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 3/31/2019
(Returns for periods of less than 1-yr are not annualized)

  QTD  YTD 1YR 3YR 5YR 10YR
Small Cap Growth - Gross 17.83%  17.83% 9.17% 19.75% 12.47% 18.82%
Small Cap Growth - Net 17.58%  17.58% 8.24% 18.74% 11.52% 17.82%
Russell 2000 Growth Index 17.14%  17.14% 3.85% 14.87% 8.41% 16.52%

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 11 accounts that had $3,537.9 million in total assets as of 3/31/19. • 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 January 1, 2019 through March 31, 2019.

Data as of 3/31/2019

10 Largest Holdings

as a % of total assets

Proofpoint, Inc.
2.66%
Mercury Computer Systems, Inc.
2.45%
Teladoc Health, Inc. 2.12%
Grand Canyon Education, Inc.
2.11%
Booz Allen Hamilton Holding Corp.
2.01%
Nexstar Broadcasting Group, Inc. 2.00%
Woodward, Inc. 1.94%
Paycom Software, Inc. 1.94%
Etsy, Inc. 1.81%
Monolithic Power Systems, Inc. 1.78%

Sector Diversification

as a % of equity assets

Information Technology 30.01%
Health Care
20.68%
Consumer Discretionary
19.25%
Industrials 19.19%
Financials 4.80%
Communication Services
2.49%
Consumer Staples
2.15%
Energy 1.42%

Composite Composition1

Domestic Common Stock 93.87%
Foreign Common Stock 1.70%
Equity Derivatives 0.03%
Cash and Cash Equivalents 4.41%

Composite Total Assets1

Assets ($M) $3,537.9
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 $3,537.9 million in total assets as of 3/31/19. • 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 January 1, 2019 through March 31, 2019.

As of 3/31/2019

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

Market Update

Market forces moved strongly back into positive territory in the first quarter of 2019 following the sharp correction at the end of last year. The upward move had both a risk-on complexion and a cyclical component to it. Accordingly, small and mid-cap stocks surged as the Russell 2000 Growth Index, the strategy’s benchmark, gained 17% during the period. Spearheading the charge was a benign Federal Reserve (Fed) whose tone turned more dovish at the beginning of the year, leading to a halt of the previous progression higher of stated interest rates. This led to a move downward in the 10-year Treasury bond and renewed enthusiasm for risk assets. Also supporting the move up was an indication of progress in the trade dispute between China and the U.S. Economic data continued to be strong, particularly job growth and the services sector, with housing activity also perking up. The momentum was strongest in the first two months of the quarter, before a slight correction in March.

Portfolio Review

The strategy delivered a positive return for the quarter and outperformed its benchmark. The strategy benefited most through gains in the information technology sector, both from strong stock selection and an overweight position in software stocks. Another contributing sector was industrials due to robust gains in aerospace and defense holdings. Health care detracted from performance, as stock selection within the health care technology and health care provider industries proved challenging during the period. Our material underweight in biotechnology also hurt performance, as returns in the category surged during the quarter. Energy was also a modest hindrance to performance as stock selection lagged the gains in sector. During the quarter, strong realized gains from information technology were reinvested back into the sector along with additions to industrials. Position reductions in health care and financials were also redeployed across the strategy. The strategy remains overweight information technology and consumer discretionary, as sustainable opportunities for growth continue to present themselves in these sectors. Health care remains an underweight position primarily due to limited exposure to biotechnology and pharmaceutical industries.

Outlook

The outlook for the year has improved because of optimism building for a settlement to the China trade issue, the Fed’s decision to halt any further interest rate hikes and the subsequent move lower in the level of interest rates. Earnings growth in 2019 won’t have the tax benefit gained in last year, so the earnings variance among companies and industries could be more pronounced. We find the greatest growth opportunities in our overweight sectors and believe a better macro environment should benefit the more cyclically exposed parts of the strategy. We remain focused on our core stock selection strategy with a finer emphasis on earnings performance in 2019.

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, 2019 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