Institutional Strategies

Mid Cap Growth

Strategy focuses on mid-capitalization U.S. companies with large cap potential that demonstrate profitability, balance-sheet strength and sustainable earnings growth. Seeks quality growth opportunities in three categories; Greenfield, Stable and Unrecognized Growth.

Our Mid Cap Growth philosophy is based on a belief that high quality growth companies that have sound capital structures and attractive valuations will provide significant opportunities for outperformance. We believe the market will generally apply a growth rate fade factor that will overestimate the deceleration in future growth over a 3-5 year time horizon. It is this market inefficiency that the strategy attempts to isolate and generate alpha.

Other tenets of the Mid Cap Growth philosophy are:

  • Quality growth defined as profitable growth
  • Emphasis on valuation
  • Seek to be early in recognizing growth potential
  • Utilize a medium to long term mindset
  • Avoid a “benchmark driven” approach to portfolio construction
  • Bottom-up stock selection as primary source of value added

Investment Process

Initial Universe - Idea Generation

Screen for:

  • Profitability metrics
  • 12 month cash flow trends
  • Valuation metrics
  • Estimate revisions

Qualitative Sources:

  • Interaction and discussion with Ivy Investments team resources
  • Meet with companies’ management
  • Quarterly earnings reports and calls
  • Conferences, research reports

Investment Universe - Company Selection

Primary Criteria:

  • Sustainable growth
  • Durable financials
  • Effective management

Conditional Criteria:

  • Valuation
  • Cash flow trends
  • Informational edge
  • Top-down factors

Mid Cap Growth Portfolio - Quality Growth Opportunities

  • Greenfield Growth – Innovators, Repeat Revenues, Global Reach, Long Runways for Growth
  • Stable Growth – Durable business models producing moderated, yet solid revenue and earnings growth
  • Unrecognized Growth – Undiscovered or interrupted growth, Low institutional following, Contrarian holdings, Seeking early ownership

Kimberly A. Scott, CFA

Senior Vice President, Portfolio Manager

Ms. Scott is co-portfolio manager of the firm's Mid Cap Growth investment strategy and has served as portfolio manager of the strategy since 2001. She has been co-portfolio manager of the firm's Ivy Mid Cap Income Opportunities Fund since 2014. She joined the organization in 1999 as an equity investment analyst, covering industries in the consumer discretionary, consumer staples and information technology sectors.

Ms. Scott's lengthy background in fundamental research contributed to her development of the firm's Mid Cap Growth philosophy in 2001. Her extensive experience at various levels of fundamental research in positions throughout her career date to 1987 with the following companies:  Bartlett & Company, NBD Bank, Johnson Investment Counsel, Inc. and the University of Cincinnati Medical Center. Ms. Scott provided sector coverage for consumer non-durables, technology, retail, food and beverage, and tobacco.

Ms. Scott earned an MBA in Finance from the University of Cincinnati and a BS in Microbiology from the University of Kansas.

Nathan A. Brown, CFA

Senior Vice President, Portfolio Manager

Mr. Brown is co-portfolio manager of the firm's Mid Cap Growth investment strategy, appointed to this role in 2016. He had served as assistant portfolio manager to the strategy since 2011. He has been co-portfolio manager of the firm's Ivy Mid Cap Income Opportunities Fund since 2014. He joined the organization in 2003 as an equity investment analyst, covering industries in the consumer discretionary, consumer staples and industrials sectors.

Prior to joining the firm, Mr. Brown interned with Morgan Keegan. From 1999 to 2001 he completed five rotations in General Electric-Aircraft Engine’s financial management program.

Mr. Brown earned an MBA with an emphasis in Finance from Vanderbilt University and a BBA from the University of Iowa.

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 12/31/2018
(Returns for periods of less than 1-yr are not annualized)


QTD  YTD 1YR 3YR 5YR 10YR
Mid Cap Growth - Gross -17.04%  1.21% 1.21% 11.81% 7.76% 16.06%
Mid Cap Growth - Net -17.22%  0.35% 0.35% 10.86% 6.85% 15.08%
Russell Midcap Growth Index -15.99%  -4.75% -4.75% 8.59% 7.42% 15.12%

Calendar Year Returns1,2

  Mid Cap Growth Gross Mid Cap Growth Net Russell Midcap Growth Index
2018 1.21%  0.35%  -4.75% 
2017 28.48%  27.39%  25.27%
2016 7.50%  6.59%  7.33%
2015 -4.79% -5.60% -0.20%
2014 9.19% 8.26% 11.90%
2013 31.64% 30.52% 35.74%
2012 14.40% 13.43% 15.81%
2011 0.77% -0.08% -1.65%
2010 33.20% 32.07% 26.38%
2009 51.01% 49.73% 46.29%

1Mid Cap Growth composite is comprised of 8 accounts that had $5,571.6 million in total assets as of 12/31/18. • 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 October 1, 2018 through December 31, 2018.

Data as of 12/31/2018

10 Largest Holdings

as a % of total assets

Chipotle Mexican Grill Class A
3.08%
Zoetis, Inc. 3.01%
CoStar Group, Inc.
3.00%
Tractor Supply Co. 2.83%
Electronic Arts, Inc.
2.32%
ServiceNow, Inc. 2.30%
Edwards Lifesciences Corp. 2.26%
Ulta Beauty, Inc.
2.19%
Intuitive Surgical, Inc. 2.05%
O'Reilly Automotive, Inc. 2.02%

Sector Diversification

as a % of equity assets

Consumer Discretionary
23.72%
Information Technology
22.75%
Industrials 19.33%
Health Care 18.08%
Financials 6.91%
Materials 3.55%
Consumer Staples 3.06%
Communication Services
 2.60%

Composite Composition1

Domestic Common Stock 95.29%
Foreign Common Stock 3.36%
Cash and Cash Equivalents 1.35%

Composite Total Assets1

Assets ($M) $5,571.6
Number of Accounts 8

Supplemental data: The Mid Cap Growth holdings and sector diversification data shown are 1 of the 8 composite accounts without client specific investment restrictions and may not be reflective of the Mid Cap Growth composite as a whole or of any other Mid Cap Growth 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.

1Mid Cap Growth composite is comprised of 8 accounts that had $5,571.6 million in total assets as of 12/31/18. • 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 October 1, 2018 through December 31, 2018.

As of 12/31/2018

Portfolio Managers:
Kimberly A. Scott, CFA
Nathan A. Brown, CFA

Market Update

Mid-cap growth stocks staged a dramatic 16% decline in the fourth quarter of 2018, erasing the year’s earlier gains and more, and landing the Russell Midcap Growth Index, the strategy’s benchmark, at an almost 5% deficit for the year. This was the first quarterly loss for the index in more than three years. The index had been on a streak of positive quarterly performances that started in the fourth quarter of 2015.

Outperformance within the index came from the Consumer Staples, Real Estate, Communication Services, Materials, Consumer Discretionary and Information Technology sectors. Only Consumer Staples and Real Estate showed any substantial outperformance versus the index as both sectors posted low single-digit declines. The other outperforming sectors were only slightly worse than the index in the quarter. Energy turned in the worst performance, falling 25%. Health Care, Industrials and Financials posted steep declines in the high teens.

Concerns over Federal Reserve (Fed) policy and the direction and level of interest rates, plus a shift in business confidence related to the trade and tariff uncertainty moved investors to a decided risk-off stance. The market’s valuation was rich, having discounted high expectations for the economy in recent years based on regulatory relief and tax reform. There was no tolerance for uncertainty, and stocks across all aspects of the mid cap universe – growth, core and value – traded off hard, with the indices all declining in sync, within 1% of each other.

Portfolio Review

After significantly outperforming the index over the course of 2018, the strategy slightly underperformed the index for the quarter ending Dec. 31, 2018. The Consumer Discretionary, Information Technology and Communications Services sectors drove much of the underperformance during the period.

Our Consumer Discretionary names had been a source of significant outperformance for much of 2018, and while many of our holdings fared relatively well in the quarter, three of our names were responsible for much of the group’s weakness. Our Information Technology exposure was weak relative compared to the index. We were underweight this sector in the quarter, as we have been much of the year. The underperformance from our Communications Services stocks came largely from a sizeable and long-standing position in the strategy.

Our Industrials sector underperformed. We were overweight this underperforming group and saw drawdowns across the group in the quarter that resulted in weakness relative to the sector in the index. Strategy outperformance in the quarter came from the Health Care, Financials and Energy sectors. Our Health Care names fared quite a bit better, on average, than the stocks in the index, which fell almost 20%.

Our Financials names largely withstood the thrashing characteristic of those in the index, and in fact, our exchange stocks both rose in price in the period. Our general lack of exposure to the capital markets and credit names was a plus for relative performance, and our bank holdings performed relatively well, with the exception of one holding that disappointed investors with soft guidance related to higher expenses. The company is also closely aligned with the Information Technology sector as its customer base, and generally performs poorly when the technology stocks are weak.

Outlook

The market’s temperament changed dramatically as the first quarter developed, moving from impressive strength throughout 2017 and early 2018, to greater volatility and tortuous returns post the near-term peak in late January. The index sold off in January and then moved sideways until early May, only to rise to new highs in September before a dramatic 16% swoon through the fourth quarter.

Concerns about higher interest rates and worldwide trade wars rattled the markets, and investors careened between near-term confidence in the economy and corporate profits, and fear of the unknown related to interest rates and tariffs. Strong corporate earnings borne of the ongoing recovery post the Energy sector-led downturn in 2014 and 2015, buoyant business and consumer confidence, and economic growth worldwide underpinned the market’s move throughout 2017 and early 2018. Tax reform was the turbo booster. But the strong economic growth and buoyant job market in the U.S. and worldwide beget fear of inflation.

The Fed has raised rates nine times in three years in a bid to begin to normalize the interest rate environment and to head-off anticipated inflation. These interest rate increases came alongside a shrinking Fed balance sheet, of which we are unsure the Fed was fairly modeling the combined tightening impact on the economy and the market. Markets typically get a bit of indigestion as the tightening cycle ensues, and this time the tariff posturing of the Trump Administration has brought added concern as trade wars and the associated risk to free trade and corporate profitability can potentially impact investment returns. The uncertainty these factors bring can also negatively affect the level of business confidence, which is an important aspect behind economic growth or lack thereof. The investor revolt was dramatic and indiscriminate. The drawdown in the fourth quarter saw the Russell Midcap Growth, Core and Value Indices all fall within 1% of each other, between 15% and 16%.

It is not unusual to see a significant market correction during economic expansions, particularly as the economic cycle ages and growth may be downshifting from a higher rate, often as the Fed is tightening – and potentially overtightening – to get ahead of what it sees as inflationary trends. We see this as the case today, and the recent contraction in the valuation of the market, alongside the Fed’s more conciliatory tone give investors headroom for gains in the stocks of companies that are still growing in a buoyant economy. The consumer is benefiting from a healthy job market and solid wage gains, more discretionary income related to tax reform, and much lower energy prices than this time last year. Corporations continue to invest in innovation and efficiency. All of this underpins healthy demand in the economy, and an intact corporate profits cycle. We must be wary of weakness in other economies around the world, namely China and the eurozone, and the potential impact that weakness could have on the U.S. economy. We see the U.S. as not immune, but somewhat insulated from economic weakness in these other regions, given our stronger demographics and regulatory and tax law changes that have enhanced the business prospects in the U.S., specifically.

The strategy continues to express a more economically constructive and optimistic view, with a more assertive pro-growth, less defensive stance – although slightly less so than in 2017 or early 2018. While our portfolio represents an economically constructive point of view, our approach is essentially balanced based on stock selection as opposed to overt sector allocations. From a broader macroeconomic factor perspective, we expect a stable-to-rising rate environment to be generally positive for our approach, related to our focus on very profitable business models and sound capital structures. The time of quantitative easing was a challenge to our returns, as lower and lower interest rates played to the benefit of the stocks of companies with lesser quality business models and/or capital structures. We expect the change in trend to favor our investment style.

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 December 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 1/1/2005 
Benchmark Russell Midcap Growth Index
Style Fundamental, Growth
Target Alpha 300 bps above Index
Over full market cycles (3-5 years)
Peer Universe U.S. Mid Cap Growth Equity
Typical Tracking Error 300-500 bps
Holdings Range 60-70
Max Position Size 5%
Sectors +/- 10% of the Index weight
Max exposure 30% to any one sector
Proprietary Growth Spectrum Diversification across three growth buckets: Greenfield, Stable and Unrecognized Growth
Investment Vehicles Institutional Separate Account
Collective Investment Trust
U.S. Mutual Fund: Institutional Share Class
Variable Insurance Portfolio