Ivy VIP Natural Resources

Ivy VIP Natural Resources
12.31.18

Market Sector Update

  • Global equity markets posted negative returns on the broad indexes. The energy and materials sectors also posted negative returns during the quarter and significantly underperformed the broader equity market.
  • Crude oil prices declined significantly in the quarter with West Texas Intermediate crude oil – the U.S. market benchmark – down nearly 40% and Brent oil down slightly less. The oil market saw significant disruption related to waivers by the U.S. that allowed Iran to continue exporting oil to approved nations. In the prior six months, OPEC had been ramping oil production in anticipation of lost supply from Iran. When waivers were granted, the oil market became oversupplied and it pressured prices lower.
  • In response to the oversupply, OPEC agreed in December to again reduce supply by 1.2 million barrels per day. The supply cuts were scheduled to begin in January 2019 and extend for six months.
  • The U.S. continued to grow production despite lower oil prices and infrastructure challenges. Because of the infrastructure challenges, U.S. and Canadian oil prices remained well below international oil prices.
  • Global trade began to slow during the quarter, driven by a variety of factors. It is expected that the U.S. economy will continue to grow in 2019 but at a materially slower rate, which may in turn lead to a pause in U.S. Federal Reserve (Fed) rate hikes and affect the relative performance of the U.S. dollar versus other currencies.

Portfolio Strategy

  • The Portfolio posted a negative return for the quarter and trailed the negative return of its benchmark index.
  • The greatest equity detractors to the Portfolio's performance relative to its benchmark index included Enbridge Inc., Core Laboratories, Parsley Energy, Inc., WPX Energy, Inc., and Centennial Resource Development, Inc.
  • The greatest equity contributors to relative performance included Randgold Resources, BHP Group plc, Rio Tinto plc, Air Products and Chemicals, Inc., and Cabot Oil & Gas Corp.
  • The Portfolio's exposure to the energy sector declined slightly from the prior quarter, ending at about 64% of equity assets, mostly because of price declines. The remaining sector exposure was to materials and industrials.
  • 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 sub-sectors.

Outlook

  • We expect the oil market to begin rebalancing in the first quarter 2019 through a combination of declining OPEC supply and decelerating U.S. production. However, U.S. supply growth is still expected to be strong year over year and we think it is likely to be enough to meet global oil demand.
  • The U.S. rig count is likely to decline slightly as producers look to spend within their cash flow. Exploration and production companies are being pressured by investors to be more prudent in allocating capital in order to generate better investor returns. Some companies are showing signs of being more disciplined when allocating capital.
  • Pricing discounts in the Permian Basin and other parts of the U.S. are expected to persist as U.S. oil production exceeds infrastructure capacity. These discounts are expected to be volatile over the next year before stabilizing in a tighter range when infrastructure capacity increases.

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, 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 12/31/2018: Chevron Corp., 5.16%; Halliburton Co., 5.09%; Phillips 66, 4.15%; Concho Resources, Inc., 4.13%; EOG Resources, Inc., 4.05%; BHP Group PLC, 3.91%;&br;Rio Tinto PLC, 3.65%; Canadian Pacific Railway Ltd., 3.61%; Marathon Petroleum Corp., 3.47%; Valero Energy Corp., 3.23%.

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&br;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.