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. She is a CFA charterholder.

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. 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 6/30/2018
(Returns for periods of less than 1-yr are not annualized)


QTD  YTD 1YR 3YR 5YR 10YR
Mid Cap Growth - Gross 6.65%  12.06% 26.90% 12.33% 13.80% 13.40%
Mid Cap Growth - Net 6.43%  11.59% 25.82% 11.38% 12.83% 12.44%
Russell Midcap Growth Index 3.16%  5.40% 18.52% 10.73% 13.37% 10.45%

Calendar Year Returns1,2

  Mid Cap Growth Gross Mid Cap Growth Net Russell Midcap Growth Index
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%
2008 -36.55% -37.09% -44.32%

1Mid Cap Growth composite is comprised of 6 accounts that had $6,458.9 million in total assets as of 6/30/18. • 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 April 1, 2018 through June 30, 2018.

Data as of 6/30/2018

10 Largest Holdings

as a % of total assets

CoStar Group, Inc.
3.17%
Electronic Arts, Inc.
2.91%
Zoetis, Inc. 2.85%
Tractor Supply Co.
2.84%
Chipotle Mexican Grill Class A 2.82%
Intuitive Surgical, Inc. 2.76%
GrubHub, Inc.
2.76%
Fastenal Co. 2.62%
Tiffany & Co. 2.26%
Polaris Industries, Inc. 2.21%

Sector Diversification

as a % of equity assets

Consumer Discretionary
24.38%
Information Technology 23.39%
Industrials 20.92%
Health Care 17.79%
Financials 8.48%
Materials 2.52%
Consumer Staples 2.51%

Composite Composition1

Domestic Common Stock 94.73%
Foreign Common Stock 3.67%
Cash and Cash Equivalents 1.60%

Composite Total Assets1

Assets ($M) $6,458.9
Number of Accounts 6

Supplemental data: The Mid Cap Growth holdings and sector diversification data shown are 1 of the 6 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 6 accounts that had $6,458.9 million in total assets as of 6/30/18. • 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 April 1, 2018 through June 30, 2018.

As of 6/30/2018

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

Market Update

Mid-cap growth stocks gained 3.16% in the second quarter of 2018, continuing a string of quarterly gains for the Russell Midcap Growth Index (the strategy’s benchmark) that started in the fourth quarter of 2015. Outperformance within the index came from the consumer discretionary, health care, information technology, energy, real estate and telecommunications sectors — a broadening of relative performance across sectors versus the first quarter of 2018. Sectors and stocks more exposed to concerns over potential changes in trade policy saw some pressure in the quarter, while interest rate sensitive sectors, such as real estate, posted better performance as yields backed off in the quarter from their climb earlier in the year.

Portfolio Review

The mid cap growth strategy outperformed the index in the second quarter. Consumer Discretionary and Health Care drove much of the outperformance. Information Technology also performed well, as did the Industrials names relative to the sector within the index. Our underweight position in the weak Materials group was a modest positive in the quarter, while the underexposure to Energy was a negative. Consumer Staples and Financials underperformed the index and were negative to relative returns. The strategy has no exposure to Telecommunications Services or Utilities, both of very small weight within the index, and had no impact to performance. The strategy has no exposure to Real Estate, a group that outperformed in the quarter, creating a very slight drag to our relative performance.

Our Consumer Discretionary names made the strongest contribution to relative performance in the quarter. We were significantly overweight this outperforming group, an opportune positioning as investors came to understand that the world may not be coming to an end for all retailers, as evidenced by a broadly strong holiday season, and improved results as investments in their businesses begin to bear fruit. Our Information Technology names continued their run of outperformance, now six quarters strong. We were underweight this slightly outperforming sector, but stock picking drove performance.

Our Health Care stocks posted another quarter of strong performance, more than doubling the performance of the sector within the index. We were overweight this outperforming sector. Our industrials exposure made a strong contribution to relative performance. We were overweight this underperforming group, so stock picking was key.

We had no exposure to Energy, which was modestly negative to performance, as that group turned in strong results relative to the index. Financials made a modest negative contribution to relative returns. We were overweight this underperforming group, and with respect to stock selection, performance of our banks backed off as interest rates receded in the quarter.

Outlook

We see the environment as on-balance constructive for corporate profit growth and firm markets. Economies are still growing synchronously around the world, businesses are optimistic, which usually feeds on itself in terms of generating more activity, and consumers are employed and enjoying wage gains. A corporate profit picture that is already firm will be enhanced by the tax legislation passed by the U.S. Congress at the end of 2017.

We expect the market to continue to move higher, but we also understand that we must consider valuation levels as we invest the portfolio. The valuation differential between growth and value stocks is at a historically wide level, a situation that eventually corrects itself to the detriment of the group in favor, in this case growth. We think this disparity could persist, given the struggle many companies are having in an economy where innovation is fast and merciless, but there is risk to growth stock investors who turn a blind eye to valuation excesses. Managing position sizes and exposures where there has been great success within the portfolio is a key aspect of risk management.

We must also monitor interest rates, yield spreads and credit conditions for clues about excesses or concerns that can build in the economy and potentially impact the market as the business cycle progresses. We do not see these issues as sufficient to impede the economy at this time, but it is clear that the level of corporate debt has grown so significantly over the past few years such that any help it might have given to companies using cheaper debt to lower interest expense or enhance earnings through debt financed stock repurchases is waning.

Further, any company that has used variable rate debt is beginning to see a bigger interest expense bill. These near term pressures on earnings can be counterbalance by the current vibrant demand environment, but this is clearly a trend change that could become a burden to companies should the economic growth weaken. We think the companies in our portfolio are better conditioned to face that environment, as they use much less debt to finance their businesses than the average company in our universe.

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.

The strategy is overweight Consumer Discretionary, Financials, Health Care and Industrials. We still have a healthy exposure to Information Technology, but had moved to an underweight position, having seen valuations increase dramatically in this sector, and enjoyed significant appreciation in our names. Information Technology valuations are more reasonable post the recent stock market down draft, so we have renewed interest in adding exposure to that sector.

We are also underweight Consumer Staples. We are underweight Materials, and we have no exposure to Telecommunications Services, Real Estate, Utilities and Energy. Within the last year, Energy was added to the “no exposure” list, as the secular trends for growth and efficient capital deployment in that sector are challenged, and we think we can invest more productively elsewhere.

While the strategy 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 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 June 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 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