Ivy VIP Mid Cap Growth

Ivy VIP Micro Cap Growth
04.05.13

Market Sector Update

  • Mid-cap growth stocks advanced strongly in the first quarter, posting a double-digit gain.
  • Six of 10 economic sectors outperformed the Russell Mid Cap Growth Index in the quarter, with strong performance from both very cyclical and very defensive groups. The more cyclical consumer discretionary, industrials, energy and financials groups all outperformed, as did the more economically stable consumer staples and utilities groups.
  • Health care, information technology, materials and telecommunications all underperformed, with telecommunications actually posting a slight loss in the quarter.
  • The first quarter was characterized by the outperformance of low quality/low return stocks, which resulted in many quality mid-cap growth portfolios, such as our Portfolio, struggling to keep pace with the benchmark.

Portfolio Strategy

  • The Portfolio underperformed in the first quarter, lagging the benchmark.
  • In addition to a higher-quality bias, other aspects of Portfolio positioning contributed to the shortfall in performance, which included underweight positions in some outperforming groups, such as consumer discretionary, consumer staples, and to a lesser degree, utilities; and overweight positions in some poorly performing groups, specifically information technology. Some stockspecific issues also hindered performance, as did the Portfolio's cash balance across the quarter.
  • The largest contributor to underperformance consumer discretionary, where an underweight in this outperforming group, in addition to some weak stocks, left us lagging both the sector and the overall benchmark performance. Returns in this sector also suffered from a lack of exposure to some strong sub-sectors, including many names in media space, dollar stores as well as auto part retailers.
  • Industrials also contributed negatively to performance, largely due to weak stock picking. Airlines were a strong group in which we had no exposure.
  • We had strong stock gains consumer staples names, better than the sector and benchmark, but an underweight in this strongly performing group was a negative to overall performance.

Outlook

  • We remain generally constructive in our outlook for the U.S. economy throughout 2013, both absolutely, and relative to prospects and expectations for growth in other regions of the world.
  • We think the very positive developments in the U.S. around a stable and rebounding housing market, abundant opportunity for growth in oil and gas exploration and production, and a trend toward manufacturing more in the U.S. again, closer to sources of demand and inexpensive energy supplies, are all supportive of growth in the domestic economy.
  • We see small business development beginning to percolate again, supported by encouraging lending statistics, and pent-up demand by consumers for autos and other capital goods is a plus for growth.
  • Finally, budget deficits are beginning to contract at the state/federal level and tax receipts are growing.
  • Within this generally positive environment, we see opportunities for growth companies to continue to perform well and continue to look for attractively valued stocks in many areas.

The opinions expressed in this commentary are those of the Fund's manager and are current through March 31, 2013. The manager’s views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results.

Russell Mid-Cap Growth Index is an unmanaged index comprised of securities that represent the mid-cap sector of the stock market. It is not possible to invest directly in an index.

Investors should consider the investment objectives, risks, charges and expenses of a portfolio and the variable insurance product carefully before investing. The portfolio and variable insurance product prospectuses contain this and other information, available by calling your financial advisor, visiting www.ivyfunds.com or contacting the applicable insurance company. Please read the prospectuses or summary prospectuses carefully before investing.

Risk Factors. As with any mutual fund, the value of the Fund’s shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Investing in mid-cap growth stocks may carry more risk than investing in stocks of larger more well-established companies. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

Variable investment options are subject to market risk, including loss of principal, and are suitable for long-term investing, particularly for retirement. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 ½ may be subject to a 10 percent IRS penalty in addition to taxes. Ivy Funds VIP 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 public.