Ivy VIP Global Bond

Ivy VIP Global Bond
12.31.17

Market Sector Update

  • President Trump achieved his first major legislative victory with the most sweeping overhaul of the U.S. tax policy in 30 years. The reform permanently reduces the federal corporate tax rate to 21 percent from the current 35 percent and reduces certain individual tax rates until 2026.
  • The Federal Open Market Committee (FOMC) raised its policy rate 0.25 percentage points to 1.50 percent and reiterated its intentions to raise short term rates three more times in 2018.
  • The FOMC began its new program for its balance normalization. In October, the drawdown was capped at $10 billion and will increase by $10 billion quarterly until it reaches $50 billion per month.
  • The European Central Bank announced that it will ease its asset purchase program to 30 billion euros per month from its current 60 billion euros per month, starting in January 2018. The era of lower rates, including negative rates, and an ever-expanding balance sheet is starting to wind down.
  • The Bank of Japan (BOJ) stood idle and did not provide any future guidance regarding a change in direction with its monetary policy of targeting interest rates. Inflation forecasts suggest that while the BOJ might have overcome deflation, the 2 percent goal is still not on the horizon.
  • The Financial Stability and Development Committee in China vowed to fend off systemic risks like rising debt and housing bubbles.

Portfolio Strategy

  • The Portfolio underperformed the Barclays Multiverse, Lipper Category Average, and Morningstar Category Mean due to the overweight in U.S. dollar. The US. dollar weakened over the quarter, with the euro and British pound appreciating 1.64 percent and 0.86 percent, respectively. Having a 98 percent dollar exposure hurt the relative return of the portfolio versus its benchmark and peer groups.
  • Credit spreads continue to compress as demand for income attracts foreign capital into the credit markets and credit spreads have benefited from that international demand. Volatility in the rates market was low and had little impact on the returns of the Portfolio, benchmark, or Lipper peer group.
  • We continue to seek opportunities to reduce the volatility in the Portfolio.
  • We are maintaining a low duration strategy for the Portfolio, as it allows us a higher degree of certainty involving those companies in which we can invest.
  • We continue to focus on maintaining proper diversification for the Portfolio.
  • We look for opportunities to make long-term investments in foreign currencies in certain emerging markets should they weaken versus the dollar.
  • We continue to hold a higher level of liquidity (patient capital) because of structural changes in the capital markets. We will be opportunistic in allocating that capital when dislocations in the market arise.

Outlook

  • We expect global growth to continue to increase over the course of the year. We believe the negative impact from the Great Recession has finally moderated. This backdrop, combined with a significant corporate tax cut and a rising capacity utilization rate, should support this growth.
  • Inflationary pressures are likely to stay subdued, which means that yields are unlikely to rise excessively. With subdued inflationary dynamics, changes in global rates have become more about monetary policy shifts rather than inflation expectations.
  • Central banks will continue to normalize their policies, driven by solid growth and easy financial conditions, amid downside risks to inflation.
  • The shape of the yield curve should continue to remain flat with the FOMC’s intention of raising short term rates and little inflationary pressures on the long end of the curve.
  • A comprehensive deal regarding Brexit before the U.K.’s economy loses steam seems unlikely. Delayed investment by companies and the negative impact on consumption should drive the economic slowdown.
  • Adjustments to the BOJ’s yield curve control (YCC) may happen sooner than generally anticipated, as Japan’s economy has been showing signs of increasing labor-market tightness.

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, 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.

Diversification and asset allocation are investment strategies that attempt to manage risk within your portfolio but they do not guarantee profits or protect against loss in declining markets.

The Bloomberg Barclays Multiverse Index is an unmanaged index comprised of securities that represent the global bond 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. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. These and other risks are more fully described in the Portfolio’s prospectus. Not all funds or classes may be offered at all broker/dealers.

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.