Market Sector Update

• The Russell 1000 Growth Index (the Portfolio's benchmark) continued its trend of upward momentum, posting a return of 11.4% for the quarter. Considering the index posted a negative return of over 14% in the first quarter of the year, the index rally through the second, third and fourth quarters was quite substantial, closing 2020 with an annual return of 38.5%. Growth stocks underperformed value stocks in the quarter, as those names that trade more in lockstep with economic cycles benefitted from the approval to two COVID-19 vaccines, passage of additional fiscal stimulus and hopes of more cyclically charged policy from the newly elected administration. Small caps also outperformed large caps in the quarter, reversing a long trend of relative underperformance. Despite large-cap growth stocks coming in last over the quarter, the index still ended the year on top, outperforming large-cap value by over 35% and small-cap growth by just over 4%, as measured by their respective Russell indexes. The broader economic landscape largely maintained the fiscally propped up status through the quarter due to effects of global economic reopening and the emergence of two vaccine candidates with remarkable efficacy. Employment through the first two months of fourth quarter reflected an approximately 56% recovery rate of the 22 million jobs lost in the first months of the pandemic, a much faster rate than expected. Housing and personal consumption remained strong and manufacturing activity strengthened in the quarter. The rapidity and magnitude of the fiscal and monetary efforts introduced early in the pandemic provided stability and the faster than expected reopening in most areas of the economy benefitted from pent up consumer demand and savings. From a sector perspective, all sectors in the index were positive on the quarter, except for real estate, which is less than 2% of the index. The one significant deviation from the prior quarter was the significant outperformance of the energy sector, another very small part of the index. At the factor level, momentum continued to outperform as did growth, while beta and low price (both risk factors) rallied in the quarter with the prospect of a revived economic cycle. Quality factors like return on equity, return on assets and gross margin lagged on the quarter, posing difficulty for stock pickers that look for durable financials and sustainable business models.

Portfolio Strategy

• While the Portfolio posted a strong absolute gain, stock selection within the largest sectors caused it to trail the benchmark for the quarter. Like prior quarters in the year, markets during fourth quarter of 2020 were primarily driven by the “tails” – in this case lower-quality cyclicals and hyper-growth businesses. The uniqueness of this period presented a challenge to the Portfolio’s long-tenured philosophy that focuses on owning the highest quality companies and business models poised to outperform throughout a market cycle not just in one phase.
• In terms of relative attribution for the Portfolio, notable detracting sectors included information technology, consumer discretionary and communication services. Performance was positively impacted in consumer staples and real estate.
• Information technology was the greatest detractor to performance. Overweight positions in salesforce.com, Adobe, Motorola Solutions and VeriSign were drags on performance. Notably these names are some of the most durable, highly profitable and cash generative in the opportunity set, and their underperformance illustrates a move to lower quality.
• Zebra Technologies, PayPal Holdings and Intuit provided positive attribution, and a partial offset to quarterly performance. The Portfolio's underweight position in Apple, Inc., the largest weight in the benchmark, was a notable source of negative performance as the stock continued its significant year-to-date rally.
• Consumer discretionary was a detractor to performance driven primarily by an underweight position in Tesla, which continued its strong performance posting a gain in the quarter and finishing the year with a staggering high-triple digit return. Several of the Portfolio’s overweight positions added to the relative underperformance including Tractor Supply Company, Home Depot and O’Reilly Automotive. Positive contributions were present through sizeable overweight positions in Booking Holdings and Ferrari.
• Consumer staples was a source of positive contribution. The Portfolio was underweighted the sector and avoided relatively weak performance from the largest weights in the benchmark including Proctor & Gamble and PepsiCo. Real estate proved to be a positive contributor to performance driven by the Portfolio’s underweight exposure to the sector.

Outlook

• Supported by low interest rates, flowing fiscal stimulus and improving global growth prospects, the markets will likely enter 2021 with a sustained desire to swing for the fences. As such, it is possible to see continued strength in the nearterm from hyper-growth dream stocks and lower quality, deeply cyclical value names. We see these tail trades, or “barbell strategies,” as temporary. Neither has deep roots attached to quality businesses. We believe as the year progresses the persistence and intensity of outperformance from these tails will cede momentum to more durable investment strategies. We are hopeful that macro and stylist influences on the market will diminish leaving a market better tuned for stock picking, not macro or factor guessing. The catalyst driving our view of a more rational market environment is simply related to the “rubber meeting the road.” Market valuation expansion has been a significant portion of growth style returns over the past two years, which embeds a high level of expectations around accelerating growth or sustaining high levels of rapid growth. We believe that parts of the market – work from home, pandemic beneficiaries and hyper-growth stocks – have built in expectations of years of forward good news based on current low interest rates, contained inflation, upsized fiscal stimulus and stronger near-term economic prospects. We think these high expectations of sustained growth along with a broadening economic recovery and upward movement in rates, poses a real risk to the growth tail of the market. Our empirically proven investment philosophy is based on the fleeting nature of growth sustainability and that growth, if ultimately durable, needs to be attached to a quality business. As such, we have always started our stock selection process with good business model selection and believe quality is paramount to controlling downside risk and driving strong multi-year returns. Although the current environment may be recklessly rewarding only those companies with the highest near-term growth or strongest pandemic revisions, we stand firm in our assessment that quality is more durable than growth. We believe starting with quality while avoiding the temptation to chase growth for growth’s sake (at any cost) will reap significant and more predictable benefits over a multi-year horizon. Thank you for your continued support.

The opinions expressed are those of the Portfolio’s manager 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, 2020, 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.

Top 10 holdings as a % of net assets as of 12/31/2020: Microsoft Corp. 9.7, Apple, Inc. 8.8, Amazon.com, Inc. 7.6, Visa, Inc. 4.4, Alphabet, Inc. 4.3, Facebook, Inc. 3.7, PayPal Holdings, Inc. 3.1, Adobe, Inc. 3.1, Motorola Solutions, Inc. 3.1 and Intuit, Inc. 2.9.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Risk factors: The value of the Portfolio’s shares will change, and you could lose money on your investment. Investing in companies involved primarily in a single asset class (large cap) may be more risky and volatile than an investment with greater diversification. The Portfolio typically holds a limited number of stocks (generally 40 to 60), and the Portfolio’s portfolio manager also tends to invest a significant portion of the Portfolio’s total assets in a limited number of stocks. As a result, the appreciation or depreciation of any one security held by the Portfolio may have a greater impact on the Portfolio’s NAV than it would if the Portfolio’s invested in a larger number of securities or if the Portfolio’s portfolio manager invested a greater portion of the Portfolio’s total assets in a larger number of stocks. 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 Portfolios may be offered at all broker/dealers. These and other risks are more fully described in the Portfolio’s prospectus. The Ivy Variable Insurance Portfolios 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 general public.

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.