Ivy Small Cap Growth Fund

Market Sector Update

  • The markets overall and small cap in particular continued to rally in the second quarter, moving up nicely out of the gate in April only to be torpedoed in early May when the Trump administration raised the tariff rate to 25% on $200 billion of imports from China. The market had been hoping for a trade deal, so the rally stalled and markets fell sharply in May, compounded by another tariff threat against Mexico.
  • However, sentiment changed again in June, spurred by a resolution of the U.S.-Mexico standoff and a Federal Reserve (Fed) swing to a more dovish posture. The markets ended the quarter up, with large and mid-caps leading the way and small caps lagging.
  • Growth equities continued outperform value for the quarter. The Russell 2000 Growth Index, the Fund’s benchmark, advanced modestly with sector leadership from an odd combination of information technology, utilities, financials and industrials.

Portfolio Strategy

  • The Fund posted a positive return for the quarter and outperformed its benchmark before the effect of sales charges.
  • The four top-weighted sectors – information technology, health care, consumer discretionary and industrials – all were the key contributors to total positive performance. Conversely, energy and communication services were a drag on performance.
  • In terms of individual stock performance during the quarter, information technology winners were led by IT service companies Globant, InterXion Holding and Booz Allen Hamilton Holding Corp. as well as with another strong quarter by HR software provider Paycom Software, Inc. Health care contributors were driven by large gains from Teledoc Health, Inc., Insulet Corp., iRhythm Technologies, Inc. and CareDx, Inc. The consumer discretionary sector contributors were Wingstop, Inc., SeaWorld Entertainment, Inc., IBP Corp. and Pool Corp. Finally, the Industrial sector had a late quarter rally driven by John Bean Technologies Corp., RBC Bearings, Inc. and Woodward, In.
  • Our position in the financials sector was a key detractor, due in part to poor performance of the Fund’s bank holdings, which we attribute to the continued flattening of the yield curve. In addition, a sizable correction at Green Dot Corporation was mitigated by our small weighting in the Fund. However, we ultimately eliminated our position of this holding during the period.
  • Other holdings eliminated during the quarter due to poor performance include At Home Group, Inc., Texas Roadhouse, Inc. and Urban Outfitters, Inc. The portfolio team continues to review holdings and cull those whose market cap has migrated to the mid-cap category and where we have found smaller and suitable alternatives.

Outlook

  • In the midst of all of the sentiment swings driven by trade, tariff and Fed policy, the economic data continues to be healthy and growth stocks continue to outperform. Small cap growth has lagged mid-cap and large cap growth for the past year which leaves valuations at relatively attractive levels.
  • In addition, it now appears that the low interest environment that has been supportive of growth stocks will remain in place for the foreseeable future. Hence, the Fund strategy is not deviating from the process that has worked over the past few years.
  • The premium for high quality fast growing small cap companies, mostly in the technology and health care sectors, could be sustained in the forthcoming quarters. A cyclical rally will likely depend on Fed policy changes and the timing of those moves. The sectors that could benefit from a reduction in Fed policy rates would be the consumer discretionary, financials and industrials. The Fund is adequately positioned in these sectors, with an emphasis on industrials and consumer discretionary holdings.

  • 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 June 30, 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.

    All information is based on Class I shares.

    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. The Fund may invest in Initial Public Offerings (IPOs), which can have a significant positive impact on the Fund’s performance that may not be replicated in the future. 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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Kenneth G. McQuade
Bradley P. Halverson

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Ivy Mid Cap Growth Fund

Market Sector Update

  • Mid-cap growth stocks, as measured by the Russell Midcap Growth Index (Fund’s benchmark) enjoyed the strongest returns across the domestic equity spectrum again in the second quarter of 2019, with an index return of 5.4%, following 19.6% in the first quarter of the year. In deconstructing the return, all sectors within the index posted positive returns except for energy. The leading performing sectors were financials, communication services, consumer discretionary, industrials and real estate.
  • Continued strong performance in the domestic market appears to be due to a more dovish Federal Reserve (Fed) indicating potential rate cuts are coming in the back half of 2019, and ongoing hopes for governmental stimulus in China moderated slightly by the on-again, off-again potential for a trade deal. The U.S. economy continues to remain resilient to many of these shocks, whether real or perceived, that are being thrown its way.

Portfolio Strategy

  • The Fund posted a positive return but underperformed its benchmark in the second quarter of 2019. Relative underperformance came from the consumer discretionary and information technology sectors.
  • Consumer discretionary continues to be the biggest sector overweight in the Fund. While this overweight was beneficial to the Fund, stock selection within the sector, particularly in specialty retail and luxury goods, more than offset the contribution. Underperformance came from overweight positions in Tiffany & Co. and Burberry Group Plc, both of which were negatively impacted by the continued strength of the U.S. dollar, the trade war impasse and declining tourism at flagship stores.
  • Performance strength came from MercadoLibre, Inc. and Grubhub Inc. MercadoLibre continued to post solid returns, as the Latin American focused e-commerce company demonstrated strong growth after emerging from a significant corporate investment period. Grubhub was a positive overweight in the Fund for the quarter as the restaurant delivery landscape lost Amazon as a player in the space at the end of June, eliminating one potential competitor for the company. Grubhub also restructured its debt, leading to additional cash on the balance sheet with looser covenants, allowing for potential acquisitions.
  • Another area of weakness for the Fund versus the benchmark was in information technology. Although the Fund was underweight this underperforming sector, stock selection within the sector dragged performance lower, namely holdings Arista Networks and Palo Alto Networks. Arista Networks, a provider of data center switches, declined as it reported disappointing guidance given the slowdown on spending from a large cloud customer. Palo Alto Networks, a leader in global cybersecurity, announced negative estimate revisions due to the change in business model as customers shifted from paying up-front subscriptions to software as a service, thereby causing a hit to near term earnings. Additionally, the company announced the acquisition dilution was worse than expected.
  • From a sector perspective, the Fund benefitted from relative outperformance in industrials and materials. The Fund’s industrials exposure was a slight overweight in the quarter that benefitted from several names, including CoStar Group, Inc. CoStar Group is the leading provider of real estate data, analytics and marketplace-listing platforms, including Apartments.com. The company has a defensible franchise of mainly subscription-based revenue that continues to grow with solid management execution. Recent online traffic trends for Apartments.com and ForRent.com indicated robust growth over the past 12 months, far outpacing that of competitors.
  • The Fund’s cash exposure, while at the low end of our typical range, was a slight drag on performance.

Outlook

  • The market’s temperament cooled substantially from the first quarter to the second quarter, based largely on trade war concerns and the ultimate effect the impasse will have on global and U.S. gross domestic product growth. Though the ramifications of the impasse seem largely contained at this point, we remain vigilant with regard to any potential changes on business activity. We also appreciate that many of the rest of the world’s economies are challenged and we continue to watch for any signs of inflection. The Fed is now talking about interest rate cuts in the back half of 2019 and there is much rhetoric around a resolution, albeit on the horizon, to the China/U.S. trade wars. Near-term confidence in the economy and corporate profits became more uncertain in the second quarter, with decelerating earnings growth once again the talk of the markets.
  • For the quarter within the benchmark, higher debt companies outperformed lower debt companies. Our take is that, while interest rates declined more than 0.4% on the 10-year treasury and the market is looking forward to two or three cuts to the Fed Funds rate this year, the environment for companies to add leverage is not the same as it was in the past cycle of cuts post the global financial crisis.
  • While the Fund’s portfolio represents an economically constructive point of view, our approach is essentially balanced based on stock selection as opposed to overt sector allocations. The portfolio continues to express a more economically constructive and optimistic view, with a more assertive pro-growth, less defensive stance.
  • The Fund remains overweight the consumer discretionary, health care and industrials sectors. We are underweight the information technology sector but still have a healthy exposure. We are also underweight the financials sector. We have no exposure to the real estate and energy sectors, which represent a combined 3.6% of the benchmark.

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 June 30, 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 06/30/2019: CoStar Group, Inc. 3.5, Tractor Supply Co. 3.0, Zoetis, Inc. 2.8, Chipotle Mexican Grill, Inc. 2.8, Electronic Arts, Inc. 2.7, ServiceNow, Inc. 2.4, Keysight Technologies, Inc. 2.2, TransUnion 2.2, Market Axess Holdings, Inc. 2.2 and Guidewire Software, Inc. 2.0.

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

All information is based on Class I shares.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Investing in mid-cap growth 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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Kimberly A. Scott, CFA
Nathan A. Brown, CFA

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Ivy Large Cap Growth Fund

Market Sector Update

  • Market strength continued in the quarter as equities posted positive returns, adding to sizeable gains in first quarter. The Fund’s benchmark, the Russell 1000 Growth Index, was up approximately 21.5% year-to-date. Equities across all capitalization ranges and all styles had positive gains during the quarter. Growth styles continued to outperform relative to value styles while mid-cap returns were more mixed across styles.
  • The Federal Reserve (Fed) remained supportive. During the quarter, markets began to price in at least one rate cut as early as July, with small odds of a more aggressive, larger cut. The Fed continued to signal a willingness to cut rates to offset the impacts from global slowing/trade pressures or to further stimulate the U.S. in the hopes of inciting some level of inflation. Investors have responded positively to a more dovish stance by the Fed.
  • It was another noisy quarter for global trade. There was a temporary tariff spat with Mexico during the quarter that resolved quickly. However, the bigger news was the building expectation for easing trade tensions between the U.S. and China that ultimately ended with a temporary “trade truce” between the countries during June’s G20 Summit. The news was welcomed by the market but also anticipated.
  • Economic data remained mixed. Employment and housing remain supportive in the U.S. while manufacturing data around the globe has weakened, with many countries moving into contraction territory.
  • From a factor perspective, momentum (price returns and relative strength) and quality (return on equity and return on assets) outperformed during the quarter. Quality has been a strong performer for entire year. Underperforming factors included value (price to sales and price to book) and risk (beta and variability of earnings).

Portfolio Strategy

  • The Fund posted a positive return, outperforming its benchmark during the quarter. Performance benefited from strong stock selection across several sectors, including information technology, industrials, health care, financials, consumer discretionary and consumer staples. The communications services sector was the only notable detractor to performance.
  • Information technology posted strong relative contribution to performance through significant overweight positions in VeriSign, Visa and Broadridge Financial Solutions. Performance also benefited from continued strength in overweight software names, Microsoft and Adobe.
  • Industrials was another notable positive contributor to performance as investors remained attracted to the strong late-cycle growth prospects from both CoStar Group and Verisk Analytics, both overweight positions.
  • Health care saw strength in a few stock-specific names, including Zoetis, which continues to benefit from its slow, steady and stable growth in the animal health sector. Illumina was a relative outperformer as investors gained incremental confidence in strong second half growth. The Fund also benefited from underweight exposure to the large-cap biotechnology and pharmaceutical sectors, both of which performed poorly during the quarter.
  • Financials was additive due to strong performance from CME Group as volatility moved higher in April. Consumer discretionary benefited from an overweight to Ferrari as investors continued to appreciate the company’s strong new car launch slate and stronger price realization.
  • The notable detractor during the quarter was communications services. The Fund was overweight Alphabet, which underperformed, and was underweight Facebook, which outperformed. The Fund also was negatively impacted by lack of exposure to Disney, which was strong in the quarter due to investor excitement over Disney’s new video streaming service.

Outlook

  • Easing rates likely due to slower growth. As illustrated by strong market gains, investors seem to be taking bad news as good news. The inference is that the Fed rate cuts are to be viewed as an attempt to further accelerate growth in order to incite some level of inflationary pressures. Another view of potential cuts, one we see as more probable, is to counter weakening trends in the U.S. driven by years of Fed rate hikes and slowing global growth.
  • The U.S.-China “trade truce” is hardly a resolution. This latest news of “kick the can” simply implies that trade will continue to be a source of volatility in the second half of 2019. We see the trade dispute as having serious long-term ramifications on allocation of capital and business investment. We believe it is difficult for companies to have confidence in a long-range plan without knowing the rules of engagement with respect to global trade.
  • Financial tightening is still hanging around. The impact of the nine rate hikes, plus quantitative tightening, working through the system is yet to be fully digested and should result in continued slowing in back half 2019. We foresee earnings risk and negative revisions ahead.
  • Growth scarcity trade is in effect, for now. We believe as growth slows investors will continue to favor high quality, highly visible, durable growth names. We believe if earnings encounter sharper negative revisions in the second half of the year there may be more opportunity to look for cyclical exposure for the Fund before 2020.

The opinions expressed are those of the Fund’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 June 30, 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 06/30/2019: Microsoft Corp. 8.6, Amazon.com, Inc. 5.1, Visa, Inc. 4.9, Apple, Inc. 4.6, Alphabet, Inc. 4.4, CME Group, Inc. 3.5, Zoetis, Inc. 3.1, PayPal, Inc. 3.1, Verisk Analytics, Inc. 3.0 and Adobe, Inc. 3.0.

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.

All information is based on Class I shares.

Risk factors: The value of the Fund’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 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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Bradley Klapmeyer

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Ivy Core Equity Fund

Market Sector Update

  • For the second quarter of 2019, the S&P 500 Index, the Fund’s benchmark, returned a respectable 4.3%. The second quarter’s strongest market sectors were financials, materials, and information technology, while energy, real estate and utilities performed the worst. Year-to-date performance favors information technology, consumer discretionary and industrials. However, the defensive sectors have held their own despite the market gains over the past six months.
  • The strong equity market move on a year-to-date basis must be taken in context with an unusually low starting point following fourth quarter 2018. As of June 30, the S&P 500 Index is essentially in line with levels at the end of last September, making it a highly volatile nine months for equities.
  • One of the catalysts to the market rally earlier this year was rising optimism that the U.S. and China would make solid progress toward a trade deal. That optimism faded in May when President Donald Trump announced the U.S. would increase the tariff rate on $200 billion in Chinese imports from 10% to 25%. Discussions between Trump and China President Xi Jinping at the G20 Summit in June were more hopeful, with the U.S. essentially announcing a trade cease-fire and lessening restrictions on Huawei Technologies Co. Ltd,, China’s crown jewel technology company.

Portfolio Strategy

  • The Fund delivered a positive return and slightly outperformed its benchmark for the quarter.
  • Individual stock selection, primarily within the information technology and financials sectors, drove performance while stock selection within the consumer discretionary sector and a modest allocation to cash slightly detracted from relative performance.
  • With regard to individual holdings, top contributors to relative performance included Blackstone Group, Inc., TE Connectivity, Qualcomm, Inc., Lockheed Martin Corporation and Take-Two Interactive Software, Inc. Holdings that were detractors to relative performance included Marathon Petroleum Corp., Philip Morris International, GoDaddy, Inc,. Facebook, Inc. and Boeing Company.
  • During the period, we reduced or eliminated positions in several names that benefitted from strong secular growth, but that also increased to questionable valuation levels. Names eliminated entirely include Procter & Gamble Company, Paypal Holdings, Inc., Intuit, Inc., Home Depot, Inc. and Eli Lilly and Company.
  • It should be noted that over the past few quarters we have materially decreased the portfolio’s weighting of highgrowth holdings as their valuation levels have increased relative to the broad market.

Outlook

  • The continual back-and-forth between China and the U.S. has served to increase the level of macro uncertainty. Business leaders have responded by becoming more guarded in their outlook and capital expenditure plans, leading to reduced industrial activity. This reduction may not hurt the overall U.S. economy which is driven primarily by consumer-led activity, but industrial ups and downs are consequential to S&P 500 Index earnings growth.
  • During the U.S. Federal Reserve’s (Fed) June meeting it became increasingly obvious the Fed has shifted to a more dovish tilt. Futures markets have priced in a cut to the federal funds rate at the July meeting. In addition, probabilities built into market pricing suggest that investors believe the Fed will cut a total of 75 basis points from the current target rate of 2.5%.
  • Policy makers elsewhere have also become more dovish, with central banks in Europe stuck on a ”lower for longer” interest rate policy and China introducing both monetary and fiscal easing. Given such widespread global easing, it would not be surprising for growth rates to improve in many parts of the world by year-end.
  • Any movement higher in global economic momentum, we believe, could serve as a catalyst for many areas of the market that have been left behind in 2019’s stock market rally. We are increasingly searching for more “value” oriented ideas within that market while keeping core positions in many long-term winners that benefit from secular/sustainable business drivers.

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 June 30, 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.

All information is based on Class I shares.

Gus C. Zinn, CFA, served as a portfolio manager on the Fund until Dec. 3, 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.

Top 10 holdings (%) as of 6/30/2019: Microsoft Corp. 6.0, TE Connectivity, Ltd. 3.5, The Boeing Co. 3.4, Citigroup, Inc. 3.1, JPMorgan Chase & Co. 3.0, Wal-Mart Stores, Inc. 3.0, Amazon.com, Inc. 2.9, AutoZone, Inc. 2.6, The Blackstone Group 2.6, MasterCard, inc. 2.5.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Because the Fund is generally invested in a small number of stocks, the performance of any one security held by the Fund will have a greater impact than if the Fund 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 Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. 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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Erik Becker, CFA

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Ivy VIP International Core Equity

Market Sector Update

  • Broad international markets were up approximately 3.5% in U.S. dollars, despite several headwinds. The U.S. dollar depreciated approximately 1% relative to a basket of other currencies. The quarter was marked by increasingly accommodative central banks, a deteriorating geopolitical backdrop and a very narrow equity market led by quality growth stocks. Earnings revisions were again negative in the quarter.
  • With regards to monetary policy, the U.S. Federal Reserve (Fed) is expected to cut the federal funds rate by 25 basis points in July, with the anticipation of at least one additional cut by year end. Consensus expectations are the European Central Bank and Bank of Japan are prepared to further loosen monetary policy and to add stimulus in an attempt to ensure the euro and yen do not appreciate relative to the U.S. dollar. However, both countries are already running negative rates, so it is hard to imagine they can “out ease” the Fed. In China, the enactment of minor fiscal policy changes was insufficient to overcome the weight of U.S. trade issues.
  • Global economic data was generally weak for the quarter, as the continuation of trade wars weighed heavily on the markets. In early May, U.S.-China trade negotiations deteriorated and the U.S. increased tariffs from 10% to 25% on $200 billion of Chinese goods. On a positive note, at quarter end, the U.S. and China agreed to resume trade discussions. In Europe, which has been experiencing little growth, trade negotiations with the U.S. seem to be moving in a negative direction, which will be a key issue to monitor as we move forward.
  • Brent crude was volatile in the quarter, exceeding $72 then falling below $60. Brent crude ended the quarter at $64.74, down 3% from its previous quarter-end price.
  • With a backdrop of dovish central banks, poor economic growth and trade frictions, 10-year bond yields continued their precipitous fall in the quarter. Most 10-year bonds around the world are at the bottom end of their two-year range. For perspective, the U.S. 10-year yield was 2% at quarter end, down 40 basis points (bps) in the quarter and down 123 bps from its November high.

Portfolio Strategy

  • The Portfolio posted positive performance but underperformed its benchmark for the quarter. The Portfolio outperformed the benchmark during April and June, but performance was adversely impacted in May. In May, the risk-off environment stemming from deteriorating trade negotiations between the U.S. and China led to nondiscriminatory selling of equities considered sensitive to trade regardless of fundamentals. Despite the Portfolio maintaining a relatively neutral allocation between cyclicals and defensives in the quarter, stock selection was the main driver of underperformance as select holdings in energy, consumer discretionary and financials performed poorly.
  • Stock selection benefitted relative performance in health care and materials for the quarter. In aggregate, sector allocation played a minimal role in relative performance, providing a slight tailwind to performance for the period.
  • Geographically, the Portfolio’s underweight allocation to Japan was a key contributor to relative performance for the period. Holdings in the U.K. (led by Imperial Tobacco Group plc) and Canada (led by Seven Generations Energy Ltd.) were a detriment to performance for the period.
  • Over the quarter, the Portfolio continued to face headwinds resulting from its relative value investment philosophy. For perspective, growth-oriented equities outperformed their value-oriented peers by more than 400 basis points over the quarter. In short, the Portfolio’s value tilt was a detriment to performance. Above mentioned value stocks Seven
  • Generations Energy Ltd. and Imperial Tobacco Group plc were top detractors, while growth-oriented holdings (Wuliangye Yibin Co. Ltd., SAP AG and Adidas AG) were strong relative contributors to performance.
  • We have maintained our forward currency contract to the Japanese yen, neutralizing our stock underweight allocation on a currency basis. Additionally, we have maintained our currency hedge to the Chinese yuan, offsetting our direct investments exposure in China.
  • Given increased uncertainties on several fronts (trade, monetary policy, etc.), we have increased the Portfolio’s cash allocation to 8%. We are utilizing cash to offset some of the higher beta exposures in the portfolio and to provide support in down markets.

Outlook

  • Shifts in central bank policy, the rise of nationalism, the Brexit saga and trade negotiations – particularly between the U.S. and China – are standout issues affecting the current economic environment. Going forward, we believe geopolitics will continue to have a meaningful impact on asset values across the world. The question remains: How much longer will the cycle extend uninterrupted by looming risks? As a result, we are watching closely for signs of change, and continue to seek stocks that should better withstand an economic downturn. While we think U.S.-China trade tensions will persist, we expect some positive agreements in 2019, in line with market expectations.
  • In much of the world, global monetary policy remains at the extremes of easy and we do not see that changing materially unless inflation accelerates at a higher-than-expected rate. Virtually all countries are struggling with high levels of debt. As a result, we believe central banks will attempt to keep rates below nominal gross domestic product growth to monetize debt and continue to stimulate their economies. As such, we believe there is a long-term cap on how high rates can go so long as central banks maintain control.
  • We believe relative valuation remains supportive for international equities. We see relative value opportunities in emerging markets (especially China), energy, internet-related companies and in many cyclicals that we view as more stable than appreciated.

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 June 30, 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 06/30/2019: Nestle S.A., Registered Shares 2.8%, Total S.A. 2.8%, SAP AG 2.6%, Roche Holdings AG, Genusscheine 2.6%, Airbus SE 2.4%, Tokio Marine Holdings, Inc. 1.8%, Unilever plc 1.8%, Orange S.A. 1.8%, Alibaba Group Holding Ltd. ADR 1.8% and Ferguson plc 1.7%.

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. 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 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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John C. Maxwell, CFA
Catherine Murray

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Ivy Municipal Bond Fund

Market Sector Update

  • Municipal market performance was primarily driven by a strong rally in the U.S. Treasury market.
  • Performance was also enhanced by a continued supply/demand imbalance and increased investor interest in taxavoidance
    strategies linked to the cap on the state and local tax deduction from the new tax bill. The Federal Reserve
    (Fed) has rapidly pivoted toward rate cuts, with the market now pricing in 75 basis points (bps) of cuts by year end.
    Trade/tariff uncertainty and slowing global growth were cited as key concerns, while inflation continues to remain
    stubbornly low.
  • Interest rates declined sharply in the quarter and the yield curve flattened slightly. The Treasury market yield curve
    remains inverted between the 3-month bill and the 10-year which the market is interpreting as a signal that a recession
    is forthcoming. We are not convinced this metric holds the same validity as in the past due to the unconventional easy
    monetary policy operations implemented by the Fed and other central banks in the last decade.
  • Defaults in the municipal bond asset class continue to be rare. While we anticipate increased headline risk from
    municipal issuers that have severely underfunded pensions and other post-retirement benefit obligations, we continue
    to believe these problems are not systemic and they will remain isolated.

Portfolio Strategy

  • The Fund had a positive return, but underperformed its benchmark. Treasury and municipal rates remain at very low
    historical levels. The portfolio duration is currently shorter than our benchmark, and the portfolio is defensively
    structured. We will continue to look for attractive opportunities to re-invest cash flow from bond income and maturity
    proceeds, but we believe valuations are stretched after the recent aggressive rally and we are proceeding with a high
    level of caution and patience.
  • We will continue to place emphasis on diversification, higher (overall) credit quality and yield curve positioning.
  • We expect to see continued headlines on municipal pension underfunding and other post-retirement benefits issues.
    We will remain vigilant in monitoring these situations and we will endeavor to avoid investments with these issuers.

Outlook

  • We remain confident that municipal bond defaults will continue to be much lower than any other fixed-income
    alternatives except U.S. Treasuries.
  • While we ultimately expect Treasury yields to be the key driver of the municipal market, we believe municipal bonds
    provide relative value for fixed income investors, as the market has backed up from previously stretched valuations.
    However, we have also experienced unprecedented cash flows into the municipal bond asset class year to date.
    Historically, it has been prudent to not invest aggressively at extremes. Therefore, we are exercising patience based
    on the belief there will be a more attractive entry point to deploy some of our excess cash.
  • While we acknowledge that the numerous risks cited above will need to be monitored closely, we believe that fixed
    income markets have overreacted to some degree and are not in sync with relatively sanguine economic reality. We
    are cautiously optimistic that a U.S. trade deal with China as well as no additional trade issues with Mexico and other
    global trading partners will unlock pent-up manufacturing activity. If we are correct on this front, we would anticipate
    the Fed to become less concerned about U.S. and global growth.
  • Anticipated higher levels of Treasury issuance in the future to finance budget deficits, as well as a potential inflation
    surprise could force the Fed to temper its extremely dovish policy stance. The big wild card moving forward is the
    Trump presidency. We remain cautiously optimistic that President Donald Trump's policies will result in enhanced
    economic growth, but much could go wrong given the high level of divisiveness in Congress. A lack of resolution in
    the trade conflict with China or an escalation of tensions, as well as the possibility of a policy mistake by the Fed could
    prove to be destabilizing. The Democrat controlled House and continued partisan bickering over the Mueller
    investigation, as well as continued impeachment rhetoric, could also prove to be difficult obstacles for the President.

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 June
30, 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 and asset allocation are investment strategies that attempt to manage risk within your portfolio but do not guarantee profits or protect against loss in declining markets

All information is based on Class I shares.
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 Pinebridge High Yield Fund

Market Sector Update

  • Credit spreads traded tighter in April, wider in May, but tightened again in June with index levels tighter overall across most fixed income asset classes.
  • In April, a better-than-expected earnings season, stable-to-improving growth conditions in China and globally, and a dovish Federal Reserve (Fed) were the catalysts for higher bond prices.
  • In May, increased trade tensions drove prices lower as rhetoric from both the U.S. and China grew more rancorous ahead of June’s G20 Summit, followed by President Donald Trump’s threat to initiate escalating tariffs on Mexican imports later in the month. Investors also had to contend with weaker growth data in the form of lower than expected purchasing manager indexes and slower job and wage growth.
  • High yield bond prices rose again in June, recapturing May’s losses, as a more dovish Fed and expectations of reduced trade tensions between the U.S. and China improved investor sentiment. At the Fed’s June meeting, the interest rate dot plot showed seven of the 17 Federal Open Market Committee participants advocating for 50 basis points (bps) in cuts by year end. Oil prices also rallied from the lows of the month due to increased geopolitical tensions with Iran, dollar weakness, and an expectation that OPEC would continue its production cut policy.
  • U.S. Treasury rates continued to trade lower during the quarter, with 5- and 10-year Treasury yields trading 47 and 40 bps lower, respectively. The 10-year Treasury yield ended June at the lowest level since November 2016. The option-adjusted spread (OAS) on the Bloomberg Barclays U.S. Corporate High Yield Index started the quarter at 391 bps and tightened to 377 at quarter end.
  • High yield funds saw inflows in April and June, but outflows in May, the only month of outflows year to date. High yield funds reported $600 million in outflows in quarter, but remain in net inflows for the first half of the year at $12 billion. Gross new issue activity totaled $74.7 billion in the quarter.

Portfolio Strategy

  • The Fund had a positive return for the quarter and outperformed its benchmark. Outperformance was driven by security selection, while sector selection detracted from performance.
  • From a security selection standpoint, holdings in the communications and technology sectors were the largest contributors, more than outweighing detractions from credits in the other industrial and energy sectors.
  • From a sector selection standpoint, an overweight allocation to the finance company sector was the largest contributor, while the cash position and an underweight allocation to the banking sector were the largest detractors.
  • Higher quality bonds outperformed lower quality bonds, on average, during the quarter. According to Barclays, Barated bonds returned 3.08%, while single-B rated bonds returned 2.66% and Caa-rated bonds returned 0.29%.

Outlook

  • The fundamental picture for the second half of 2019 seems relatively clear, with moderate but lower levels of sales, earnings, and global growth, although U.S. induced trade tensions threaten to hasten the trend.
  • Estimate revisions continue the downward trend, with third-quarter earnings comparisons now slightly negative. The default outlook remains relatively benign, and for those few credits with default potential, it is already priced in. The last twelve months default rate at the end of June stood around 1.5%, well below historical averages. Additionally, spreads trading tighter to end June at 377 bps OAS is consistent with our view that the summer will be range-bound and volatile with an expected range of 350-450 bps OAS heading into a challenging earnings season.
  • The technical environment has been supportive, despite the primary calendar picking up, as cash and sentiment are both positive. Generally, a positive technical environment lacking any clear fundamental catalyst should lead to continued volatility over the summer based around macroeconomic and trade headlines. We believe the fundamentals of credit markets are quite good; however, with a softening macro picture, a neutral to downward earnings growth trend, and valuations tightening, we remain fully invested, but see more reasons to be cautious in our approach.

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 June 30, 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.

All information is based on Class I shares.

The Bloomberg Barclays U.S. Corporate High-Yield Index measures the U.S. dollar-denominated, high-yield, fixed-rate corporate bond market. 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.

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Ivy Managed International Opportunities Fund

Market Sector Update

  • Equity returns were volatile in the second quarter and although ultimately positive, certainly muted relative to a very strong first quarter.
  • The dovish pivot articulated by the U.S. Federal Reserve (Fed) in December 2018 continued and the Fed’s June meeting resulted in markets increasing expectations for rate cuts in response to weakening economic data and threats to global trade from tensions between the U.S. and China.
  • Interest rates declined precipitously as a result, supporting financial conditions as credit and equities recovered in June from the volatility experienced in May. The markets took solace from not only more dovish central banks, globally, but also in response to assurances that trade negotiations between the U.S. and China would continue.

Portfolio Strategy

  • The Fund finished the quarter with positive performance but underperformed its benchmark index. Fund performance reflects the mix of returns in the underlying funds and their allocation weightings. The most significant contributors were from the Ivy International Core Equity Fund, Ivy Global Growth Fund and Ivy Global Equity Income Fund. The Ivy Emerging Markets Equity Fund and the Ivy Pzena International Value Fund contributed the least to performance as emerging markets and value-oriented equities relatively underperformed in the period. On the other hand, exposure to the U.S. and growth-oriented equities were both positive tailwinds for the Fund.
  • Relative to its benchmark index, the Fund’s underperformance was roughly equally attributable to the underperformance of both emerging markets and value styles as well as the Ivy International Core Equity Fund’s underperformance relative to its own benchmark. The Ivy International Core Equity Fund suffered from an overweight allocation to higher volatility energy securities, emerging market assets (specifically China) and a drag from its relatively large cash allocation in a rising market.
  • The Fund ended the period with the following target asset allocation: Ivy International Core Equity Fund 35%, Ivy Pzena International Value Fund 20%, Ivy Emerging Markets Equity Fund 15%, and a 10% allocation each to Ivy Global Growth Fund, Ivy International Small Cap Fund and Ivy Global Equity Income Fund.
  • At quarter end, about 86% of the portfolio was invested in foreign equities, 10% in domestic equities and 4% in cash and cash equivalents.

Outlook

  • Global growth remains tepid, but inflation is very low, which allows for very accommodative global monetary and fiscal policy – an environment that has fostered financial conditions supportive of risk assets in terms of both interest rates and credit spreads. Policy makers in China have implemented numerous measures to stimulate growth and our economists anticipate these factors will be a tailwind to growth in the coming quarters.
  • However, rhetoric around the U.S.-China trade dispute has become more volatile and remains a major risk factor to global growth and corporate earnings. But we believe the market has reflected this by applying very significant valuation discounts to higher beta, cyclical securities relative to historical norms. With a less clear macro backdrop and a difficult choice between lower-priced, high-beta stocks or higher-priced compounders, we have positioned the Fund in an attempt to maximize the potential impact of the stock selection skills of our underlying active managers.

  • 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 June 30, 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.

    All information is based on Class I shares.

    Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. 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 performance of the Fund will depend on the success of the allocations among the chosen underlying funds. Investing in a single region involves greater risk and potential reward than investing in a more diversified fund. 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 International Core Equity Fund

Market Sector Update

  • Broad international markets were up approximately 3.5% in U.S. dollars, despite several headwinds. The U.S. dollar
    depreciated approximately 1% relative to a basket of other currencies. The quarter was marked by increasingly
    accommodative central banks, a deteriorating geopolitical backdrop and a very narrow equity market led by quality
    growth stocks. Earnings revisions were again negative in the quarter.
  • With regards to monetary policy, the U.S. Federal Reserve (Fed) is expected to cut the federal funds rate by 25 basis
    points in July, with the anticipation of at least one additional cut by year end. Consensus expectations are the
    European Central Bank and Bank of Japan are prepared to further loosen monetary policy and to add stimulus in an
    attempt to ensure the euro and yen do not appreciate relative to the U.S. dollar. However, both countries are already
    running negative rates, so it is hard to imagine they can “out ease” the Fed. In China, the enactment of minor fiscal
    policy changes was insufficient to overcome the weight of U.S. trade issues.
  • Global economic data was generally weak for the quarter, as the continuation of trade wars weighed heavily on the
    markets. In early May, U.S.-China trade negotiations deteriorated and the U.S. increased tariffs from 10% to 25% on
    $200 billion of Chinese goods. On a positive note, at quarter end, the U.S. and China agreed to resume trade
    discussions. In Europe, which has been experiencing little growth, trade negotiations with the U.S. seem to be moving
    in a negative direction, which will be a key issue to monitor as we move forward.
  • Brent crude was volatile in the quarter, exceeding $72 then falling below $60. Brent crude ended the quarter at
    $64.74, down 3% from its previous quarter-end price.
  • With a backdrop of dovish central banks, poor economic growth and trade frictions, 10-year bond yields continued
    their precipitous fall in the quarter. Most 10-year bonds around the world are at the bottom end of their two-year range.
    For perspective, the U.S. 10-year yield was 2% at quarter end, down 40 basis points (bps) in the quarter and down 123
    bps from its November high.

Portfolio Strategy

  • The Fund posted positive performance but underperformed its benchmark for the quarter. The Fund outperformed
    the benchmark during April and June, but performance was adversely impacted in May. In May, the risk-off environment
    stemming from deteriorating trade negotiations between the U.S. and China led to nondiscriminatory selling of equities
    considered sensitive to trade regardless of fundamentals. Despite the Fund maintaining a relatively neutral allocation
    between cyclicals and defensives in the quarter, stock selection was the main driver of underperformance as select
    holdings in energy, consumer discretionary and financials performed poorly.
  • Stock selection benefitted relative performance in health care and materials for the quarter. In aggregate, sector
    allocation played a minimal role in relative performance, providing a slight tailwind to performance for the period.
  • Geographically, the Fund’s underweight allocation to Japan was a key contributor to relative performance for the
    period. Holdings in the U.K. (led by Imperial Tobacco Group plc) and Canada (led by Seven Generations Energy Ltd.)
    were a detriment to performance for the period.
  • Over the quarter, the Fund continued to face headwinds resulting from its relative value investment philosophy. For
    perspective, growth-oriented equities outperformed their value-oriented peers by more than 400 basis points over the
    quarter. In short, the Fund’s value tilt was a detriment to performance. Above mentioned value stocks Seven
    Generations Energy Ltd. and Imperial Tobacco Group plc were top detractors, while growth-oriented holdings (Wuliangye Yibin Co. Ltd., SAP AG and Adidas AG) were strong relative contributors to performance.
  • We have maintained our forward currency contract to the Japanese yen, neutralizing our stock underweight
    allocation on a currency basis. Additionally, we have maintained our currency hedge to the Chinese yuan, offsetting
    our direct investments exposure in China.
  • Given increased uncertainties on several fronts (trade, monetary policy, etc.), we have increased the Fund’s cash
    allocation to 8%. We are utilizing cash to offset some of the higher beta exposures in the portfolio and to provide
    support in down markets.

Outlook

  • Shifts in central bank policy, the rise of nationalism, the Brexit saga and trade negotiations – particularly between
    the U.S. and China – are standout issues affecting the current economic environment. Going forward, we believe
    geopolitics will continue to have a meaningful impact on asset values across the world. The question remains: How
    much longer will the cycle extend uninterrupted by looming risks? As a result, we are watching closely for signs of
    change, and continue to seek stocks that should better withstand an economic downturn. While we think U.S.-China
    trade tensions will persist, we expect some positive agreements in 2019, in line with market expectations.
  • In much of the world, global monetary policy remains at the extremes of easy and we do not see that changing
    materially unless inflation accelerates at a higher-than-expected rate. Virtually all countries are struggling with high
    levels of debt. As a result, we believe central banks will attempt to keep rates below nominal gross domestic product
    growth to monetize debt and continue to stimulate their economies. As such, we believe there is a long-term cap on
    how high rates can go so long as central banks maintain control.
  • We believe relative valuation remains supportive for international equities. We see relative value opportunities in
    emerging markets (especially China), energy, internet-related companies and in many cyclicals that we view as more
    stable than appreciated.

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 June
30, 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.
All information is based on Class I shares.

Top 10 equity holdings as a percent of net assets as of 06/30/2019: Nestle S.A., Registered Shares 2.8%, Total S.A. 2.8%, SAP AG 2.6%, Roche Holdings AG, Genusscheine 2.6%, Airbus SE 2.4%, Tokio Marine Holdings,
Inc. 1.8%, Unilever plc 1.8%, Orange S.A. 1.8%, Alibaba Group Holding Ltd. ADR 1.8% and Subaru Corp. 1.7%.

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. 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.

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Ivy Funds VIP Energy

Market Sector Update

  • Oil prices started to retreat in the quarter over concerns about rising shale oil production, a slowing global economy and escalation of the U.S.-China trade tension.
  • Brent crude oil is strongly in backwardation – meaning the current (spot) price is higher than the futures market price – which typically suggests a tight physical oil market. Concerns about deteriorating global macro sentiment versus a tight physical oil market have led to a disconnect between Brent futures and spot oil prices.
  • The Trump Administration did not extend waivers during the quarter to allow selected countries to buy Iranian crude oil and threatened penalties for anyone trading with that country.
  • Geopolitical risks around the world have increased. Tensions between the U.S. and Iran continued to rise after Iran shot down a U.S. military drone and was accused of being behind attacks on oil tankers in the Straits of Hormuz. Roughly 20% of the world oil supply travels thru the Straits every day, raising fears of additional disruptions. Geopolitical risk continues to affect production in Iran, Libya and Venezuela.
  • The OPEC member countries plus Russia agreed to extend production cuts through the first quarter of 2020. OPEC will review the cuts and could extend them again through the end of 2020, depending on global economic growth.

Portfolio Strategy

  • The Portfolio had a negative return for the quarter and underperformed the negative return of its benchmark.
  • Key detractors to the Portfolio’s performance relative to its benchmark included holdings in FTS International, Inc., Transocean Ltd., Whiting Petroleum Corp., Ensco plc-Class A and Chevron Corp.
  • Key contributors to the Portfolio’s relative performance included holdings in Anadarko Petroleum Corp. and WEX, Inc. The Portfolio also benefitted by not holding several underperforming equities that are benchmark components, including ExxonMobil Corp., Occidental Petroleum Corp. and Conocophillips.
  • About 38% of the equity holdings in the Portfolio were allocated to the Oil & Gas Exploration & Production industry segment, followed by about 28% to Oil & Gas Equipment & Services and about 14% to Oil & Gas Refining & Marketing. The Portfolio’s allocation to domestic equity was steady from the prior quarter at about 90% of net assets.
  • The focus of the energy strategy remains on investing in companies that can create value over the full course of the energy cycle. We identify those as companies that are low-cost operators, have strong balance sheets, have the ability to grow profitably and have strong return on capital.

Outlook

  • We expect the oil markets to continue to be tight through 2019 because of draws on inventories and the extension of OPEC’s production cuts into 2020. We think growth in U.S. shale production is likely to exceed worldwide demand growth for 2019.
  • The worldwide demand growth rate continues to be the greatest risk to oil prices. We believe it will slow in the second half of 2019. Nevertheless, demand growth has been better than the market expected despite the increased tension between U.S. and China over trade issues.
  • We expect geopolitical tensions in the Middle East to remain high and continue to be a factor in the oil market, with no sign of talks in the future.

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 June 30, 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 06/30/2019: Concho Resources, Inc., 5.41%; Pioneer Natural Resources Co., 4.35%; Continental Resources, Inc., 4.31%; Diamondback Energy, Inc., 4.18%; Valero&br;Energy Corp., 3.95%; Phillips 66, 3.82%; EOG Resources, Inc., 3.61%; Marathon Petroleum Corp., 3.37%; Parsley Energy, Inc., Class A, 3.36%; WEX, Inc., 3.35%.

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. Investing in the energy sector 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 energy companies in complying with environmental safety regulations. 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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