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.

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 9/30/2018
(Returns for periods of less than 1-yr are not annualized)

  QTD  YTD 1YR 3YR 5YR 10YR
Large Cap Growth - Gross 8.83%  20.65% 28.36% 20.12% 17.03% 13.62%
Large Cap Growth - Net 8.64%  20.02% 27.46% 19.32% 16.28% 12.92%
Russell 1000 Growth Index 9.17%  17.09% 26.30% 20.55% 16.58% 14.31%

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 22 accounts that had $6,988.7 million in total assets as of 9/30/18. 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 July 1, 2018 through September 30, 2018.

Data as of 9/30/2018

10 Largest Holdings

as a % of total assets

Microsoft Corp. 6.93%
Apple, Inc. 6.36%
Amazon.com, Inc.
5.78%
Visa, Inc. Class A
4.46%
Alphabet, Inc. 4.43%
MasterCard, Inc. Class A
4.36%
salesforce.com, inc. 3.76%
CME Group, Inc. 3.76%
VF Corp. 3.08%
Home Depot, Inc. (The)
3.02%
Alphabet, Inc. represents aggregate weight
of Class A and Class C securities.
 

Sector Diversification

as a % of equity assets

Information Technology 36.69%
Consumer Discretionary
18.26%
Health Care 13.12%
Industrials
11.60%
Communication Services 8.95%
Financials 6.40%
Consumer Staples 2.71%
Real Estate 1.20%
Energy  1.07%

Composite Composition1

Domestic Common Stock 98.49%
Cash and Cash Equivalents 1.50%

Composite Total Assets1

Assets ($M) $6,988.7
Number of Accounts 22

Supplemental data: The Large Cap Growth holdings and sector diversification data shown are 1 of the 22 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 22 accounts that had $6,988.7 million in total assets as of 9/30/18. 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 July 1, 2018 through September 30, 2018.

As of 9/30/2018

Portfolio Manager:
Bradley M. Klapmeyer, CFA

Market Update

Third quarter performance for equities was strong, posting solid gains across all styles and capitalization ranges. Growth styles outperformed value styles, further widening the year-to-date outperformance of growth relative to value. Large cap styles outperformed both mid and small cap, as well as outperforming both on year-to-date basis. The market performance was driven by strong U.S. economic growth, which has been exceptionally strong during recent quarters. We view the domestic economy as temporarily benefiting from the fiscal stimulus impact on personal consumption (tax cuts) and export gains related to pull ahead from tariffs. The acceleration in U.S. growth compared favorably to softening growth prospects in Europe and emerging markets.

The trade war rhetoric softened with North American and European trading partners but intensified further versus China as the U.S. moved forward with a third round of tariffs and alluded to future action. The Federal Reserve is likely watching these international trade disputes with interest but did move forward with another rate increase in September, continuing the steady climb higher in the fed funds rate. 10-year U.S. Treasury yields ended the quarter back at recent highs, but the short-end yields moved higher causing the yield curve to flatten slightly during the quarter.

Within our benchmark, the Russell 1000 Growth Index, momentum, growth and quality factors outperformed risk and value factors during the quarter, which has been the established trend all year. This likely indicates that investors have positioned for a deceleration in GDP growth from the rapid levels seen recently.

Portfolio Review

The portfolio modestly underperformed the benchmark return during the period, although posted very strong absolute gains for quarter and has maintained strong relative and absolute outperformance year-to-date. Stock selection in Consumer Discretionary benefited performance. Information Technology provided positive attribution. The portfolio also benefited from overweight exposure to two major credit card companies as well as from limited exposure to semiconductor and semiconductor capital equipment stocks, both of which were notably weak during the period.

Financials were a detractor from performance. Upside to the group was limited as interest rates had yet to break to new highs and market volatility. Oil services stocks were negatively impacted by constrained ability to move oil out of the Permian Basin, a key area of U.S. exploration, which required slowing of oil production in that region and idled equipment.

The more notable portfolio adjustments during the quarter include the sale of two holdings, although those reductions were initiated during the second quarter.

Outlook

As mentioned, we believe the torrential pace of GDP growth in the U.S. is unlikely to continue, but economic data remains supportive of growth in the 2.5%-3.0% range. Inflationary pressures are a key watch item, but currently there appears to be only modest pressure. With that said, the market has seemingly concluded the environment is more late-cycle with expectations for increasing risk and volatility. We agree with this forecast and believe this outlook will constrain market valuations and steer investors to more durable, high-quality growers.

The trade war with China is still a material overhang and remains the most visible threat to markets. China’s economic growth is likely to slow because of the tariffs, which we think will also send ripples through many emerging market economies. As we have noted in prior commentary, globalization has been a source of incremental sales growth and profit margins for many U.S. companies. Building out an international supply chain, sourcing inputs (labor) from global markets and selling into those same markets have all provided a higher level of growth and profitability then would have been likely otherwise.

Many economists project limited first-order impacts from tariffs, but we believe clarity on trade rules is needed to sustain corporate and consumer confidence. Continued uncertainty about the duration of trade war rhetoric and depth of tariffs is likely to erode the strong business confidence and eventually spill over into business investment. We view as very possible a scenario in which business investment will pause during this trade dispute, causing negative revisions in many technology and manufacturing sectors.

In our portfolio we have been reducing the cyclical exposure in Information Technology and Industrials throughout the year and are now more comfortable with our bets in those sectors given the current global backdrop. Although we are careful not to overreact to specific macro events, we also want to make sure we aren’t betting on factors that are uncontrollable by the companies in which we invest. Where possible, we want to avoid predicting the outcome binary macro events, preferring to maintain a focus on the long-term success of a company’s business model.

As the trade war has escalated, investors have transitioned into more U.S.-focused securities, higher quality and more profitable names. If the trade war escalates further, with detrimental impacts on global growth, then sectors and industries considered more defensive, e.g. Consumer Staples and pharmaceuticals, would be a potential hiding spot for investors. This may lead to temporary gains for defensive areas in the market, but they remain largely unattractive to us because of limited growth prospects due to secular pressures, particularly within Consumer Staples.

We remain overweight Information Technology due to solid long-term growth prospects and favorable business models, but we remain watchful of valuations and decelerating growth. We are materially underweight the new Communication Services sector. As always, we are comfortable maintaining sector differences with our benchmark provided that a company and its stock fit the core tenets of our philosophy and process.

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 September 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