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 the organization 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 the organization 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 9/30/2017
(Returns for periods of less than 1-yr are not annualized)


QTD  YTD 1YR 3YR 5YR 10YR
Mid Cap Growth - Gross 5.38%  19.56% 19.66% 9.27% 12.69% 10.00%
Mid Cap Growth - Net 5.15%  18.80% 18.65% 8.34% 11.73% 9.07%
Russell Midcap Growth Index 5.28%  17.29% 17.82% 9.96% 14.18% 8.20%

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 $5,604.9 million in total assets as of 9/30/17. • 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 July 1, 2017 through September 30, 2017.

Data as of 9/30/2017

10 Largest Holdings

as a % of total assets

Intuitive Surgical, Inc. 3.75%
Zoetis, Inc. 3.34%
Fastenal Co. 3.27%
Electronic Arts, Inc. 2.93%
CoStar Group, Inc. 2.85%
Polaris Industries, Inc. 2.68%
CME Group, Inc. 2.58%
BorgWarner, Inc. 2.47%
Tractor Supply Co. 2.37%
ServiceNow, Inc. 2.36%

Sector Diversification

as a % of equity assets

Information Technology 28.72%
Consumer Discretionary 19.33%
Health Care 17.77%
Industrials 15.42%
Financials 8.79%
Consumer Staples 5.53%
Energy 2.33%
Materials 2.11%

Composite Composition1

Domestic Common Stock 95.01%
Foreign Common Stock 3.70%
Equity Derivatives 0.11%
Cash and Cash Equivalents 1.18%

Composite Total Assets1

Assets ($M) $5,604.9
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 $5,604.9 million in total assets as of 9/30/17. • 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 July 1, 2017 through September 30, 2017.

As of 9/30/2017

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 5.28% in the third quarter of 2017. The Russell Midcap Growth Index has not posted a quarterly decline since third quarter 2015. Outperformance within the index came from the Information Technology, Industrials, Energy and Financials sectors – all relatively cyclical sectors. The Telecommunications and Utilities sectors also outperformed, but their representation within the index is very small. The Portfolio slightly outperformed its benchmark in the third quarter, and leads the Russell Midcap Growth Index on both a year to date and a trailing 12-month basis. The Financials and Industrials sectors were the leading relative detractors to the Portfolio. The Financials sector made the largest negative contribution to relative returns in the quarter. We significantly underperformed this outperforming group. Our exposure to banks was the biggest source of underperformance, a group that saw broad weakness as the interest rate spread narrowed. We were also underweight the strongly performing capital markets stocks. The Portfolio’s Industrials exposure also made a negative contribution to relative returns. We were underweight this outperforming sector. Most of our stocks in this group performed very competitively in the quarter. Relative strength during the quarter came from Health Care, Consumer Discretionary, Consumer Staples and Information Technology. The Health Care stocks made the strongest positive contribution to relative performance in the quarter. The group underperformed the index, but outperformed the Health Care sector within the index. The Portfolio’s Consumer Discretionary names made a positive contribution to relative performance, as did our Consumer Staples stocks. The Portfolio was overweight the Consumer Discretionary sector, and very slightly underperformed the index, while solidly outperforming the sector within the index. Consumer Staples outperformed versus the group within the index. The Portfolio’s Information Technology exposure also contributed positively to relative performance, and was the strongest performing sector within the portfolio in the quarter. The Portfolio slightly underperformed the sector within the benchmark, but was overweight this outperforming sector, which led to the positive performance contribution. Most of the names turned in strong performances.

Outlook

The Portfolio’s outlook since last quarter is largely unchanged. We believe economic growth in the U.S. and around the world is solid. This is the first relatively coordinated global expansion we have seen in many years. U.S. corporate profits appear strong and continue to improve. Consumers are employed and confidence looks strong. The upward move in interest rates is contained at this point, but could become a source of concern depending on the number of moves and the level of increase in interest rates, particularly given the historically high market valuation.

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, 2017 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
Non-U.S.: UCITS