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 40-60 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 held equity investment analyst research responsibilities prior to his appointment as 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.

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, CO from 2006 to 2009.

Mr. Krieger earned an MBA from Rockhurst University and a BSBA; concentration in Finance from Colorado State University.

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 3/31/2019
(Returns for periods of less than 1-yr are not annualized)

  QTD  YTD 1YR 3YR 5YR 10YR
Large Cap Growth - Gross 16.15%  16.15% 14.81% 18.21% 14.13% 16.64%
Large Cap Growth - Net 15.95%  15.95% 14.01% 17.40% 13.39% 15.91%
Russell 1000 Growth Index 16.10%  16.10% 12.75% 16.53% 13.50% 17.52%

Calendar Year Returns1,2

  Large Cap Growth Gross Large Cap Growth Net Russell 1000 Growth Index
2018 3.19%  2.47%  -1.51% 
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%

1Large Cap Growth composite is comprised of 12 accounts that had $6,192.0 million in total assets as of 3/31/19. 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 January 1, 2019 through March 31, 2019.

Data as of 3/31/2019

10 Largest Holdings

as a % of total assets

Microsoft Corp. 6.95%
Alphabet, Inc.
6.47%
Amazon.com, Inc.
4.88%
Apple, Inc. 4.54%
Visa, Inc. Class A
4.53%
MasterCard, Inc. Class A
3.53%
Verisk Analytics, Inc.
3.36%
CME Group, Inc. 3.28%
Intuit, Inc. 3.09%
PayPal, Inc. 3.07%
Alphabet, Inc. represents aggregate weight
of Class A and Class C securities.
 

Sector Diversification

as a % of equity assets

Information Technology 34.65%
Consumer Discretionary
17.76%
Health Care 14.27%
Industrials
13.12%
Communication Services 10.52%
Financials 5.23%
Consumer Staples 2.66%
Real Estate 1.78%

Composite Composition1

Domestic Common Stock 99.53%
Cash and Cash Equivalents 0.47%

Composite Total Assets1

Assets ($M) $6,192.0
Number of Accounts 12

Supplemental data: The Large Cap Growth holdings and sector diversification data shown are 1 of the 12 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 12 accounts that had $6,192.0 million in total assets as of 3/31/19. 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 January 1, 2019 through March 31, 2019.

As of 3/31/2019

Portfolio Manager:
Bradley M. Klapmeyer, CFA

Market Update

As the year began it felt as if the markets were going to race away from our style of investing (high-quality growth) and leave the strategy in the dust following a strong fourth quarter 2018 and full year 2018. Sharp reversals were everywhere. Markets went aggressively risk on, high beta, and low quality, an environment in which we sometimes struggle. How quickly investors forgot the names that got them into trouble in 2018, particularly those with high earnings volatility or low quality metrics. As the quarter progressed, the markets found their way back to quality and our performance moved more on par with the benchmark. Although we slightly underperformed the Russell 1000 Growth Index, we were pleased to participate in a 16% market gain for the quarter without taking on undue risk.

It isn’t difficult to find the factors that generated the optimism driving markets higher during the first quarter. In many ways, it was a quarter of reversals, perhaps the biggest of which was the reversal of the Federal Reserve’s stance on monetary tightening. Post what many perceived as a policy error during 4Q18, the Fed moved quickly to ease tightening financial conditions. Actions taken included stepping back from material quantitative tightening (balance sheet reduction), while communicating fed funds rate increases would be on hold for the foreseeable future. Interest rates responded predictably with the yield curve moving lower, and easing fears of an economic slowdown boosted stocks.

Another reversal was the market stress related to escalating trade war rhetoric. There was building consensus during the quarter that China and U.S. were on a path to a real trade agreement. Companies with foreign exposure, which had a difficult year in 2018, particularly benefited from this more optimistic sentiment.

There was also a notable reversal in overall market performance. All sectors in the Russell 1000 Growth Index ended the fourth quarter in negative territory, marking the worst quarter since the financial crisis. By contrast, all sectors ended the first quarter in positive territory, with strength in Information Technology and Real Estate, and relative underperformance in Financials and Energy. In a stark turnaround, the just-completed quarter marked the strongest one since the bounce coming out of the financial crisis.

From a factor perspective, risk (beta, variability of earnings) and quality (ROE, ROA) factors outperformed during the quarter. Underperforming factors included value (price/sales, price/book) and pockets of momentum.

Portfolio Review

As noted, the strategy slightly underperformed, but was nearly in line with the benchmark. Almost all sectors contributed to relative performance with one notable detractor – Financials. Consumer Staples outperformed owing to an overweight position in a well-known cosmetics retailer, a position that was initiated during the China growth debate in fourth quarter of 2018. The company’s shares responded positively during the quarter on the back of sustained strong growth out of China. Consumer Discretionary also benefited from stock selection. Industrials was another notable positive contributor to performance.

The Financials sector was a meaningful detractor from performance. One large holding underperformed significantly as overall market volatility ebbed. Increasingly, it seems the shares of this stock have become a proxy for the VIX index. And while this decreases the attractiveness of the stock, we remain positive as a long-term secular winner in global futures trading.

Portfolio changes during the quarter were minimal. We exited a position in a major aerospace/defense company as we see more limited defense spending growth in the coming years. Such a scenario would make the stock more highly reliant on elevated threat levels, a catalyst that we don’t have high confidence in predicting. A new position was established in the largest aerospace company as the recent debate on safety offered an attractive entry point. We believe the commercial aerospace industry, with a 7-year backlog, will prove more resilient through this cycle. A foreign carmaker was added back to the portfolio as we regained conviction that future innovation would drive a mix to higher priced vehicles, including hybrid drive trains, and generate continued positive sales and earnings revisions.

At the close of the first quarter, one could easily be drawn back into a narrative that has worked for most of this decade-long bull market. In short, this narrative counsels that slow growth is sufficient, as long as China adds economic support, and market pullbacks represent good buying opportunities. In fact, we have benefited from this narrative since the financial crisis by buying during many of the “mini-shocks” that have rattled markets.

Outlook

Our current outlook, however, takes issue with returning to this same narrative so quickly. Yes, there are actions in place to address the slowing global growth. Yes, there are actions to address tightening financial conditions in the U.S. But we must remember that the slowdowns, and subsequent recoveries, of 2013 and 2016 occurred during a backdrop of very easy global monetary policy conditions. Since then the Federal Reserve has instituted nine rate hikes and has stopped the expansion of their balance sheet, mechanisms that lead directly to tighter monetary conditions. This tightening has begun to trickle into global growth projections and corporate earnings growth projections, both of which have moved lower. Investors must now ask themselves how real are the threats to global growth, and if recent “dovish” moves from the Fed will be enough to counter these threats.

Furthermore, we remain concerned that investors may be sweeping aside global trade fears too quickly. Several points are important to remember: 1) Despite optimism, the U.S. has still not reached a deal with China as of this writing, 2) any such deal is likely imperfect and unlikely to bring closure to trade fears, and 3) CFO’s of global corporations are likely to be very cautious in global capital allocation for years to come even if a deal is reached and the risk of unwinding the benefits of globalization will remain elevated.

Within this framework we have taken the simple approach of positioning the portfolio toward higher quality growth so that we feel comfortable walking into any economic backdrop. We are in a watchful mode, waiting for opportunities to present themselves but not forcing action. We think the market action over the last six months indicates confusion, low visibility, and low confidence, with sentiment swinging pro-growth one day and fearing growth the next. If decreased growth prospects for the second half 2019 and 2020 get priced into stocks, that would present a better risk/reward opportunity. On the other hand, we are also looking for signs that growth may be stronger than we think, in which case we would need to adjust accordingly.

Our goal is to win with great bottoms-up stock research, stock selection, disciplined portfolio construction and risk management, rather than with large macroeconomic bets. Over the past year we have emphasized more heavily the utilization of risk management tools to further understand our intentional/unintentional sector and risk factor bets. We are continuously trying to improve the implementation of the philosophy, and portfolio construction plays an important role. We believe further appreciating the risk generated from portfolio construction is a key determinant in driving upside participation with the market, but also protecting with high-quality in market drawdowns. At its core, our philosophy and process are risk management tools and we strive to build on that disciplined approach every day.

We continue to believe that growth scarcity will increase as we move through the latter part of the economic cycle. If this does prove to be near the end of the cycle, growth style investing will continue to work well as investors hunt for those remaining places of earnings stability combined with earnings growth.

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 March 31, 2019 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 40-60
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