Ivy VIP High Income

Ivy VIP High Income

Market Sector Update

  • The third quarter of 2017 was anything but uneventful. Data such as the ADP job report, upwardly revised second quarter growth, lower than expected inflation, geo-political tensions in North Korea, social unrest in Charlottesville and natural disasters impacting the nation’s third largest city (Houston), as well as the state of Florida, all took place in the third quarter. Despite these events, the S&P 500 climbed 4.48% during the quarter and the major fixed Income asset classes also experienced positive performance, although somewhat more subdued. Throughout the quarter, 10-year Treasury yields drew down close to 2.0% levels, but rebounded by quarter-end following a three month deal on the debt ceiling and the announcement by the Federal Open Market Committee they will begin reducing the Federal Reserve’s (Fed) balance sheet in October.
  • Per the Lipper High Yield peer group returns, the high yield markets rose 2.03% during the quarter with monthly performance of 1.14% in July, flat in August followed by a turnaround in September of 0.94% led by the positive momentum from the proposed tax plan, strength in the equity markets and a rebound in energy prices. The result is a 6.03% return year-to-date for the Lipper High Yield peer group. Spreads finished the quarter at 415 basis points with a yield now under 6%, at 5.90%.
  • Flows into the High Yield mutual fund category were negative for the quarter totaling -$585 million, but slowing from the previous quarters’ outflows of -$1.34 billion. September inflows were positive, totaling $1.7 billion. These were the strongest inflows seen since December 2016.
  • Issuance was muted in July and August but rebounded in September, bringing third quarter volume to $79.8 billion.

Portfolio Strategy

  • The Portfolio performed in line with the Bank of America U.S. High Yield Master II TR USD Index (BAMLHY), the benchmark for the Portfolio.
  • The Portfolio retains a 21.29% allocation to Senior Loans. The BAMLHY Index does not have an allocation to loans, but the exposure was a positive contributor to the Portfolio for the quarter. Although the strategy is driven by fundamental, bottom-up research selection rather than a quality or sector bias, the Portfolio’s allocation to CCC paper and loans will allow it to be less interest rate sensitive in a rising rate environment.
  • Other contributors for the quarter were within the health care sector, driven by the selection of individual credits. The Portfolio actually has less than half the weighting of the index (around 4% versus the index of almost 10%), but outperformance of specific bonds within the sector benefited the Portfolio. A slight overweight within the leisure subsector and individual credit selection also benefited the Portfolio from an attribution perspective.
  • Higher credit quality non-investment grade bonds outperformed the past three months, which is a reversal from previous quarters. BB rated bonds returned 2.53%, B rated bonds climbed 1.69% and CCC rated bonds garnered 1.44%.


  • The central question on the majority of minds continues to be: where are we in this credit cycle? The probability for a third rate hike in 2017, most likely in December, continues to increase along with an anticipated three or four rate hikes in 2018. Rate hikes accompanied by the Fed reducing its $4 trillion balance sheet, as well as geo-political tensions, are just some of the factors that could make it difficult to experience meaningful gains from here. There are however, good reasons for optimism too. The global economy is showing durable signs of improvement in particular in areas like Asian trade, European Union recovery, and the U.S. labor market. Tax reform, if passed, could add a substantial boost to both consumers and corporations. The argument could also be made that the cyclical clock has been set back a few hours to account for the energy default experience over the past two years. To be sure, it is a mixed picture.
  • At the end of the quarter, CCC credits are now trading over 90 at $92.92, while BB quality credits and B credits are now well over par at $105.88 and $103.14, respectively. In the era of ever-present demand for yield, accompanied by compressing spreads and lower rates across the entire credit spectrum, there is increasing concern over risk-adjusted returns. As yields on the high yield indexes and the exchange-traded funds tracking them have pushed down to 5% levels, it begs the question of how much risk investors should be taking for moderate yield.
  • It is our view that finding value in the high-yield market has become increasingly more difficult, and considerable caution is warranted in making new investments. The global reach for yield has kept demand at all-time highs. As such, we believe our continued process of bottom-up, in-depth fundamental research and analysis will guide us to those investments where the risk/reward is in our favor. We also think the ability to continue to invest in loans will be an attractive differentiator for the Portfolio, because of the potential of a continuation of rising interest rates accompanied by the possibility of a more active Fed. We believe our relative underweight to bonds may prove beneficial, as we believe bonds may have more downside risk over the next 12 months.

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, 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 is an investment strategy that attempts to manage risk within your portfolio but it does not guarantee profits or protect against loss in declining markets.

The BofAML U.S. HY Master II TR USD Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. It is not possible to invest directly in an index.

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. 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. 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. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Portfolio 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 fund 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.