Ivy Pictet Emerging Markets Local Currency Debt Fund

Market Sector Update

  • The Fund's benchmark, the JP Morgan GBI-EM Global Diversified Index, fell by 15.2% in U.S. dollar terms over the quarter.
  • The increasing global impact of COVID-19 became the primary driver contributing to a collapse in oil prices and a rush towards safe-haven assets. Emergency interest rate cuts by the U.S. Federal Reserve (Fed) and other major central banks along with quantitative easing and stimulus measures were implemented.
  • There were more than 90 interest rate cuts by central bank across the globe. All of this was supportive leading to some stabilisation in the last few days of March. Brazil and Colombia each fell 21% while Mexico dropped 19%.
  • Chile fell 14% and Peru only 6%. Russia was down 21% where the collapse in oil prices was a key factor. Turkey declined 10% where oil prices should be beneficial. Hungary declined 13% partly from local bond prices as inflation pressures have been growing. South Africa fell 29% where, in a widely expected move, their rating was downgraded given vulnerable economic dynamics. Asia held up better, though Indonesia with its large budget deficit was an exception, down 18%. China gained 2% all from local rates while Malaysia and the Philippines were each down around 4%.

Portfolio Strategy

  • The Fund posted negative performance and underperformed its benchmark index for the quarter. Selected overweights to local rates continues to be a key strategic theme for the portfolio. We like markets where the yield curve is too steep, there is solid domestic investor demand, after inflation yields are attractive and the central bank is dovish or at least on hold.
  • Taking into consideration the liquidity of these markets is also a key criteria. Local rate overweights in Mexico, Russia and China are key convictions. Conversely, we believe there are some opportunities for underweights, such as Hungary, as inflation pressures are building. We will also look for underweight opportunities in countries we believe have deteriorating fundamentals and environmental, social, and governance (ESG) factors.
  • In terms of emerging market currencies, we believe valuations look even more attractive and it is not clear that the U.S. dollar will continue to strengthen. We believe it is more likely to weaken as COVID-19 curves flatten and markets stabilise. But currencies are not necessarily a mean reverting asset class and if a particular currency looks cheap, it may be for very good reasons. So while we are seeking to be overweight, selection and timing is critical while we are also looking at specific relative value trades.

Outlook

  • The negative impact of COVID-19 will likely continue for months, impacting both global demand and supply chains and increasing the likelihood of a global recession this year, but with the potential of a ‘V’ shaped recovery.
  • This environment is unique as it’s the first time we have had a combination of a severe global health pandemic, a collapse in oil prices and a financial markets shock. Countries heavily dependent on oil exports and those not well prepared for an outbreak of COVID-19 are countries we are monitoring very closely.
  • Major global central banks have acted like never before to support markets in both monetary and fiscal ways and we believe this will now help provide an anchor for the asset class.
  • We believe most emerging market countries still have high real rates and further room to use the traditional means of cutting interest rates, making selected local rate markets still attractive, particularly after recent moves. Emerging markets allowed their currencies to be the natural pressure release valve with very limited use of their foreign reserves to support their currencies as in some previous crises. The result is that emerging market currencies are now at multiyear lows, but we need to see a flattening in the COVID-19 curve in the most heavily impacted countries, a genuine peak in market volatility and more constructive investor sentiment before underlying fundamentals start to feed through again.

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, 2020, 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 JP Morgan GBI-EM Global Diversified is an unmanaged index that tracks the performance of emerging market debt. 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: As with any fund, 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. 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, especially securities with longer maturities. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may seek to manage exposure to various foreign currencies, which may involve additional risks. The value of securities, as measured in U.S. dollars, may be unfavorably affected by changes in foreign currency exchange rates or exchange control regulations. Investing in foreign securities involves a number of risks that may not be associated with the U.S. markets and that could affect the Fund’s performance unfavorably, such as greater price volatility; comparatively weak supervision and regulation of securities exchanges, fluctuation in foreign currency exchange rates and related conversion costs, adverse foreign tax consequences, or different and/or less stringent financial reporting standards. Sovereign debt instruments are also subject to the risk that a government or agency issuing the debt may be unable to pay interest and/or principal due to cash flow problems, insufficient foreign currency reserves or political concerns. Risks of credit-linked notes include those risks associated with the underlying reference obligation, including but not limited to market risk, interest rate risk, credit risk, default risk and foreign currency risk. The buyer of a credit-linked note assumes the risk of default by the issuer and the underlying reference asset or entity. If the underlying investment defaults, the payments and principal received by the Fund will be reduced or eliminated. Also, in the event the issuer defaults or there is a credit event that relates to the reference asset, the recovery rate generally is less than the Fund’s initial investment, and the Fund may lose money. The use of derivatives presents several risks including the risk that fluctuation in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. Moreover, some derivatives are more sensitive to interest rate changes and market fluctuations than others, and the risk of loss may be greater than if the derivative technique(s) had not been used. Derivatives also may be subject to counterparty risk, which includes the risk that a loss may be sustained by the Fund as a result of the insolvency or bankruptcy of, or other non-compliance by, another party to the transaction. These and other risks are more fully described in the Fund's prospectus.

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Ivy Accumulative Fund

Market Sector Update

  • To put it bluntly, we believe the COVID-19 pandemic has the global economy facing a possible downturn unlike anything seen since the Great Depression. We believe we are at the beginning of the largest short-term drop in economic activity in our lifetimes. No level of education is required to understand what happens when the services-led economy of the U.S. is told to stay at home. We have never seen a time where so many businesses are unable to generate sales.
  • We’re experiencing a multi-pronged challenge – what will likely become unprecedented employment weakness, a correction in asset valuations, a liquidity squeeze, a collapse in energy prices, and an upturn in defaults stemming from high corporate leverage and pandemic-specific shocks. Uncertainty is exceptionally high, placing a premium on a strong framework for assessing new information.
  • The Federal Reserve (Fed) and U.S. government have opened the fiscal and monetary spigots in an attempt to "build a bridge" until we get to the other side of the health crisis. The Fed has moved to stabilize important parts of the fixed income markets by restarting its quantitative easing programs and increasing its balance sheet by over $1 trillion since the beginning of March.
  • Congress also responded with the Coronavirus Aid, Relief and Economic Security (CARES) Act, an unprecedented $2 trillion bill of support, targeting hard hit segments of the economy. It includes $1.2 trillion in direct support for consumers and small businesses, and $500 billion in first loss capital and direct lending to affected industries, healthcare funding, and increased unemployment benefits, including broadened access. It is our belief the markets have already discounted the current air pocket of economic activity.

Portfolio Strategy

  • The Fund delivered a negative return, but slightly outperformed its benchmark for the quarter.
  • At the sector level, consumer discretionary was the only sector weighting to deliver a positive return for the Fund. Conversely, information technology, communication services, industrials and health care had the worst performance for the period. The Fund benefitted from not holding positions in energy, consumer staples or utilities, all of which delivered negative returns for the benchmark.
  • Stock selection in industrials and health care was a bright spot. The Fund was overweight to the benchmark in both areas and still outperformed. However, it was not significant enough to offset other areas of weakness, particularly the Fund’s overweight position to communications services.
  • With regard to individual holdings, the largest contributors to performance for the period include Apple, Inc., Starbucks Corp. and Five9, Inc. The largest detractors include Gartner Group, Inc. Gardner Denver Holdings and Walt Disney Co.

Outlook

  • The increasing number of COVID-19 cases in the U.S. continues to be one of the key factors pressuring the markets. While the medical response to the virus continues to unfold, we believe financial markets could respond positively to two developments: 1) when the U.S. begins to “bend the curve” on new cases, and 2) clarity around how the economy reopens. However, uncertainty is high and the news is likely to remain grim in the short term.
  • Even as the economy reopens, there will be a number of new realities that will have important investment ramifications. How will January 2021 and 2022 be different than January of 2020? Once “stay at home” orders are lifted, how quickly will people go out for dinner, travel, or attend a sporting event? Will corporate America more readily embrace work from home options for employees and continue to make the technology investment required to facilitate it? We and the entire Ivy Investments team are collaborating to understand these topics and others and the investment ramifications in the months and years to come.
  • We think a key advantage for the Fund is our ability to structure the portfolio with a longer-term time horizon than the market currently offers. As clarity of the outlook improves in the coming months, we believe this could benefit the Fund. We believe more certainty will be learned by the next quarterly update, hopefully for the positive. Most importantly, we wish you and your loved ones a healthy quarter ahead.

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, 2020, 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 holdings (%) as of 3/31/2020: Microsoft Corp. 9.0, Amazon.com, Inc. 7.7, Fiserv, Inc. 5.1, Mastercard, Inc. – Class A 5.0, Five9, Inc. 3.6, Facebook, Inc. 3.6, Dexcom, Inc. 3.1, Ingersoll-Rand, Inc. 3.1, LiveNation, Inc. 3.0, Adidas AG 2.7.

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. Large-capitalization companies may go in and out of favor based on market and economic conditions. 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. The Fund typically holds a limited number of stocks (generally 30 to 50). As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Fund's net asset value than it would if the Fund invested in a larger number of securities. 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 High Income

Market Sector Update

  • Risk assets sold off dramatically starting Feb. 20 due to the COVID-19 pandemic. Investors seeking safety rushed out of corporate bonds and into U.S. Treasuries and cash, which caused equities to decline by nearly 20% in the quarter, while the high-yield sector returned -14.30% and leveraged loans returned -13.00%.
  • U.S. Treasuries rallied sharply with the yield on the 10-year U.S. Treasury falling 125 basis points (bps) from 1.92% to 0.67% at quarter-end.
  • Energy experienced the largest decline among all sectors, which was true for equity and fixed income. Other sectors performing poorly in the period were gaming and leisure, down 20.4%, as well as transportation, which was down 18.6%.
  • Initial jobless claims data for March was a stark indicator of the challenge faced by the domestic economy with 3.28 million claims, a level that was four-times the previous record high.
  • As the economic ramifications of COVID-19 and its remediation became apparent, policymakers responded. Unprecedented efforts from the Federal Reserve (Fed), coupled with the $2.2 trillion stimulus package from Washington, helped to stabilize and improve credit markets before the end of the quarter.
  • Following the Fed and government actions, non-investment grade credit yields improved by 195 bps during the final six days of the quarter, marking the second swiftest recovery on record, only behind the six-day stretch recovery of 207 bps in January 2009.
  • Following a five-week $19.2 billion unprecedented exodus, fund flows improved with high-yield mutual funds tracking their largest weekly inflows on record totaling $7.09 billion.

Portfolio Strategy

  • The Portfolio declined mid-teens during the first quarter, modestly underperforming the ICE BofA High Yield Index. Underperformance was driven by all three asset class categories – bonds, loans and equities.
  • High yield bonds (61% of the portfolio) were negatively impacted by credit selection in the telecommunications, gaming and health care sectors. Positive contributions from credit picks within the food and insurance sectors, along with an underweight in the energy sector, were not enough to offset the negatives.
  • Leverage loan investments (25% of the portfolio) were negatively impacted by credits in the oil & gas, retail and technology sectors. Leveraged loans did not perform as well as we would have expected in the massive sell-off, driven mainly by technical selling across the board from both outflows in the asset class and collateralized loan obligation selling pressure.
  • While equity investments only make up 6% of the Portfolio, the 25% decline in the allocation during the quarter detracted from underperformance.
  • Given the level of volatility, the Portfolio’s allocation across asset classes remained relatively steady, ending the quarter with 61% bonds, 25% loans, 6% other and 8% cash. The Portfolio’s weighting by rating category is 9% BB, 55% B, and 31% CCC.

Outlook

  • Prior to March 2020, the words ‘social distancing’ and ‘bending the curve’ were phrases the vast majority of the investing community had probably never heard, let alone given any validity to their occurrence. Today, they will be ingrained into the psyche of the world for generations to come. A true black swan, COVID-19 came out of China with a vengeance that no one (the markets, the health care community, the government) were prepared for. Once the gravity of the virus was fully understood it was all but too late.
  • The volatility experienced in the month of March will go down in history with the VIX exploding to a high of 82.69 on March 16, which eclipsed the previous high set back in 2008 when Lehman Brothers failed. Six days later the Fed’s decision to “go all in” on saving the markets from another liquidity crisis has, for the time being, put the bottom in for the markets. The fallout from shutting down the world’s economic way of life is still yet to be determined.
  • We are looking for a meaningful increase in high-yield bond and loan defaults in the coming year due to a significantly weaker economy stemming from the COVID-19 outbreak, as well as stress in the energy sector heightened by the production conflict between Saudi Arabia and Russia. As always, our focus when evaluating investments is a company’s business model and competitive advantages in order to weather a recession and perform throughout the cycle.
  • That said, we're watching downgrades more so than defaults, especially as BBB rated companies fall to BB ratings. For example, we believe many large and strong companies being downgraded into high yield are creating opportunities for investors like us. New entrants into high yield are expected to surpass $250 billion over the next twelve to eighteen months. Additionally, in hard hit areas like energy we should keep in mind that oil isn't going away. Demand may fall, but there could be opportunities in producers who will make it through the recession.
  • Historically, black swan type events have been attractive buying opportunities for those with a long-term investment horizon. When high-yield spreads blow out to levels they are at now, returns 1-year into the future have almost always been positive, and if you go out beyond a year, they've always been positive. This is not to say there aren’t risks ahead. How the economy re-opens and how quickly the world can “get back to work” remains to be seen, but with the blowout in high-yield spreads to over 1,000 bps and today still sitting around 900bps, we think the risk-reward is on investors side in high yield.

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, 2020, 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 CBOE Volatility Index is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market.

The ICE BofAML US High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic 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. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Portfolio may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher rated bonds. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. These and other risks are more fully described in the Portfolio's prospectus. Not all funds or fund classes may be offered at all broker/ dealers.

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

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Ivy VIP Global Bond

Market Sector Update

  • The first two months of quarter were strong as the U.S.–China trade deal was finally signed in January. Business confidence was improving and optimistic. Job growth was solid; beating expectations and the unemployment rate was at a historical low. The stock market reached new records with consumer confidence elevated. The outlook for 2020 was for stable global growth.
  • Unfortunately, the rise of COVID-19, which began in late-November 2019 and spread throughout China, Asia, Europe and ultimately the U.S. in early-March, has dramatically impacted the overall picture for global growth, capital markets and financial stability. This macro-environment led to an immediate decline in global gross domestic product (GDP) output, massive job losses and enormous reductions of wealth.
  • The fiscal and monetary responses have been massive with the Federal Reserve (Fed) cutting rates to zero, and providing U.S. dollar liquidity to other central banks, money market funds and corporate credit. It also started unlimited quantitative easing with large purchases of U.S. Treasuries and mortgage-backed securities. The Fed’s balance increased by $1 trillion in a week. Most central banks have indicated they will respond as needed to maintain operations and avoid dysfunctional financial markets during this crisis and it is clear that they will keep policy extremely accommodative as their economies recover. The monetary response has been just as impressive. The $2.0 trillion spending bill passed the Senate and House of Representatives after last minute negotiations – ultimately it should help bridge the effects of “social distancing.”
  • The sharp contraction in economic activity stemming from COVID-19 and the related shutdown is assumed to be temporary. Uncertainties dominate, but the baseline assessment is the acute stage of the health crisis has largely ended in China and will begin to ease in advanced countries by late- April to early-June. Recoveries in different nations will depend mainly on their performances prior to the pandemic and whether factors that supported or detracted from economic performance will change. The downside risk is that the pandemic extends longer and there is an extended period of getting back to normal activities, which lowers the overall economic activity and GDP drifts sideways from depressed second-quarter levels rather than a “V” shaped recovery.

Portfolio Strategy

  • The Portfolio underperformed its benchmark and Morningstar peer group for the quarter. Most of the underperformance was attributable to the Portfolio’s exposure to credit. Concerns of a global recession due to the COVID-19 pandemic have led to a dramatic decrease in confidence, consumption and business investment. These concerns spilled into the credit markets, which witnessed large spikes in credit spreads to levels not seen since the 2008 global financial crisis.
  • With concern of a global recession, the U.S. dollar strengthened over the quarter against developed market currencies as the pound and euro gained 6.3% and 1.6%, respectively. The Portfolio’s 99.5% U.S. dollar exposure enhanced its performance relative to peers.
  • We continue to seek opportunities to reduce volatility in the Portfolio. Additionally, we are maintaining a low-duration strategy for the Portfolio as we feel it allows us a higher degree of certainty involving those companies in which we can invest. With the dramatic increase in credit spreads, we are taking this dislocation to allocate our portfolio out of higher quality U.S. Treasuries and credit into higher yielding emerging market credit and domestic investment grade corporates.
  • We continue to focus on maintaining proper diversification for the Portfolio. We continue to hold a higher level of liquidity (patient capital) because of structural changes in the capital markets. We will be opportunistic in allocating that capital when we believe dislocations in the market arise.

Outlook

  • The U.S.’s sizable fiscal packages provide much needed income support for sidelined workers and financial support for businesses facing interrupted product demand and cash flows. However, the packages are not fiscal stimulus that will generate stronger growth.
  • China was weak going into the crisis; its domestic demand had slowed sharply. Business fixed investments had decelerated materially, while growth in gross capital formation had been propped up by government infrastructure investment. Consumer and business debt levels were very high, which reduced the government’s flexibility to stimulate more.
  • Most emerging markets were not well positioned going into the pandemic. Poor economic performances have harmed finances. In some Latin American countries, misguided policies and poor leadership have created turmoil that had contributed to capital flight. Debt levels are relatively high, and in special cases like Turkey, are burdened by large amounts of U.S. dollar-denominated debt levels that are costly to service as their currencies weaken versus the dollar.
  • The other concern with emerging markets is the dramatic decline in the price of oil. This impact has dramatically reduced overall budgets in OPEC, Russia, Nigeria, Brazil, Mexico and other nations.
  • Finally, the tilt away from globalization that has been underway for about half of the decade is likely to be reinforced. We believe new factors stemming from COVID-19 will fuel the move further away globalization, which will change complex international supply chains, higher tariffs and potentially increased barriers to immigration.

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, 2020, 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.

Risk factors: The value of the Portfolio’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. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Portfolio may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. These and other risks are more fully described in the Portfolio’s prospectus.

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

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Ivy VIP Corporate Bond

Market Sector Update

  • The first quarter saw a dramatic sell-off in risk assets due to the COVID-19 pandemic, which caused domestic equities to decline by nearly 20%.
  • The evolving COVID-19 pandemic has been met with unprecedented fiscal and monetary stimulus. During the quarter, the government responded with several stimulus measures including the $2.2 trillion CARES Act, similar to the stimulus passed during the 2008-2009 crisis. In addition to cutting rates 150 basis poitns (bps), the Federal Reserve (Fed) also launched QE4, which was subsequently termed “unlimited” in size. It will purchase both U.S. Treasuries (including U.S. Treasury Inflation-Indexed Bonds) and agency mortgage-backed securities for however long and in whatever quantity is necessary. It is going to be purchasing investment-grade corporate bonds with maturities of four years and less in the primary (new issue) market, while it has a separate program to purchase investment grade corporate bonds with maturities of five years and less in the secondary market. Additionally, it will also begin buying highly rated commercial paper. The launch of the investment-grade corporate bond purchase program by the Fed has thus far marked the high point investment-grade spreads, which rapidly compressed in the days subsequent to the program’s announcement.
  • U.S. Treasuries rallied sharply in the quarter with the yield on the 10-year U.S. Treasury falling 125 basis points (bps) from 1.92% to 0.67%. The yield on the 2-year U.S. Treasury fell 132 bps from 1.57% to 0.25% as the Fed cut rates twice, by 50 bps in early-March then again by 100bps in mid-March, ending the quarter with a target range of 0%-0.25%.
  • During the quarter, the yield curve steepened slightly as the difference between the 10-year U.S. Treasury and the 2-year U.S. Treasury rose 8 bps to 42 bps.
  • The spread on the Portfolio’s benchmark, the Bloomberg Barclays U.S. Credit Index, widened massively from 90 bps to 255 bps, a level not seen since the 2008-2009 financial crisis and above the prior recession level in 2002. Intraquarter, the index reached 341 bps before rallying into the end of the quarter. High yield lost 12.68% as the spread on the high yield index rose from 336 bps to 880 bps, while leveraged loans fared even worse, losing 13.19%.
  • Despite the substantial increase in volatility in the quarter, investment-grade bond supply increased dramatically in the days after the Fed announced it would begin purchases. During the period, investment-grade bond issuance totaled $480 billion, up 49% from the $321 billion issued in the first quarter of 2019. The month of March accounted for $262 billion of issuance by itself, up 129% year over year. This surpassed the prior monthly issuance record of $178 billion in May 2016. Given the spread widening, issuance was dominated by higher quality issuers. For the quarter, AA, A and BBB rated issuance increased 193%, 89% and 4% year over year, respectively. The duration of issuance during the quarter rose with average time to maturity at 13.3 years, above the 11.7 years average for new issuance over the past four years.
  • Ratings action this quarter had a severe negative trend with the two-week rolling net ratings change hitting -$673 billion in March, the highest in at least 20 years. The market saw a large uptick in fallen angels, those issuers downgraded from investment grade into the high-yield market. The first quarter had $149 billion of fallen angels, and we believe more will come as $243 billion of BBB rated investment-grade bonds have spreads wider than the BB index. This compares with the approximately $60 billion of fallen angels in the first quarter of 2016 during the energy crisis, $80 billion in the second quarter of 2009, and less than $20 billion through all of 2019.

Portfolio Strategy

  • The Portfolio had a negative return, but outperformed its benchmark, mainly driven by the Portfolio’s conservative positioning relative to the benchmark. The Portfolio’s return was primarily driven by a fall in interest rates and coupon income, more than offset by the widening of the benchmark spread by 165 bps.
  • The Portfolio’s duration fell slightly during the quarter and remains modestly under the benchmark’s duration of 7.65 years. Higher duration means higher price volatility for a given change in spreads as well as interest rates.
  • The Portfolio increased its allocation to BBB and BB rated credits, at the expense of the Portfolio’s exposure primarily to A rated credits.
  • The largest changes in sector positioning were increases in the financial and consumer cyclical sectors and decreases in the industrial and energy sectors.

Outlook

  • The markets have been derailed by the COVID-19 pandemic. We believe markets will find difficulty pricing in the vast uncertainty and the impact on macroeconomic variables and asset classes. A year ago it would have been impossible to predict the events of 2020 thus far, but what was seemingly predictable was that eventually a negative economic shock would occur and expose the excesses built in the corporate credit markets, a process now unfolding.
  • While we have long been cautious on the corporate credit market due to our view that excesses had built up, we now believe the combination of the valuations and stimulus programs, most principally the program to purchase investment-grade bonds by the Fed, has created an attractive environment to take risk in the asset class and are positioning the portfolio accordingly.
  • For the last 20 years, spreads in the investment-grade market have averaged 146 bps, and now stand at 255 bps. The yield on the 10-year U.S. Treasury has averaged 335 bps over the same 20-year period and ended the quarter at 67 bps. The ratio of investment-grade spreads to the 10-year Treasury yield currently sits at 3.81-times versus the average of around 0.5-times over the last 20 years – this exceeds the prior peak of approximately 2.5-times during the 2008-2009 recession. Coupled with the $10.5 trillion of negative-yield debt instruments globally, we believe there is a powerful technical supporting the investment-grade market.
  • While we believe the high point in spreads has been reached for this cycle, the path will be bumpy given the unprecedented scenario that occurred in the first quarter. We believe the various investment-grade issuers will see a wide dispersion in returns as various businesses are impacted in dramatically different ways by the COVID-19 pandemic. We believe this year will have the largest number of fallen angels ever with greater than $500 billion of investment grade issuers falling in 2020. This amount is roughly 50% of the entire high-yield market, which we believe will be difficult to absorb. We think the dispersion and fallen angel activity we expect this year favors an active approach to investing in this market, so we will be selective in adding risk and will continue to seek attractive riskreward investments.

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, 2020, 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.

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 Portfolio's shares will change, and you could lose money on your investment. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the 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. These and other risks are more fully described in the Portfolio's prospectus. Not all funds or fund classes may be offered at all broker/ dealers.

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

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Ivy VIP Science and Technology

Market Sector Update

  • The first quarter started strongly, but mid-February began an almost unprecedented, broad-based, rapid deterioration due to the COVID-19 pandemic.
  • The reasons for this rapid market deterioration in the quarter were the accelerating spread of COVID-19 across the world. Shutdowns and stay-at-home orders during March slashed economic activity and drove concerns into the market of extended job losses, economic recession and long-term economic malaise.
  • The S&P North American Technology Index, the benchmark for the strategy, declined almost 13% in the quarter after the roughly 12% increase last quarter.
  • The information technology sector saw weak performance across sub-sectors, with the software, hardware and semiconductor sub-sectors the relative outperformers. These sub-sectors were down over 10%, but most other subsectors were down more than 20% in the quarter.

Portfolio Strategy

  • The Portfolio underperformed the benchmark in the quarter. Despite strong outperformance from the Portfolio’s health care exposure, the technology allocation in the portfolio more than offset this outperformance and led to the underperformance. Health care is absent from the Portfolio’s benchmark.
  • QTS Realty Trust, Microsoft, Alibaba Group and ASML Holdings were among the largest relative positive contributors. Detractors included WNS Holdings, Euronet Worldwide and ACI Worldwide. Additionally, the Portfolio’s relative underweights in Amazon.com, Intel and Adobe detracted from relative performance.
  • Within health care, Vertex Pharmaceuticals, Teladoc Health and Moderna were significant positive contributors. Teladoc Health and Moderna performed exceptionally well in the current quarter – we own these stocks based on long-term trends that both virtual health care and vaccine technology trends will be strong. COVID-19 has accelerated both of these trends and the underlying stocks. We believe both stocks remain attractive.

Outlook

  • We believe the current market turmoil due to COVID-19 will create significant new innovation and innovation-driven investment opportunities. During times of crisis, innovation accelerates. Over the course of February and March, we raised our cash levels in the Portfolio, anticipating additional market weakness. We expect to deploy this capital in new ideas that will benefit long-term from changes we anticipate in both company and consumer behavior as the world works through the pandemic.
  • The supportive factor for the technology and health care sectors is the constant pace of innovation, especially in the midst of the current crisis. While we are highly cognizant of moves in the market, our three-to-five year timeline for investing allows us to take a longer term approach. For example, technology is going to be more critical going forward for companies to gain advantages. Data aggregation, data analytics, migration towards cloud computing, semiconductors – all are key areas we are positioned to take advantage of going forward. Changes in how we work and where we work are driving shifts in technology utilization. We continue to see strong cloud computing capex trends, as anticipated, and expect strength through the course of 2020.
  • We continue to be optimistic on semiconductors. The space has contributed strongly to information technology performance over the past couple years and we believe the emergence of new secular growth opportunities, like autos, machine learning and ubiquitous connectivity will continue to support above-market returns in the sector. While we remain constructive on semiconductors, we expect some level of volatility that likely creates compelling new opportunities for the Fund over the longer term.
  • We are carefully monitoring the technology supply chain and demand signals coming from key technology endmarkets as a result of COVID-19. Currently, both the supply side and demand side are being impacted as a result of the pandemic. Although the trade situation had shown recent improvement, Huawei’s continued inclusion on the U.S. “entity list” has created a headwind within the technology supply chain that we expect to persist. We believe the U.S. may begin restricting shipment of semiconductor manufacturing equipment used for Chinese semiconductors in the next few quarters and expect this action may have a cooling effect on U.S.-China negotiations.
  • Our exposure to biotechnology helped relative performance again this quarter. Biotechnology remains a key area of innovation within health care and an area where we expect our holdings to continue outperforming over the coming quarters. Gene therapy and personalized advanced therapies are the areas of groundbreaking research and innovation that should provide significant opportunities for investment.

The opinions expressed are those of the Portfolio’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Top 10 equity holdings as a percent of net assets as of 3/31/2020: Microsoft Corp. 10.95%, Apple, Inc. 6.48%, Facebook, Inc. 5.57%, Vertex Pharmaceuticals, Inc. 5.48%, Micron Technology, Inc. 4.74%, Alibaba Group Holding Ltd. ADR 4.55%, Aspen Technology, Inc. 4.50%, Cerner Corp. 3.92%, ACI Worldwide, Inc. 3.60%, Amazon.com, Inc. 3.56%

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

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 invests more than 25% of its total assets in the science and technology industry, the Fund’s performance may be more susceptible to a single economic, regulatory or technological occurrence than a fund that does not concentrate its investments in this industry. Securities of companies within specific industries or sectors of the economy may periodically perform differently than the overall market. In addition, the Portfolio’s performance may be more volatile than an investment in a portfolio of broad market securities and may underperform the market as a whole, due to the relatively limited number of issuers of science and technology related securities. Investment risks associated with investing in science and technology securities, in addition to other risks, include: operating in rapidly changing fields, abrupt or erratic market movements, limited product lines, markets or financial resources, management that is dependent on a limited number of people, short product cycles, aggressive pricing of products and services, new market entrants and obsolescence of existing technology. 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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Bradley Warden

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Ivy VIP Natural Resources

Market Sector Update

  • Global equity markets posted negative returns on the broad indexes. The energy and materials sectors also posted negative returns and underperformed the broader equity market. Materials outperformed the energy sector.
  • Crude oil prices declined significantly in the quarter with West Texas Intermediate crude oil, the U.S. benchmark, down about -67% and Brent oil down about -61%. A perfect storm hit the oil market as demand significantly weakened due to the COVID-19 pandemic, coupled with a policy change from OPEC to supply more oil to the market. This shift in policy occurred when OPEC and Russia were unable to agree on extending existing production cuts. The result was a dramatically oversupplied market for oil that is straining inventory storage around the world.
  • The severe decline in oil prices in the quarter caused producers around the world, notably in the U.S., to slash capital expenditures and growth outlooks. The U.S. shifted from growth mode to contraction mode as many domestic producers announced plans to cut activity from 30-50% for the full year in 2020. With the oil price dropping below the cash costs of operation in some areas, some producers have elected to completely stop activity in the near term.
  • Other commodity prices moved lower in the quarter with iron ore prices down by about 4% and copper prices down by about 20%. Iron ore prices held up relatively well due to tight controls on supply by the largest suppliers.

Portfolio Strategy

  • The Portfolio outperformed the return of its benchmark, the S&P North American Natural Resources Sector Index, but posted a negative return for the quarter. Outperformance was partially driven by an underweight in the energy sector, an overweight in materials, and strong stock performance relative to the index in solar, precious metals, other metals and chemicals.
  • The five greatest equity contributors to relative performance were overweight positions in Canadian Pacific Railway, Barrick Gold Corp., Rio Tinto plc, Schlumberger and Occidental Petroleum.
  • The five greatest equity detractors to relative performance were TC Energy Corp., Enbridge Inc., Newmont Corp., Chevron Corp. and WPX Energy Inc.
  • The Portfolio’s exposure to the energy sector decreased significantly from the prior quarter, ending at about 33% of equity assets. The decrease was due to reduction in exposure and depreciation of equity. The remaining sector exposure was composed of materials, solar, industrials, utilities and chemicals. The Portfolio also increased its cash position to around 11% given the significant uptick in market volatility and unprecedented market conditions..
  • In general, we seek to own companies in the strategy with low-cost positions, strong balance sheets and the ability to grow profitably with high returns on capital. We also seek to own companies exposed to favorable trends in their respective commodities and sub-sectors.

Outlook

  • Due to the open-ended nature of the COVID-19 pandemic, it is unclear when exactly demand for oil and other commodities will return to previous levels. With large parts of the world economy grinding to a standstill, demand is expected to be significantly below trend until businesses begin to increase operations.
  • In order to match lower demand conditions, supply of oil and other commodities is expected to be drastically cut also. However, the supply cuts are likely to be slower than the demand reduction, which should result in increasing inventories for much of the remaining year. Persistent oversupply will likely continue to keep commodity prices near cash costs of operation or the marginal cost of new supply until more supply growth is needed to meet demand.
  • After several years of expansion in the U.S. energy industry, we are likely headed for a contraction that could last for many months. Much higher oil prices will be needed for the industry to return to growth. It is expected that this will not occur until demand recovers to a level where more supply from U.S. producers is needed. If OPEC continues its increasing market share strategy, U.S. oil supply growth will likely not be needed until 2021.

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, 2020, 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 03/31/2020: Barrick Gold Corp. 5.9, Phillips 66 3.9, Canadian Pacific Railway Ltd. 3.6, Union Pacific Corp. 3.3, Rio Tinto plc 3.3, Valero Energy Corp. 3.2, Galp Energia SGPS S.A., Class B 2.7, Marathon Petroleum Corp. 2.6, Air Products and Chemicals, Inc. 2.6, and BHP Group plc 2.6.

The S&P North American Natural Resources Sector Index represents U.S.-traded securities in the energy and materials sectors, excluding the chemicals industry, and steel sub-industry. 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. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in natural resources can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments; and the cost assumed by natural resource companies in complying with environmental and safety regulations. Investing in physical commodities, such as gold, exposes the Portfolio to other risk considerations such as potentially severe price fluctuations over short periods of time. The Portfolio may use a range of derivative instruments in seeking to hedge market risk on equity securities, increase exposure to specific sectors or companies, and manage exposure to various foreign currencies and precious metals. Such hedging involves additional risks, as the fluctuations in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. These and other risks are more fully described in the prospectus.

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

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Ivy VIP Balanced

Market Sector Update

  • Markets exhibited historic levels of volatility with equity markets posting dramatic declines in the first quarter of 2020, as the COVID-19 pandemic spread across the globe and countries adopted increasingly stringent policies to slow the rate of infection. As the quarter progressed, we witnessed a dizzying array of unprecedented market, economic and societal events. In the realm of economics, the March initial jobless claims data was a stark indicator of the challenge faced by the domestic economy with more than 3 million claims filed, a level that was four times the previous record high.
  • As the economic ramifications of the virus and its remediation became apparent, markets declined and policy-makers responded. Global central banks dramatically reduced interest rates with the Federal Reserve (Fed) cutting its target range by 100 basis points (bps) over a two-week time period to 0.00% – 0.25%. In addition, the Fed launched a series of monetary and regulatory measures to ease the hit to the U.S. economy including unlimited purchases of Treasury and agency mortgages; various loan facilities; and foreign exchange swap lines with global central banks to name a few.
  • The U.S. Congress also moved quickly to pass legislation. The most significant being the $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act, which was signed into law late in the quarter. Unfortunately, the number of cases and deaths resulting from the COVID-19 virus continued to grow, which is first and foremost a tragic human loss and secondarily, a growing threat to the global economy.
  • The S&P 500 Index, the Portfolio’s equity benchmark, declined 19.6% for the period, with the energy, financials, industrials and real estate sectors leading the decline. While every sector posted negative returns for the quarter, information technology, health care, consumer staples and utilities sectors declined the least.
  • The Portfolio’s fixed income benchmark, the Bloomberg Barclays U.S. Government/Credit Index rose 3.4% as interest rates declined and U.S. Treasuries rallied. The 10-year Treasury yield collapsed by approximately 125 bps to 0.67%. The Treasury curve steepened modestly with the spread relationship between the 2-year and the 10-year Treasury bond at 40 bps, up from 35 bps at the start of the quarter. Investment grade credit spreads widened significantly during the quarter to 272 bps, a level historically coincident with economic recessions.

Portfolio Strategy

  • The Portfolio delivered a negative return and underperformed its benchmark for the quarter.
  • The Portfolio’s underperformance was driven by poor security selection in the equity and fixed income sleeves and a modest overweight of equity. For the quarter, the equity weight of the Portfolio averaged 63%, the fixed income averaging 34% and the balance in cash.
  • Within the Portfolio’s equity sleeve, an overweight of pro-cyclical sectors and, in particular, the industrial sector hampered relative performance. Stock selection was also a meaningful detractor. The drivers of underperformance at a security level were idiosyncratic in nature but resulted from a value bias in the equity sleeve. Stock selection detracted the most within the health care, information technology and industrials sectors.
  • Within the fixed income sleeve, our allocation to Treasury inflation protected securities produced a positive return for the quarter, but underperformed nominal Treasuries which negatively impacted relative performance. In addition, poor security selection in the energy sector was a significant detractor. At the end of the quarter, the fixed income sleeve had duration around seven years, which is approximately in-line with the benchmark.

Outlook

  • As we look ahead, global economic growth is likely to contract meaningfully in the near term as governments, businesses and individuals adjust to the necessary realities of combating a global pandemic. Our thoughts and prayers go out to the growing number of people tragically impacted by this virus as well as to those working tirelessly to contain it. As stewards of your capital, it is our responsibility to perform the seemingly cold-hearted but necessary analysis of the financial impacts of this pandemic on markets and individual securities.
  • To that end, we made two significant changes over the course of the quarter. In January, we reduced the Portfolio’s equity exposure by 5%, the proceeds of which were invested in U.S. Treasuries. In March, we began reducing our substantial position in Treasuries to fund purchases of predominately Investment Grade rated fixed income instruments. As of quarter end, the Portfolio’s allocation to equity was 58%, fixed income was 40% with a cash balance of 2%.
  • The economic impacts of COVID-19 are likely to be significantly negative with unprecedented declines in economic activity as measured by GDP very likely in the near term. The resulting surge in unemployment as well as likely credit losses will dampen the outlook for growth. However, the experience of other countries provides some hope, and increasingly evidence, that a sharp rebound in economic activity can commence once the spread of the virus slows. While we believe domestic economic contraction is all-but-certain in the near term, the lagged effects of fiscal and monetary stimulus put in place over the last several weeks is likely to bring some stability to financial markets and eventually aid the economic recovery.
  • While we continue to monitor macroeconomic forces and trends, we maintain an emphasis on finding high quality, growing companies whose securities are trading at a reasonable valuation with visible catalysts to drive relative outperformance over the next 12 months. This approach has served investors well over time, and our confidence in it has not waned.

The opinions expressed are those of the Portfolio's managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2020, 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. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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

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

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

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

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Mark Beischel
Susan K. Regan

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Ivy VIP Asset Strategy

Market Sector Update

  • The spread of COVID-19 dominated both the economic and market backdrop during the quarter, causing nearly unprecedented market volatility. The “viral” impact was exacerbated by falling oil prices, when what began as an expended demand shock was compounded by Russia’s lack of cooperation with Organization of Petroleum Exporting Countries (OPEC) in cutting oil production, and then Saudi Arabia’s reaction to increase its own production punitively.
  • Equity markets declined sharply as uncertainty over earnings and liquidity made visibility over valuations difficult. Credit markets experienced a painful leverage unwind that was felt across a broad swatch of instruments. Investment grade, high yield and emerging credit all experienced sharp price declines as did other parts of fixed-income markets, including mortgages, commercial mortgage-backed securities, and Municipals.
  • The U.S. Federal Reserve (Fed) initially cut the Federal Funds Rate by 50 basis points at the beginning of March to combat the slowing economy. This proved woefully inadequate and, within a few weeks, rates had been cut to zero and an extensive quantitative easing program was launched that eventually included assets beyond the traditional instruments of Treasuries and agency mortgage-backed securities.
  • Fed easing was eventually complemented by a large fiscal policy response to try to combat the dramatic slowing of the real economy. Similar policy steps were taken internationally with many countries enacting fiscal legislation complemented by aggressive monetary policy from global central banks to ease financial conditions.

Portfolio Strategy

  • The Portfolio outperformed its global equity benchmark during the quarter. The Portfolio experienced more volatility than expected as asset correlations rose significantly during March. Despite entering the quarter below our median risk allocation, the portfolio performed below expectations, capturing about 91% of the benchmark index’s downside. Exacerbating the cross-asset correlations, on an equity-only basis, the Portfolio slightly underperformed the benchmark. Our fixed-income portfolio, which is credit heavy, suffered through much of the leveraged unwind we saw across asset markets. The one standout during the quarter was our gold position, which returned more than 3%.
  • Within equities, stock selection was the biggest culprit to performance combined with the Portfolio’s underweight allocation to the U.S., and thus underweight to the U.S. dollar which strengthened during the period. Our health care stocks underperformed, with Zimmer Holdings, Inc. hit the hardest as investors attempted to gauge the impact on elective procedures like knee and hip replacements. We added to our position during the quarter. Poor selection also impacted financials, industrials and consumer discretionary. Airbus SE, a long-term Portfolio holding, declined more than 55% during the quarter. We believe this sell-off was a bit overdone, and also added to Airbus during the quarter. Our auto-related positions were hard-hit in the sell-off. We have reduced our exposure to auto original equipment manufacturers (OEMs) but have retained our key auto parts positions, which we believe should benefit from continued content shift toward electric vehicles, hybrids and driver assistance. On the positive side, both stock selection and our overweight to information technology provided a positive effect, along with an underweight allocation to oilfield services and exploration and production (E&P).
  • As previously mentioned, the fixed-income side of the portfolio had a rough quarter. Several of our credit positions were hit particularly hard. While our credit research prioritizes the ability of companies to create cash flow over the cycle, that analysis had not contemplated the real economy coming to almost a complete stop. Even some of our higher quality fixed-income assets in the mortgage market suffered as levered unwinds of positions and fears over deferred payments and defaults dominated the landscape.

Outlook

  • The economic backdrop contains an almost unprecedented amount of uncertainty. It is unknown exactly how long COVID-19 shutdowns will last, and how much human behavior will change given the extraordinary events we are living through. With this backdrop, we try to look at what is known to dictate how we make portfolio decisions. This, for the moment, has led us towards two different ideas, including gold and investment-grade credit.
  • While gold has long been a staple of the Portfolio, our preference for the metal as a safe, diversifying asset continues to grow. Across the globe, huge fiscal programs are being enacted in an effort to plug gross domestic product (GDP) holes being created by COVID-19 shutdowns. Those fiscal programs are being funded largely by central banks providing huge amounts of liquidity and expanding central bank balance sheets to unprecedented levels. In the U.S., we could very well see the Fed’s balance sheet grow to $10 trillion. We believe the debasement of fiat currencies further strengthens the case for gold in portfolios. Given the low level of yields, growing deficits and central bank balance sheet expansion, we increasingly favor holding gold over other safe-haven assets such as Treasury notes or highly rated government bonds. We have also added a gold miner to the equity portfolio in an effort to take advantage of its leverage to the price of gold.
  • Our other strong preference is for investment-grade credit. This is an asset class which sold off heavily in mid-March as leveraged unwinds drove spread widening in violent fashion. Investment-grade companies tend to have large liquidity buffers and credit metrics which allow them to withstand economic shocks. In a world where most of the Treasury curve yields less than 1% and companies are cutting dividends, we believe the search for safe income will drive credit spreads tighter, providing good opportunities for total return.

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, 2020, 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 horizonPast performance is not a guarantee of future results.

Top 10 equity holdings as a percent of net assets as of 03/31/2020: Microsoft Corp., 3.1%; Taiwan Semiconductor Manufacturing Co. Ltd., 2.9%; Wal-Mart Stores, Inc., 2.5%; Visa, Inc., Class A, 1.9%; Adobe, Inc. 1.8%; ORIX Corp. 1.6%; Subaru Corp. 1.5%; Fiserv, Inc., 1.5%; Ping An Insurance (Group) Co. of China Ltd., H Shares, 1.5%; and Northrop Grumman Corp. 1.4%.

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.

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

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Ivy VIP Value

Market Sector Update

  • The decade-long bull market came to an abrupt and painful end with the emergence of the COVID-19 virus. Up until that time, the market was looking like it was on track for another solid year. A trade deal with China and record-low unemployment had the stock market setting new highs.
  • Just like that, everything changed. More than 80% of the country was ordered to shelter-in-place, with the rest of the country likely headed that way. With the order, small and large businesses alike were forced to shut their doors and dramatically change how they operated. Record low unemployment changed to record high unemployment almost overnight. Adding to the pain, Russia and Saudi Arabia started an oil price war by disagreeing to any production cuts, causing oil prices to collapse. The Federal Reserve (Fed) then took interest rates to zero. Finally, the U.S. government responded with an unprecedented support package.
  • We expect market volatility to be very high for the near term but are more constructive for the longer term. While each day brings with it an unthinkable new surprise, we believe the coronavirus is temporary, and we expect growth to improve in the back half of 2020 as the frozen economy begins to thaw out.

Portfolio Strategy

  • The Russell 1000 Value Index, the Portfolio’s benchmark, was down 26.7% for the quarter. The Portfolio underperformed the index for the period. Nearly all of the quarter’s underperformance occurred in March as the market dropped significantly. We believe market volatility often favors value investing; however, many high-quality companies are now trading at depressed prices. We feel optimistic that careful buying at these low prices will be rewarded.
  • The Portfolio's best performing sectors on a relative basis were consumer discretionary and information technology. Sectors that dragged on performance included health care and financials. Our largest overweight sectors were information technology and consumer discretionary, while the most underweight sectors were real estate and health care.
  • The virus quickly ended several positive trends in financials, the sector that detracted the most from Portfolio performance during the quarter. Strong consumer credit card spending dramatically slowed, hurting portfolio holding Synchrony Financial. AGNC Investment Corp., our mortgage real estate investment trust holding, was down due to fears over both mortgage defaults and volatile fixed-income markets. Additionally, the Portfolio’s underweight to the health care sector, specifically within pharma and health care equipment, detracted from our relative performance as investors flocked to those industries during the pandemic.
  • The Portfolio’s best sector was consumer discretionary, with Target doing well as a safe haven in a time when many retail businesses are closed. Walmart, in the consumer staples sector, experienced similar benefits. Information technology also contributed, and to date has fared better than many sectors in response to COVID-19. Our investments in Lam Research and Microsoft were the bright spots. Lam Research continues to benefit from strong spending for semiconductors. Microsoft continues to do well with its cloud strategy.
  • Our strategy does not attempt to make sector calls, rather focusing primarily on stock selection. We overweight or underweight sectors based on individual stock opportunity, with some limits to control risk or volatility. We are currently overweight financials and information technology, where we are finding value and yield. These two sectors often move in opposite directions, which can provide an overall lessening of volatility. In these areas, we have been able to find what we believe are good companies with repeatable business models generating high rates of free cash flow, and low stock prices relative to our estimation of each company’s true intrinsic value. Our underweight to real estate and communications services is simply due to lack of compelling ideas.

Outlook

  • The U.S. economy had enjoyed a long successful run from the end of the 2008 recession, but the coronavirus ended this streak in March. We think the pandemic-driven shutdown in economic activity will cause a recession unlike any we have ever seen before. For the foreseeable future, battling the virus will dominate life and drive stock prices and the U.S. economy going forward. While we recognize there are many unknowns in this battle, the government backstop provides the markets a bit of relief. As we get closer to a vaccine, the world should restart, thus our reason for a constructive longer-term outlook. In the meantime, we will continue to seek value as opportunities present themselves.
  • While the economic forces listed above are clearly important factors, our first approach is from the company level. We seek to find quality, growing companies whose stocks are trading below what we consider their intrinsic values. This often is due to short-term negative factors, and we become larger owners of a company if we feel those negatives are about to dissipate. We continue to search for and make investments one company at a time to seek to benefit clients over the long run.

The opinions expressed are those of the Portfolio’s manager and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 31, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Top 10 holdings (%) as of 03/31/2020: Walmart, Inc. 4.6, Philip Morris International, Inc. 4.2, Bank of America 4.0, CVS Caremark Corp. 3.9, Exelon Corp. 3.7, Comcast Corp. 3.6, Fidelity National Information Services, Inc. 3.3, Allstate Corp. 3.2, Northrop Grumman Corp. 3.1 and Citigroup, Inc. 3.1.

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

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. The value of a security believed by the Portfolio’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. Investing in companies in anticipation of a catalyst carries the risk that certain of such catalysts may not happen or the market may react differently than expected to such catalysts, in which case the Portfolio may experience losses. The securities of many companies may have significant exposure to foreign markets as a result of the company’s operations, products or services in those foreign markets. As a result, a company’s domicile and/or the markets in which the company’s securities trade may not be fully reflective of its sources of revenue. Such securities would be subject to some of the same risks as an investment in foreign securities, including the risk that political and economic events unique to a country or region will adversely affect those markets in which the company’s products or services are sold. 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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Matthew Norris

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