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 assumed co-portfolio manager responsibilities for the firm's Ivy Mid Cap Income Opportunities Fund in 2014. She joined Waddell & Reed in 1999 as an equity investment analyst and covered 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 from the University of Cincinnati and a BS in Microbiology from the University of Kansas. She is a CFA charterholder.

Nathan A. Brown, CFA

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 served as assistant portfolio manager to the strategy since 2011. He assumed co-portfolio manager responsibilities for the firm's Ivy Mid Cap Income Opportunities Fund in 2014. He joined Waddell & Reed as an equity investment analyst in 2003 and covered industries in the Consumer Discretionary, Consumer Staples and Industrials sectors.

Prior to joining Waddell & Reed, 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 from Vanderbilt University and a BBA from the University of Iowa. 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
Mid Cap Growth - Gross 6.14%  13.46% 18.73% 6.70% 12.72% 9.73%
Mid Cap Growth - Net 5.92%  12.98% 17.73% 5.79% 11.77% 8.80%
Russell Midcap Growth Index 4.21%  11.40% 17.05% 7.83% 14.19% 7.87%

Calendar Year Returns1,2

  Mid Cap Growth Gross Mid Cap Growth Net Russell Midcap Growth Index
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%
2008 -36.55% -37.09% -44.32%
2007 15.09% 14.12% 11.43%

1Mid Cap Growth composite is comprised of 9 accounts that had $5,492.8 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

Intuitive Surgical, Inc. 3.60%
Zoetis, Inc. 3.44%
Fastenal Co. 3.26%
CoStar Group, Inc. 3.01%
Electronic Arts, Inc. 2.80%
CME Group, Inc. 2.60%
Tiffany & Co. 2.42%
Edwards Lifesciences Corp. 2.37%
ServiceNow, Inc. 2.34%
Microchip Technology, Inc. 2.27%

Sector Diversification

as a % of equity assets

Information Technology 28.33%
Health Care 19.06%
Consumer Discretionary 17.60%
Industrials 14.78%
Financials 9.82%
Consumer Staples 5.55%
Energy 2.86%
Materials 1.99%

Composite Composition1

Domestic Common Stock 95.54%
Foreign Common Stock 3.67%
Cash and Cash Equivalents 0.79%

Composite Total Assets1

Assets ($M) $5,492.8
Number of Accounts 9

Supplemental data: The Mid Cap Growth holdings and sector diversification data shown are 1 of the 9 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 9 accounts that had $5,492.8 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 6/30/2017

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

Portfolio Review

Mid-cap growth stocks, as measured by the Russell Midcap Growth Index (Portfolio’s benchmark), gained 4.21% in the second quarter. Outperformance within the index came from the technology, health care, materials, financials, and real estate sectors – an eclectic mix. The energy, telecommunications services, consumer staples, utilities, consumer discretionary and industrials sectors all underperformed. There was no clear trend of aggressive or defensive, cyclical or noncyclical behavior across the index in the quarter. The Portfolio outperformed the benchmark in the second quarter, and on both a year-to-date and a trailing 12-month basis. Individual sector performance generally aligned with the strengths and weakness of the index. Technology, consumer staples, health care and financials were outperformers, and energy, consumer discretionary and materials all underperformed. The Portfolio’s technology exposure made the strongest positive contribution to performance, significantly outperforming this strong group within the index. The Portfolio was overweight this outperforming group, and almost all of the names turned in strong performances. Consumer staples contributed positively to relative performance. We were underweight this group, which was slightly beneficial to performance. Health care was another area of strength with the largest positions leading performance within the sector. Financials made a small positive contribution to relative performance based on the overweight position in this outperforming group. Nearly all of the names were solid performers versus the benchmark and the financials group within the index. Industrials exposure also made a slight positive contribution to relative returns, primarily due to strong stock selection, as we were slightly overweight this underperforming group. Energy was the largest detractor to Portfolio performance. After delivering strong returns in 2016, the sector has weakened in 2017 on an early year decline in the price of oil, concerns about the oil production supply response related to a rebound in the rig count, and uncertainty about OPEC’s perspective regarding production restraint. The Portfolio was overweight this underperforming sector, and the oil exploration and production names all underperformed. We believe that oil demand will remain generally firm and that the price is headed modestly higher. We are mindful that fracking technology has proven to produce considerable amounts of oil in a short period of time, and we are monitoring the supply response and any potential supply/demand imbalances, which could secularly pressure on the price of oil. The consumer discretionary names detracted slightly from returns, primarily related to adverse stock selection, as being underweight this underperforming group was somewhat helpful to returns. While we have seen some pockets of strength in retail, we are generally guarded in our approach to owning names in this group, expecting to continue to see pressures on growth and margins. Performance relative to materials also detracted slightly. The Portfolio was underweight this outperforming sector. The stocks of many packaging and chemical companies performed extremely well as the price of oil – key input for many of these companies – declined, and as investors became more comfortable with strong economic growth prospects. The Portfolio tends to be underweight this group, in general, and are not usually exposed to the more cyclical materials companies within the sector.

Outlook

We have expected the market to deliver positive returns in 2017, and thus far, have not been disappointed. We think the markets can move higher from here based on accelerating economic growth around the globe, vastly improved corporate profits in the U.S. as compared to the last two years, and the potential, if not waning, benefits of pro-growth, pro-cyclical policies from a Trump administration that can enhance an already positive environment. Economic activity in the U.S. continues at a low but stable, if not accelerating pace, as housing demand continues to improve, and consumption in general remains firmly tied to ongoing strength in jobs and wage gains. Global industrial production is stronger than in recent years as evidenced by the Purchasing Managers Index in many countries. Interest rates, while increasing, still seem supportive of investment and growth, as does the credit environment. The valuation on the market has expanded with last year’s gains, but levels are reasonable to support further market appreciation as we discount additional increases in corporate profits. The factor that should provide underlying support for a corporate profit and stock market outlook that was encouraging even pre-election is the pro-growth stance of the Trump administration, should it get organized enough to effect change. A more supportive regulatory and taxation environment and a drive to invest in the U.S. could lift an already improving economic and profit picture to a higher level. The response from credit markets will be important to monitor, as higher interest rates could have a dampening impact on a stronger growth scenario. The Portfolio continues to express a more economically constructive and optimistic view, with a more assertive pro-growth, less defensive stance. The Portfolio is overweight technology, financials, industrials, energy and health care. Health care, while often considered defensive, remains one of the higher growth sectors in our universe. We have recently achieved a slight overweight to industrials, as we see an opportunity for many companies to benefit from a recovery in industrial demand, as the world begins to grow again, in addition to benefitting from possible fiscal spending initiatives of the Trump administration. We are underweight consumer discretionary, consumer staples, materials, real estate, telecommunication services and utilities. The climate for many consumer discretionary companies and retailers remains difficult. Consumer discretionary should be a key beneficiary of firmer economic growth and consumption, but secular structural issues for many of the companies, particularly in retail and related areas, limit our enthusiasm for much of the group at this time. While we have seen some positive pockets of retail, we are generally guarded in our approach to owning names in this group, expecting to continue to see pressure on growth and margins, with stock valuations trending lower as a result. We are less confident about energy, as the significant investment in technology and productivity seem to have led to higher than expected supply persistency, the impact of which could be a lower ceiling on oil prices and lower than expected revenue and earnings outlooks for the group in the near to intermediate term.

The opinions expressed in this commentary are those of the portfolio managers and are current through June 30, 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 1/1/2005 
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
Non-U.S.: UCITS