Ivy VIP Natural Resources

12.31.20

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 in the U.S. market by a wide margin.
  • Crude oil prices were up strongly in the quarter, approximately 20%. The energy sector was the best performing sector in the market and the largest beneficiary of the announcement of vaccines for the COVID-19 virus.
  • Other commodity prices also moved higher in the quarter as economic activity continued to recover. Iron ore prices were up by about 25% and copper prices were up by about 16%. The price of gold was flat in the quarter as real interest rates began to signal a change from deflation to reflation.

Portfolio Strategy

  • The Portfolio posted a positive return in the quarter but 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 in the materials space.
  • The five greatest detractors to the Portfolio's performance relative to its benchmark were underweight positions in Freeport-McMoRan Inc. and Canadian Natural Resources Ltd. as well as overweight positions in Barrick Gold Corp., Reliance Industries Ltd. and Air Products and Chemicals, Inc.
  • The five greatest contributors to relative performance were underweight positions in TC Energy Corp. and Newmont Corp. as well as overweight positions in Enphase Energy Inc., Southern Copper Corp. and Bunge Ltd.
  • The Portfolio's exposure to the energy sector increased from the prior quarter, ending at about 37% of equity assets. The remaining sector exposure was composed of materials, solar, industrials, utilities and chemicals. The Portfolio's gold mining position decreased in the quarter to around 10% from 19% 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

  • Since the announcement of COVID-19 vaccines in November, energy equities have rebounded strongly. Despite that move, energy equities remain far below pre-pandemic levels. The path forward in 2021 will be dependent on supply restraint from energy companies/OPEC, as well as the pace of demand recovery. With regard to demand, it is expected that leisure travel will recover and resume growth throughout the coming year. It is also expected that many more businesses will resume on-premise work arrangements, which should improve work commute travel demand. It remains unclear if employers will permanently embrace work from home for employees, but it seems reasonable that at least some percentage of workers will be working from home rather than commuting. Even with sequentially improving demand recovery, getting back to pre-pandemic demand levels is likely a second half of 2021 or 2022 event.
  • On the supply side, U.S. oil production is forecasted to be lower in 2021. OPEC production is also expected to be down from the previous year but will likely be increasing sequentially throughout 2021 as demand recovers. Overall, reduced capacity and consolidation by energy companies should help regulate supply increases. We will focus on increasing positions in the energy space with companies that maintain discipline and focus on returns over growth.
  • From a macroeconomic level, the outlook for the natural resource space is improving. After facing crippling deflation for most of 2020, the economic backdrop has shifted to reflation. Historically, this has been positive for commodity demand and prices. The highest demand growth for commodities is mostly driven by emerging markets. This makes commodity prices dependent on currency movements, particularly in the U.S. dollar. Government stimulus remains high as the world digs out from slower economic growth and high debt levels. This could continue to put more downward pressure on the U.S. dollar, which would likely be supportive for emerging market and commodity demand. Many governments have signaled a desire for higher inflation and will implement policies to encourage that to happen. If successful, we believe natural resource equities are positioned well to see improved performance in the coming year. 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 Dec. 31, 2020, 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 12/31/2020: Phillips 66 4.0, Rio Tinto plc 3.2, BHP Group plc 3.2, Barrick Gold Corp. 3.0, Total SE Sponsored ADR Class B 2.9, EOG Resources, Inc. 2.9, Reliance Industries Ltd. 2.7, Canadian Pacific Railway Ltd. 2.7, Union Pacific Corp. 2.7 and Southern Copper Corp. 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.