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 3/31/2018
(Returns for periods of less than 1-yr are not annualized)


QTD  YTD 1YR 3YR 5YR 10YR
Mid Cap Growth - Gross 5.07%  5.07% 26.29% 9.84% 12.62% 12.52%
Mid Cap Growth - Net 4.85%  4.85% 25.22% 8.91% 11.67% 11.57%
Russell Midcap Growth Index 2.17%  2.17% 19.74% 9.17% 13.31% 10.61%

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 7 accounts that had $6,245.4 million in total assets as of 3/31/18. • 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 January 1, 2018 through March 31, 2018.

Data as of 3/31/2018

10 Largest Holdings

as a % of total assets

GrubHub, Inc. 3.29%
Zoetis, Inc. 3.26%
Intuitive Surgical, Inc. 3.25%
CoStar Group, Inc. 3.13%
Fastenal Co. 3.04%
Electronic Arts, Inc. 2.66%
Polaris Industries, Inc. 2.59%
MercadoLibre, Inc. 2.59%
Edwards Lifesciences Corp. 2.38%
Tractor Supply Co. 2.37%

Sector Diversification

as a % of equity assets

Information Technology 24.59%
Consumer Discretionary 23.02%
Industrials 21.47%
Health Care 17.21%
Financials 8.37%
Consumer Staples 2.85%
Materials 2.49%

Composite Composition1

Domestic Common Stock 92.58%
Foreign Common Stock 3.96%
Cash and Cash Equivalents 3.45%

Composite Total Assets1

Assets ($M) $6,245.4
Number of Accounts 7

Supplemental data: The Mid Cap Growth holdings and sector diversification data shown are 1 of the 7 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 7 accounts that had $6,245.4 million in total assets as of 3/31/18. • 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 January 1, 2018 through March 31, 2018.

As of 3/31/2018

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

Market Update

Mid-cap growth stocks gained 2.17% in the first quarter of 2018. The Russell Midcap Growth Index hasn’t posted a quarterly decline since the third quarter of 2015. Performance within the index came from the information technology, utilities, health care, financials and consumer staples sectors — a narrowing of relative performance across sectors versus fourth quarter 2017 — and many sectors posted negative performance, unlike in fourth quarter 2017 when all sectors posted positive returns. The materials, telecommunications, energy, real estate, consumer discretionary and industrials sectors all underperformed, and of those, only industrials posted a positive return for the quarter.

Portfolio Review

The Ivy mid cap growth strategy performed well on an absolute and relative basis, outperforming the Russell Midcap Growth Index in quarter. The information technology and health care sectors drove much of the outperformance. Financials and industrials also performed well. Our lack of exposure to the real estate sector was a nice positive to performance, as was our underweight position in the weak materials group.

Our information technology names made the strongest contribution to relative performance in the quarter. This continued the sector’s string of strong positive relative performance over the past five quarters. We were underweight this underperforming sector in fourth quarter 2017, but stock picking drove performance this period, and our names turned in a return of 16% that was more than twice as strong as the sector within the index. Our health care stocks posted strong performance in the quarter, almost 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. Our financials sector made a positive contribution to relative returns in the first quarter, after having struggled in the third and fourth quarters of 2017. We were overweight this outperforming group, and with respect to stock selection, our bank holdings recovered somewhat as interest rates began to move higher. These holdings had been weak for several quarters. Having no exposure to the underperforming real estate sector was a positive for relative performance in the first quarter, as was our underexposure to the materials sector. Our consumer staples, consumer discretionary and energy sectors all underperformed the index in the quarter and were negative to relative returns. Our consumer discretionary names made the greatest negative contribution to performance, followed closely by consumer staples. Our consumer discretionary names only slightly underperformed the group within the index, but we were overweight this underperforming group, which accounted for much of the negative relative contribution to returns. In consumer staples, ongoing weakness in one holding accounted for most of the underperformance. Our energy exposure also contributed negatively to relative performance. We were underweight this underperforming group, and both of our energy names underperformed both the overall index and the energy sector within the index.

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. Concerns about higher interest rates and worldwide trade wars have rattled the markets, and investors have been careening 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 Federal Reserve has raised rates six 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.

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. We continue to see the near-to-intermediate term positives outweighing the concerns over interest rate and trade tensions. The interest rate trends at this point in the cycle are a reflection of economic vitality, and are not yet a challenge to growth, as we see it. We also think that ongoing easing elsewhere in the world will be a natural governor on interest rate levels here in the U.S. The tariff and trade concerns are legitimate, but we think the current rhetoric represents early stage posturing for negotiations that could bring reasonable changes.

So 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 in the strategy, and 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. 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 currently overweight the consumer discretionary, financials, health care and industrials sectors. We still have a healthy exposure to information technology, but have 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. The strategy is underweight materials, and we have no exposure to the telecommunications, real estate, utilities and energy sectors. 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 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 interest rate environment to be generally positive for our approach, related to our focus on profitable business models and sound capital structures. The time of quantitative easing was a challenge to our returns, as 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 March 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