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 Waddell & Reed 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.

Prior to joining Waddell & Reed, Mr. Becker was 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 Waddell & Reed 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 Waddell & Reed 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, Colorado 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 6/30/2017
(Returns for periods of less than 1-yr are not annualized)

  QTD  YTD 1YR 3YR 5YR 10YR
Large Cap Growth Concentrated - Gross 4.33%  14.67% 23.83% 8.52% 15.16% 11.18%
Large Cap Growth Concentrated - Net 4.13%  14.24% 22.92% 7.78% 14.41% 10.49%
Russell 1000 Growth Index 4.67%  13.99% 20.42% 11.11% 15.30% 8.91%

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 $9.9 million in total assets as of 6/30/17. • 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 April 1, 2017 through June 30, 2017.

Data as of 6/30/2017

10 Largest Holdings

as a % of total assets

Alphabet, Inc. Class C 7.39%
MasterCard, Inc. Class A 6.82%
Adobe Systems, Inc. 5.73%
Facebook, Inc. Class A 5.23%
Home Depot, Inc. (The) 5.08%
Microsoft Corp. 4.95%
Philip Morris International, Inc. 4.85%
Visa, Inc. Class A 4.75%
Celgene Corp. 4.75%
salesforce.com, Inc. 4.40%

Sector Diversification

as a % of equity assets

Information Technology x.xx%
Health Care %
Consumer Discretionary %
Financials %
Industrials %
Consumer Staples %
Energy x.xx%

Composite Composition1

Domestic Common Stock 95.43%
Foreign Common Stock 1.69%
Cash and Cash Equivalents 2.87%

Composite Total Assets1

Assets ($M) $9.9
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 $9.9 million in total assets as of 6/30/17. • 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 April 1, 2017 through June 30, 2017.

As of 3/31/2017

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

Portfolio Review

The market extended its post-presidential election rally during the first quarter of 2017. U.S. markets posted very strong gains on the continued enthusiasm around prospects for a pro-growth regimen and improving global economic growth. Large-cap growth names, particularly high-quality growth, outperformed nearly all other styles, which was a notable reversal from the fourth quarter when lower quality value performed the strongest. Active management reared its head, with more than half of large cap growth managers outperforming the respective benchmarks. This level of excitement around potential accelerating growth is something the markets have not experienced in nearly a decade, and investors are attempting to interpret real-time moves in U.S. government policy as clues for what is to come. This is likely a dangerous exercise as the market is likely to overreact to normal policy hiccups. We believe a mini policy shock began to occur during the back half of the first quarter when interest rates stalled around 2.5%. At that time investors began to ponder the implications of the Trump administration getting bogged down with health care reform, and whether this spelled disaster for other pro-growth policies, such as tax reform and infrastructure spending. We still see success of pro-growth policies as an accelerant, not a necessity, for a strong growth outlook in the U.S., where current domestic economic indicators already seem rather supportive. The portfolio participated in the rally, marginally outperforming the Russell 1000 Growth Index (portfolio’s benchmark) for the period ended March 31, 2017. Technology and consumer staples were key contributors to performance but were balanced by pullbacks in energy and financials. There was a diverse group of portfolio contributors. Many of the portfolio’s poorest performing stocks were names that had rallied significantly during the back half of the fourth quarter 2016. Our material underweight in the safety trade, stocks sometimes described as “bond proxies,” contributed to our strong return. Sectors heavy with such stocks, including telecommunications, real estate investment trusts (REITs) and consumer staples, notably underperformed the Russell 1000 Growth Index.

Outlook

Although we fully anticipate continued volatility around policy progress, we see this as akin to prior mini shocks that have rattled investors in prior years. These events temporarily disrupt equity prices but don’t disrupt economic trajectory. Said another way, the mini shocks have typically weighed on valuations without changing underlying fundamentals. Currently, we believe key economic indicators remain aligned with improving growth. These include business confidence, capital spending intentions, payrolls, wages, manufacturing data and inventories, all of which point to a healthy economic backdrop regardless of the pace of policy execution. The rationale for further accelerated growth is supported by improved business investment, as corporations exited 2016 with the belief that federal regulations are likely to ease. There will surely be periods of disappointment as the administration’s pro-growth agenda unfolds, but overall we expect continued opportunities for high-quality growth investors. During the quarter, we made only modest portfolio changes following the more significant repositioning in the fourth quarter. We believe earnings growth over the coming year will likely favor financials, energy and technology sectors, all which are overweight positions in the portfolio. Our underweight to defensive sectors remains, as we think these sectors are still overpriced relative to their growth prospects. We believe the U.S. economy should continue to post strong growth and the Federal Reserve, which recently hiked for just the third time since the last recession, will continue to move rates higher throughout the year. In this environment we believe attractively-priced growth securities should outperform their defensive counterparts. More generally, we think this environment favors a growth style, especially concentrated, high quality growth.

The opinions expressed in this commentary are those of the portfolio managers and are current through March 31, 2017. The managers’ views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results. 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