completed the team turns to our internal research department for validation of the initial findings. Key to the fundamental research effort is identifying companies that they believe possess a sustainable competitive advantage, which should enable them to generate superior levels of profitability and growth for an extended period of time. Special focus is given to those companies that appear well-positioned to benefit from secular trends embedded in the marketplace (i.e., demographics, deregulation, capital spending trends, etc.).

The investment process consists of a disciplined 3-step process: 

Screening for inclusion in the "Franchise Growth Universe"

The process starts with a quantitative screen that reduces the investable universe of the 1,500 largest U.S. companies down to 200-300. Companies with a market cap of at least $3 billion, and generally above $8 billion are filtered according to the strength of their earnings growth and a profitability matrix. This matrix, an essential part of the team’s analysis, includes measures such as gross margin, operating margin, net margin, return on equity, and/or return on assets.

Franchise Growth Universe – Evaluation of sustainable competitive advantage

The next step consists of identifying the sustainable growth drivers that support the high levels of profitability displayed by this reduced list of 200-300 companies. These generally consist of strong brand equity, proprietary technology, high switching costs, greater access to distribution channels, larger economies of scale, and/or stronger network effects.

Building the Franchise Growth Portfolio

The final step consists of building a portfolio of 45-60 companies that have the appropriate catalysts such as a superior business model (structural advantages producing superior returns) and also attractive industry characteristics (having barriers to entry, large market opportunities and secular unit growth). The selection of these stocks is based on criteria such as profitability, growth, capital discipline and valuation factors.

Daniel P. Becker, CFA

Senior Vice President, Portfolio Manager

Mr. Becker is co-portfolio manager of the firm’s Large Cap Growth investment strategy. He developed the firm’s Large Cap Growth philosophy and has been a portfolio manager of the strategy since 1995. Mr. Becker joined the organization in 1989 as an equity investment analyst, covering industries in the consumer discretionary, financials and industrials sectors.

Mr. Becker earned a MS with an emphasis in Finance, Investments and Banking and a BS in Mathematical Economics from the University of Wisconsin at Madison. He is a CFA charterholder.

Bradley M. Klapmeyer, CFA

Senior Vice President, Portfolio Manager

Mr. Klapmeyer is co-portfolio manager of the firm’s Large Cap Growth investment strategy, appointed to this role in 2016. He has been a member of the Large Cap Growth team since 2011. He was appointed portfolio manager of the firm’s Tax-Managed Equity mutual funds in 2014. He held equity investment analyst research responsibilities prior to his appointment as co-portfolio manager, covering large cap growth securities and the biotechnology industry.

Prior to joining the organization in 2007 as an equity investment analyst, Mr. Klapmeyer held equity analyst positions with Prudential Equity Group, LLC from 2006 to 2007 and with Commerce Bank from 2000 to 2006.

Mr. Klapmeyer earned a BS in Finance from Truman State University. He is a CFA charterholder.

Gage T. Krieger, CFA

Assistant Vice President, Assistant Portfolio Manager

Mr. Krieger is assistant portfolio manager of the firm’s Large Cap Growth investment strategy and assists the co-portfolio managers in idea generation, research, portfolio construction, and risk management efforts. He has been a member of the Large Cap Growth team since 2016. He is also a member of the firm’s equity research team, covering industries in the health care sector.

Prior to joining the organization in 2012 as an equity investment analyst, Mr. Krieger was a senior associate, equity research covering the telecommunications services sector for Citi Investment Research from 2009 to 2012. Prior to his role at Citi Investment Research in New York, Mr. Krieger was an associate, middle market equity sales for Citigroup Global Markets in Denver, Colo. from 2006 to 2009.

Mr. Krieger earned an MBA from Rockhurst University and a BSBA; concentration in Finance from Colorado State University. 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 12/31/2017
(Returns for periods of less than 1-yr are not annualized)

  QTD  YTD 1YR 3YR 5YR 10YR
Large Cap Growth - Gross 6.39%  30.44% 30.44% 12.78% 17.32% 9.16%
Large Cap Growth - Net 6.20%  29.53% 29.53% 12.06% 16.59% 8.49%
Russell 1000 Growth Index 7.86%  30.21% 30.21% 13.79% 17.33% 10.00%

Calendar Year Returns1,2

  Large Cap Growth Gross Large Cap Growth Net Russell 1000 Growth Index
2017  30.44% 29.53%  30.21% 
2016 2.18%  1.53% 7.08% 
2015 7.64% 6.99% 5.67%
2014 12.94% 12.26% 13.05%
2013 37.19% 36.37% 33.48%
2012 12.87% 12.19% 15.26%
2011 2.93% 2.32% 2.64%
2010 13.36% 12.69% 16.71%
2009 27.94% 27.19% 37.21%
2008 -35.85% -36.25% -38.44%

1Large Cap Growth composite is comprised of 27 accounts that had $7,150.4 million in total assets as of 12/31/17. Composite returns are measured in U.S. dollars. 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. Past performance is no guarantee of future results. 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 their benchmarks.

2Russell Investment Group is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is a presentation of Ivy Investment Management Company (IICO). Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in IICO’s presentation thereof.

3QTD return from October 1, 2017 through December 31, 2017.

Data as of 12/31/2017

10 Largest Holdings

as a % of total assets

Alphabet, Inc. 4.96%
Microsoft Corp. 4.50%
Apple, Inc. 4.47%
Home Depot, Inc. (The) 4.40%
PayPal, Inc. 4.39%
MasterCard, Inc. Class A 4.13%
Amazon.com, Inc. 4.11%
Visa, Inc. Class A 3.87%
Facebook, Inc. Class A 3.86%
CME Group, Inc. 3.59%
Alphabet, Inc. represents aggregate weight
of Class A and Class C securities.
 

Sector Diversification

as a % of equity assets

Information Technology 47.41%
Industrials 14.66%
Consumer Discretionary 13.02%
Financials 10.72%
Health Care 9.87%
Energy 1.90%
Consumer Staples 1.50%
Real Estate  0.91%

Composite Composition1

Domestic Common Stock 98.93%
Cash and Cash Equivalents 1.07%

Composite Total Assets1

Assets ($M) $7,150.4
Number of Accounts 27

Supplemental data: The Large Cap Growth holdings and sector diversification data shown are 1 of the 27 composite accounts without client specific investment restrictions and may not be reflective of the Large Cap Growth composite as a whole or of any other Large Cap 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.

1Large Cap Growth composite is comprised of 27 accounts that had $7,150.4 million in total assets as of 12/31/17. Composite returns are measured in U.S. dollars. 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. Past performance is no guarantee of future results. 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 their benchmarks.

2Russell Investment Group is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is a presentation of Ivy Investment Management Company (IICO). Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in IICO’s presentation thereof.

3QTD return from October 1, 2017 through December 31, 2017.

As of 12/31/2017

Portfolio Managers:
Daniel P. Becker, CFA
Bradley M. Klapmeyer, CFA

Portfolio Review

The Strategy underperformed the Russell 1000 Growth Index for the quarter, in a very strong period of absolute performance for most areas of the market. The Strategy’s 2017 yearly performance was roughly in line with its benchmark. We were disappointed in another sharp factor and style reversal that favored value over growth and detracted from the Strategy’s strong absolute performance for the year.

Within the quarter, information technology produced the majority of the underperformance, as there was a dramatic shift from leaders to laggards. Our information technology returns suffered from an overweight in semiconductor capital equipment companies, which are benefiting from increasing capital intensity in the semiconductor industry. Several global names were also headwinds to performance in the quarter, as many of them lacked exposure to domestic tax rate decreases. On the positive side, our consumer discretionary holdings benefited from the strong performance, where housing market strength and tax reduction benefits combined to generate strong performance. Our financials exposure continued to help overall performance, as several names benefited from both tax rate reductions and higher interest rates. Finally, our global payment stocks collectively contributed to performance in the quarter despite getting caught up in the above-mentioned rotation. We believe the fundamental investment case for these stocks remains sound despite the market leadership change near year-end.

Outlook

Investor consensus remains generally optimistic on U.S. and global economic growth, as excesses seem difficult to find. We believe U.S. economic growth will now likely accelerate and remain in the 3% range for the foreseeable future. Faster economic growth will eventually lead to higher interest rates, a tighter employment market and possibly higher inflation. While higher inflation may be welcomed, we are a bit unsure of how the equity markets may deal with it given the current state of fixed income globally. Should bond prices fall marginally, this may be a positive for equity markets in 2018 and beyond. A sharp correction in the bond market, on the other hand, might have a ripple effect across equity markets. Over the last several quarters our biggest concern has been an economic change that might dramatically accelerate the business cycle, leading to corporate enthusiasm, tighter labor markets and eventual recession as the cycle comes to an end. We have since changed our opinion and now believe we are starting another stage of the economic cycle. We think that the more robust global growth conditions may lead to increased profits, potentially broadening and deepening the global bull market in stocks. We expect the recent rotation to subside and technology to reemerge, as these tech stocks are one of the more cyclical areas of the economy and should do well as the economy accelerates. Within the portfolio, our positions in information technology remains a notable overweight, reflecting our belief that valuations, particularly based on cash flow generation, remain fairly reasonable. We continue to have a high exposure in the financials as tax reform benefits, combined with higher interest rates, intersect to produce robust profit growth. We remain concerned and underweight the defensive areas of the market such as consumer staples and REITs, as we still view valuations and profit outlooks as elevated and correlated to low bond yields globally.

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, 2017 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 Russell 1000 Growth Index
Style Fundamental, Growth
Target Alpha 200 bps above Index
Over full market cycles (3-5 years)
Peer Universe U.S. Large Cap Growth Equity
Typical Tracking Error 300-500 bps
Holdings Range 45-60
Max Position Size Greater of 5% or 1.5x Index
Sectors Greater of 2x Index or 25%
Proprietary Growth Spectrum Diversification across five growth buckets: Hyper, Accelerating, Controlled, Cyclical and Asset Growth
Investment Vehicles Institutional Separate Account
Collective Investment Trust
U.S. Mutual Fund: Institutional Share Class
Variable Insurance Portfolio
Non-U.S.: UCITS