Institutional Strategies

Large Cap Growth - Concentrated

The strategy utilizes the same investment approach as the firm’s more diversified Large Cap Growth strategy, but adds an additional step to filter only the best long term ideas. The result is a more concentrated strategy approach consisting of only the highest conviction Large Cap Growth stocks.

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 the 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 4-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 next 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.

Building the Concentrated Growth Portfolio

In the final step the team selects what they feel are the best 12 to 18 long term ideas from the diversified 45-60 growth portfolio. The concentrated portfolio consists of only the companies the team feels are the most durable franchises with superior growth characteristics. Despite the limited number of stocks, the team seeks to minimize the risk of business model disruption by paying particular attention to not being over leveraged to a theme or sector.

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 3/31/2018
(Returns for periods of less than 1-yr are not annualized)

  QTD  YTD 1YR 3YR 5YR 10YR
Large Cap Growth Concentrated - Gross 5.37%  5.37% 25.74% 11.41% 15.88% 11.83%
Large Cap Growth Concentrated - Net 5.18%  5.18% 24.80% 10.61% 15.10% 11.12%
Russell 1000 Growth Index 1.42%  1.42% 21.25% 12.90% 15.53% 11.34%

Calendar Year Returns1,2

  Large Cap Growth Concentrated Gross Large Cap Growth Concentrated Net Russell 1000 Growth Index
2017 31.15% 30.17%  30.21% 
2016 0.24% -0.47%  7.08%
2015 4.23% 3.53% 5.67%
2014 13.71% 13.03% 13.05%
2013 40.51% 39.67% 33.48%
2012 17.21% 16.51% 15.26%
2011 6.80% 6.16% 2.64%
2010 9.85% 9.20% 16.71%
2009 33.21% 32.41% 37.21%
2008 -37.06% -37.44% -38.44%

1Large Cap Growth Concentrated composite is comprised of 1 account that had $11.8 million in total assets as of 3/31/18. • 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.

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, 2018 through March 31, 2018.

Data as of 3/31/2018

10 Largest Holdings

as a % of total assets

Adobe Systems, Inc. 6.89%
Microsoft Corp. 6.72%
MasterCard, Inc. Class A 6.61%
Alphabet, Inc. Class C 5.87%
Home Depot, Inc. (The) 5.85%
Amazon.com, Inc. 5.46%
salesforce.com, Inc. 4.95%
PayPal, Inc. 4.90%
CME Group, Inc. 4.69%
Charles Schwab Corp. (The) 4.36%

Sector Diversification

as a % of equity assets

Information Technology 55.22%
Consumer Discretionary 15.83%
Industrials 10.56%
Financials 9.64%
Health Care 8.75%

Composite Composition1

Domestic Common Stock 93.86%
Cash and Cash Equivalents 6.14%

Composite Total Assets1

Assets ($M) $11.8
Number of Accounts 1

Supplemental data: The Large Cap Growth - Concentrated holdings and sector diversification data shown are 1 of the 1 composite account without client specific investment restrictions and may not be reflective of the Large Cap Growth - Concentrated composite as a whole or of any other Large Cap Growth - Concentrated 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 Concentrated composite is comprised of 1 account that had $11.8 million in total assets as of 3/31/18. • 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.

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, 2018 through March 31, 2018.

As of 3/31/2018

Portfolio Manager:
Bradley M. Klapmeyer, CFA

Market Update

Equities again outperformed most asset classes during the first quarter of 2018 and started the year on a good note, but then depreciated quickly as the quarter progressed. Growth styles led the market for the quarter, especially the mega cap technology stocks that have led the market over the past few years. These stocks eventually succumbed to the downwards market pressures as did most growth stocks late in the quarter. Several mini shocks rippled through global capital markets during the quarter including an inflation scare and a larger and more dangerous global trade dispute with several trading partners. The current cocktail mix of accelerating profit growth, stronger wage and GDP growth combined with potential inflation and trade disruptions may make the next few quarters very volatile, and hence may provide some interesting opportunities for growth investors.

Portfolio Review

The Ivy large cap growth concentrated strategy performed well on an absolute and relative basis, outperforming the Russell 1000 Growth Index by over 300 basis points in quarter. In general our exposure to large technology stocks, capital market-related financial stocks, and our underweighting in both defensive and bond proxy-related stocks all helped to generate our relative performance.

Outlook

Recent policy progress out of Washington, D.C. has been and will likely continue to be a large factor in both the positive and negative tailwinds to growth stocks. The sudden Republican success at passing tax reform catalyzed a belief that economic growth may accelerate and generated a strong response to stocks early in the year.

More recently, the Trump administration’s views on global trade imbalances have had quite the opposite effect on global capital markets and have caused quite a debate on the topic. In this debate, many have recalled the Smoot Hawley trade bill which was passed into effect in 1930. Those tariff increases, also implemented by a Republican president, Herbert Hoover, were signed into law amidst an overwhelming view that they would produce a growth shock. Hoover’s protectionism was related to farming and agriculture, and trade flows slowed substantially after the bill was passed into law. Economists still debate what effect that law had on catalyzing or adding to the Great Depression, a question that has received renewed interest from policy-makers. Trade barriers in general have been coming down since the end of World War II, which helped catalyze the “globalization” theme that has helped increase both standards of living around the world and profit margins for US companies. This potential reversal in policy may continue to worry global capital markets for some time. We will have to continually monitor this situation going forward. Economic growth here at home continues to be strong, with wage growth, GDP and corporate profits all going in the right direction. We believe the extremely low short- and long-term bond yields are unsustainable, thus we view the recent rise in short-term rates as a welcome development. Ten years after the Great Recession, corporate optimism is finally high and most signs point toward an eventual pick-up in capital spending and continued declines in the unemployment rate, both of which should be welcomed on Main Street, USA. There appears much to worry about in the short term, such as inflation levels, trade policy, input costs, profit margin implications, Federal Reserve policy, and peaking in short-term economic data points. With these worries come potential opportunities, as the underlying fundamentals appear sustainable, provided trade policy does not produce the shock it did nearly eighty years ago.

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, 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.
Share this page:

Key Features

Composite Performance History Since 1/1/2003
Benchmark Russell 1000 Growth Index
Style Fundamental, Growth
Target Alpha 200-300 bps above Index
Over full market cycles (3-5 years)
Peer Universe U.S. Large Cap Growth Equity
Typical Tracking Error 600-1000 bps
Holdings Range < 18
Max Position Size 15%
Sectors 0-2x Index weights
Proprietary Growth Spectrum Diversification across three proprietary buckets: Accelerating, Controlled and Cyclical
Investment Vehicles Institutional Separate Account