Ivy VIP Core Equity

12.31.19

Market Sector Update

  • During the fourth quarter of 2019, the S&P 500 Index, the Portfolio’s benchmark, increased slightly over 9%, marking a strong finish to a good year for the equity market. The strongest performing sectors for the quarter were health care and information technology, which both generated returns greater than 14%
  • We believe strong returns in the health care sector were driven primarily by declining political risk for the sector, as political rhetoric softened about potential implementation of “Medicare-for-all”.
  • Strong information technology sector performance was driven largely by robust fundamentals for most sector constituents and optimism that the U.S. and China have reached a trade truce that will positively impact the more cyclical names in the group.
  • Financials and communication services roughly matched the benchmark’s gains, while the more defensive sectors of real estate, utilities and consumer staples faired significantly worse.

Portfolio Strategy

  • The Portfolio delivered a positive return, but slightlyunderperformed its benchmark for the quarter.
  • Underperformance was largely stock driven, as opposed to underperforming sector bets. Stock picking for the quarter was most negative within the information technology sector as the areas of highest cyclicality, including certain semiconductor stocks, rallied strongly in anticipation of a bottoming in fundamentals along with the aforementioned trade agreement with China. Semiconductor stocks we hold tend to be industrial and auto-related, where we believe the longer-run growth potential resides. However, leaders in this space tended to be companies bottoming first, specifically those tied to the computer and smartphone supply chain.
  • The Portfolio has continued to shift into more value-oriented names that should benefit from any growth stabilization/improvement or even an extended period of moderate economic growth.
  • We have also taken action based on the performance of the health care sector. Overall sector positioning is currently more balanced than other periods, though we continue to be underweight the defensive sectors – utilities, real estate, consumer staples – given robust valuations in those stable groups.

Outlook

  • Calendar year 2019 was unique in that the 31% market appreciation was accompanied by essentially no earnings growth for the market as a whole. That is, stocks were driven by investors’ willingness to pay a higher price for a given earnings stream. It could also be that market participants expect a significant acceleration in the rate of earnings growth in the future.
  • Many have argued, and we concur, that 2019 represented the third profits recession since the Global Financial Crisis. At present, consensus estimates suggest the market anticipates aggregate earnings growth will accelerate in 2020. Industrials, information technology and commodity sensitive industries could fare better as the global growth slowdown and trade-related inventory correction ultimately reverse in 2020.
  • Global central banks have aggressively reduced short-term interest rates to stimulate business investment and risktaking. That stated, we continue to be wary of the extent to which investors have pushed valuations higher in many of the stable and high-growth areas of the market that performed superbly as cyclical growth slowed in 2019.

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 Dec. 31, 2019, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index.

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Risk factors: Because the Portfolio is generally invested in a small number of stocks, the performance of any one security held by the Portfolio will have a greater impact than if the Portfolio were invested in a larger number of securities. Although larger companies tend to be less volatile than companies with smaller market capitalizations, returns on investments in securities of large capitalization companies could trail the returns on investments in securities of smaller companies.

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.