Ivy VIP Core Equity

Market Sector Update

  • For the first quarter of 2021, the S&P 500 Index increased 6.2%, the Portfolio’s benchmark, and the Russell 1000 Index increased 5.9%. Energy led all sectors for the quarter with a return of 30%. Financials followed, increasing 16%. Industrials rounded out the top three with a return of 11%. The quarter’s worst performing sectors included consumer staples, information technology and utilities. As can be seen by the sector leadership, value stocks – those companies with lower inherent growth rates – significantly outperformed growth stocks for the quarter. Cyclicals – those companies with revenues and earnings closely tied to the economic cycle – outperformed defensives.

Portfolio Strategy

  • The Portfolio modestly outperformed its benchmark for the quarter. Sector allocation and individual stock selection both contributed roughly half of the outperformance. The Portfolio’s allocation to financials (our largest sector overweight) and stock selection within industrials were the main performance drivers for the quarter.
  • United Rentals and Deere & Company drove the strength within industrials. Within financials, JPMorgan Chase & Co., KKR & Co. and Morgan Stanley drove strong relative returns. Take-Two Interactive, Costco and Charter Communications were the worst performing equites during the quarter. Underperformance in these companies was not due to fundamental weakness, but a rotation by market participants out of 2020 “winners.” We continue to have strong confidence in each of these names over a multi-year horizon.
  • During the quarter, we made very few changes to portfolio composition. Our only addition to the portfolio was American Express, a company that trades significantly cheaper than the market and peers such as Mastercard and Visa. American Express is expected to see rapid growth in revenue and earnings as consumer spending broadens out. We exited positions in Facebook, Intuit and Walmart Inc. at gains to focus on similar securities within each sector at better reward/risk tradeoffs (Alphabet, Microsoft and Costco).

Outlook

  • The impetus for the relative market movements in the first quarter was expectations for a sharply accelerating economy as vaccinations take hold and economies open up, first in the U.S. followed by other parts of the world. The recent signing of the latest $1.9 trillion fiscal stimulus bill and expectations for some portion of President Biden’s $2 trillion infrastructure package to be enacted add further support to a significant acceleration in gross domestic product (GDP) growth for both 2021 and 2022. Ivy economists expect U.S. GDP will rise over 7% in 2021 and over 5% in 2022, providing significant support to revenues and profits for the market. As expectations for faster growth and more stimulus increased, so did bond rates with the 10-year Treasury yield rising from 0.9% at the start of the year to over 1.7% as of quarter end. This relatively rapid increase did affect prices on longer duration securities (growth stocks underperforming value) and provided a boost to financials. We do not fear this increase given the rapidly accelerating growth. At the moment, most market participants expect a sharp rise in inflation in the near term as higher energy prices and base effects (comparisons from 2020) create the illusion of rapid price growth. We believe persistent inflation due to a hot economy and resource constraints (labor, commodities, transportation etc.) is not the consensus base case and thus could create future surprises in both the equity and bond markets.
  • Counterbalancing expected profit leverage to U.S. and global economic strength, tax rates are broadly expected to move higher as current proposals call for a hike to the U.S. corporate tax rate to 28% from 21% and a global minimum tax on international earnings. While we don’t know the exact destination of tax rates, we expect taxes to be somewhat of a headwind to corporate profit growth in the future. That said, current consensus expectations for >25% earnings growth for S&P 500 companies in 2021 followed by 15% in 2022 seems broadly realistic in light of analysts’ tendency to underestimate operating leverage early in an economic cycle.
  • For several quarters, we had been writing about the growing discomfort with the growth and momentum characteristics of the leadership securities within the equity market. We slowly transitioned the Portfolio to be more valuation sensitive and, as opportunities presented themselves, moved aggressively to purchase securities where saw significant dislocations in their valuations during the early innings of the pandemic. With value having significantly outperformed growth in the latest quarter, some of the valuation opportunity inherent in the market has dissipated. The leadership or momentum stocks within the market have become, in many cases, value stocks or reopening stocks. Expensive growth stocks have underperformed, though only for a few quarters. Left behind, we believe, are the stable compounders: companies expected to grow revenues 5-10% with valuations about in line with the overall market. These companies are not sexy, they are not on any hedge fund’s “re-opening list,” and they are not cheap enough to be called “deep value” during a rotation to value securities. However, as a group, they have become cheaper. We happen to own several of these securities, such as United Healthcare, the most dominant and integral player within U.S. health care. Another is Aon PLC, an insurance brokerage with expected revenue growth in the mid-single digits but a large catalyst ahead in the potential acquisition of Willis Towers Watson. Finally, Fiserv, which is the Portfolio’s largest active weighting, is valued at a discount to the market on forward earnings with mid- to high-single digit sustainable revenue growth and leverage to growth in accelerated spending on travel, leisure and in-person venues.
  • We believe the Portfolio’s risk characteristics are well controlled. Though the future looks bright, we are cognizant of growing risks in the form of persistent inflation, aggressive use of leverage by market participants, and a Federal Reserve that will ultimately move away from extraordinary accommodation. As always, we thank you for your interest in our strategy and look forward to updating you next quarter.

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, 2021, 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 a % of net assets as of 03/31/2021: Microsoft Corp. 7.2, Fiserv, Inc. 4.2, Apple, Inc. 4.0, Alphabet, Inc. 3.4, JPMorgan Chase & Co. 3.4, United Healthcare Group, Inc. 3.2, Amazon.com, Inc. 3.2, Mastercard, Inc. 2.9, Union Pacific Corp. 2.7, and Aon Plc. 2.7.

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.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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 Portfolios may be offered at all broker/dealers. These and other risks are more fully described in the Portfolio’s prospectus. The Ivy Variable Insurance Portfolios are only available as investment options in variable life insurance policies and variable annuity contracts issued by participating insurance companies. They are not offered or made available directly to the general public.

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 Municipal High Income Fund

Market Sector Update

  • The municipal market posted negative returns in the quarter. However, returns across the credit spectrum and the yield curve were not uniform. Higher quality returns were more negative the further one moved out on the curve, while performance was enhanced by bearing additional credit risk; A-rated, BBB-rated, below investment grade, and nonrated bonds posted positive returns with higher returns realized the further one moved down the credit spectrum. Credit spreads continued to tighten with the magnitude of compression incrementally greater the further out on the credit curve, while the yield curve steepened significantly.
  • Mutual fund flows into the asset class continued to be robust, as well as high levels of reinvestment flows from bond maturities, bond calls and coupon income. Tax-exempt new issue supply was not enough to satisfy the insatiable investment demand.
  • As yields on the highest quality bonds hovered near all-time low levels, investors moved further out on the credit spectrum, including high yield, in search of higher absolute yields. Credit spreads on BBB-rated bonds declined 37 bps while spreads on high yield bonds compressed 61 bps. President Joe Biden's American Rescue Plan, which included over $500 billion in aid to states, cities, public transit, education and airports, has materially enhanced the credit profile of many municipal issuers. Creditor protections in many lower quality new issues continue to be relaxed substantially. In the current yield-seeking environment, investors are showing little concern for bearing this increased credit risk, which is now lower for some as a result of the massive stimulus funding.
  • Defaults in the municipal bond asset class continue to be rare and tend to be highly concentrated in the high yield space. We are beginning to see distressed situations in the high yield space with more frequency; to date, these have been heavily concentrated in the continuing care retirement communities, speculative project finance, student housing, and hotel/convention center sectors. This will need to be monitored closely, and we will continue to exercise high levels of surveillance on our below investment grade and non-rated holdings. However, we expect the overall municipal market default rate to remain significantly lower than the corporate default rate, as has been the history between these markets.

Portfolio Strategy

  • The Fund posted a positive total return for the quarter, although performance lagged the peer group and benchmark. The portfolio duration is slightly shorter than its benchmark, and the portfolio is defensively structured with a meaningful higher quality emphasis.
  • At quarter-end, exposure to non-rated bonds was approximately 20%. While admittedly off the low spread level observed in early 2020 (pre-COVID-19 pandemic), high yield spreads are currently well below both 5-year and 10-year averages.
  • Persistent credit surveillance will be critical in this environment.

Outlook

  • We remain confident in our belief that investment grade municipal bond defaults will continue to be much lower than any other fixed income alternatives except U.S. Treasuries. The massive stimulus infusion from the American Rescue Plan has been a large credit positive for the overall municipal bond market.
  • We continue to take a long-term approach with credit selection. We will not compromise the overall credit quality of the Fund by chasing lower quality opportunities with poor bondholder protections and deteriorating credit profiles.
  • The Municipal Liquidity Facility (MLF) expired at year-end. While not widely utilized, it should be noted that the Federal Reserve is no longer in a position to be the lender of last resort in a crisis.
  • At this juncture, the municipal bond market is very expensive relative to taxable fixed income alternatives. There is euphoria as a result of the massive stimulus funds provided by the American Rescue Plan. Expected corporate and personal income tax rate increases on the horizon are also adding to the exuberance. Large investor flows into a negative supply market is also a tailwind. However, credit spreads are rapidly approaching the all-time lows observed last spring, and are well inside both 5-year and 10-year averages. While the market has recently decoupled from the U.S. Treasury market, we do not believe that this situation will be sustainable in the long run. Continued pressure on U.S. Treasury market yields will eventually have to be acknowledged by the municipal bond market, as has been the historical relationship between these markets.
  • One concern we have is the heavy concentration of assets in a select few high yield municipal bond funds. As of last year, five fund families controlled 80% of all high yield assets. That level of concentration has been a contributor to high levels of volatility in prior stressed market episodes, and we believe that this is a risk that needs to be monitored closely moving forward.

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, 2021, 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 impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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

  • An improving economic outlook caused yields to rise across the maturity curve in the first quarter. While the yield on the 2-year U.S. Treasury note increased just under four basis points (bps) to 16 bps, the 3- and 5-year maturities saw yields move more dramatically from 18 and 57 bps to 35 and 94 bps, respectively.
  • The third round of stimulus combined with a successful vaccine rollout has increased both optimism and the prospects of a return to normalcy sooner rather than later. Employment rose 1.6 million in the quarter. While unemployment remains higher than pre-pandemic, the reopening of our communities has helped to recover about 62% of the jobs lost in the pandemic. Near the end of the quarter, the Biden administration announced an infrastructure wish-list to help build and repair highways, bridges, airports, water systems, electric grids and increase broadband access across the country. These are some factors leading to the greatly improved economic outlook and expectations for growth in 2021 after an unprecedented drop of -2.4% gross domestic product growth in 2020.
  • The Federal Reserve (Fed) was dovish at its March meeting and does not expect to taper its purchases of securities or to hike soon. The rise in yields was not a great concern as the prospects of growth naturally lead to a rise in yields. While it is anticipated that inflation will be elevated this year, Fed Chairman Jerome Powell expects it to be temporary. He noted the Fed wants to see inflation overshoot the 2% target for an extended period before taking action.
  • Credit spreads were subdued in the quarter. The Bloomberg Barclays U.S. Credit Index, a good gauge of credit spreads, a subset of which is part of the Fund’s benchmark, traded in an 11 bps range over the quarter and ended the quarter at 86 bps, six bps tighter than at year-end.

Portfolio Strategy

  • The dramatic rise in yields and the steepening of the yield curve presented an attractive opportunity to increase duration and the Fund’s allocation to intermediate maturities.
  • We added approximately 8-9% to our overall weighting in the 3- to 5-year part of the curve, raising duration slightly over the benchmark.
  • Most of the purchases in the Fund were in investment-grade corporate bonds. The decision to own any bonds beyond the maturity of those in the benchmark, however, caused the Fund’s underperformance in the quarter.

Outlook

  • Rising yields can be unsettling to bond markets because they can lead to losses. We believe these rate moves present opportunities to add yield to the Fund at a time when it is relatively cheap. We don’t think rates will go materially higher and remain there. We believe the Fed has plenty of tools to use if it feels the need to calm the markets. While we don’t know what level would cause Fed action, we feel it will act to lower yields should it be necessary. The Fed has said it will be keeping rates low for a long time. We believe the portfolio is now better positioned to participate in the carry trade in the market.
  • We are still in the throes of a pandemic that has brutally taken so many lives and livelihoods. While it has been a difficult year, many people have been vaccinated and some level of normalcy is beginning to return. Both the desire and the ability to return to a sense of normal are necessary for the economy to begin to return to growth.
  • Our first responsibility is capital preservation. With that responsibility always in view, we will look for opportunities to invest in securities in which we have high conviction that their addition will positively contribute to the Fund’s total return over the life of the investment.

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, 2021, 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 impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

All information is based on Class I shares.

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

  • Small-cap stocks were the best market performers in the quarter, and small-cap value stocks were the stars. After a four-year drubbing by small-cap growth over small-cap value, first quarter 2021 turned the corner and small value trounced growth for the three-month period, rising 21.2% versus a 4.9% gain for growth, as measured by the Russell 2000 Value Index and Russell 2000 Growth Index, respectively.
  • This was just the beginning of the challenge for growth, as the quarter also saw the lowest return on equity companies significantly outperforming the highest, the smallest market caps outperforming the largest, and the information technology sector performing the worst out of all of the major growth sectors.
  • The value/cyclical rotation was the most severe through early March, then settled back down through the end of the quarter. The combination of fiscal stimulus, easy money and a reopening of the U.S. economy all contributed to strong cyclical growth expectations and a rising 10-year Treasury Yield that pressured the valuations of high-growth stocks.

Portfolio Strategy

  • In spite of all of the headwinds mentioned, the Fund slightly underperformed but stayed in line with its Russell 2000 Growth Index benchmark for the quarter.
  • Outperforming sectors, led by health care, included consumer discretionary, financials and communication services. The principal performance drag in the quarter was the aforementioned information technology sector and the industrials sector.
  • We have taken small steps over the past six months to lower exposure to the highest valued stocks in the information technology and health care sectors as well as modestly increased portfolio exposure to the consumer discretionary, financials and industrials sectors. These moves helped us to gain exposure to more economically sensitive companies as well as limit the negative impact of valuation adjustments to the most aggressive growth companies. Contributors in the quarter included Marriott Vacations Worldwide Corp., Plug Power, Inc., Lithia Motors, Inc. and Coherent, Inc.

Outlook

  • The outlook for the near term will be dependent on the significant macro factors influencing the pace of economic growth and the financial markets. On the favorable side, the most recent stimulus package, the reopening of the economies in many states, the increasing percentage of people vaccinated, and the continued monetary easing of the Federal Reserve should provide significant boost to economic activity. The financial markets’ reaction to all of this growth has been a continued rotation to cyclical/value, but also a sharp rise in interest rates and growing inflation fears, which is creating a headwind for the stock market.
  • Small-cap stocks had been leading the charge upward over the past year but have recently stalled with the market. The case for small-cap growth is improving as valuations of the cyclical companies have risen sharply and are no longer as compelling from a historical perspective. The growth opportunities in information technology and health care remain as dynamic as ever, and newer markets in alternative energy, environmental, financial technology and consumer internet provide a host of opportunities for the Fund.

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, 2021, 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.

Top 10 holdings as a % of net assets as of 03/31/2021: Vericel Corp. 3.3, Five9, Inc. 3.1, Brink’s Company 2.7, CareDx, Inc. 2.5, PetIQ, Inc. 2.3, Varonis Systems, Inc. 2.3, Nextstar Broadcasting Group 2.1, Marriott
Vacations Worldwide 2.0, Shift 4 Payments, Inc. 2.0 and Globant SA 2.0.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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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Bradley P. Halverson

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Ivy Mid Cap Growth Fund

Market Sector Update

  • The Russell Midcap Growth Index (the Fund’s benchmark) was down 0.57% for the first quarter of 2021 as the market began to indicate a move toward cyclicals and small-cap stocks. Sector performance for the quarter was a mixed bag, with consumer discretionary, industrials, consumer staples, materials, real estate and energy turning in positive performance for the benchmark, while financials, health care, communications services and information technology posted negative returns.

Portfolio Strategy

  • The Fund outperformed its benchmark for the quarter. All sectors where we had exposure were additive to performance relative to the index. Stock selection was the most significant contributor to outperformance in the quarter. This is the focus of the strategy – buying profitable companies with durable business models for the long term – so we are always pleased with strong, additive stock selection. Sector allocation weights detracted to the outperformance of the Fund, primarily due to our lack of exposure to real estate.
  • Information technology is our largest sector weighting yet was also the largest underweight sector relative to the benchmark in the quarter. As the market rotated from growth to value, this sector underperformed within the benchmark for the period and our underweight exposure, coupled with strong stock selection, was additive to relative outperformance. Overweight positions to Microchip Technology Inc., Keysight Technologies, Inc. and Twilio all provided strong contributions to our sector performance while II-VI, Inc. and Guidewire Software, Inc. were the biggest detractors. Health care, our second largest sector allocation, was a positive relative contributor. While our slight overweight of the sector detracted incrementally, stock selection more than offset the performance drag from the overweight position. Laboratory Corporation of America Holdings and Envista Holdings Corp. were the top performers for the quarter, while exposure to Genmab and Seagen, Inc. were the biggest detractors to relative performance. Industrials, our largest overweight, was also the top relative contributor to performance by way of stock selection within the sector. Off benchmark holdings Middleby Corp. and A.O. Smith Corp. delivered strong returns for the quarter while overweight positions to TransUnion and CoStar Group, Inc. were drags on absolute and relative performance. Overweight exposure to financials and strong stock selection led to solid relative outperformance over the benchmark. While the benchmark is comprised of 23 small allocations in this sector, our exposure comes from two off-benchmark holdings and one significant overweight position. Off-benchmark holdings SVB Financial Group and First Republic Bank posted strong relative and absolute returns in the quarter while an overweight position in MarketAxess Holdings Inc. was a drag on overall relative performance. Our communication services exposure continues to comprise a total of three names: Twitter, Inc. and Electronic Arts Inc. (EA), both of which are not held in the benchmark, and a relative underweight position to IAC/Interactive Corp. While Twitter posted solid positive absolute and relative results on the quarter, both EA and IAC were relative detractors to overall performance. Overall, both the underweight allocation relative to the sector and our solid stock picks were additive to total relative return. Our sector overweight to materials by way of overweight positions to Scotts Miracle-Gro Company and RPM International added positive performance relative to the benchmark. Both consumer staples and consumer discretionary were additive to overall relative performance. Consumer discretionary names like Canada Goose Holdings, Inc. and BorgWarner, Inc. outperformed both on an absolute and relative basis, while the biggest detractors came from names we didn’t own, like Tractor Supply Co. and Wayfair, Inc. Our lone consumer staples holding, Hershey Company, outperformed on both an absolute and relative basis. Cash, which averaged just over 2% in the quarter, detracted 0.01% from the overall relative performance, while equity options detracted 0.12%. We continue to have no exposure to the real estate, utilities or energy sectors, which were drag on overall relative performance.

Outlook

  • Outlooks are point-in-time assessments, a look at the future today, and as has been made abundantly clear over the past year, outlooks exist to be challenged, rethought and rewritten. The abiding principles of our outlook in all that we do all year, every year, are that “well-valued stocks of companies with growing streams of cash flow derived from innovation and strong management execution are key to wealth creation;” “markets go up more than they go down;” and, outside of stock picking, “the outlook that matters most is the one that figures out when the broad corporate profit cycle is determinedly inflecting into or out of a recession and what companies are best positioned over the long term, given the assessment of the profit cycle.”
  • We witnessed a serious pandemic-wrought corporate profit recession in 2020, one that few would have predicted as it was swiftly and steeply discounted by gob-smacked investors. The recovery in 2020 (not well predicted), was almost as swiftly and steeply discounted to a market upside that has broken records, seemingly indicating economic growth and prosperity beyond previous expectations as world economies emerge and heal from the impact of the pandemic. This has also been carried along by government stimulus and interest rate maneuvering. First quarter 2021 has added a new layer to the recovery story – one that tends to lend itself to historical study of economic recoveries. That is, the broadening out of returns in the stock market from those strong, quality growers to the more cyclically charged business models that are heavily reliant on the economic cycle for earnings productivity. While the market winds have changed a bit in the quarter, we are still witnessing impressive innovation in life sciences, business and consumer technology, green energy and many other areas that have captured the imagination of professional and retail investors, driving the valuations of many companies to dizzying levels. So where does this leave us? We offer a series of predictions: 1) World economies will continue to recover and grow as vaccine distributions allow them to emerge from the pandemic lockdowns. 2) The strength of the recovery could be overestimated, as the underlying economic damage may be deeper than we appreciate. 3) While markets go up more than they go down, this may be a year in which the market takes a breather to digest the spectacular gains and sturdy valuations achieved over the last half of 2020. 4) The composition of returns may continue the trend established in the first quarter, where some groups of stocks perform quite well as many companies regain earnings power in a broad economic recovery, while the stocks of companies that over earned during the pandemic struggle to appreciate further, possibly giving up some value. 5) Many technology and health care companies may continue to experience a soft spot in demand in the remaining quarters of 2021 after a surprisingly robust 2020, and stock valuations could be at risk as a result. 6) Inflation and interest rate expectations could be too low as a result of persistent supply chain disruptions related to global lockdowns, strong generational demand for housing in an under-inventoried market, and one-off incidents like the wayward ship in the Suez Canal. 7) The Fed will continue to be supportive, but could possibly lag in its response to demand, inflation and interest rate pressures. While stock picking is always key to our process and performance, it will be paramount in this environment as we seek to manage valuation risk in the portfolio, while investing in durable growers, both secularly and cyclically.

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, 2021, 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 a % of net assets as of 03/31/2021: Chipotle Mexican Grill, Inc. 3.4, CoStar Group, Inc. 3.1, MarketAxess Holdings, Inc. 2.9, Monolithic Power Systems, Inc. 2.6, DexCom, Inc. 2.6, DocuSign, Inc. 2.5, Electronic Arts, Inc. 2.4, Teradyne, Inc. 2.4, Microchip Technology Inc. 2.2 and Arista Networks, Inc. 2.1.

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.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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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Ivy Large Cap Growth Fund

Market Sector Update

  • The Russell 1000 Growth Index (the Fund’s benchmark) posted a modest positive return of 0.94%. On a trailing 12- month basis, starting from near the depths of the 2020 market sell off, the benchmark returned nearly 63%, a remarkable period of strength considering the dire narrative during the early days of the pandemic. Value leads growth. Growth stocks underperformed value stocks during the quarter, marking the second consecutive quarter of strength across value styles. Small-capitalization companies, and particularly the small-value style, were the real source of strength as growth styles generally lagged. There was an abundance of news to generate positive market sentiment and peak investor interest in value/cyclical style investments. The main drivers included material progress made on immunization in the U.S., a steadfast accommodative Federal Reserve (Fed), and an additional round of consumer stimulus along with tangible progress toward a significant fiscal infrastructure package under a unified legislature. The quarter saw a move in the 10-year treasury rate from under 1% to start 2021 to finishing near 1.7%, approaching the pre-pandemic level. Investors began to anticipate a less accommodative policy by the Fed, although there was no change in tone from the central bank during the quarter. Concerns surfaced that the Fed would end up behind the curve and significantly overshoot its targets, with an acute focus on inflation. This shift in sentiment is notable and drove a broad compression of equity valuation multiples. Economic indicators continued to improve during the quarter. Manufacturing data has been extremely robust and services industries saw sustained gains due to improvements in mobility. Inventories remain extremely lean implying that strength should sustain given the need to replenish channel inventories. As for performance of benchmark sectors, energy (a small portion of the index), communication services, real estate (another small weight), industrials and financials were sources of strength and are illustrative of investors’ desires to find economically leverage exposure. Relative weakness came from consumer discretionary, consumer staples and information technology. At the factor level, value factors, such as earnings yield and price-to-cash flow, significantly outperformed all other factors. Risk factors, such as beta and low price, were also outperformers. Growth factors (long-term earnings growth) and momentum factors (price returns and relative strength) trailed. It was encouraging to see quality factors (return on equity and return on assets) perform during the period, but we believe that quality was not the defining characteristic but more so along for the ride as an unintentional byproduct of value buying or momentum-selling decisions.

Portfolio Strategy

  • The Fund posted a gain during the quarter, outperforming the benchmark’s return. During the period, macro influence on stock returns diminished and stock correlations moved lower, lending to a stock pickers environment, which we found favorable.
  • In terms of relative performance, positive contribution was generated from information technology, industrials and communication services. Performance was negatively impacted by stock selection in health care and underweight exposure to the real estate sector.
  • Information technology was the greatest positive contributor to performance. Overweight positions in Motorola Solutions and Zebra Technologies were additive as each saw relative strength due to the potential for strong earnings revisions. Apple was a relative laggard, but our underweight position benefited relative performance.
  • J.B. Hunt Transport Services and Stanley Black & Decker drove positive contribution from the industrials sector. J.B. Hunt saw positive sentiment around a tight freight market and strong economic environment. Stanley Black & Decker saw sustained strength out of its tools segment, dispelling concerns of a potential slowdown in consumer interest as increased mobility appears to be driving attention away from the home.
  • Another contributor was communications services with Alphabet experiencing strong gains during the period as investors begin to anticipate the re-emergence of leisure and travel, wherein Google has decent exposure. Continued improvement in profitability from Google Cloud was also a positive.
  • Health care was the notable detractor. An overweight position to Cerner was a detractor as guidance for the current year failed to meet investors’ expectations of an improving growth backdrop for the company. Intuitive Surgical, where we have a modest overweight, was also a detractor as investors likely grew concerned over short-term procedures volumes.

Outlook

  • We anticipated continued strength from both the hyper growth and lower quality cyclical stocks into early 2021, and it was that deep value cyclical exposure that emerged as the dominate player over the past few months. We think the strength in these V-shaped economic recovery trades – specifically industrials, financials and materials – can be attributed mainly, if not entirely, from price-to-earnings multiple expansion, not earnings growth. While the economic backdrop remains favorable, we believe that valuation expansion from low-quality, economically sensitive segments can only drive returns so far. The next leg of outperformance requires one to call the magnitude of strength from the cycle – something even the most experienced economists struggle to forecast correctly. From our perspective, the reward from calling incremental upside based on macro prospects is balanced by the risk to the downside. So, what is left to do? Focus on stock-specific drivers and growth potential independent of macro influences or macro upside surprises. We remain convinced that investors will be forced to use even more discretion and picking the next winner will prove more difficult than just buying “cheap stocks” or owning a macro-influenced basket of stocks. We think the outperforming stocks that will ultimately emerge will be connected to quality businesses. Only the best businesses should see sustained relative growth, protect if economic forecasts go awry, and retain their premium valuations. Market sentiment should likely remain balanced in the near term with positive sentiment being driven by strong earnings revisions of many cyclical companies, strong economic data fueled by needed restocking and progress toward a significant U.S. infrastructure package. This should be offset by anticipation of the Fed’s monetary response to stronger growth and realization that a significant infrastructure package, while positive for near-term sentiment, really doesn’t have much effect on near-term or intermediate-term growth. Another watch item for growth stocks, particularly those names that experienced robust revenue growth as pandemic beneficiaries, is the looming deceleration of growth during the second half of 2021. This growth deceleration can be a difficult sentiment headwind for highly valued, lower-quality growth stocks. A few of these should emerge as high-quality, strong cash flow generators and we will watch for opportunities as they present themselves. Thank you for your continued support.

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 March 31, 2021, 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 a % of net assets as of 03/31/2021: Microsoft Corp. 10.5, Apple, Inc. 7.9, Amazon.com, Inc. 7.3, Alphabet, Inc. 5.1, Visa, Inc. 4.8, Facebook, Inc. 3.7, Motorola Solutions, Inc. 3.4, UnitedHealth Group, Inc. 3.1, Intuit, Inc. 3.0 and PayPal Holdings, Inc. 2.9.

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.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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. The Fund typically holds a limited number of stocks (generally 40 to 60), and the Fund’s portfolio manager also tends to invest a significant portion of the Fund’s total assets in a limited number of stocks. As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Fund’s NAV than it would if the Fund invested in a larger number of securities or if the Fund’s portfolio manager invested a greater portion of the Fund’s total assets in a larger number of stocks. 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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Ivy Core Equity Fund

Market Sector Update

  • For the first quarter of 2021, the S&P 500 Index increased 6.2%, the Fund’s benchmark, and the Russell 1000 Index increased 5.9%. Energy led all sectors for the quarter with a return of 30%. Financials followed, increasing 16%. Industrials rounded out the top three with a return of 11%. The quarter’s worst performing sectors included consumer staples, information technology and utilities. As can be seen by the sector leadership, value stocks – those companies with lower inherent growth rates – significantly outperformed growth stocks for the quarter. Cyclicals – those companies with revenues and earnings closely tied to the economic cycle – outperformed defensives.

Portfolio Strategy

  • The Fund modestly outperformed its benchmark for the quarter. Sector allocation and individual stock selection both contributed roughly half of the outperformance. The Fund’s allocation to financials (our largest sector overweight) and stock selection within industrials were the main performance drivers for the quarter.
  • United Rentals and Deere & Company drove the strength within industrials. Within financials, JPMorgan Chase & Co., KKR & Co. and Morgan Stanley drove strong relative returns. Take-Two Interactive, Costco and Charter Communications were the worst performing equites during the quarter. Underperformance in these companies was not due to fundamental weakness, but a rotation by market participants out of 2020 “winners.” We continue to have strong confidence in each of these names over a multi-year horizon.
  • During the quarter, we made very few changes to portfolio composition. Our only addition to the portfolio was American Express, a company that trades significantly cheaper than the market and peers such as Mastercard and Visa. American Express is expected to see rapid growth in revenue and earnings as consumer spending broadens out. The Fund exited positions in Facebook, Intuit and Walmart Inc. at gains to focus on similar securities within each sector at better reward/risk tradeoffs (Alphabet, Microsoft and Costco).

Outlook

  • The impetus for the relative market movements in the first quarter was expectations for a sharply accelerating economy as vaccinations take hold and economies open up, first in the U.S. followed by other parts of the world. The recent signing of the latest $1.9 trillion fiscal stimulus bill and expectations for some portion of President Biden’s $2 trillion infrastructure package to be enacted add further support to a significant acceleration in gross domestic product (GDP) growth for both 2021 and 2022. Ivy economists expect U.S. GDP will rise over 7% in 2021 and over 5% in 2022, providing significant support to revenues and profits for the market. As expectations for faster growth and more stimulus increased, so did bond rates with the 10-year Treasury yield rising from 0.9% at the start of the year to over 1.7% as of quarter end. This relatively rapid increase did affect prices on longer duration securities (growth stocks underperforming value) and provided a boost to financials. We do not fear this increase given the rapidly accelerating growth. At the moment, most market participants expect a sharp rise in inflation in the near term as higher energy prices and base effects (comparisons from 2020) create the illusion of rapid price growth. We believe persistent inflation due to a hot economy and resource constraints (labor, commodities, transportation etc.) is not the consensus base case and thus could create future surprises in both the equity and bond markets.
  • Counterbalancing expected profit leverage to U.S. and global economic strength, tax rates are broadly expected to move higher as current proposals call for a hike to the U.S. corporate tax rate to 28% from 21% and a global minimum tax on international earnings. While we don’t know the exact destination of tax rates, we expect taxes to be somewhat of a headwind to corporate profit growth in the future. That said, current consensus expectations for >25% earnings growth for S&P 500 companies in 2021 followed by 15% in 2022 seems broadly realistic in light of analysts’ tendency to underestimate operating leverage early in an economic cycle.
  • For several quarters, we had been writing about the growing discomfort with the growth and momentum characteristics of the leadership securities within the equity market. We slowly transitioned the Fund to be more valuation sensitive and, as opportunities presented themselves, moved aggressively to purchase securities where saw significant dislocations in their valuations during the early innings of the pandemic. With value having significantly outperformed growth in the latest quarter, some of the valuation opportunity inherent in the market has dissipated. The leadership or momentum stocks within the market have become, in many cases, value stocks or reopening stocks. Expensive growth stocks have underperformed, though only for a few quarters. Left behind, we believe, are the stable compounders: companies expected to grow revenues 5-10% with valuations about in line with the overall market. These companies are not sexy, they are not on any hedge fund’s “re-opening list,” and they are not cheap enough to be called “deep value” during a rotation to value securities. However, as a group, they have become cheaper. We happen to own several of these securities, such as United Healthcare, the most dominant and integral player within U.S. health care. Another is Aon PLC, an insurance brokerage with expected revenue growth in the mid-single digits but a large catalyst ahead in the potential acquisition of Willis Towers Watson. Finally, Fiserv, which is the Fund’s largest active weighting, is valued at a discount to the market on forward earnings with mid- to high-single digit sustainable revenue growth and leverage to growth in accelerated spending on travel, leisure and in-person venues.
  • We believe the Fund’s risk characteristics are well controlled. Though the future looks bright, we are cognizant of growing risks in the form of persistent inflation, aggressive use of leverage by market participants, and a Federal Reserve that will ultimately move away from extraordinary accommodation. As always, we thank you for your interest in our strategy and look forward to updating you next quarter.

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 March 31, 2021, 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 a % of net assets as of 03/31/2021: Microsoft Corp. 7.1, Fiserv, Inc. 4.2, Apple, Inc. 4.0, Alphabet, Inc. 3.8, JPMorgan Chase & Co. 3.3, United Healthcare Group, Inc. 3.2, Amazon.com, Inc. 3.2, Mastercard, Inc. 2.9, Union Pacific Corp. 2.7, and Aon Plc. 2.7.

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. All information is based on Class I shares.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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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Ivy VIP International Core Equity

Market Sector Update

  • International markets showed a clear rotation of leadership in the first quarter as defensive sectors trailed the more economically sensitive areas of the economy. While it was volatile throughout, the quarter ended with the MSCI EAFE Index up 3.5%. Investors were focused on rates, reopening, and the potential for what an overheating global economy may do to inflation. This was the spark behind the shift back to cyclicals.
  • As such, energy, financials, and consumer cyclicals drove market returns while the more defensive health care, utilities and consumer staples lagged. The latter were negative for the period. The U.K., Europe and developed Asia Pacific countries experienced the greatest gains, while Japan was relatively weak.
  • In the spotlight was U.S. monetary policy and President Biden’s new administration’s fiscal packages, both lending to increased investor expectations for inflation. The Biden administration signed a new $1.9 trillion stimulus plan into place and presented a historic infrastructure bill. Between money already spent, approved, and likely to be approved by the U.S. government, it appears the U.S. will top what was spent during World War II (inflation adjusted), but over a much smaller timeframe. At the same time, the U.S. Federal Reserve (Fed) remains dovish, the global economy is perceived to be spring loaded for a significant snap back, and supply chain disruptions are causing major shortages across the globe. This is a recipe for inflation that the market recognizes but may be underestimating.
  • The U.S. dollar reversed course and appreciated against a major basket of currencies, primarily driven by yen and euro weakness as the British pound appreciated. Bond yields spiked across the globe in anticipation of inflationary pressure and the impact it may have on central bank policy. Commodities continued to rally, led by industrial metals and oil, while precious metals declined.

Portfolio Strategy

  • The Portfolio significantly outperformed the index over the quarter. The portfolio’s posture, which favors companies trading at an attractive relative valuation, accompanied with a slight tilt toward cyclicals (vs. defensive stocks), benefited our investors. Generally, positive contributions were distributed across most sectors, with consumer discretionary, energy, and health care helping the most. Financials, information technology and real estate detracted from performance. From a country standpoint, Japan, Canada, the U.K and Europe were positive relative contributors to performance. On the other hand, Brazil and Taiwan dragged on performance.
  • At a stock level, Volkswagen AG, Canada Goose Holdings, Inc., and Seven Generations Energy Ltd. were the top contributors. Volkswagen, a German auto manufacturer, had good quarterly results and impressed investors with their progress in electric vehicles where they plan to manufacture their own batteries and become a real competitor to Tesla. Canada Goose is a Toronto-based outerwear company known for their luxury down jackets. Their e-commerce business has offset traditional retail weakness. Additionally, they had strong sales into China, and are having early success diversifying into three-season apparel. Seven Generations, a Canadian energy company, was up with the broader energy complex as oil prices appreciated significantly.
  • The largest relative detractors were gold, Deutsche Wohnen AG and Ubisoft Entertainment S.A. Gold, for which there are several possible reasons it has been weak recently, has been one of the best assets during periods of inflation. We believe it should act as a ballast in the portfolio with key reasons it could strengthen, such as higher inflation, fiscal and monetary policy, and increased demand for physical gold, such as jewelry as the global recovery takes hold. Deutsche Wohnen, a German real estate developer and manager, was under pressure throughout the quarter as the government mandated rent freeze weighed on margins. However, rental demand is strong, and we believe Deutsche Wohnen has a high-quality portfolio in major cities within Germany. Ubisoft, a French videogame designer, was down despite strong growth after announcing they will delay certain new releases and experience likely margin pressure. We sold the position during the quarter.
  • While the market recovery has inflated valuations across many industries, we continue to find perceived unique opportunities. We bought SK Telecom Co. Ltd., a South Korean conglomerate, during the quarter. In South Korea, we believe several of their large conglomerates currently offer significant value. For SK Telecom, we believe more than 100% of the value is in SK Hynix, where they own more than 20% of shares. Their legacy business is the leading telecom provider in South Korea where they are already invested in 5G. There is also potential for gains due to the country lifting temporary securities regulations that have weighed on shares. We sold Ubisoft as the valuation did not justify the near-term weakness to fundamentals.

Outlook

  • Despite the recent market rotation, we believe there is a deep underappreciation by investors for the magnitude of economic growth and inflationary pressures ahead. Generally, investors have not fully adopted the idea that stocks outside of what has been in favor for the greater part of the last decade will relinquish the spotlight. However, we believe the many signs of a sustained market shift are present.
  • The level of spending by governments around the world, particularly in the U.S., is at unprecedented levels. Additionally, central banks continue to support capital markets and are signaling low rates for the foreseeable future. The Fed has communicated a persistent dovish approach toward interest rate policy. This also has great potential to perpetuate inflation, particularly if they manipulate the curve to keep the 10-year rate at 2%.
  • Another inflationary pressure, although difficult to handicap its duration, is a shortage within the global supply chain, particularly within semiconductors. With semiconductor shortages around the world, many everyday goods, particularly autos, are experiencing manufacturing delays. Low supplies will lead to higher prices. When also considering higher commodity prices, in turn, raw material costs of everything we consume from food to clothes to electronics and beyond could go up. Meanwhile, the global economy is opening and consumers’ propensity to spend is high after a year of clamping down on social activities.
  • We believe these events should drive tremendous economic growth, which is generally good for early cycle equities. This leads us to be particularly optimistic about pockets of equities consistent with our investment style. After years of being underappreciated, international equities may be a great area of the world to find relative value. This, coupled with our investment style, which we believe is well positioned to take advantage of many of the currents carrying the market forward, may support a continued shift in our favor.

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, 2021, 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 03/31/2021: Merck KGaA 2.4%; Volkswagen AG 2.3%; Roche Holdings AG, Genusscheine 2.1%; Carrefour S.A. 2.0%; Airbus SE 2.0%; WPP Group plc 1.9%; Samsung Electronics Co. Ltd. 1.8%; Legal & General Group plc 1.8%; DNB ASA 1.7%; and ENGIE 1.7%.

The MSCI EAFE Index is an equity index which captures large- and mid-cap representation across 21 developed market countries around the world, excluding the U.S. and Canada. With 915 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. It is not possible to invest directly in an index.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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. To the extent the Portfolio invests a significant portion of its assets in a particular geographical region or country, economic, political, social and environmental conditions in that region or country will have a greater effect on Portfolio performance than they would in a more geographically diversified equity fund and the Portfolio’s performance may be more volatile than the performance of a more geographically diversified fund. 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 Municipal Bond Fund

Market Sector Update

  • The municipal market posted negative returns in the quarter. However, returns across the credit spectrum and the
    yield curve were not uniform. Higher quality returns were more negative the further one moved out on the curve, while
    performance was enhanced by bearing additional credit risk; A-rated, BBB-rated, below investment grade, and nonrated
    bonds posted positive returns with higher returns realized the further one moved down the credit spectrum.
    Credit spreads continued to tighten with the magnitude of compression incrementally greater the further out on the
    credit curve, while the yield curve steepened significantly.
  • Municipal high grade rates (MMD) ended the quarter 41 basis points (bps) and 36 bps higher on 10-year and 30-year
    maturities, respectively. Mutual fund flows into the asset class continued to be robust, as well as high levels of
    reinvestment flows from bond maturities, bond calls and coupon income. Tax-exempt new issue supply was not enough
    to satisfy the insatiable investment demand.
  • As yields on the highest quality bonds hovered near all-time low levels, investors moved further out on the credit
    spectrum, including high yield, in search of higher absolute yields. Credit spreads on BBB-rated bonds declined 37 bps
    while spreads on high yield bonds compressed 61 bps. President Joe Biden's American Rescue Plan, which included
    over $500 billion in aid to states, cities, public transit, education and airports, has materially enhanced the credit profile
    of many municipal issuers. Creditor protections in many lower quality new issues continue to be relaxed substantially.
    In the current yield-seeking environment, investors are showing little concern for bearing this increased credit risk,
    which is now lower for some as a result of the massive stimulus funding.
  • Defaults in the municipal bond asset class continue to be rare and tend to be highly concentrated in the high
    yield space. We are beginning to see distressed situations in the high yield space with more frequency; to date, these
    have been heavily concentrated in the continuing care retirement communities, speculative project finance, student
    housing, and hotel/convention center sectors. This will need to be monitored closely, as we believe an acceleration of
    defaults or impairments on a larger scale would impact the high grade space as funds sell the highest quality, most
    liquid holdings to fund investor redemptions. However, we expect the overall municipal market default rate to remain
    significantly lower than the corporate default rate, as has been the history between these markets.

Portfolio Strategy

  • The Fund posted a negative total return for the quarter, in line with the peer group while outperforming its
    benchmark. The portfolio duration is slightly shorter than its benchmark, and the portfolio is defensively structured with
    a marginally higher quality emphasis.
  • We will continue to place emphasis on diversification, higher (overall) credit quality and yield curve positioning, while
    continuing to look for attractive credit opportunities in the lower investment grade space.
  • Persistent credit surveillance, especially with lower investment grade names, will be critical in this environment.

Outlook

  • We remain confident in our belief that investment grade municipal bond defaults will continue to be much lower than
    any other fixed income alternatives except U.S. Treasuries. The massive stimulus infusion from the American Rescue
    Plan has been a large credit positive for the overall municipal bond market.
  • We continue to take a long-term approach with credit selection. We will not compromise the overall credit quality of
    the Fund by chasing lower quality opportunities with poor bondholder protections and deteriorating credit profiles.
  • The Municipal Liquidity Facility (MLF) expired at year-end. While not widely utilized, it should be noted that the
    Federal Reserve is no longer in a position to be the lender of last resort in a crisis.
  • At this juncture, the municipal bond market is very expensive relative to taxable fixed income alternatives. There is
    euphoria as a result of the massive stimulus funds provided by the American Rescue Plan. Expected corporate and
    personal income tax rate increases on the horizon are also adding to the exuberance. Large investor flows into a
    negative supply market is also a tailwind. However, credit spreads are rapidly approaching the all-time lows observed
    last spring, and are well inside both 5-year and 10-year averages. While the market has recently decoupled from the
    U.S. Treasury market, we do not believe that this situation will be sustainable in the long run. Continued pressure on
    U.S. Treasury market yields will eventually have to be acknowledged by the municipal bond market, as has been the
    historical relationship between these markets.

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, 2021, 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 a method designed to manage risk but does not guarantee profits or protect against loss in declining markets.
All information is based on Class I shares.
The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets
in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises
caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined
with certainty.

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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Bryan J. Bailey

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Quarterly Fund Commentary

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Ivy VIP Global Growth

Market Sector Update

  • Global equity markets continued to show strength in the first quarter of 2021, with global markets up nearly 5%. Developed markets outperformed emerging markets. COVID-19 infection rates and vaccine penetration rates played a role in equity returns as investors anticipate recovering economic activity based on COVID-19 containment. Brazil, along with other parts of Latin America, have struggled with increasing COVID-19 outbreaks, leading to hospitalizations throughout the country and equity markets have struggled as a result. Value significantly outperformed growth in the quarter, extending a trend that began in fourth quarter of 2020.
  • Energy was a standout performer after having been a significant laggard for much of 2020. Financials also performed well as government bond yields continued to rise in the period, notably U.S. Treasuries. Industrials, communication services and materials also outperformed. Consumer staples, utilities, health care and information technology all underperformed. Generally, businesses geared towards economic recovery did well in the period.

Portfolio Strategy

  • The Portfolio underperformed its benchmark index for the period. Stock selection was the primary detractor to performance along with the Portfolio’s relative higher weighting to growth stocks. Weak stock selection in financials, consumer staples and industrials more than offset the strong stock selection in health care. Poor individual stock performers in the period included Ferrari N.V., Ubisoft Entertainment S.A., Alimentation Couche-Tard, Inc. and Daikin Industries Ltd. Strong selection came from opening up restaurant trades Brinker International, Inc. and Darden Restaurants, Inc., along with energy holdings Canadian Natural Resources Ltd. and ConocoPhillips.
  • We remain overweight cyclicals in both industrials as well as consumer discretionary on the belief that the opening of trade, particularly in the U.S., will be strong and more persistent than expected given pent up demand and savings. We remain overweight information technology (although to a lesser degree than in the past) and remain overweight in financials and energy as well. We are underexposed to consumer staples, health care, real estate and utilities on the view the economy will be more pro cyclical in the coming months.

Outlook

  • We expect the impact from COVID-19, which continues to vary significantly depending on the country and region, will have the largest impact on near-term growth and portfolio positioning. We believe the U.S. consumer will be the strongest driver of short-term growth given the relatively high rate of vaccinations in the U.S. versus the rest of the world as well as massive government stimulus in the U.S. that put money directly into consumers pockets. We also think the U.S. Federal Reserve will be very slow to temper inflationary concerns in the initial stages of recovery.
  • We believe Europe will be slower to recover, but also will have improving growth over time. We view valuations in some parts of the European market as more attractive than in the U.S., and we continue to focus on looking for opportunities in sustainable growth businesses that may be undervalued by the market. While we remain overweight emerging markets, the bulk of our emerging-market exposure is concentrated in China at the moment, which is not having the issues of uncontrolled COVID-19 cases that other emerging markets such as Brazil and India are experiencing.

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 March 31, 3021, 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 03/31/2021: Amazon.com, Inc. 4.3%; Microsoft Corp. 3.5%; Apple, Inc. 3.3%; PayPal, Inc. 2.8%; Ferrari N.V. 2.8%; Schneider Electric S.A. 2.7%; Airbus SE 2.7%; Taiwan Semiconductor Manufacturing Co. Ltd. ADR 2.6%; Brinker International, Inc. 2.6%; and Darden Restaurants, Inc. 2.4%.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

MSCI World is an unmanaged index comprised of securities that represent the securities markets around the world. 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. Prices of growth stocks may be more sensitive to changes in current or expected earnings than the prices of other stocks. Growth stocks may be more volatile or not perform as well as value stocks or the stock market in general. 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 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 Portfolio may have a greater impact on the Portfolio’s net asset value than it would if the Portfolio invested in a larger number of securities. 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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Article Related Management: 

Sarah C. Ross, CFA

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Quarterly Fund Commentary

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