Ivy VIP Core Equity

09.30.19

Market Sector Update

  • The S&P 500 Index, the Portfolio’s equity benchmark, advanced nearly 2% in the third quarter of 2019. Sector leadership was overwhelmingly defensive as utilities, real estate, and consumer staples meaningfully outperformed the overall market.
  • Declines in certain economic indicators were evident for the period, primarily those tied to the industrial sector of the U.S. economy, which has weakened with slower areas like the eurozone and China. The ongoing trade disputes with key trading partners have diminished business confidence and caused a pause in business investment.
  • Yields on the 10-year U.S. Treasury note declined from more than 2% near the start of the period to around 1.65% at quarter-end, as market participants reacted to weaker growth readings and the expectation that inflation indicators would weaken.

Portfolio Strategy

  • The Portfolio delivered a positive return for the quarter and outperformed its benchmark.
  • The Portfolio’s top-performing sectors were materials, consumer staples and information technology. Conversely, health care, consumer discretionary and industrials were the biggest sector detractors from performance. In addition, the Fund’s lack of exposure to real estate also was a drag on performance.
  • Throughout the year, we have continued to shift the Portfolio toward more value-oriented holding by selling full or partial positions in many of our high-growth stocks. This continued in the third quarter with our exit from positions in three holdings and reduced positions in two others. We also added four holdings with attractive valuations, including some labeled as volatile, cyclical or saddled by controversy
  • Despite these moves, the Portfolio is still structured moderately towards growth and our risk characteristics are wellcontrolled during a highly uncertain period in the market. We will look to future signs of bottoming in economic activity to make more significant changes toward value/cyclical holdings.

Outlook

  • The broader equity market – as measured by the S&P 500 Index– is up nearly 20% year to date. However, the market has digested slowing in overseas markets, notably Europe and China, significant trade disruption caused by tariff increases, political turmoil in the U.S. that includes an impeachment inquiry and lingering Middle East tensions, including the attack on a key Saudi Arabia oil facility.
  • U.S. economic weakness appears primarily manifest in multinational businesses exposed to capital spending and consumption patterns outside the U.S. This segment of the economy represents approximately 20% of economic activity, but constitutes a higher percentage of corporate profits, which we have repeatedly discussed as being the most fundamental driver for stock prices.
  • Fully 10 years into the current economic cycle, underlying jobs and wage data remains healthy and indicative of an expansionary economy despite a high degree of uncertainty elsewhere. Against this backdrop of strong wage and employment figures, it may seem odd the Federal Reserve (Fed) has embarked on a series of interest rate reductions in response to signs of economic softness as an “insurance policy” against a stronger slowdown or even recession. This more favorable interest rate environment is providing the housing sector a boost as new home sales and housing starts have reached cycle highs.

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 Sept. 30, 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.

Gus C. Zinn, CFA, served as a portfolio manager and the strategy until Dec. 3, 2018.

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.

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.