Institutional Strategies

Small Cap Growth

The strategy seeks U.S. common stocks of small capitalization companies. Small capitalization companies typically have market capitalizations within the range of companies in the Russell 2000® Growth Index at time of acquisition. The strategy seeks new or unseasoned companies in their early stages of development, or smaller companies positioned in new or emerging industries where the portfolio management team believes there is opportunity for higher growth than in established companies or industries.

Investment Philosophy

The team seeks to purchase successful, innovative small-cap growth companies that are pursuing large-market opportunities.

We believe common characteristics of successful small-cap growth companies are:

  • Serve large-market opportunities and/or markets growing substantially in excess of the average industry and/or the general economy
  • Leaders in their industry
  • Enduring financial model
  • Effective company management

Investment Process

The team looks for sustainable growth that it believes is highly valued in the market and driven by the following components:

  • Sales unit growth
  • Margins showing upward momentum
  • Internal cash flow generation
  • Rising ROIC

Once a company is selected, the following is monitored on a regular basis:

  • Earnings quality, financial metrics
  • Competitive trends
  • Management's ability to execute
  • Quantitative risk review

Diversification across Growth Spectrum

Throughout the portfolio construction process, the team monitors the strategy's allocation across a proprietary spectrum of types of growth companies. Any of these categories may assume market leadership, so the team strives to maintain exposure to each. The growth spectrum is comprised of four major categories: Aggressive Growth, Accelerating Growth, Consistent Growth and Out of Favor Growth.

Timothy J. Miller, CFA

Senior Vice President, Portfolio Manager

Mr. Miller is co-portfolio manager of the firm’s Small Cap Growth investment strategy. He has been affiliated with the strategy since 2010 as portfolio manager of Ivy Small Cap Growth Fund. He was appointed to the leadership role of the small cap growth team and assumed co-portfolio manager responsibilities for the Small Cap Growth strategy in 2016. He joined the firm in 2008 as vice president and portfolio manager of Ivy and Ivy VIP Small Cap Core Funds.

Prior to joining the organization, Mr. Miller managed his personal funds in a hedged equity style from 2004 to 2007. From 1992 through mid-2004, he was affiliated with INVESCO Funds Group, including serving four years as its chief investment officer, five years as head of the growth funds group, and from 1993-2004 as lead manager of the INVESCO Dynamics Fund.

Mr. Miller earned an MBA from the University of Missouri/St. Louis and a BSBA in Finance from St. Louis University.

Kenneth G. McQuade

Senior Vice President, Portfolio Manager

Mr. McQuade is co-portfolio manager of the firm’s Small Cap Growth investment strategy. He has been affiliated with the strategy since 2006 as portfolio manager of Ivy VIP Small Cap Growth. He was named co-portfolio manager of the strategy in 2016. Mr. McQuade joined the organization in 1997 as an equity investment analyst. He was named assistant portfolio manager of small cap growth institutional accounts in 2003.

Mr. McQuade earned a BS in Finance from Bradley University.

Bradley P. Halverson, CFA

Senior Vice President, Portfolio Manager

Mr. Halverson is co-portfolio manager of the firm’s Small Cap Growth investment strategy. He has been affiliated with the strategy since 2014 as assistant portfolio manager. He was named co-portfolio manager of the strategy in 2016. Mr. Halverson joined the organization in 2008 as an equity investment analyst, providing research analysis on small capitalization securities and industries in the industrials sector.

Mr. Halverson was previously associated with Northpointe Capital as an equity analyst responsible for researching growth stocks across micro, small, and mid cap portfolios.

Mr. Halverson earned an MBA with an emphasis in Finance and Corporate Strategy from the University of Michigan and a BS and MS in Accounting from Brigham Young University.

Additional Small Cap Resources

Kenneth G. Gau

Senior Vice President, Portfolio Manager

Mr. Gau is part of the firm’s broader Small Cap team. He has been a portfolio manager of the firm’s Small Cap Core investment strategy since 2014. From 2011 to August 2014 he was assistant portfolio manager of small cap growth institutional accounts. He has been affiliated with the small cap strategy since 2006. He joined the firm in 2000 as an equity investment analyst. He provided research analysis on small capitalization securities and industries in the consumer staples and consumer discretionary sectors.

Mr. Gau earned an MBA from Cornell University Johnson Graduate School of Management and a BS in Finance from The Pennsylvania State University Smeal College of Business Administration.

John Bichelmeyer, CFA

Senior Vice President, Portfolio Manager

Mr. Bichelmeyer is part of the firm’s broader Small Cap team. He has been a portfolio manager since joining the organization in 2015.

Mr. Bichelmeyer earned a BSBA in Finance from Creighton University.

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 12/31/2018
(Returns for periods of less than 1-yr are not annualized)

  QTD  YTD 1YR 3YR 5YR 10YR
Small Cap Growth - Gross -19.73%  -2.81% -2.81% 14.49% 8.81% 16.72%
Small Cap Growth - Net -19.90%  -3.63% -3.63% 13.52% 7.89% 15.74%
Russell 2000 Growth Index -21.65%  -9.31% -9.31% 7.24% 5.13% 13.52%

Calendar Year Returns1,2

  Small Cap Growth Gross Small Cap Growth Net Russell 2000 Growth Index
2018 -2.81%  -3.63%  -9.31% 
2017 25.37%  24.31%  22.17%
2016  23.16% 22.12%  11.32%
2015 -2.47% -3.30% -1.38%
2014 4.22% 3.34% 5.60%
2013 46.81% 45.57% 43.30%
2012 12.21% 11.26% 14.59%
2011 -4.39% -5.20% -2.91%
2010 35.29% 34.17% 29.09%
2009 44.43% 43.24% 34.47%

1Small Cap Growth composite is comprised of 10 accounts that had $2,993.2 million in total assets as of 12/31/18. • Composite returns are measured in U.S. dollars. 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 October 1, 2018 through December 31, 2018.

Data as of 12/31/2018

10 Largest Holdings

as a % of total assets

Grand Canyon Education, Inc.
2.47%
Mercury Computer Systems, Inc.
2.34%
Proofpoint, Inc. 2.20%
Teladoc Health, Inc. 2.18%
Texas Roadhouse, Inc. Class A
2.14%
AMN Healthcare Services, Inc. 2.00%
Paycom Software, Inc. 1.99%
HubSpot, Inc.
1.98%
Booz Allen Hamilton Holding Corp. 1.92%
Monolithic Power Systems, Inc. 1.80%

Sector Diversification

as a % of equity assets

Information Technology 29.27%
Health Care
21.62%
Consumer Discretionary
20.04%
Industrials 18.24%
Financials 5.84%
Communication Services
1.90%
Energy 1.68%
Consumer Staples 1.41%

Composite Composition1

Domestic Common Stock 92.70%
Foreign Common Stock  1.62%
Cash and Cash Equivalents 5.69%

Composite Total Assets1

Assets ($M) $2,993.2
Number of Accounts 10

Supplemental data: The Small Cap Growth holdings and sector diversification data shown are 1 of the 10 composite accounts without client specific investment restrictions and may not be reflective of the Small Cap Growth composite as a whole or of any other Small 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.

Small Cap Growth composite is comprised of 10 accounts that had $2,993.2 million in total assets as of 12/31/18. • Composite returns are measured in U.S. dollars. 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.

Russell 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.

QTD return from October 1, 2018 through December 31, 2018.

As of 12/31/2018

Portfolio Managers:
Timothy J. Miller, CFA
Kenneth G. McQuade
Bradley P. Halverson, CFA

Market Update

The fourth quarter of 2018 experienced the sharpest correction since 2011, one that spared few asset classes or sectors in the equity market. Size mattered, as small caps fell the most (the Russell 2000 Growth Index declined 21.7%) and large caps the least. Volatility surged, with daily and even inter-day swings reaching dramatic levels. Uncertainty drove the decline, as rising short-term interest rates and trade fears with China seemed to threaten economic growth and corporate profits. Further, the downward momentum of the markets also appears to have been magnified by quantitative, algorithmic trading systems amidst shallow liquidity.

In the small cap markets, some corrections were extreme, with Energy dropping over 40% for the quarter. Growth lagged value in small caps for the quarter but outperformed for the year. The fears seemed most pronounced in economic-sensitive areas such as Materials, Industrials, and cyclical consumer stocks, where lower price earnings multiples provided little safety. Stocks suffered among the higher valued Information Technology and Health Care sectors, but many of the companies with clear growth prospects outperformed on a relative basis.

Portfolio Review

The strategy participated in the market decline during the quarter but outperformed the benchmark. The losses touched every sector, with Health Care the largest detractor, followed by Industrials, Information Technology and Consumer Discretionary all weighing on the index. The portfolio outperformance was primarily driven by our continued underweight to the highly volatile biotechnology and pharmaceutical industries, which experienced a significant correction during the period. Overall positive performance within Health Care was tempered by unfavorable stock selection in health care devices and technology. Despite favorable stock selection within Industrials and Information Technology, particularly software, the overweight to the software industry was an overall negative contribution to performance.

Information Technology continues to carry the largest weighting in the portfolio. During the period, we added to positions as quality companies with strong end markets and good visibility came for sale. Further, two software stocks had nice returns during the quarter due to acquisition. While we plan to ultimately redeploy the proceeds of these acquisitions, their steady price during the market downdraft helped performance. Also, gains from positions in Health Care were redeployed into the Industrials sector, specifically commercial services. No other significant changes impacted sector weights for Consumer Discretionary, Financials or Energy. The portfolio remains underweight Health Care, primarily due to limited exposure to biotechnology, though we seek to add positions within the sector as opportunities present themselves.

Outlook

Until clarity on trade negotiations, central bank polices, and the trajectory of company earnings develops, we expect volatility to remain elevated. The market appears to be pricing in a severe slowdown in economic growth and possibly zero earnings growth for 2019. We believe the stocks within the portfolio can collectively deliver double digit earnings expansion, even in a slower growth scenario, and have the potential to outperform. As further dislocations occur, we expect to initiate new or bolster positions within software, semiconductors, medical equipment and select consumer and industrial niches. We remain committed to our emphasis of selecting companies with strong sales and earnings predictability and believe holding innovative firms serving large markets should continue to deliver promising returns over the market cycle.

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 December 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 2/1/2003 
Benchmark Russell 2000 Growth Index
Style Fundamental, Growth
Target Alpha 200 bps above Index
Over full market cycles (3-5 years)
Peer Universe U.S. Small Cap Growth Equity
Typical Tracking Error 400-800 bps
Holdings Range 70-90
Max Position Size 5%
Sectors +/- 10 percentage points of the Index
Proprietary Growth Spectrum Diversification across four growth buckets: Aggressive, Accelerating, Consistent and Out of Favor
Investment Vehicles Institutional Separate Account
Collective Investment Trust
U.S. Mutual Fund: Institutional Share Class
Variable Insurance Portfolio