Institutional Strategies

Large Cap Value

The strategy invests in various types of U.S. equity securities of large capitalization companies. The portfolio manager seeks those companies believed to be undervalued or trading at a significant discount relative to the intrinsic value of the company and/or are out of favor in the financial markets but have a favorable outlook for capital appreciation.

Investment Philosophy

  • Mathematical fact - The present value of any investment is the sum of all its expected future cash flows discounted at some interest rate
  • Cash flow growth drives stock value over time. Changes in what investors pay for those cash flows drive excess investment returns

Long term excess returns can potentially be achieved by:

  • Fundamental research focused on sustainable cash flow generation which drives intrinsic value estimates
  • Disciplined focus on proprietary intrinsic value targets as well as persistent macro overlay minimizes big mistakes
  • Portfolio concentration enables best ideas to meaningfully impact performance

Investment Process

The Large Cap Value strategy aims to identify companies whose fundamental health is strong but whose stock price has declined due to transitory factors. Through consistent application of rigorous valuation analysis, the portfolio manager seeks to build a portfolio of companies that are currently trading at a notable discount to their valuation with identifiable catalysts to reach or exceed fair value. Generally, firms with market values of at least 30 percent less than their intrinsic value qualify as portfolio candidates.

The investment process begins with a universe of companies with market capitalizations generally in excess of $10 billion. Next, the universe is filtered/narrowed down to approximately 100 securities by screening a variety of fundamental factors:

  • Low relative valuation on standard valuation metrics
  • High and/or rising free cash flow yield
  • Prudent capital allocation
  • Durable business models

Within this narrowed universe more rigorous fundamental analysis is conducted looking at the origin of profit and cash flow drivers. To these companies, the manager applies a proprietary four step process to determine intrinsic value:

  1. In-depth, free cash flow analysis that incorporates more than a dozen financial statement metrics.
  2. Qualitative adjustment of those metrics − Example: Did inventories decline because strong sales outpaced production, or did management reduce production levels because of sluggish consumer interest?
  3. Normalizing those metrics to adjust for ebbs and flows in specific industry cycles, one-time events and the broader economic cycle.
  4. Discounting resulting cash flows at a proper rate to determine intrinsic value.

Firms considered for portfolio inclusion must meet the intrinsic value requirements and exhibit or have a reasonable expectation of a catalyst to cause the stock to appreciate towards its intrinsic value.

Through this process they seek to build a portfolio of 35-45 stocks each with an average holding period of two to three years. Throughout the holding period, both quantitative and qualitative factors are continually reevaluated to ensure their integrity. The reevaluation process may lower the manager’s intrinsic value estimate and thus compromise the stock’s capital appreciation potential, typically leading the manager to sell that particular holding. The manager uses similar analysis to evaluate price declines within the portfolio, thus trying to avoid "value traps."

Matthew T. Norris, CFA

Senior Vice President, Portfolio Manager

Mr. Norris is portfolio manager of the firm’s Large Cap Value investment strategy and has been in this role since 2003 when he joined the firm. He was the Director of Equity Research and responsible for the firm’s equity research team from 2005 to 2010.

Mr. Norris was affiliated with Advantus Capital Management, Inc. in St. Paul, Minn. from 1997 to 2003. He joined Advantus as an equity analyst and was appointed portfolio manager in 2000. Prior to joining Advantus, he was an equity analyst and portfolio manager for Norwest Investment Management, Inc. from 1994 to 1997.

Mr. Norris earned an MBA from the University of Nebraska and a BS in Cellular Biology from the University of Kansas. He is a CFA charterholder.

Joshua P. Brown

Assistant Vice President, Assistant Portfolio Manager

Mr. Brown is assistant portfolio manager of the firm’s Large Cap Value investment strategy and assists the portfolio manager in idea generation, research, portfolio construction, and risk management efforts. He has been a member of the team since 2017. He is also a member of the firm’s equity research team, covering industries in the industrials, consumer discretionary and materials sectors.

Prior to joining the organization in 2009 as an equity investment analyst, Mr. Brown was an investment analyst intern for the company in 2008, covering oil and gas master limited partnerships. Prior to that he spent five years as a broker for Citigroup - Smith Barney.

Mr. Brown earned an MBA with a concentration in Finance; specialization in Investment Management from the University of Texas at Austin, McCombs School of Business and a BBA; concentration in Finance from the University of Kansas.

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 Value - Gross -1.81%  -1.81% 7.56% 7.46% 10.60% 8.82%
Large Cap Value - Net -1.99%  -1.99% 6.81% 6.72% 9.87% 8.14%
Russell 1000 Value Index -2.83%  -2.83% 6.95% 7.88% 10.78% 7.78%

Calendar Year Returns1,2

  Large Cap Value Gross Large Cap Value Net Russell 1000 Value Index
2017 13.71%  12.91%  13.66% 
2016 12.34%  11.56%  17.34% 
2015 -3.00% -3.62% -3.83%
2014 11.94% 11.27% 13.45%
2013 37.46% 36.64% 32.53%
2012 20.05% 19.33% 17.51%
2011 -6.07% -6.63% 0.39%
2010 18.28% 17.58% 15.51%
2009 24.89% 24.16% 19.69%
2008 -31.97% -32.40% -36.85%

1Large Cap Value composite is comprised of 4 accounts that had $1,668.0 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

JPMorgan Chase & Co. 5.22%
Citigroup, Inc. 4.39%
Wal-Mart, Inc. 4.17%
Energy Transfer Partners L. P. 3.98%
Capital One Financial Corp. 3.88%
State Street Corp. 3.51%
DowDuPont, Inc. 3.32%
HCA Healthcare, Inc. 3.30%
Welltower, Inc. 3.29%
SunTrust Banks, Inc. 3.27%

Sector Diversification

as a % of equity assets

Financials 38.17%
Health Care 12.52%
Consumer Discretionary 11.20%
Information Technology 10.90%
Energy 9.28%
Consumer Staples 7.66%
Materials 3.52%
Real Estate 3.48%
Industrials 3.26%

Composite Composition1

Domestic Common Stock 90.67%
Foreign Common Stock 4.29%
Cash and Cash Equivalents 5.04%

Composite Total Assets1

Assets ($M) $1,668.0
Number of Accounts 4

Supplemental data: The Large Cap Value holdings and sector diversification data shown are 1 of the 4 composite accounts without client specific investment restrictions and may not be reflective of the Large Cap Value composite as a whole or of any other Large Cap Value 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 Value composite is comprised of 4 accounts that had $1,668.0 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:
Matthew T. Norris, CFA

Market Update

Volatility re-emerged in the equity markets in the first quarter of 2018. After years of low volatility, this certainly felt uncomfortable and unwelcome, but is actually more of a return to normal. There were a number of contributing factors, including the federal budget deal signed on February 9th, which we feel creates additional economic stimulus on top of the tax bill from December. Jerome Powell took over as new U.S. Federal Reserve Chairman, and the Fed Open Market Committee (FOMC) seemed to turn a hawkish pivot upon his appointment. We now expect a minimum of three rate hikes for 2018 and continued increases into 2019. This is in response to inflation data that has rebounded recently. We believe core CPI will be north of 2% by April, a level we have not seen for a few years. Otherwise, the economy remains solid, with the labor market and consumer spending holding in at good levels.

Portfolio Review

In the first quarter, the Ivy Investments large cap value strategy outperformed Russell 1000 Value Index. The index return for the third quarter was -2.83%, and the Ivy portfolios outperformed by about 100 basis points. Value investing, while still lagging, has begun performing better relative to the growth indices. As usual, we try to ignore short-term fluctuations and keep our focus longer-term.

Our best relative sector in the quarter was Health Care. The next best relative sector was Information Technology, where our overweight position and stockpicking both contributed. The biggest areas of underperformance in the quarter came from Financials and Materials. In both cases, long-term holdings failed to keep pace with the market. For the quarter, the strategy’s biggest overweights were in the Financials and Consumer Discretionary sectors. We believe the U.S. banking system is strong and well capitalized, with many equities attractively priced. Rising short-term interest rates may also serve as a tailwind to this sector. In other sectors, our overweights are more a function of incidental names than any overall theme. The strategy’s major underweights in the quarter were Utilities, Industrials and Telecommunications. Years of declining interest rates have caused valuation expansion, especially in Telecommunications and Utilities. Value names are hard to find among these sectors, and our lack of exposure there helped as the sectors trailed the broader value index in the quarter.

Outlook

Recent economic data has been encouraging with strong job growth and rising, but still historically low, interest rates. We believe the new tax bill should provide a stimulus to the economy, and an accelerating economy typically bodes well for value investors. Headwinds do exist, however, including the Fed’s difficult job of tightening monetary policy. The goal is to prevent inflation via higher short-term rates and a shrinking of the Fed balance sheet, and the market is expecting three to four rate hikes in 2018. History shows a high probability of central bank mistakes in this process, however, and the Fed risks contributing to a recession if rates rise too much too quickly. This is of course something we will watch carefully. While the economic forces listed above are clearly important factors, the portfolio management team’s first approach is from the company level. We seek to find quality, growing companies whose stocks are trading below what we consider their intrinsic value. Oftentimes this is due to short-term negative factors, and we become larger owners of a company if we feel those negatives are about to dissipate. We continue to search for and make investments one company at a time to benefit clients over the long run.

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.
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Key Features

Composite Performance History Since 6/1/2003
Benchmark Russell 1000 Value Index
Style Fundamental, Value
Target Alpha 200 bps above Index
Over full market cycles (3-5 years)
Peer Universe U.S. Large Cap Value Equity
Typical Tracking Error 300-500 bps
Holdings Range 35-45
Max Position Size Generally 7%
Sectors Greater of 2x Index weight or 40%
Investment Vehicles Institutional Separate Account
U.S. Mutual Fund: Institutional Share Class
Variable Insurance Portfolio