Ivy VIP Micro Cap Growth

Ivy VIP Micro Cap Growth

Market Sector Update

  • Fourth quarter 2017 wrapped up an exceptional year for the broader equity markets. In what can only be described as unthinkable after the 2016 election, the S&P 500 Index posted a positive return each and every month during 2017, despite all the unconventional leadership tactics emanating from Washington. This marked the first “perfect” year ever in the S&P’s 60-year history.
  • The positive fundamental factors that have been fueling the steady rise in the equity markets remained firmly in place during the quarter, but perhaps more importantly, a new catalyst emerged – tax reform. This marks the first major change to the U.S. tax code in more than 30 years and is expected to act as an accelerant to economic growth and earnings in 2018.
  • Specifically for the quarter, the trend of larger companies outperforming their smaller peers resumed and so did the growth style bettering value style.

Portfolio Strategy

  • The Portfolio outperformed the Russell Microcap Growth Index, but underperformed Russell 2000 Growth Index (its benchmarks) for the quarter ended Dec. 31, 2017.
  • Returns in the Russell Microcap Growth Index were led by the consumer discretionary, financial and industrials sectors. Many companies within these sectors generate a majority of their revenues from the U.S. and commonly pay the highest tax rates. The passage of corporate tax reform motivated investors to seek out those companies that should benefit most from lower taxes. Conversely, the technology and health care sectors lagged in the quarter, which may have been due to the fact that these companies already commonly pay lower tax rates; thus, the future benefit will be less when compared to areas that led the benchmark. It is also worth noting that the technology and health care sectors had posted solid gains earlier in the year.
  • Portfolio performance attribution analysis for the quarter indicates that on a relative basis, stock selection was solid but the allocation effect caused a slight headwind. The stock selection benefit was once again prevalent in health care while the Portfolio’s industrials and technology holdings also provided a tailwind during the period. In regard to sector allocation, technology actually was also a drag due to the Portfolio’s overweight positioning during a time when that sector was the worst performer in the benchmark. Consumer discretionary and financial holdings were also small detractors in terms of allocation effect.
  • Looking at the Portfolio’s holdings that performed well in the quarter revealed that better than expected financial performance and accretive acquisitions were the two key factors that pushed shares higher. Top performers included AxoGen, GTT Communications, Aeri Pharmaceuticals and American Woodmark. Additionally, Entellus Medical received an acquisition offer at a significant premium from large-cap medical device manufacturer, Stryker.
  • In terms of performance detractors, the Portfolio continued to be hampered by weakness in the consumer discretionary sector. As a result, certain positions were eliminated or materially reduced to make room for new holdings that have a more promising outlook. The energy sector was another area of underperformance during the fourth quarter given worse than expected results from two oil service and equipment companies. Both are early-stage growth companies with unique products and services that have business models that are difficult to predict in any one given quarter, which can cause consternation for short-term investors. At this time, the long-term growth profile of these businesses does not appear to be impaired and a bounce back is financial performance is expected.


  • As the calendar flips to the new year there is little debate that the outlook for economic growth remains bright. The pivotal question is: how long will the good times last? From our vantage point, the growth outlook looks solid for the foreseeable future, especially with the passage of tax reform. Furthermore, we believe inflation remains in check and monetary conditions remain accommodative despite rising short-term interest rates. This combination of factors is contributing to a wave of optimism and it has the potential to continue to push equity markets higher. However, investors must realize that the unbridled optimism of the recent past is not the norm and volatility will undoubtedly increase compared to last year’s near automatic daily increases.
  • Looking forward, a key challenge will be to find companies with prospects that can justify increasingly lofty investor expectations given the significant rally that has occurred over the past couple years. While absolute valuations are elevated, relative valuations are less onerous and, thus far, investment opportunities have not been difficult to uncover.

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, 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.

Top 10 holdings (%) as of 12/31/2017: Aerie Pharmaceuticals 5.3, 8x8, Inc. 4.4, MYR Group, Inc. 4.0, Mimecast Ltd. 4.0, AxoGen, Inc. 3.8, GTT Communications, Inc. 3.4, Tactile Systems Technology, Inc. 3.0, Kornit Digital Ltd. 3.0, Community Healthcare Trust, Inc. 3.0 and Mercury Computer Systems, Inc. 2.8.

The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. The Russell Microcap Growth Index measures the performance of the micro-cap growth segment of the U.S. equity market. The S&P 500 Index is an unmanaged index of common stocks. 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. Market risk for small-sized companies may be greater than that for medium or large companies. Smaller companies are more likely to have limited financial resources and inexperienced management. Stocks of smaller companies, as well as stocks of companies with high-growth expectations reflected in their stock price, may experience volatile trading and price fluctuations. Furthermore, when the economy enters a recession, there tends to be a “flight to quality,” which may exacerbate the increased risk and greater price volatility normally associated with smaller companies. The Portfolio’s performance may be more susceptible to a single economic, regulatory, or technological occurrence than if it had a more diversified investment portfolio. The Portfolio may invest in Initial Public Offerings (IPOs), which can have a significant positive impact on the Portfolio’s performance that may not be sustainable. 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. 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.