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.

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 consumer discretionary, financials, industrials 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 9/30/2018
(Returns for periods of less than 1-yr are not annualized)

  QTD YTD 1YR 3YR 5YR 10YR
Large Cap Value - Gross 8.00%  8.31% 14.03% 13.16% 10.85% 11.09%
Large Cap Value - Net 7.81%  7.75% 13.23% 12.37% 10.11% 10.39%
Russell 1000 Value Index 5.70%  3.92% 9.45% 13.55% 10.72% 9.79%

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 $1,846.3 million in total assets as of 9/30/18. • 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 July 1, 2018 through September 30, 2018.

Data as of 9/30/2018

10 Largest Holdings

as a % of total assets

Citigroup, Inc. 4.86%
JPMorgan Chase & Co.
4.50%
Walmart, Inc. 3.94%
CVS Health Corp. 3.83%
DowDuPont, Inc.
3.47%
Energy Transfer Partners L. P.
3.45%
Capital One Financial Corp. 3.15%
Pfizer, Inc. 3.11%
Broadcom Ltd. 3.01%
Target Corp. 3.00%

Sector Diversification

as a % of equity assets

Financials 32.32%
Health Care 15.49%
Consumer Discretionary 10.64%
Information Technology 10.41%
Energy 9.01%
Industrials
6.90%
Consumer Staples 4.05%
Materials 3.56%
Communication Services 2.76%
Utilities  2.61%
Real Estate  2.25%

Composite Composition1

Domestic Common Stock 94.86%
Foreign Common Stock 2.40%
Cash and Cash Equivalents 2.74%

Composite Total Assets1

Assets ($M) $1,846.3
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 $1,846.3 million in total assets as of 9/30/18. • 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 July 1, 2018 through September 30, 2018.

As of 9/30/2018

Portfolio Manager:
Matthew T. Norris, CFA

Market Update

Equity markets continued the push higher with broad-based strength. Economic data points continue to show strong and stable growth in the U.S., and corporate earnings reflect that trend. The Russell 1000 Value Index return for the third quarter was +5.7%, which trailed both the broader S&P 500 Index as well as the growth style. Inflation and wage gains have appeared, although still very small. Interest rates rose at both the shorter and longer end of the treasury curve. Macro focus continues to be on the increasingly concerning trade environment, but so far the markets have anticipated a positive outcome.

Portfolio Review

In the third quarter, the Ivy Investments large cap value strategy strongly outperformed the Russell 1000 Value. The best relative sector was Energy. The next best relative sector was Health Care, where two of our holdings significantly outperformed the group.

Detracting from performance in the quarter was our ownership of a major semiconductor manufacturer and a company that produces and sells memory and storage solutions worldwide. Despite the underperformance of these stocks in the quarter, we still believe that both names are trading far enough below their intrinsic value to still warrant ownership.

For the quarter, the portfolio’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. The Federal Reserve’s recent Comprehensive Capital Analysis and Review (CCAR) gave most large banks the ability to raise dividends and repurchase shares, adding to their appeal. In other sectors, our overweights are more a function of incidental names than any overall theme. Industries held include HMOs, chemicals, airlines and pipelines.

The portfolio’s major underweights in the quarter were Utilities and Consumer Staples. Value names are hard to find amongst these sectors, and our lack of exposure there helped as the sectors trailed the broader value index in the quarter.

Outlook

The rest of 2018 could be interesting for investors. We believe the U.S. economy will continue to plug along and other parts of the world will also grow, but at a slower pace. Corporate profits are solid, and we expect planned capital expenditures to continue through the year. The tightened job market appears to be stable, but consumers have yet to see real wage growth. Midterm elections could ratchet up volatility in stocks. On a macro level, we are cautiously optimistic for a continued supportive backdrop, with continued GDP growth, rising corporate profits, a tightening job market and the avoidance of a trade war. Given these conditions, we would expect small positive returns from the overall stock market.

While the economic forces listed above are clearly important factors, the first approach of the portfolio management team 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 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 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