Ivy VIP Natural Resources

Ivy VIP Natural Resources
06.30.18

Market Sector Update

  • Global equity markets increased slightly in the quarter, while energy outperformed and materials underperformed the broader equity market.
  • Oil prices moved strongly higher in the quarter but base metals moved lower on continued fears of slowing demand from China.
  • The Organization of Petroleum Exporting Countries (OPEC) in June modified its supply quota to begin increasing production again. The change was an effort to account for the loss of production in places like Venezuela and in response to continued rising demand for oil.
  • Investment in U.S. oil supply continues to ramp higher, as evidenced by increasing capital spending due to rising service costs and rising rig count. The rig count remains highest in the Permian Basin despite a widening difference between the prices of West Texas Intermediate and Midland crude oil, which most Permian producers realize.
  • The U.S. continues to be a significant part of global oil supply growth with an accelerating growth rate in the quarter. The overall oil market looked to be relatively balanced in the quarter, with inventories showing just a slight increase.

Portfolio Strategy

  • The Portfolio posted a positive return for the quarter (based on Class I shares), but underperformed the positive return of its benchmark index.
  • The five greatest equity contributors to the Portfolio’s performance relative to its benchmark index in the quarter were WPX Energy, Inc., Magellan Midstream Partners, BHP Billiton Ltd., Core Laboratories and Nutrien, Ltd.
  • The five greatest detractors to relative performance were Exxon Mobil Corp., Occidental Petroleum Corp., ConocoPhillips, Suncor Energy, Inc. and Chevron Corp.
  • The Portfolio’s exposure to the energy sector moved higher from the prior quarter, ending at about 62.5% of equity assets. The remaining sector exposures totaled about 30% to materials, about 5.8% to industrials and about 1.3% to consumer staples.
  • In general, we seek to own companies in the Portfolio with low-cost positions, strong balance sheets and the ability to grow profitably with high returns on capital. With the increase in oil prices, energy companies are rising in our quality rankings.

Outlook

  • We expect U.S. oil production will continue ramping higher and lead the U.S. to have the strongest supply growth of any country in the world. We believe this supply will satisfy the majority of world demand for oil.
  • Pricing discounts in the Permian Basin are emerging because of infrastructure constraints and the inability to find pipeline transport capacity. The market generally expects this situation to continue for at least another year.
  • OPEC has modified its policy and will now begin increasing supply in 2018. This is a signal that the organization has achieved its goal to bring inventories to a lower level and balance the market. We think global oil inventories will remain at or below the five-year average despite this policy change.
  • Oil producers are expected to generate higher cash flow with the strong oil price environment, but very few are signaling an intention to increase capital expenditures. Instead, many companies are choosing to return this excess cash to shareholders. We believe this behavior is supportive for oil prices.

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 June 30, 2018, 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 Equity Holdings as a percent of net assets as of 06/30/2018: Halliburton Co., 6.06%; EOG Resources, Inc., 4.19%; Phillips 66, 3.82%; Chevron Corp., 3.65%; Schlumberger Ltd., 3.23%; Parsley Energy Inc., Class A, 3.21%; BHP Billiton Ltd., 3.04%; Core Laboratories N.V., 3.03%; Rio Tinto PLC, 3.00%; Union Pacific Corp., 2.90%.

Effective, April 30, 2018, the Portfolio's benchmark changed to the S&P North American Natural Resources Sector Index from the MSCI ACWI IMI 55% Energy + 45% Materials Index. The S&P North American Natural Resources Sector Index represents U.S.-traded securities in the energy and materials sectors, excluding the chemicals industry, and steel sub-industry. 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. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in natural resources can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments; and the cost assumed by natural resource companies in complying with environmental and safety regulations. Investing in physical commodities, such as gold, exposes the Portfolio to other risk considerations such as potentially severe price fluctuations over short periods of time. The Portfolio may use a range of derivative instruments in seeking to hedge market risk on equity securities, increase exposure to specific sectors or companies, and manage exposure to various foreign currencies and precious metals. Such hedging involves additional risks, as the fluctuations in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. These and other risks are more fully described in the 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.