Ivy Funds VIP Energy

Ivy VIP Energy
06.30.17

Market Sector Update

  • The U.S. Federal Reserve (Fed) raised interest rates in June, the second hike this year. Oil prices weakened on concerns about inventory levels and optimism waned for stimulus or legislative progress from the Trump Administration.
  • Equity and fixed income markets generally moved higher around the globe. In U.S. equities, growth indexes again outperformed value.
  • The U.S. dollar weakened against the currencies of most trading partners, including the Mexican peso which is showing strength after a battering in 2016 following the U.S. presidential election.
  • U.S. economic data showed improvement, Europe’s economy continued its positive trajectory and economic growth moderated in China.

Portfolio Strategy

  • The Portfolio posted a negative return for the quarter that was greater than the negative return of its benchmark index.
  • The five greatest contributors to performance relative to its benchmark index in the quarter were RPC, Inc., Keane Group, Inc., Schlumberger Ltd. (because of an underweight versus the benchmark to an underperforming stock), Wex, Inc. and Enterprise Products Partners L.P.
  • The five greatest detractors to relative performance were Oasis Petroleum LLC, Continental Resources, Inc., Weatherford International Ltd., U.S. Silica Holdings, Inc. and Whiting Petroleum Corp.
  • If oil and other commodity prices are not rapidly rising, high-quality companies with the lowest cost resources, strong balance sheets and highest returns should benefit the most. Therefore, we continue to focus on these types of companies in the portfolio.

Outlook

  • We estimate global oil demand is growing steadily this year at a pace of 1.2-1.4 million barrels per day, about 20- 40% above its recent historical average.
  • After two years of slowing supply growth, we believe we are in the beginning stages of supply reacceleration in certain areas of the world, with the U.S. showing the fastest move. We think the pace of supply growth in the U.S. could reach 1 million bpd by the end of 2017.
  • We believe an oil price of $55 to $65 per barrel would provide sufficient cash flow to allow continued supply growth from the U.S. for the next couple years and make it the largest contributor to growth for the near future. That leads us to believe U.S.-focused production companies are likely to have the highest growth rates and offer potential opportunities to reduce costs through productivity gains. Higher prices will be needed in the coming years in order to balance global supply and demand.
  • We still think global economic growth will steadily improve in the remainder of 2017 and 2018.

The opinions expressed are those of the Portfolio's managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 30, 2017, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Top 10 Equity Holdings as a percent of net assets as of 06/30/2017: Halliburton Co., 4.77%, Schlumberger Ltd., 4.53%; U.S. Silica Holdings, Inc., 4.49%; EOG Resources, Inc., 4.42%; Parsley Energy, Inc., 4.07%; RPC, Inc., 4.04%; Pioneer Natural Resources Co., 3.90%; Continental Resources, Inc., 3.81%; Baker Hughes, Inc., 3.73%; Concho Resources, Inc., 3.29%.

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Risk factors. The value of the Portfolio's shares will change, and you could lose money on your investment. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. Investing in the energy sector can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments, and the cost assumed by energy companies in complying with environmental safety regulations. These and other risks are more fully described in the Portfolio's prospectus.

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