Ivy Funds VIP International Core Equity

12.30.14

Market Sector Update

  • International markets rose slightly more than 5% in the quarter, based on the Portfolio’s benchmark, with currency a hindrance on international performance resulting from the strengthened U.S. dollar. Central banks remained very accommodative and provided support for risky asset prices in equity and fixedincome markets.
  • Political hardships were a drag on international markets. In particular, the financial crisis in Cyprus accompanied by inconclusive election results in Italy proved to be key headwinds and will likely continue to negatively affect the eurozone going forward. On a positive note, the Chinese economy improved, albeit at a slow pace. Additionally, legislative changes designed to kick-start the Japanese economy by the Abe administration was a positive surprise.
  • Turning to the U.S., the political gridlock continued as the two key political parties could not agree on spending cuts. As a result, automatic cuts under the wellpublicized sequester were implemented.

Portfolio Strategy

  • The Portfolio lagged the benchmark slightly for the quarter. Underperformance can primarily be attributed to a beta rally in January, a market environment that was unfavorable due to the defensive positioning of the Portfolio, and our exposure to emerging markets.
  • The market environment reversed course during the latter half of the quarter as a market rotation into defensives enabled the Portfolio to recoup a large majority of the performance shortfall. In aggregate, our developed markets outperformed the index, which was encouraging as defensives beat cyclicals in these markets.
  • We expect to maintain cash levels at around 5% of assets in the Portfolio. We continue to seek undervalued or reasonably priced companies that we think can do well in a slow growth environment and withstand a material downturn.
  • The Portfolio’s sector allocation continues to favor stable over cyclical stocks and remains neutrally positioned between growth and value. Approximately 7% of the Portfolio is exposed to emerging market stocks, which we think is reasonable in the current market environment.

Outlook

  • We believe global economic growth is fragile but showing positive momentum with global monetary policy remaining aggressive through year-end.
  • We think any significant improvement in economic growth will eventually lead to tighter monetary and fiscal policy in the advanced economies. In our opinion, the slower economic growth experienced since 2008 is likely as good as we can expect today, with greater downside than upside risks.
  • Equities are trading at levels that are in line with their historic averages (last 25 years), while bonds are trading at a premium. Since 2008, investors have had a great appetite for bonds and little for equities. If investors determine that it is safe to return to equities and sustained flows were to come, then multiples would expand. If not, we feel equities should trade at a discount to their recent average as prospects for global growth are lower.
  • Long term, we believe emerging countries such as China, India and Brazil will continue to try to improve their population’s standard of living. To accomplish this feat, the countries will require vast amounts of infrastructure and increasingly productive economies. As a result, we believe these trends will benefit consumer-facing and infrastructure companies serving these markets.

The opinions expressed in this commentary are those of the Fund's manager and are current through March 31, 2013. The manager’s views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results.

Investors should consider the investment objectives, risks, charges and expenses of a portfolio and the variable insurance product carefully before investing. The portfolio and variable insurance product prospectuses contain this and other information, available by calling your f nancial advisor, visiting www.ivyfunds.com or contacting the applicable i insurance company. Please read the prospectuses or summary prospectuses carefully before investing.

Risk Factors. As with any mutual 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. These and other risks are more fully described in the Fund's prospectus.

Variable investment options are subject to market risk, including loss of principal, and are suitable for long-term investing, particularly for retirement. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 ½ may be subject to a 10 percent IRS penalty in addition to taxes. Ivy Funds VIP are only available as investment options in variable life insurance policies and variable annuity contracts issued by participating insurance companies. They are not offered or made available directly to the public.