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 9/30/2018
(Returns for periods of less than 1-yr are not annualized)


QTD  YTD 1YR 3YR 5YR 10YR
Mid Cap Growth - Gross 8.87%  22.00% 31.10% 20.30% 13.47% 15.25%
Mid Cap Growth - Net 8.64%  21.22% 29.99% 19.28% 12.51% 14.27%
Russell Midcap Growth Index 7.57%  13.38% 21.10% 16.65% 13.00% 13.46%

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 8 accounts that had $7,019.5 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

Tractor Supply Co.
3.01%
Zoetis, Inc. 2.98%
CoStar Group, Inc.
2.88%
Chipotle Mexican Grill Class A
2.82%
GrubHub, Inc. 2.80%
Fastenal Co. 2.61%
Electronic Arts, Inc.
2.42%
Intuitive Surgical, Inc. 2.41%
ABIOMED, Inc. 2.34%
Ulta Beauty, Inc. 2.31%

Sector Diversification

as a % of equity assets

Consumer Discretionary
29.57%
Industrials 20.75%
Health Care 18.68%
Information Technology
14.00%
Financials 6.99%
Communication Services 4.33%
Consumer Staples 2.91%
Materials  2.78%

Composite Composition1

Domestic Common Stock 94.64%
Foreign Common Stock 3.53%
Cash and Cash Equivalents 1.83%

Composite Total Assets1

Assets ($M) $7,019.5
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 $7,019.5 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 Managers:
Kimberly A. Scott, CFA
Nathan A. Brown, CFA

Market Update

Mid-cap growth stocks gained 7.57% in the third quarter of 2018, continuing a string of quarterly gains for the Russell Midcap Growth Index (the Portfolio’s benchmark) that started in the fourth quarter of 2015.

Outperformance within the index came from the health care, information technology and industrials sectors – a narrowing of relative performance across sectors versus the second quarter of 2018.

Trade and tariff concerns continued to pressure some sectors and stocks in the third quarter. Interest rates and a compressing yield curve dampened enthusiasm for financial service firms, banks in particular, throughout the period. That narrative shifted dramatically as the third quarter started and long-term interest rates began to increase quickly to levels not seen since 2011.

The materials, communication services, real estate, financials and energy sectors all underperformed the index in the quarter. Sector performance within the portfolio was solid and broad, with consumer staples, information technology, industrials, health care and consumer discretionary besting the index.

Portfolio Review

For the third quarter, the Ivy Investments Mid Cap Growth portfolio delivered positive returns and solid outperformance relative to the benchmark.

Our consumer discretionary names made the strongest contribution to relative performance in the quarter. We were significantly overweight this strong performing group, and our names well outperformed both the index and the sector within the index. Consumer spending has been buoyant along with job and wage gains, and many retailers have adjusted their business models to compete more effectively in an omni-channel retailing world. We had some weak names in this group, with much of that weakness related to tariff concerns, and associated demand and cost pressures.

Our health care stocks posted another quarter of strong performance. The information technology and industrials sectors both contributed a slight negative to relative performance. The portfolio was also underweight information technology, an outperforming sector for the index. The stocks of many of these companies were weak in the quarter related to tariff concerns and a slowdown in Chinese business.

Our consumer staples names performed well and made a positive contribution to relative performance. Our underweight position in the weak materials sector was a modest positive in the quarter, as was the Portfolio’s lack of exposure to the underperforming energy and real estate sectors.

Two of the Portfolio’s information technology names moved into the newly minted communications services sector. Our communications services exposure made a small positive contribution to relative returns in the quarter, as our names didn’t perform as poorly as those in the underperforming sector.

Our financials sector made a modest negative contribution to relative returns in the quarter. We were slightly overweight this underperforming group, and with respect to stock selection, performance of our banks continued to be modest at best as interest rates receded and the yield curve compressed in the quarter.

Outlook

The U.S. market continues to power ahead, reaching all-time highs in the quarter, despite ongoing concerns about the direction of rates and worldwide trade wars. Investors have been vacillating between near-term confidence in the economy and corporate profits, and fear of the unknown related to 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 have underpinned the market’s move in 2017 and so far this year. Tax reform has been a turbo booster. But the strong economic growth and buoyant job market in the U.S. and worldwide beget fear of inflation.

The Federal Reserve has raised rates seven times in three years in a bid to begin to normalize the interest rate environment and to head-off anticipated inflation. Markets typically get a bit of indigestion as the tightening cycle ensues. That indigestion has become acute on the news of continued strong job growth, with rates rising more quickly and to levels not seen since 2011. The tariff posturing of the Trump administration brings added concern as trade wars and the associated risk to free trade and corporate profitability has the potential to 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.

We continue to see the near-to-intermediate term positives outweighing the concerns over rates and trade tensions, although the rate environment is more concerning to us in the intermediate term than it has been for some time, especially given the valuation levels on many long duration, high-growth stocks. We see the rate trends at this point in the cycle as a reflection of economic vitality, and not yet a challenge to growth, but the recent rate of change is causing a valuation adjustment in much of the market as investors reassess the horizon. The tariff and trade concerns are legitimate, but we think the current rhetoric represents posturing for negotiations that could bring reasonable changes, even though this gets a little murkier the longer the posturing persists, and the more countries that get involved. We see the environment as constructive for corporate profit growth and firm markets in the U.S., but are monitoring the health of economies in other parts of the world, particularly in the emerging markets, where China’s woes are negatively impacting other economies, as is the stronger dollar and rising interest rates.

Our portfolio continues to express a more economically constructive and optimistic view, although we have made moves to reduce the valuation risk in the portfolio by reducing our exposure to some of the more highly valued stocks. This has included moving to an underweight position in information technology, both proactively and based on moves in the index, for the near term.

We are overweight the consumer discretionary, health care and industrials sectors. We are neutral in the financials sector, and we are underweight consumer staples, although we are looking for interesting small- to mid-cap growth names for additional investment in both of those areas. We are underweight materials, and have no exposure to real estate and energy, which represent a combined 3.8% of the index. We have recently added energy 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 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 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 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 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