Ivy VIP Mid Cap Growth

Ivy VIP Mid Cap Growth
03.31.19

Market Sector Update

  • Mid-cap growth stocks, as measured by the Russell Midcap Growth Index (Portfolio’s benchmark), enjoyed the strongest returns across the domestic equity spectrum in first quarter 2019, with a return of 19.6%, after falling 16% in fourth quarter 2018. This return ranked as number five among the top quarterly returns for the index over the past 20 years, showing a significant rebound since the end of 2018.
  • As the market rebounded from the selloff late last year, all sectors within the index posted positive returns. Information technology, industrials, consumer discretionary and health care were the top contributing sectors. Energy, in particular, had a strong rebound from worst performing sector in fourth quarter 2018 to a top five performing sector in first quarter 2019, although the sector’s relatively small exposure within the index keeps its contribution to the overall return relatively small.
  • The market’s rebound appears to have come from a more dovish Federal Reserve (Fed) and the announcement that it was pausing interest rate hikes; hopes for governmental stimulus in China coupled with positive news from the Trump Administration on the potential for a trade deal; and indicators that global growth could be nearing the bottom of deceleration. The U.S. economy appears resilient at this point when compared to the recent shocks, whether real or perceived, that are being thrown its way.

Portfolio Strategy

  • The Portfolio had a positive double-digit absolute return for the quarter, outperforming its benchmark. From a sector perspective, the Portfolio benefitted from relative outperformance in consumer discretionary, communication services, industrials and information technology.
  • Consumer discretionary was a significant overweight in the Portfolio and the sector benefitted from solid stock selection. Chipotle Mexican Grill posted strong sales performance as its management’s initiatives in the e-commerce area take hold. MercadoLibre was another particularly strong performer as the Latin American focused e-commerce company is demonstrating strong growth after emerging from a significant corporate investment period. Ulta Beauty, Inc. also posted positive results for the quarter with strong same store sales growth and margin expansion in the ubercompetitive retail space. Ulta has also shown an early adeptness in balancing “traditional” beauty products with the growing health and wellness categories.
  • Within communication services, Electronic Arts had an extremely positive streaming platform game launch during the quarter. The game, Apex Legends, had more than 25 million players within the first week, which compared quite favorably to similar competitors’ offerings. Electronic Arts is a name we have held in the Portfolio for a long time and we still believe strongly in the company’s fundamentals and growth prospects.
  • Our industrials exposure was a slight overweight in the quarter that benefitted from several names, including CoStar Group and Fastenal. CoStar is the leading provider of real estate data, analytics and marketplace-listing platforms, including Apartments.com. It has a defensible franchise of mainly subscription based revenue that continues to grow with solid management execution. In the quarter, the company surprised to the upside as well as refreshed five-year guidance to a stronger level. Fastenal has been in the portfolio for more than a decade and continues to deliver strong numbers with good guidance.
  • Information technology was underweight the benchmark in the quarter. While the allocation affect was a slight negative, stock selection more than offset the underweight drag of the sector on the portfolio. Two particularly strong names for the quarter were ServiceNow and Keysight Technologies. ServiceNow is a software-as-a-service provider specializing in enterprise cloud-based solutions. During the period, it benefitted from higher-than-expected growth in billings against some very difficult comparisons from the year before and has projected higher guidance for the rest of 2019. ServiceNow also continues to ramp up the pace of research and development, which should benefit the company at least through 2020. Keysight Technologies provides testing systems and solutions for a diverse customer base with 5G communications network needs. It reported solid numbers in the quarter and guided higher for its April quarter. With 5G deployment currently in its infancy stages, we think the runway for this mid-cap grower is long.
  • Our cash exposure, while at the low end of our typical range, was still a drag on performance. Also, our small options exposure in the form of protective puts detracted a small amount from performance on the quarter. (A put gives the owner the right, but not obligation, to sell a specified amount of an underlying asset at a set price within a specified time.)

Outlook

  • The market’s temperament changed dramatically between fourth quarter 2018 and the end of first quarter 2019. Concerns about higher interest rates and worldwide trade wars were largely put to bed, with the Fed halting talk of rate hikes for 2019 and much rhetoric around a resolution, albeit on the horizon, to the China/U.S. trade wars. Near term confidence in the economy and corporate profits became in vogue again in the quarter, with a strong risk trade presenting itself in the markets.
  • While the Portfolio represents an economically constructive point of view, our approach is essentially balanced based on stock selection as opposed to overt sector allocations. The Portfolio continues to express a more economically constructive and optimistic view, with a more assertive pro-growth, less defensive stance.
  • We are currently overweight the consumer discretionary, health care and industrials sectors. We are underweight the information technology sector but still have a healthy exposure. We are also underweight the consumer staples sector with our primary exposure in Hershey Foods Corp. and Sprouts Farmers Market. We are underweight materials and have no exposure to the real estate and energy sectors, which represent a combined 3.7% of the benchmark.

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.

Top 10 holdings (%) as of 03/31/2019: CoStar Group, Inc. 3.4, Chipotle Mexican Grill, Inc. 3.3, Zoetis, Inc. 2.8, Tractor Supply Co. 2.7, Electronic Arts, Inc. 2.6, ServiceNow, Inc. 2.5, MercadoLibre, Inc. 2.3, Ulta Beauty, Inc. 2.3, Keysight Technologies, Inc. 2.3 and Edwards Lifesciences Corp. 2.1.

The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. 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. Investing in mid-cap growth stocks may carry more risk than investing in stocks of larger more wellestablished 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.