Ivy VIP Core Equity

Ivy VIP Core Equity
03.31.19

Market Sector Update

  • Domestic markets surged in the first quarter of 2019, with the S&P 500 Index, the Fund’s benchmark, up over 13% for the quarter. This follows a dismal performance in the previous quarter, where the benchmark declined nearly 14%.
  • We attribute this dramatic rebound to the Federal Reserve (Fed) and its pivot on interest rate increases. The Fed indicated it will likely leave rates unchanged this year due to weaker global growth and benign inflationary pressure.
  • In another surprising move, Fed Chairman Jerome Powell announced in March plans to halt the Fed’s program of reducing bonds and mortgage-backed securities holdings on its balance sheet in September. The best performing sectors for the first quarter included information technology, real estate, industrials and energy as the market took a decidedly pro-cyclical turn. Real estate, while not typically pro-cyclical, performed well thanks to the downward move in 10-year Treasury interest rates in late March. The worst performing sectors for the quarter included health care and financials.

Portfolio Strategy

  • The Portfolio delivered a positive return for the quarter, but underperformed its benchmark.
  • The largest detractor from relative performance was the larger-than-normal cash balance. Additional negatives included stock selection in the communication services sector. The portfolio’s underweight and stock selection in energy also detracted from relative performance. The largest positive contributor to relative performance came from stronger stock selection within financials.
  • From a style perspective, it should be noted that over the past nine months we have materially decreased the portfolio’s weighting of high growth stocks as their valuation levels have increased relative to the broad market.
  • We anticipate that through the course of 2019, investors will feel somewhat better about growth prospects outside of the U.S. and more value-oriented investments could see a good tactical run. We have and will continue to pivot the Portfolio to companies with valuation characteristics that are more favorable. Often these moves will come at the expense of some longtime winners in the Portfolio.
  • Looking at the Portfolio's composition, the information technology and consumer discretionary sectors are the Portfolio’s largest sector overweights as we are adding positions in which there has been growth in earnings and/or free cash flow while trading at valuation levels below their historical norms. The Portfolio continues to be underweight expensive bond proxy groups including real estate and utilities. We saw large opportunities to invest in companies following the recent correction, so the Portfolio’s cash levels are down over the previous quarter.

Outlook

  • As we look ahead, the pace global economic growth is very likely to slow, but remain positive in the near term. There are signs that policy makers globally are responding to slowing growth and a lack of inflation. Chinese policymakers are stimulating, while eurozone officials continue a policy of negative interest rates and the Fed’s signal of no further near-term rate hikes.
  • However, the uncertainties around political, monetary and trade policies have been stubbornly persistent and are likely to linger for most of this year. While we believe domestic economic growth will continue, the lagged effects of tighter monetary policy and waning benefits from fiscal stimulus will be a headwind.

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, 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.

Gus C. Zinn, CFA, served as a portfolio manager and the strategy until Dec. 03, 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: The value of the Portfolio’s shares will change, and you could lose money on your investment. 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. 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. Not all funds or fund classes may be offered at all broker/dealers. 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.