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 investment managers believe there is opportunity for higher growth than in established companies or industries.

Investment Philosophy

The Small Cap Growth strategy's investment philosophy is centered on the following beliefs:

  • The strategy seeks to purchase successful small-cap growth companies with strong business models that have potential for large market opportunities.
  • Common characteristics of successful small-cap growth companies are:
    • Those that serve markets which are growing at rates substantially in excess of the average industry and/or the general economy.
    • Leaders in their industry increasing market share, creating increasing barriers to entry either through technological advancement, marketing, distribution or some other innovative means.
    • Those that produce solid financial returns through sales, margins, cash-flow.

Investment Process

The team looks for sustainable growth which they believe is highly valued in the market and driven by the following components:

Sales - unit growth

  • Strong top line growth driven by unit volume, not pricing, indicating that the industry is growing faster than the economy and the company is growing faster than the industry.

Margins - upward momentum

  • Strong top line growth should result in rising operating margins as a company leverages its fixed costs.

Cash-Flow - internal funding

  • Internal cash-flow drives the company's growth as opposed to external financing which can be dilutive to shareholders.

Strong Company Management

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

  • Earnings quality, balance sheet
  • Management guidance consistency
  • Management's ability to execute
  • Quantitative risk review and factor analysis

Diversification across Growth Spectrum

Throughout the portfolio construction process they are at all times aware of the strategy's allocation across a proprietary spectrum of types of growth companies. Any of these categories may assume market leadership, so they strive 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 and Waddell & Reed Advisors Small Cap 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 Value 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 was named co-portfolio manager of the strategy in 2016. He has been affiliated with the strategy since 2006 as portfolio manager of Ivy VIP Small Cap Growth. 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 had previously been affiliated with A.G. Edwards & Sons as a health care investment analyst.

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

Bradley P. Halverson, CFA

Vice President, Portfolio Manager

Mr. Halverson is co-portfolio manager of the firm’s Small Cap Growth investment strategy. He was named co-portfolio manager of the strategy in 2016. He has been affiliated with the strategy since 2014 as assistant portfolio manager. He joined the firm as an equity investment analyst in 2008. He provided 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 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 9/30/2017
(Returns for periods of less than 1-yr are not annualized)

  QTD  YTD 1YR 3YR 5YR 10YR
Small Cap Growth - Gross 4.08%  18.53% 22.62% 16.27% 16.36% 10.86%
Small Cap Growth - Net 3.86%  17.78% 21.58% 15.29% 15.37% 9.93%
Russell 2000 Growth Index 6.22%  16.81% 20.98% 12.17% 14.28% 8.47%

Calendar Year Returns1,2

  Small Cap Growth Gross Small Cap Growth Net Russell 2000 Growth Index
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%
2007 8.91% 7.99% 7.05%

1Small Cap Growth composite is comprised of 11 accounts that had $2,938.9 million in total assets as of 9/30/17. • 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 July 1, 2017 through September 30, 2017.

Data as of 9/30/2017

10 Largest Holdings

as a % of total assets

AMN Healthcare Services, Inc. 2.96%
Mercury Computer Systems, Inc. 2.75%
XPO Logistics, Inc. 2.39%
Booz Allen Hamilton Holding Corp. 2.20%
Ultimate Software Group, Inc. (The) 2.07%
HealthEquity, Inc. 2.04%
Beacon Roofing Supply, Inc. 2.01%
Re/Max Holdings, Inc. Class A 1.98%
Acadia Healthcare Co., Inc. 1.93%
Paycom Software, Inc. 1.85%

Sector Diversification

as a % of equity assets

Information Technology 29.42%
Industrials 22.60%
Health Care 17.76%
Consumer Discretionary 14.34%
Financials 6.21%
Energy 4.14%
Materials 2.43%
Real Estate 2.05%
Consumer Staples 1.05%

Composite Composition1

Domestic Common Stock 92.86%
Foreign Common Stock  2.26%
Equity Derivatives   0.05%
Cash and Cash Equivalents 4.84%

Composite Total Assets1

Assets ($M) $2,938.9
Number of Accounts 11

Supplemental data: The Small Cap Growth holdings and sector diversification data shown are 1 of the 11 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 11 accounts that had $2,938.9 million in total assets as of 9/30/17. • 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 July 1, 2017 through September 30, 2017.

As of 9/30/2017

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

Portfolio Review

A steady economic backdrop supported by expanding synchronized global activity and continued loose monetary conditions contributed to low volatility in the markets. Small caps were rewarded in this environment, with the Russell 2000 Growth Index lifting 6.2% during the third quarter. The increasing rhetoric about the potential of lower taxes, while far from certain, triggered higher interest rates, usually a signal that investors expect better growth and higher inflation. Energy prices, interest rates and employment measures remain supportive of positive consumer spending and confidence trends.

The Ivy Investments Small Cap Growth portfolio lagged the benchmark for the third quarter, but has still outperformed the benchmark on a year-to-date basis. Strong stock selection within Industrials (aerospace and defense industries) and Energy (equipment and services) were offset by significant weakness in Health Care, primarily due to underweighting the biotechnology industry, which is up over 50% year-to-date. Stock selection within Information Technology (electronic equipment and semiconductors industries) and Consumer Discretionary (restaurants) were also modest detractors to performance. Several large winning positions in the first half of the year stalled and adversely impacted results for the period.

Sector weightings were only modestly changed during the quarter. Positions in the Industrials sector were increased, using both gains from strong performers and reallocation of laggards within Consumer Discretionary, Health Care and Financials. We remain dedicated to finding attractive, improving companies with good value creation opportunities. We continue to position the portfolio with the best intermediate-term growth stories we can find. We have overweights in Technology, particularly within software, Consumer Discretionary, particularly in entertainment, travel, and restaurants, and Industrials. Consistent with historical positioning, we remain underweight Health Care, primarily due to limited exposure to biotechnology and pharmaceuticals.

Outlook

We think the underlying health of the domestic economy and the recovery in global activity remains somewhat underappreciated by the markets. The timing and details of tax reform remain elusive and could be potentially market-moving depending upon the eventual outcome. Investors are also carefully watching as the Federal Reserve begins the process of shrinking its balance sheet, which would imply additional monetary tightening. We remain focused on owning stocks with sustainable growth advantages operated by dependable management teams. These attributes have been critical to the ability of our portfolio to deliver outperformance 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 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.
Share this page:

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 60-80
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