Ivy VIP Natural Resources

Ivy VIP Natural Resources
03.31.18

Market Sector Update

  • Global equity markets declined slightly in the quarter as volatility increased. Energy and materials underperformed the broader equity market as growth concerns weighed on returns.
  • Oil prices moved higher in the quarter while base metals moved lower, based on fears of slowing demand from China. Supply trends remained generally favorable across commodity industries, as producers showed better capital discipline.
  • Global trade and economic activity continued to be strong but markets reflected increasing concerns about the potential for a trade war between the U.S. and China following the imposition of tariffs between the two countries.
  • Investment in U.S. oil supply continued to ramp higher as evidenced by increasing capital spending and a rising rig count. The majority of the investment continued to be directed at the Permian Basin, where oil supply is ample and breakeven prices are low on the cost curve.
  • As a result, supply is accelerating rapidly in the U.S. while most other parts of the world are seeing supply declines. The overall oil market remained slightly undersupplied as of the end of the quarter and global inventories continued to trend lower.
  • As expected, the U.S. Federal Reserve in March again increased its base interest rate to a target range of 1.50-1.75% and indicated it plans to continue raising rates this year.

Portfolio Strategy

  • The Portfolio posted a negative return for the quarter and underperformed its blended benchmark index, which also had a negative return.
  • The five greatest contributors to performance relative to the benchmark index in the quarter were RSP Permian, Inc., WPX Energy, Inc., West Fraser Timber Co. Ltd., Parsley Energy, Inc., and Noble Energy, Inc.
  • The five greatest detractors to relative performance were RPC, Inc., Cimarex Energy Co., Cabot Oil & Gas Corporation, Magellan Midstream Partners L.P. and Nutrien Ltd.
  • The Portfolio's exposure to the energy sector moved slightly higher from the prior quarter, ending at about 55.8% of equity assets. Exposure to materials and other sectors was about 44%.
  • 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.

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.
  • Early signs have emerged that supply growth in the Permian Basin may be getting ahead of infrastructure development, which could create pricing discounts in that region.
  • The Organization of Petroleum Exporting Countries (OPEC) will continue to constrain supply in 2018, but will reevaluate this strategy throughout the year. We think global oil inventories will remain at or below the five-year average if OPEC supply is capped. This would be supportive for world oil prices.
  • Despite strong oil supply growth in the U.S., producers are signaling an intent to be more capital disciplined in the coming years and returning more free cash flow to shareholders. This behavior would support oil prices, and we are watching to see if this becomes reality.

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, 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 03/31/2018: Halliburton Co., 6.20%; RSP Permian, Inc., 3.69%; EOG Resources, Inc., 3.56%; Phillips 66, 3.42%; Concho Resources, Inc., 3.16%; Diamondback Energy, Inc., 3.02%; Cabot Oil & Gas Corp., 3.02%; Parsley Energy Inc., Class A, 3.02%; Chevron Corp., 3.01%; Schlumberger Ltd., 2.93%.

Risk factors: 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 companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. Investing in the energy sector 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 energy companies in complying with environmental safety regulations. 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.

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.