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.

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 as an equity investment analyst in 1989 and covered industries in the Consumer Discretionary, Financials and Industrials sectors. He assumed portfolio management responsibilities in 1994.

Mr. Becker had previously been affiliated with the State of Wisconsin Investment Board from 1988 to 1989.

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

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. Mr. Klapmeyer 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 studied German literature and language at Hannover University in Hannover, Germany in a summer Study Abroad Program. 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 9/30/2017
(Returns for periods of less than 1-yr are not annualized)

  QTD  YTD 1YR 3YR 5YR 10YR
Large Cap Growth Concentrated - Gross 7.05%  22.76% 22.66% 10.22% 14.61% 9.87%
Large Cap Growth Concentrated - Net 6.85%  22.07% 21.75% 9.45% 13.86% 9.18%
Russell 1000 Growth Index 5.90%  20.72% 21.94% 12.69% 15.26% 9.08%

Calendar Year Returns1,2

  Large Cap Growth Concentrated Gross Large Cap Growth Concentrated Net Russell 1000 Growth Index
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%
2007 40.17% 39.33% 11.81%

1Large Cap Growth Concentrated composite is comprised of 1 account that had $10.6 million in total assets as of 9/30/17. • 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 July 1, 2017 through September 30, 2017.

Data as of 9/30/2017

10 Largest Holdings

as a % of total assets

MasterCard, Inc. Class A 6.31%
Alphabet, Inc. Class C 6.09%
Adobe Systems, Inc. 5.66%
Home Depot, Inc. (The) 5.07%
Microsoft Corp. 5.01%
Facebook, Inc. Class A 4.89%
Apple, Inc. 4.84%
Visa, Inc. Class A 4.54%
Salesforce.com, Inc. 4.44%
Philip Morris International, Inc. 4.29%

Sector Diversification

as a % of equity assets

Information Technology 51.67%
Consumer Discretionary 16.20%
Health Care 9.71%
Industrials 9.69%
Financials 8.16%
Consumer Staples 4.57%

Composite Composition1

Domestic Common Stock 94.62%
Cash and Cash Equivalents 5.38%

Composite Total Assets1

Assets ($M) $10.6
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 $10.6 million in total assets as of 9/30/17. • 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 July 1, 2017 through September 30, 2017.

As of 9/30/2017

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

Portfolio Review

Equities outperformed most asset classes during the third quarter and remain the clear asset outperformer year-to-date. Within equities, growth styles of all capitalization ranges led the market higher, while small caps outperformed mid caps and large caps. The outperformance of growth vs. value is a trend that has been in place throughout 2017. The quarter had multiple potential disruptors – tension with North Korea, building tension with Iran, multiple hurricane landfalls, and further normalization of global central bank policy. Furthermore, the lack of policy progress out of Washington, D.C. is still a headliner as investors worked through another failed legislative attempt at health care repeal and replace.

Despite the noise, the global economic backdrop remained resilient. Manufacturing data remained strong with ISM hitting new highs and inventories generally in check. Business sentiment and capital spending continued track higher indicating that confidence in pro-business policy remains. Investors even viewed the latest legislative failure on health care with enthusiasm as expectations quickly pivoted toward tax reform and the Trump administration’s determination to make progress on that front.

The Ivy Investments Large Cap Growth Portfolio strongly outperformed the Russell 1000 Growth Index for the quarter. Recall that second quarter was generally strong outside of a sharp factor reversal in June that favored value over growth and detracted from our performance. That reversal proved short-lived as growth and quality factors came surging back during July and August. However, similar to the prior quarter, September saw a swing back to more value-oriented stocks as investor began to once again lean into the potential for tax reform to accelerate economic growth. Unlike June, we managed to outperform during this latest rotation due to our exposure in Financials.

Within the quarter, Information Technology produced the majority of the outperformance. Our technology returns benefited from an overweight in semiconductor capital equipment companies, which are benefiting from increasing capital intensity in the semiconductor industry. Other winners include global payment stocks, which are all benefiting from the global secular trend of cashless transactions and increasing use of mobile payments. Our Consumer Discretionary holdings benefited from the strong performance of an Italian car manufacturer, where steady innovation and improved profitability have helped move the share price higher as of late. Our underweight position to the Consumer Discretionary sector, the sub-sectors of which are fighting numerous structural pressures and generally underperforming, drove relative outperformance in that sector.

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 likely remain in the 2.0-2.5% range for the foreseeable future. With that said, there are several important events that could have a material impact of the trajectory of economic growth in the U.S. First, progress on tax reform may reignite conversation about government deficits and perhaps influence interest rate policy of the Federal Reserve. Next, the appointment and confirmation of a new Federal Reserve chairperson should reveal much about the direction of monetary policy. Finally, the Federal Reserve balance sheet run-off, recently commenced, will likely elicit strong opinions about its impact on the yield curve and liquidity.

From our perspective these watch items appear very manageable over the near and intermediate term. The last several years has taught us that any hit to sentiment may be an opportunity to add to strong fundamental names. Right now our bigger concern would be economic policy that works to dramatically accelerate the business cycle, leading to disruption and eventual recession as the cycle comes to an end.

A more immediate watch item remains the probability of success investors assign to advancing the pro-growth policy agenda, specifically tax reform and the potential of infrastructure spending. As noted, the market enthusiasm around the advancement of pro-growth policies post the November 2016 election proved unwarranted. Moreover, it led directly to a sharp reversal away from the early cyclical, deep value names that had been excessively bid up on policy success. It is possible the market will make a similar rotation ahead of potential tax reform legislation, a trade we would view with skepticism and caution at this point in time.

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 remain underweight the defensive areas of the market, as we still view those valuations 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 September 30, 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 1/1/2003
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