Ivy VIP Natural Resources

03.31.21

Market Sector Update

  • Global equity markets posted positive returns on the broad indexes. The energy and materials sectors also posted a positive return in the quarter, with both outperforming the broader equity market. Energy outperformed the materials sector by a wide margin.
  • Crude oil prices were up strongly in the quarter, approximately 22%. Energy was the best performing sector in the market and the largest beneficiary of the announcement of COVID-19 vaccines for the second straight quarter.
  • Other commodity prices also moved higher in the quarter as economic activity continued to recover. Iron ore prices were up by about 10% and copper prices were up by about 13%. The price of gold was down almost 10% in the quarter as real interest rates continued to trend higher.

Portfolio Strategy

  • While the Portfolio posted a positive return in the quarter, it underperformed the return of its benchmark, the S&P North American Natural Resources Sector Index. Underperformance was driven by an underweight position in the energy sector and overweight positions in various sectors within the materials space.
  • The five greatest equity contributors to performance relative to its benchmark index were underweight positions in Barrick Gold Corp., Newmont Corp. and Amcor PLC and overweight positions in Diamondback Energy, Inc. and Steel Dynamics Inc.
  • The five greatest detractors to relative performance were overweight positions in Petrobras, Reliance Industries Ltd., FMC Corp., Enphase Energy, Inc. and an underweight position in Exxon Mobil Corp.
  • Our exposure to the energy sector increased from the prior quarter, ending at about 39% of equity assets. The remaining sector exposure was composed of materials, solar, industrials, utilities and chemicals. The Portfolio’s gold mining position continued decreasing in the quarter to around 7% from 10% in the previous quarter.
  • 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. We also seek to own companies exposed to favorable trends in their respective commodities and subsectors.

Outlook

  • The path forward continues to signal further recovery in the U.S. economy and further increase in demand for oil and other commodities. Thus far, supply restraint from energy companies/OPEC has continued into 2021 and will likely continue into the summer months. Demand recovery numbers should be significantly positive on a year-over-year basis, until comparisons get tougher later in 2021.
  • On the supply side, U.S. producers continue to signal restraint despite rising prices. This should result in rising cash flow profiles for those companies as the year progresses. Pressure from shareholders to show increased focus on returns instead of growth is expected to be an ongoing theme. In addition, social pressure to shift energy sources away from carbon-based fuels is likely to increase the cost of capital for energy companies, causing a limitation in capital investment.
  • From a macro level, we think the outlook for the natural resources space remains positive. Reflation remains the prevailing economic backdrop, which should positively impact demand for commodities. With the mass rollout of vaccines for COVID-19, consumers around the world are likely to resume normal activities, resulting in a positive tailwind for travel and oil demand. The Portfolio is focusing on equities across the natural resources landscape that we believe can deliver above-market returns on capital, with disciplined capital allocation and strong balance sheets.

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, 2021, 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 03/31/2021: Phillips 66 4.0, EOG Resources, Inc. 3.5, Rio Tinto plc 3.2, BHP Group Plc 3.0, Canadian Pacific Railway Ltd. 2.8, Valero Energy Corp. 2.8, ConocoPhillips 2.7, Pioneer Natural Resources Co. 2.6, Union Pacific Corp. 2.6 and Diamondback Energy, Inc. 2.6.

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.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Risk factors: The value of the Portfolio's shares will change, and you could lose money on your investment. 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. 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 Portfolios may be offered at all broker/dealers. These and other risks are more fully described in the Portfolio’s prospectus. The Ivy Variable Insurance Portfolios 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 general public.

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.