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 manager adheres 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.

Bradley M. Klapmeyer, CFA

Senior Vice President, Portfolio Manager

Mr. Klapmeyer is 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 portfolio manager 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 6/30/2018
(Returns for periods of less than 1-yr are not annualized)

  QTD  YTD 1YR 3YR 5YR 10YR
Large Cap Growth - Gross 6.20%  10.86% 27.28% 14.64% 17.49% 11.37%
Large Cap Growth - Net 6.02%  10.48% 26.39% 13.89% 16.74% 10.68%
Russell 1000 Growth Index 5.76%  7.25% 22.51% 14.98% 16.36% 11.83%

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 24 accounts that had $6,758.0 million in total assets as of 6/30/18. 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 April 1, 2018 through June 30, 2018.

Data as of 6/30/2018

10 Largest Holdings

as a % of total assets

Microsoft Corp. 6.49%
Amazon.com, Inc. 5.31%
Apple, Inc. 4.62%
MasterCard, Inc. Class A
4.40%
Alphabet, Inc. 4.26%
Visa, Inc. Class A
4.18%
salesforce.com, inc. 4.13%
CME Group, Inc. 3.92%
Home Depot, Inc. (The) 3.84%
PayPal, Inc. 3.50%
Alphabet, Inc. represents aggregate weight
of Class A and Class C securities.
 

Sector Diversification

as a % of equity assets

Information Technology 44.27%
Consumer Discretionary
18.70%
Industrials 12.35%
Health Care
9.95%
Financials 9.07%
Consumer Staples 2.50%
Energy 1.86%
Real Estate 1.30%

Composite Composition1

Domestic Common Stock 97.89%
Cash and Cash Equivalents 2.11%

Composite Total Assets1

Assets ($M) $6,758.0
Number of Accounts 24

Supplemental data: The Large Cap Growth holdings and sector diversification data shown are 1 of the 24 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 24 accounts that had $6,758.0 million in total assets as of 6/30/18. 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 April 1, 2018 through June 30, 2018.

As of 6/30/2018

Portfolio Manager:
Bradley M. Klapmeyer, CFA

Market Update

Second quarter equity performance was strong across all styles and capitalization ranges. Growth styles continued to outperform value styles while small caps outperformed larger market caps. Most market gains in the quarter came in May as the Information Technology sector pushed higher. However, during the quarter, especially in June, there was a clear underlying rotation to more defensive positions, specifically dividend payers, and away from beta exposure and cyclicals. This rotation was due in part to several continuing conversations, including the implementation of trade tariffs, falling bonds yields, the strong U.S. dollar, and concerns over the economic cycle and global growth. These items are all more fully discussed below and are generally all related.

Although trade war rhetoric was not expected to disappear, it unfortunately intensified during the quarter as the U.S. threated additional tariffs on China and other key trading partners. As the quarter closed there were signs that the trade war uncertainty was beginning to find its way into business and consumer confidence, supply chain lead times, and the Federal Reserve’s economic commentary.

The Fed’s Open Market Committee (FOMC) increased short-term rates in June, marking the second this year and seventh since the first hike back in December of 2015. Despite some volatility, the front end of the yield curve finished the quarter 27 bps higher while the long end (10-year) finished only up slightly, indicating continued flattening to yield curve during the quarter. It is worth mentioning that long end yields were well off the intra-quarter highs, likely stemming from an increasing threat of a trade war and the impact on global growth, pushing investors to temporarily seek safety.

Portfolio Review

The Ivy large cap growth strategy performed well in the strong market, outperforming the Russell 1000 Growth Index. Strong performance from Information Technology, specifically software and payments companies, drove a portion of the outperformance. The Consumer Discretionary sector performed well. Health Care provided a positive contribution with a couple of stock-specific winners. Industrials was the notable detractor as the sector was at the center of multiple debates – the end of cycle debate, strong U.S. dollar, and uncertainty on global growth and escalating trade tensions. Not only did we have a slight overweight in this poorly performing sector, but our stocks also underperformed their benchmark peers. Our stock performance within Industrials was hurt by a number of factors, including sizeable positions in two holdings.

Outlook

U.S economic data remains supportive of steady GDP growth, likely 2.5%-3.0%, for second half 2018 and 2019, with few apparent excesses. We believe unemployment should continue to move lower while inflationary pressures continue to build. The Fed’s tightening should continue as policy moves from accommodative to neutral. The general setup is a move toward late cycle with increasing risk and volatility.

A full-blown trade war remains the biggest threat to markets in the near term. Globalization has boosted growth and allowed for strong net profit gains for many multinational manufacturing and technology companies. These companies have also been revalued higher based on the perceived strength, stability and consistency of profitability related to global sourcing and access to a global consumer. Thus, not only could a trade war unwind some of the margin benefits accrued through globalization, it could also lead to a revaluation lower of those equities that benefited. This double whammy would likely produce strong headwinds for growth investors.

Economists see limited first order impacts from implemented and proposed trade tariffs on U.S. economic growth, but clarity on the rules of global trade is needed for corporations to put growth capital to work. Continued uncertainty about the duration of trade war rhetoric and depth of tariffs may erode the strong business (and consumer) confidence in the U.S. that was boosted by the successful implementation of tax reform. Willingness to invest capital in long-term growth projects will probably diminish if the rules underlying global trade are left uncertain. Such a pause in spending would, in all likelihood, have negative economic and market ramifications.

Understandably it is difficult to predict which path the Trump administration will take on global trade. It may choose a hard line initially but ultimately decide to cooperate. On the other hand, it may stick to a strong protectionist policy despite significant disruption to multiple industries. Our belief is that the ramifications of adopting hardline protectionist policies may be so severe that the administration would be forced to soften its position. We think the market reaction to true protectionism would be so untenable that a more cooperative policy framework would need to be adopted.

We are careful not to overreact to the building fear, as we have seen the market bounce back from macro disruptions many times since the Financial Crisis. In a similar vein, we are hesitant to make major adjustments to the portfolio based on low conviction beliefs around government policy. We believe the best long-term course of action for our clients is to consider all these factors as we attempt to pick stocks that win on a two, three, or even five-year horizon.

Where the portfolio has taken on a different flavor has been in the trimming of some Information Technology positions where growth and earnings are likely plateauing, or expectations are more embedded in valuations. Likewise, the overweight to Financials has been trimmed as those names correlate strongly to interest rates and emerging market growth instead of stock-specific fundamentals. That money has been repositioned into several consumer names, wherein the thesis is not on consumer strength alone, which can be fleeting, but on stocks with specific fundamental drivers to their business beyond just the consumer.

This latest defensive rotation in the market has brought back thoughts of 2015 and 2016, a time when investors were throwing aside fundamentals to focus on safety and yield. Exiting 2016 we were vocal about the extreme level of valuations of those “bond proxies” – names in Consumer Staples, Telecommunication Services and REITs that were highly correlated to bond yields. Our underweight position here has been a benefit to performance the last 18 months as those bond proxy stocks dramatically underperformed during 2017 and the first half of 2018. Still, we are watching these groups closely for a couple of reasons: 1) Many Consumer Staples stocks are under significant disruption (due to Amazon), so finding the winners is even more important – a job we think we perform well; 2) Stocks in all these groups remain highly correlated with bond yields, implying that they are not yet at the point when they will differentiate themselves on stock-specific factors. Still, the underperformance of these stocks has put many in a more approachable position than in the past. It is possible some may periodically see bursts of outperformance, but at this point we are on hold until further notice.

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 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