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. He is a CFA charterholder.

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. He is a CFA charterholder.

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

Vice President, Portfolio Manager

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

Mr. Bichelmeyer earned a BSBA in Finance from Creighton University. 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
Small Cap Growth - Gross 7.44%  12.70% 24.07% 15.75% 16.68% 14.67%
Small Cap Growth - Net 7.21%  12.23% 23.02% 14.77% 15.69% 13.70%
Russell 2000 Growth Index 7.23%  9.70% 21.86% 10.60% 13.65% 11.24%

Calendar Year Returns1,2

  Small Cap Growth Gross Small Cap Growth Net Russell 2000 Growth Index
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%
2008 -35.32% -35.89% -38.54%

1Small Cap Growth composite is comprised of 10 accounts that had $3,266.3 million in total assets as of 6/30/18. • 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 April 1, 2018 through June 30, 2018.

Data as of 6/30/2018

10 Largest Holdings

as a % of total assets

AMN Healthcare Services, Inc. 3.21%
Teladoc, Inc. 2.18%
Visteon Corp. 1.70%
HubSpot, Inc. 1.67%
Booz Allen Hamilton Holding Corp.
1.67%
Zendesk, Inc. 1.63%
Texas Roadhouse, Inc. Class A 1.61%
Mercury Computer Systems, Inc.
1.60%
HealthEquity, Inc. 1.58%
Wingstop, Inc. 1.58%

Sector Diversification

as a % of equity assets

Information Technology 27.26%
Health Care
21.20%
Consumer Discretionary
20.15%
Industrials 16.81%
Financials 7.51%
Energy 4.23%
Materials 1.50%
Consumer Staples 0.92%
Real Estate 0.42%

Composite Composition1

Domestic Common Stock 91.50%
Foreign Common Stock  1.33%
Cash and Cash Equivalents 7.18%

Composite Total Assets1

Assets ($M) $3,266.3
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 $3,266.3 million in total assets as of 6/30/18. • 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 April 1, 2018 through June 30, 2018.

As of 6/30/2018

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

Market Update

A volatile environment of trade tensions, political uncertainty in Europe and immigration fallout was overpowered by strong company earnings, as well as the continued improvement in economic conditions, especially in the U.S. relative to most of the rest of the world. As a result, the Russell 2000 Growth Index produced a strong 7.2% return for the second quarter. Consumer and business confidence remained at high levels despite the daily government infighting and rhetoric. Domestic economic data remained robust, including personal consumption, unemployment, and corporate capital spending. The Federal Reserve (Fed) conducted its seventh interest rate hike since 2015 and indicated possibly two more coming this year, signaling growing comfort with the strength of the economy.

Portfolio Review

For the quarter, the Ivy Investments Small Cap Growth strategy slightly exceeded the strong positive performance of the benchmark for nearly all client accounts. The small-cap growth segment was one of the strongest investment classes in the market. The portfolio benefited most through gains in Health Care and Information Technology. Our material underweight in biotechnology, which had a negative quarterly return, was a significant benefit along with strong stock selection in medical devices and health providers. Information Technology gained from strong stocks in internet services and software. Results were moderated by weakness in Industrials as trade wars along with tightened raw materials generated fears of inflation and slower demand, compressing valuation multiples across the group. Although the portfolio was underweight the sector, weak stock selection in the sector hurt relative performance.

During the quarter, strong gains from Information Technology were reinvested in Consumer Discretionary and Health Care. The portfolio remains overweight Information Technology and now Consumer Discretionary due to attractive business models within the sectors and a continued improvement in consumer and corporate spending. Health Care remains an underweight position primarily due to the limited exposure to biotechnology and pharmaceutical industries.

Outlook

The portfolio continues in a posture to potentially benefit from broadening economic strength connected to improvements in earnings growth. While our enthusiasm for significant fiscal reform is tempered, we are encouraged by positive consumer sentiment, manageable inflation and improvement in corporate outlooks. We are closely monitoring the Fed’s rate hike cycles and remain positioned for modestly rising interest rates should they occur and a pro-cyclical backdrop. Consistent with our process, we are focused on owning companies with improving growth and earnings prospects managed by proven leadership — characteristics we believe will contribute to portfolio performance over time.

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 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