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 (fka Small Cap Value).

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 portfolio manager of the firm’s Small Cap Core investment strategy since 2014 and assumed co-portfolio manager responsibilities for the strategy in 2017. 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.

Scott R. Sullivan

Vice President, Portfolio Manager

Mr. Sullivan is part of the firm’s broader Small Cap team. He has been co-portfolio manager of the firm’s Small Cap Core investment strategy since 2017. He was assistant portfolio manager for the firm’s Asset Strategy mutual funds from 2014 to 2017. He joined the firm in 2007 as an equity investment analyst. He provided research analysis on industries in the industrials sector.

Mr. Sullivan earned an MBA from the University of Wisconsin-Madison and a BA in Economics from Tufts University.

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 12/31/2017
(Returns for periods of less than 1-yr are not annualized)

  QTD  YTD 1YR 3YR 5YR 10YR
Small Cap Growth - Gross 5.77%  25.37% 25.37% 14.62% 18.17% 12.07%
Small Cap Growth - Net 5.54%  24.31% 24.31% 13.65% 17.17% 11.12%
Russell 2000 Growth Index 4.59%  22.17% 22.17% 10.28% 15.21% 9.19%

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 $2,963.5 million in total assets as of 12/31/17. • 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, 2017 through December 31, 2017.

Data as of 12/31/2017

10 Largest Holdings

as a % of total assets

XPO Logistics, Inc. 3.11%
AMN Healthcare Services, Inc. 2.95%
Mercury Computer Systems, Inc. 2.63%
Beacon Roofing Supply, Inc. 2.42%
Booz Allen Hamilton Holding Corp. 2.17%
Ultimate Software Group, Inc. (The) 2.11%
Dycom Industries, Inc. 2.07%
Installed Building Products, Inc. 1.87%
John Bean Technologies Corp. 1.86%
Burlington Stores, Inc. 1.83%

Sector Diversification

as a % of equity assets

Information Technology 29.24%
Industrials 23.59%
Consumer Discretionary 16.71%
Health Care 15.61%
Financials 6.33%
Energy 4.25%
Materials 2.75%
Real Estate 1.52%

Composite Composition1

Domestic Common Stock 94.27%
Foreign Common Stock  1.79%
Equity Derivatives   0.08%
Cash and Cash Equivalents 3.86%

Composite Total Assets1

Assets ($M) $2,963.5
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 $2,963.5 million in total assets as of 12/31/17. • 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, 2017 through December 31, 2017.

As of 12/31/2017

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

Portfolio Review

The Strategy outperformed the benchmark for the quarter and delivered strong performance for the year. Strong stock selection within consumer discretionary (specialty retail), technology (software) and industrials (air freights and logistics) overcame adverse stock selection in health care (equipment and services). Taken together, the biotechnology and pharmaceuticals industries were detractors for the year, but neutral for the quarter. Sector weightings remained relatively constant during the quarter. We made additions within consumer discretionary as attractive candidates emerged in specialty retail. We replaced names within technology, industrials and health care with stocks deemed to have greater investment return potential and/or lower market capitalizations. We believe the current economic cycle offers advantages to companies with incremental operating leverage as well as strong secular growth. This belief has contributed to our overweight positions in technology, particularly within software, consumer discretionary, restaurants and specialty retail, and industrials across industries. Consistent with historical positioning, we remain underweight health care. After a spectacular run in biotechnology in 2017, we expect more modest performance in 2018 and maintain a very limited exposure to biotechnology and pharmaceuticals.

Outlook

The Strategy will continue to be driven by a disciplined focus on the growth companies that meet our criteria: they serve large market opportunities, have a defensible leadership position, strong management, and a financial model that will deliver high returns on invested capital. While the lion’s share of these companies are in the technology, health care and consumer growth areas of the market, they also exist in some of the cyclical areas of the economy such as industrials, energy and financials. For the coming year, the current macroeconomic factors should continue to be a tailwind for the markets. This momentum should boost the cyclical growth areas such as industrials, financials and energy. The Strategy has good exposure in all of these sectors with a focus on the high-quality growth companies. In the traditional growth areas, technology and the consumer sectors are more of a focus, whereas health care is an underweight position. After a strong run by the biotechnology stocks in 2017, we expect more modest performance in 2018. The Strategy’s health care focus is on products and services that benefit from moves away from hospitals and toward new technologies that aid more minimally invasive procedures that can be utilized in office or home settings. In technology, software will continue to be an overweight for the Strategy along with the highest quality semiconductor and technology services names. The consumer sectors surprised many over the holidays with good results. They have easier comparisons in 2018, so we will focus on new ideas in this area.

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, 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 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