Ivy VIP Science and Technology

Market Sector Update

  • Equities rebounded from the significant decline in the final months of 2018 and largely recovered all losses from last quarter.
  • The reasons for this strong rebound were the dovish pivot by the Federal Reserve (Fed) on future interest rate tightening and optimism around the China trade dispute. While U.S. and China economic data continued to weaken through the quarter, the Fed’s actions and positive trade negotiation meetings supported a significant equity rally.
  • The S&P North American Technology Index, the benchmark for the strategy, increased nearly 20% in the quarter after the roughly 18% decline in the fourth quarter of 2018.
  • The broad snapback within the technology sector drove positive performance across the spectrum, regardless of market capitalization or subsector.

Portfolio Strategy

  • The Portfolio’s double-digit return significantly outperformed the benchmark during the period. Stock selection within information technology was the primary driver of outperformance. Euronet Worldwide, Inc. was the top individual relative contributor, while allocations to Universal Display Corp. and Aspen Technology, Inc. also contributed to outperformance.
  • The Portfolio’s underweight in some of the largest benchmark constituents, namely Amazon.com, Inc., Facebook, Inc., Apple, Inc., and Cisco was a drag during the period. The impact of the underweight positions was more than offset by the outperformance in the portfolio.
  • Despite strong performance, the Portfolio’s allocation to health care, a sector absent from the benchmark, detracted on a relative basis due to the strong rebound in technology equities.

Outlook

  • The supportive factor for the technology and health care sectors is the constant pace of innovation. While we are highly cognizant of moves in the market, our three-to-five year timeline for investing allows us to take a longer term approach. For example, technology is going to be more critical going forward for companies to gain advantages. Data aggregation, data analytics, migration towards cloud computing, semiconductors – all are key areas we are positioned to take advantage of going forward. We expect cloud computing capex to bounce back in the second half of 2019, a meaningful contributor to how we view our investable universe right now.
  • We continue to be optimistic on semiconductors. The space has contributed strongly to information technology performance over the past couple years and we believe the emergence of new secular growth opportunities, like autos, machine learning and ubiquitous connectivity will continue to support above-market returns in the sector. While we remain constructive on semiconductors, we expect some level of volatility that likely creates compelling new opportunities for the Portfolio over the longer term.
  • We are carefully monitoring the technology supply chain and demand signals coming from key technology endmarkets. The U.S.-China geopolitical risk remains, but we are optimistic on the trajectory of these relations along with an expected rebound in technology spending in the next few quarters.
  • Our exposure in biotechnology remains a key area of innovation within health care and an area where we expect our holdings to outperform over the coming quarters. Gene therapy and personalized advanced therapies are the areas of groundbreaking research and innovation that should provide significant opportunities for investment.

The opinions expressed are those of the Portfolio’s managers 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, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Top 10 equity holdings as a percent of net assets as of 3/31/2019: Microsoft Corp. 9.2%, Euronet Worldwide, Inc. 5.8%, Aspen Technology, Inc. 5.1%, WNS (Holdings) Ltd. ADR 5.0%, Vertex Pharmaceuticals, Inc. 4.8%, ACI Worldwide, Inc. 4.7%, Apple, Inc. 4.5%, Universal Display Corp.: 4.4%, Micron Technology, Inc. 4.3%, Alibaba Group Holding Ltd. ADR 4.2%.

The S&P North American Technology Sector Index is a modified-capitalization weighted index representing U.S. securities classified under the GICS® technology sector and internet retail sub-industry. It is not possible to invest directly in an index.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Zachary Shafran
Bradley Warden

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Quarterly Fund Commentary

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Ivy VIP Natural Resources

Market Sector Update

  • Global equity markets posted positive returns on the broad indexes. The energy and materials sectors also posted positive returns during the quarter, with energy outperforming and materials underperforming the broader equity market.
  • Crude oil prices rebounded significantly higher in the quarter. West Texas Intermediate, the U.S. benchmark, was up about 30% and Brent, the global benchmark, was up slightly more. The OPEC supply reduction announced in December 2018 provided a positive stimulus for the oil market. OPEC’s policy change was in response to waivers granted by the U.S. that allowed Iran to continue exporting oil to approved nations. As a result of the decreased supply from OPEC, global oil inventories declined in the quarter.
  • The U.S. continued to grow oil production in the quarter, even as the rig count declined slightly. Lower rig count was driven by lower oil prices in the prior quarter as well as lower capital expenditures as producers aimed to generate more free cash flow.
  • Other commodity prices moved higher in the quarter; iron ore prices were up more than 20% and copper prices were up more than 10%. Supply disruptions in iron ore were the primary driver of the move higher.

Portfolio Strategy

  • The Portfolio posted a positive return for the quarter, but underperformed the return of its benchmark index.
  • The five greatest equity contributors to performance relative to the benchmark were Rio Tinto plc, ConocoPhillips, BHP Group plc, Occidental Petroleum and Newmont Mining.
  • The five greatest detractors to relative performance were Centennial Resource Development, Inc., Kinder Morgan, Inc., Williams Companies, Inc., TransCanada Corp. and International Flavors & Fragrances, Inc.
  • The Portfolio's exposure to the energy sector increased slightly from the prior quarter, ending at about 66% of equity assets, mostly due to appreciation. The remaining sector exposure was in materials and industrials.
  • In general, we seek to own companies in the Portfolio with low-cost positions, strong balance sheets and the ability to grow profitably with high returns on capital. We also seek to own companies exposed to favorable trends in their respective commodities and sub-sectors.

Outlook

  • We expect the oil market price rebalancing that occurred in the quarter to continue, with OPEC expected to maintain production cuts into the summer. U.S. production growth is expected to decelerate but still grow in excess of 1 million barrels per day in 2019. U.S. supply growth is expected to be roughly in-line with global oil demand.
  • U.S. rig count, after declining in the quarter, is likely to remain flat as producers show spending discipline even with higher oil prices. Exploration and production companies are seeing more pressure from investors to be more prudent in allocating capital in order to generate better investor returns. This discipline could be tested in the second half of 2019 if oil prices remain in the current range or higher.
  • Energy equities have lagged the appreciation in oil prices this year, but we think that gap will be reduced throughout the year as equities gain back some ground versus the commodity.

The opinions expressed are those of the Portfolio’s managers 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, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Top 10 equity holdings as a percent of net assets as of 03/31/2019: Chevron Corp., 5.69%; Halliburton Co., 5.25%; Phillips 66, 4.46%; Concho Resources, Inc., 4.35%; BHP Group PLC, 4.34%; Rio Tinto PLC, 4.31%; EOG Resources, Inc., 4.22%; Marathon Petroleum Corp., 3.68%; Valero Energy Corp., 3.56%; Diamondback Energy, Inc., 3.25%.

Risk factors: The value of the Portfolio's shares will change, and you could lose money on your investment. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in natural resources can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments; and the cost assumed by natural resource companies in complying with environmental and safety regulations. Investing in physical commodities, such as gold, exposes the Portfolio to other risk considerations such as potentially severe price fluctuations over short periods of time. The Portfolio may use a range of derivative instruments in seeking to hedge market risk on equity securities, increase exposure to specific sectors or companies, and manage exposure to various foreign currencies and precious metals. Such hedging involves additional risks, as the fluctuations in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. These and other risks are more fully described in the prospectus.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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David P. Ginther, CPA
Michael T. Wolverton, CFA

Article Short Summary: 

Where are the financial markets headed in the next 12 months? Rather than focus on unknowns, advisors and investors are better off looking at opportunities and implications. What can we learn from what we know at this point?

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Ivy VIP Balanced

Market Sector Update

  • Domestic markets rebounded sharply in the first quarter of 2019, with the S&P 500 Index, the Portfolio’s equity benchmark, positing its strongest quarterly performance in nearly 10 years.
  • The S&P 500 Index advanced nearly 14% with information technology, industrials energy and consumer discretionary sectors leading the way. Every sector posted a positive return for the quarter with the laggards being health care and financials.
  • Despite the pro-cyclical bias of the equity market, the 10-year U.S. Treasury yield declined 11 basis points (bps) to 2.57%. The yield curve continued to flatten with the spread relationship between the 2-year and 10-year U.S. Treasuries ending the quarter at 14 bps, down from 19 bps at the start of the year.
  • The Portfolio’s fixed income benchmark, the Bloomberg Barclays U.S. Government/Credit Index, increased 3.26% during the quarter as the Treasury market rallied due to falling interest rates and the duration benefit from curve flattening. Investment grade credit spreads tightened to 113 bps, which also contributed to the benchmark's positive return for the quarter.

Portfolio Strategy

  • The Portfolio’s equity portfolio delivered a positive return for the period, and was in line with the benchmark before the effect of sales charges. Overweight positions to the industrials and energy sectors positively impacted relative performance. In addition, strong stock selection in the consumer staples and energy sectors was a tailwind.
  • The fixed income portion of the Portfolio advanced slightly, outperforming the benchmark return. The portfolio’s relative underweight of Treasuries positively impacted performance as credit spreads tightened, resulting in stronger performance from corporate credit. In addition, strong security selection in corporate credit was a positive contributor to performance. Duration stands at approximately 90% of the benchmark. The portfolio’s Treasuries position has increased and is in line with the benchmark.
  • The Portfolio outperformed the Morningstar U.S. Fund Allocation 50%-70% Equity category average. Performance was positively impacted by an overweight of equities, which outperformed fixed income during the quarter, and strong security selection in the fixed-income sleeve.

Outlook

  • As we look ahead, global economic growth is likely to decelerate over the next several months, but we expect it to remain positive. As we have previously highlighted, individual and corporate tax reform was a meaningful positive for the domestic economy which, along with lighter regulation and a generally more business-friendly political climate, was supportive for growth.
  • However, the uncertainties around political, monetary and trade policies have been stubbornly persistent and are likely to linger for most of this year. While we believe domestic economic growth will continue, the lagged effects of tighter monetary policy and waning benefits from fiscal stimulus will be a headwind.
  • As a result, we are closely watching inflation rates and inflation expectations which have been modest, and must remain so, in order to allow our central bank to respond to slower growth and adjust the pace of monetary policy normalization. As the domestic economy grows, we expect the Federal Reserve to raise interest rates at a very modest pace and continue the process of winding down its balance sheet.
  • While we continue to monitor macroeconomic forces and trends, we maintain an emphasis on finding high quality, growing companies whose securities are trading at a reasonable valuation with visible catalysts to drive relative outperformance over the next 12 months. This approach has served investors well over time, and our confidence in it has not waned.

The opinions expressed are those of the Portfolio's managers 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, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Rick Perry served as a portfolio manager on the strategy until April 12, 2018.

The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-cap U.S. equity market. The index includes 500 of the top companies in leading industries of the U.S. economy. It is not possible to invest directly in an index.

The Bloomberg Barclays U.S. Government/Credit Index measures the performance of U.S. dollar-denominated United States Treasuries, government-related, and investment-grade U.S. corporate securities that have a remaining maturity of greater than or equal to one year. In addition, the securities have $250 million or more of outstanding face value and are fixed-rate and non-convertible securities. It is not possible to invest directly in an index.

Risk factors: The value of the Portfolio's shares will change, and you could lose money on your investment. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed-income securities are subject to interest rate risk and, as such, the net asset value of the Portfolio may fall as interest rates rise. The lower-rated securities in which the Portfolio may invest may carry greater risk of nonpayment of interest or principal then higher-rated bonds. In addition to the risks typically associated with fixed-income securities, loan participations in which the Portfolio may invest carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loan participations may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. The Portfolio's emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform nondividend paying stocks and the market as a whole over any period of time. In addition, there is no guarantee that the companies in which the Portfolio invests will declare dividends in the future or that dividends, if declared, will remain at current levels or increase over time. The amount of any dividend the company may pay may fluctuate significantly. In addition, the value of dividend-paying common stocks can decline when interest rates rise as fixed-income investments become more attractive to investors. This risk may be greater due to the current period of historically low interest rates. The Portfolio typically holds a limited number of stocks (generally 45 to 55). As a result, the appreciation or depreciation of any one security held by the Portfolio will have a greater impact on the Portfolio's net asset value than it would if the Portfolio invested in a large number of securities. The value of a security believed by the Portfolio's managers to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Matthew A. Hekman
Mark Beischel
Susan K. Regan

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Ivy VIP Asset Strategy

Market Sector Update

  • The first quarter was in many ways the inverse of the quarter prior and likely caught a large chunk of the professional investment world off-guard. The seemingly synchronized global stall of fourth-quarter 2018 gave way to an abruptly dovish U.S. Federal Reserve (Fed) and increasingly dovish European Central Bank (ECB), an increase in stimulus in China, new promises via tweets by President Donald Trump of trade progress with China, and a huge comeback in the price of crude oil with West Texas Intermediate crude bouncing 30%.
  • Last quarter’s losers were largely this quarter’s winners. The new twist, if there is one, is that long-term rates in the developed world – having risen through most of 2018 – fell through most of the quarter, and caused yield curves to flatten further and, in some cases, invert.
  • While many are confused about the overarching message from the markets, it appears bonds and equities are indicating that growth is likely to rebound from the depths of the fourth quarter and inflation will be well-contained. Some would call that a “Goldilocks” environment.
  • Some of the more cyclical areas of the equity market thus led the rally (information technology, energy and industrials), while rate-sensitive areas responded to bond market signals. Real estate was near the top and financials were near the bottom. Safe-haven assets such as utilities and consumer staples gave back some of their relative performance from the prior quarter.
  • It was the best of both worlds for high yield, with duration assets backed by falling long-term rates and credit spreads tightening with the rally in risk assets.
  • While U.S. equities generally outperformed the rest of the world in U.S. dollar terms, the renewed stimulus in China reignited the local market, with the SSE Composite Index (Shanghai) rallying 27% in dollar terms, leading the overall emerging markets index by 10%.
  • India equities kept up during the quarter and rose 8% despite massive outperformance in the fourth quarter that was driven by falling oil prices. Oil is a key component of India’s current account deficit. We view this performance in the face of rising oil prices in the first quarter as an overall positive signal as India looks to important elections in the second quarter.

Portfolio Strategy

  • The Portfolio had a positive return in the quarter but underperformed its all-equity benchmark index. The Portfolio entered the fourth quarter just below the midpoint of its defined risk budget, at about 80% of expected benchmark volatility, and maintained that exposure through the first quarter.
  • Key detractors to performance were in the technology sector, where the Portfolio lacked enough exposure to the bounce in semiconductors and hardware, and consumer discretionary and health care, where stock selection hurt as well.
  • Contributors to performance were led by industrials, where Airbus rallied 39% during the quarter, helped in part by Boeing’s problems with its 737 Max aircraft.
  • In fixed income, both rates and credit performed well but performance significantly lagged equities. We largely started upgrading the quality of the fixed income portfolio toward the end of the quarter as credit spreads tightened significantly.
  • Standalone fixed income performance was relatively strong. Most of the Fund’s rate exposure outside the Treasury Inflation Protected Securities (TIPS) market is longer duration. The credit portfolio performed well as spreads rallied and the bank loan positions, which faced a headwind from falling rate expectations, held up well because of good credit selection.
  • Gold helped cushion the equity stumble in the fourth quarter but cooled this quarter and rose only 0.7%.

Outlook

  • We lamented that we had not reduced risk a bit further after the fourth quarter, but feel fortunate to have stuck with our positioning into the first quarter.
  • We believe some factors that began to go right at the start of the year could continue on a positive trajectory. These include a rebound in China’s growth, driven by stimulative policies, leading to renewed growth for its trading partners;c ontinued support from the Fed and the ECB, as expectations for a further tightening of policy have diminished.; improving U.S. economic data, with long rates falling (an important tailwind for housing); and likely improvement in Europe, though there are wildcards such as Brexit and global demand for European autos.
  • We expect to stay in the middle of our risk budget, with equities at just under 70% of assets under management. We will remain disciplined with price targets, taking advantage of what we believe are mispricings in equities or credit. We will continue to make room for what we consider our best ideas, sizing them appropriately and offsetting unwanted risks in an effort to produce equity-like returns with less risk.

The opinions expressed are those of the Portfolio's managers 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, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Top 10 equity holdings as a percent of net assets as of 03/31/2019: Microsoft Corp., 3.18%; Airbus SE, 2.09%; Pfizer, Inc., 1.98%; Nestle S.A., 1.76%; Visa Inc., Class A, 1.74%; Amazon.com, Inc., 1.74%; Wal-Mart Stores, Inc., 1.63%; Royal Dutch Shell PLC, Class A, 1.54%; QUALCOMM, Inc., 1.53%; AIA Group Ltd., 1.47%.

The SSE Composite Index reflects all stocks traded at the Shanghai Stock Exchange. It is not possible to invest directly in an index.

Risk factors: The value of the Portfolio's shares will change, and you could lose money on your investment. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Portfolio may allocate its assets among different asset classes of varying correlation around the globe. The Portfolio's Equity Sleeve typically holds a limited number of stocks (generally 50 to 70). As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Portfolio’s NAV than it would if it invested in a larger number of securities. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. The Portfolio’s Diversifying Sleeve includes fixed-income securities, that are subject to interest-rate risk and, as such, the net asset value of the Portfolio may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. The Portfolio may seek to hedge market risk via the use of derivative instruments. Such investments involve additional risks. Investing in commodities is generally considered speculative because of the significant potential for investment loss due to cyclical economic conditions, sudden political events, and adverse international monetary policies. Markets for commodities are likely to be volatile and the Portfolio may pay more to store and accurately value its commodity holdings than it does with the Portfolio’s other holdings. These and other risks are more fully described in the prospectus.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Chace Brundige
W. Jeffery Surles, CFA

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Ivy VIP Value

Market Sector Update

  • The end of 2018 saw the return of stock volatility as equity markets took a sharp late year fall. This pullback, however, was followed immediately by a “hockey stick” recovery to start 2019.
  • The stocks that led the decline in December were the first to recover in January, providing a painful sting to investors who decided the selloff was a signal to position portfolios more defensively. Following a complacent 2017, large market swings have returned and have elevated fear amongst investors. Global growth has appeared to slow, and the Federal Reserve (Fed) has taken notice, halting further rate hikes for 2019.

Portfolio Strategy

  • The Portfolio had a positive single-digit absolute return but underperformed the Russell 1000 Value Index (the Portfolio’s benchmark) during the quarter, primarily due to individual stock selection that was mainly confined to our health care holdings. Four health care names in particular hurt relative performance: CVS, Humana, Hospital Corporation of America and Amgen. Of these, CVS was specifically costly. The company recently closed on the acquisition of Aetna, and in early January issued guidance for the combined company that was well below investor expectations. Often in large mergers like these, the first year can be difficult as the two companies become one. Despite this rough start, we believe CVS has long-term potential in the space and remain positive on the position. Outperformers in the quarter included Synchrony Financial in credit cards, Citigroup in banking and Lam Research in semiconductors.
  • The best performing sectors overall were information technology, industrials and energy. The selloff in the fourth quarter gave way to a broad market rally, with every sector in the benchmark posting a strong return.
  • We focus primarily on stock selection and avoid making sector calls. We overweight or underweight sectors based on individual stock opportunity, with some limits to control risk or volatility. The Portfolio is currently overweight financials and consumer discretionary, where we find value and yield. In these areas, we have been able to find what we believe are good companies with repeatable business models generating high rates of free cash flow, and low stock prices relative to our estimation of each company’s true intrinsic value. We are underweight consumer staples and communication services, simply due to a lack of compelling ideas.

Outlook

  • The U.S. economy has enjoyed a long successful run from the end of the 2008 recession. There was an additional boost with the tax cut in early 2018. Recent economic data supports the idea of a slowing economy but does not yet support the concept of a shrinking economy (recession). The current challenge will be for the Fed to tighten money policy back up, yet not slow the economy into contraction. The recent pause in interest rate hikes for 2019 indicates it is not an easy task – slowing the economy and inflation via rate hikes is a difficult job. We liken it to stepping on a rolling egg to stop it without breaking it. History shows a high probability of failure, if interest rates rise too much thus helping to create a recession. This is something we will watch carefully.
  • While the economic forces listed above are clearly important factors, our first approach is from the company level. We seek to find quality, growing companies whose stocks are trading below what we consider their intrinsic values. Oftentimes this is due to short term negative factors, and we become larger owners of a company if we feel those negatives are about to dissipate. We continue to search for and make investments one company at a time, to benefit clients over the long run.

The opinions expressed are those of the Portfolio’s manager 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, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Top 10 holdings (%) as of 03/31/2019: Citigroup, Inc. 4.7, Comcast Corp. 4.6, Walmart Stores, Inc. 4.3, Pfizer, Inc. 4.2, Broadcom Corp. 4.0, Energy Transfer Partners 3.8, Marathon Petroleum Corp. 3.3, Lam Research Corp. 3.2, AGNC Investment Corp. 3.1 and Target Corp. 3.1.

The Russell 1000 Value Index is an unmanaged index comprised of securities that represent the large-cap sector of the stock market. It is not possible to invest directly in an index.

Risk factors: The value of the Portfolio's shares will change, and you could lose money on your investment. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The value of a security believed by the Portfolio’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. Investing in companies in anticipation of a catalyst carries the risk that certain of such catalysts may not happen or the market may react differently than expected to such catalysts, in which case the Portfolio may experience losses. The securities of many companies may have significant exposure to foreign markets as a result of the company’s operations, products or services in those foreign markets. As a result, a company’s domicile and/or the markets in which the company’s securities trade may not be fully reflective of its sources of revenue. Such securities would be subject to some of the same risks as an investment in foreign securities, including the risk that political and economic events unique to a country or region will adversely affect those markets in which the company’s products or services are sold. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Portfolio’s prospectus.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Ivy VIP Growth

Market Sector Update

  • It was a quarter of reversals. Equities performed strongly and reversed a significant portion of the losses realized during the prior quarter. Equities across all capitalization ranges and all styles had significant gains during the first quarter 2019. Growth styles outperformed value styles while mid caps outperformed both small and large. The Russell 1000 Growth Index, the Portfolio’s benchmark, increased by approximately 16% in the quarter.
  • The Federal Reserve (Fed) was a big source of optimism that developed during the quarter. Post what was perceived to be policy error during fourth quarter 2018, the Fed moved quickly to ease tightening financial conditions. Actions taken included stepping back from quantitative tightening (balance sheet reduction) and taking a more dovish position regarding future interest rate hikes.
  • In response to these actions from the Fed, yields across the yield curve moved lower and the yield curve spread (10- year minus 2-year Treasuries) flattened slightly. Investors perceived the reduction in rates across the yield curve as helpful for solving the problem of tight financial conditions.
  • On the trade tariffs front, there was building hope during the quarter that China and the U.S. were on a path to agreement. Companies with high foreign sales exposure, those that experienced a difficult year in 2018, benefited from this more optimistic sentiment.
  • The net positive is that several of the most prominent worries during 2018 were mitigated during the first quarter 2019, sending volatility lower and market multiples higher. Despite near-term earnings risk based on weak global growth, there were building expectations for an acceleration in earnings growth later in 2019.
  • In another reversal of fourth quarter 2018 performance, a period in which all sectors in the index ended the period in negative territory, first quarter ended with all sectors in positive territory with strength in information technology and real estate and relative underperformance in financials and energy.
  • From a factor perspective, risk and quality outperformed during the quarter. Underperforming factors included value and pockets of momentum.

Portfolio Strategy

  • The Portfolio posted strong absolute double-digit gains, slightly underperforming its benchmark during the period. Performance benefited from strong stock selection in consumer staples, consumer discretionary and industrials. The main offset was driven by stock selection in financials.
  • Consumer staples provided positive attribution as the Portfolio held an overweight position to Estee Lauder. The shares responded positively to sustained strong growth out of China, a source of stress into quarterly results. The Portfolio also benefited from weakness in Coca-Cola, an index holding, as we have no exposure to this company.
  • Consumer discretionary benefited from stock selection with strength in Ulta Beauty, Inc. following strong quarterly results and VF Corp., which bounced back following recent concern around growth sustainability of its Vans shoe segment. The Portfolio also benefited from zero exposure to Tesla, which underperformed in the quarter.
  • The industrials sector was another notable positive contributor to performance. Strong growth momentum from CoStar Group and Verisk Analytics, both overweight positions, propelled those stocks higher and offset weakness from some cyclical names, such as JB Hunt.
  • The strong positive relative drivers were offset by performance in financials. Specifically, CME Group was a significant detractor of performance as the gains realized in 2018 related to increase in volatility partly reversed as volatility in the markets ebbed.

Outlook

  • We are cautious in returning to the narrative that the economy/equity markets will exit from the recent period of volatility and stress back on the same bull market trade as before. We are concerned economic conditions will remain tight and that a more cautious narrative is warranted and not currently being reflected.
  • The Fed has stepped back from further tightening but the impact from past interest rate hikes will remain in the system. We believe investors must ask if the repositioning of the Fed policy is an attempt to further accelerate the economy or a response to increasing, late-cycle risks to global growth.
  • We think the concerns around trade tariffs have also been swept away too quickly as investors have just moved to anticipation of a clear resolution. Several questions still linger and it is an unknown if a deal will bring full closure. We worry the uncertainty already created regarding global supply chains will be hard to unwind.
  • Excesses appear to be difficult to find as consumer debt, manufacturing inventories, corporate debt coverage and excess business investment, just aren’t apparent this cycle. We think the implication could be a growth deceleration with no recession or a shallow recession looming on the horizon.
  • The Portfolio will remain tilted to high quality, profitable growth as we believe the controversy regarding the growth outlook will remain, if not increase. In the current environment of sentiment swings between pro-growth and growth fears, it is important to stress risk management to avoid mistakes given the high failure rate of large-cap growth companies.

The opinions expressed are those of the Portfolio’s manager 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, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Top 10 holdings (%) as of 03/31/2019: Microsoft Corp. 8.0, Amazon.com, Inc. 4.9, Alphabet, Inc. 4.7, Apple, Inc. 4.6, Visa, Inc. 4.6, MasterCard, Inc. 3.6, Verisk Analytics, Inc. 3.4, CME Group, Inc. 3.3, Intuit, Inc. 3.1 and PayPal, Inc. 3.1.

Co-portfolio Manager Daniel P. Becker, CFA, left the firm effective April 12, 2018.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.

Risk factors: The value of the Portfolio’s shares will change, and you could lose money on your investment. Investing in companies involved primarily in a single asset class (large cap) may be more risky and volatile than an investment with greater diversification. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Portfolio’s prospectus.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Ivy VIP Core Equity

Market Sector Update

  • Domestic markets surged in the first quarter of 2019, with the S&P 500 Index, the Fund’s benchmark, up over 13% for the quarter. This follows a dismal performance in the previous quarter, where the benchmark declined nearly 14%.
  • We attribute this dramatic rebound to the Federal Reserve (Fed) and its pivot on interest rate increases. The Fed indicated it will likely leave rates unchanged this year due to weaker global growth and benign inflationary pressure.
  • In another surprising move, Fed Chairman Jerome Powell announced in March plans to halt the Fed’s program of reducing bonds and mortgage-backed securities holdings on its balance sheet in September. The best performing sectors for the first quarter included information technology, real estate, industrials and energy as the market took a decidedly pro-cyclical turn. Real estate, while not typically pro-cyclical, performed well thanks to the downward move in 10-year Treasury interest rates in late March. The worst performing sectors for the quarter included health care and financials.

Portfolio Strategy

  • The Portfolio delivered a positive return for the quarter, but underperformed its benchmark.
  • The largest detractor from relative performance was the larger-than-normal cash balance. Additional negatives included stock selection in the communication services sector. The portfolio’s underweight and stock selection in energy also detracted from relative performance. The largest positive contributor to relative performance came from stronger stock selection within financials.
  • From a style perspective, it should be noted that over the past nine months we have materially decreased the portfolio’s weighting of high growth stocks as their valuation levels have increased relative to the broad market.
  • We anticipate that through the course of 2019, investors will feel somewhat better about growth prospects outside of the U.S. and more value-oriented investments could see a good tactical run. We have and will continue to pivot the Portfolio to companies with valuation characteristics that are more favorable. Often these moves will come at the expense of some longtime winners in the Portfolio.
  • Looking at the Portfolio's composition, the information technology and consumer discretionary sectors are the Portfolio’s largest sector overweights as we are adding positions in which there has been growth in earnings and/or free cash flow while trading at valuation levels below their historical norms. The Portfolio continues to be underweight expensive bond proxy groups including real estate and utilities. We saw large opportunities to invest in companies following the recent correction, so the Portfolio’s cash levels are down over the previous quarter.

Outlook

  • As we look ahead, the pace global economic growth is very likely to slow, but remain positive in the near term. There are signs that policy makers globally are responding to slowing growth and a lack of inflation. Chinese policymakers are stimulating, while eurozone officials continue a policy of negative interest rates and the Fed’s signal of no further near-term rate hikes.
  • However, the uncertainties around political, monetary and trade policies have been stubbornly persistent and are likely to linger for most of this year. While we believe domestic economic growth will continue, the lagged effects of tighter monetary policy and waning benefits from fiscal stimulus will be a headwind.

The opinions expressed are those of the Portfolio’s managers 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, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Gus C. Zinn, CFA, served as a portfolio manager and the strategy until Dec. 03, 2018.

The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index.

Risk factors: The value of the Portfolio’s shares will change, and you could lose money on your investment. Because the Portfolio is generally invested in a small number of stocks, the performance of any one security held by the Portfolio will have a greater impact than if the Portfolio were invested in a larger number of securities. Although larger companies tend to be less volatile than companies with smaller market capitalizations, returns on investments in securities of large capitalization companies could trail the returns on investments in securities of smaller companies. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Portfolio’s prospectus.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.

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Erik Becker, CFA

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Ivy Municipal High Income Fund

Market Sector Update

  • The high yield municipal curve performed well during the quarter. The long end of the curve, notably maturities greater than 20 years, benefitted the most as the Federal Reserve (Fed) indicated it will not raise rates in 2019 and expects only one more increase in this tightening cycle. Overall, we believe the short and long ends of the municipal curve are richly valued relative to Treasuries.
  • Puerto Rico bonds strengthened during the quarter with mid-to-high single digit returns due to the restructuring of the island’s sales-tax-backed debt. We continue to be wary of these bonds as additional restructurings will need to proceed through bankruptcy courts, which could take years. We still believe Puerto Rico bonds are “dead money,” meaning investors will receive no income from the bonds for the foreseeable future. We would be remiss to pursue an investment with a high likelihood of offering no income.
  • While debt issuance was higher in the first quarter than a year earlier it remained lower than historical norms. We are confident that supply should rise materially over the remainder of the year.
  • The rally in rates during the quarter has led us to become less constructive on the high yield municipal space as new issues come to market with historically low absolute yields and weak collateral for investors. Broadly, we have turned more bearish on the credit market as spreads hover near the lows of 2007.

Portfolio Strategy

  • The Fund returned low-single-digits during the quarter, but underperformed relative to its benchmark. Fund’s underweight to the tobacco sector detracted from performance. Several tobacco refundings are on the calendar and we will look to add attractive opportunities at discounts to par.
  • The Fund has been reducing exposure to non-rated bonds. At the end of the quarter, exposure to non-rated bonds was 27%. Non-rated bond spreads are at record lows, so we feel it is prudent to own more liquid rated bonds in order to provide us the opportunity to exploit any credit widening.
  • Approximately 3% of non-rated bonds in the Fund are pre-refunded, which means while non-rated the bonds are highly liquid. In total, the portfolio holds more than 9% of pre-refunded bonds, which affords ample liquidity to exploit investment opportunities as they arise. We plan on continuing to hold more than 9% of the Fund in pre-refunded bonds as a source of additional liquidity moving forward.
  • We continue to favor revenue bonds over tax-backed debt. We think revenue bonds provide higher yields and better diversification from the general tax and pension issues currently affecting many municipalities. While general obligations have favored well in Chapter 9 bankruptcies, this trend changed post-Detroit and we expect the same outcome in the Title IV filing in Puerto Rico.

Outlook

  • We believe the strength in the high yield municipal market should continue in the near term as inflows along with low levels of issuance continue to generate positive results. We believe demand for municipal bonds will stay consistent with normal levels, but one significant outlier would be additional issuance caused by a large infrastructure bill passed by Congress.
  • We will look for opportunities with more defensive structures as interest rates continue to hover near historically low levels and credit spreads remain tight. We believe it makes sense to remain shorter duration relative to the benchmark as the sector seems fully priced.
  • We expect the Fed to remain on the sidelines for the remainder of the year. We are concerned about potential global trade wars with China and the European Union and the impact on the global economy. On a positive note, with the government shutdown over, we expect second-quarter gross domestic product to rebound slightly.
  • We will continue to monitor how tariffs and the one-year threat of closing the southern border might cause the Fed to reassess current interest rate policy. With the Fund’s duration at 49% of its benchmark, we feel appropriately structured to weather the impact of a long trade war and potential border closure.
  • We believe investors will continue to search for tax-exempt yield even after the tax legislation was passed. We view the tax cuts as favoring lower income brackets, but with the top tax rate at 37% we believe municipal bonds remain highly attractive.
  • Going forward, we believe supply should increase about 20% from 2018 levels; however we believe the demand is strong enough to handle the increase. One growing concern is the consolidation of assets into a select few high yield municipal bond funds. With three firms controlling a significant percentage of high yield municipal assets, a potential market disruption may cause an issue if investors decided to redeploy capital into other asset classes. We feel if that was to occur we are well positioned to redeploy capital at more attractive spreads and lengthen duration quickly.

The opinions expressed are those of the Fund’s managers 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, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Diversification is an investment strategy that attempts to manage risk within your portfolio but it does not guarantee profits or protect against loss in declining markets.

Risk factors: The value of the Fund's shares will change, and you could lose money by investing. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may include a significant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax (AMT). Exempt interest dividends the Fund pays may be subject to state and local income taxes. The portion of the dividends the Fund pays that is attributable to interest earned on U.S. government securities generally is not subject to those taxes, although distributions by the Fund to its shareholders of net realized gains on the sale of those securities are fully subject to those taxes. The municipal securities market generally, or certain municipal securities in particular, may be significantly affected by adverse political, legislative or regulatory changes or litigation at the Federal or state level. These and other risks are more fully described in the fund’s prospectus. Not all funds or fund classes may be offered at all broker/ dealers.

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Ivy Limited-Term Bond Fund

Market Sector Update

  • The first quarter saw strong performance in U.S. Treasuries and U.S. corporate bonds. The yield on the 2-year U.S. Treasury Note ended the quarter at 2.26%, nearly 23 basis points (bps) lower than year-end 2018. Yield compression was more pronounced on the 5-year U.S. Treasury Note, as it ended March at 2.23%, 28 bps lower than the end of last year.
  • The Bloomberg Barclays U.S. Credit Index, a good overall gauge for investment grade credit, tightened 30 bps during the quarter and delivered an excess return of 252 bps over duration-matched U.S. Treasuries.
  • After raising rates for the ninth time in this tightening cycle in December, the Federal Reserve (Fed) started a new message of “patience” in January. During the press conference following the January Federal Open Market Committee (FOMC) meeting, Fed Chairman Jerome Powell implied that rate hikes were off the table for the remainder of the year. This greatly surprised the markets, as the message in December was to expect two hikes in 2019. The new messaging caused a rally in the U.S. Treasury market, which also was boosted by the partial government shutdown, weakening domestic and global economic data, ongoing Brexit drama and the continued trade war with China.
  • The FOMC’s March meeting included the plan to end the balance sheet reduction program in September. Chairman Powell expressed satisfaction with strong employment and low inflationary pressures. He indicated the Fed can afford to be patient and help keep the economy plugging along until inflation continually exceeds the 2% target. This should keep interest rates lower for longer and opens the possibility that the Fed hiking cycle is over.
  • The yield curve inverted slightly on March 22 as the spread between the 10-year U.S. Treasury Note and the 3-month U.S. Treasury Bill turned negative. The inversion lasted five business days. Historically, an inverted yield curve implies a forthcoming recession, but the time lag can be significant – typically six to 24 months following the inversion.

Portfolio Strategy

  • The Fund had a positive return, but slightly underperformed relative to its benchmark for the quarter.
  • We reduced the Fund’s cash position, which we had kept at a higher level due to market uncertainty in late 2018. We increased our allocation to U.S. Treasuries during the first quarter. We also increased our exposure to commercial mortgage-backed securities (CMBS), preferring them to the types of mortgage-backed securities in which the Fed has been involved. CMBS often have “bullet like” maturities, similar to both corporate bonds and U.S. Treasuries.
  • With more certainty on Fed policy, we increased duration in the Fund, but still remain below benchmark duration.

Outlook

  • We will be opportunistic in further reducing our corporate bond exposure and increase our U.S. Treasury exposure over the next several months.
  • We believe fixed income should perform well with the Fed on hold and waiting for inflation to achieve its target level. Some market participants believe the next move from the Fed will be a rate cut. Domestic rates are much higher than in other developed markets, most notably Japan and Europe, where negative rates have been in place for several years. The Fed may come to believe that the current federal funds rate range of 2.25%-2.50% is the neutral rate in this environment.

The opinions expressed are those of the Fund’s managers 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, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The Bloomberg Barclays U.S. Credit Index measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government-related bond markets, including a non-corporate component of non- U.S. agencies, sovereigns, supranationals and local authorities. It is not possible to invest directly in an index.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rate rise. These and other risks are more fully described in the Fund's prospectus.

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Ivy Small Cap Growth Fund

Market Sector 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 Fund’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 Strategy

  • The Fund delivered a positive return for the quarter and outperformed its benchmark before the effect of sales charges.
  • The Fund 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 portfolio.
  • The portfolio 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 the limited exposure to the 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 portfolio.
  • The portfolio remains focused on its core stock selection strategy with a finer emphasis on earnings performance in 2019.

The opinions expressed are those of the Fund’s managers 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, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Investing in small-cap stocks may carry more risk than investing in stocks of larger more well-established companies. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.

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Timothy Miller, CFA
Kenneth G. McQuade
Bradley P. Halverson

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