Ivy VIP Natural Resources

Ivy VIP Natural Resources
12.31.17

Market Sector Update

  • Global equity markets generally moved higher in the quarter, capping off a strong year. Emerging markets led most broad indexes. In the U.S., sentiment was buoyed by completion of tax legislation.
  • Energy underperformed the market for the year despite improving oil fundamentals and increases in U.S. crude oil prices for the year. The oil market was more concerned with the rate of U.S. production growth as oil prices moved higher, whether the Organization of Petroleum Exporting Countries (OPEC) would comply with its production quotas and potential oil demand destruction from electric vehicles.
  • U.S. oil supply started to grow in 2017, led by output from the Permian Basin shale oil areas, and oil prices started to recover. Geopolitical issues become more of a concern as supply and demand were in a deficit by the year’s end. Global oil inventories declined in 2017 because of stronger-than-expected worldwide demand and OPEC’s adherence to its production cut agreement.
  • As expected, the U.S. Federal Reserve again increased its base interest rate in December to a target range of 1.25- 1.50% and reaffirmed the potential for three more hikes in 2018.

Portfolio Strategy

  • The Portfolio posted a positive return for the quarter that was greater than the positive return of its blended benchmark index.
  • The five greatest contributors to performance relative to the benchmark index in the quarter were Diamondback Energy, Inc., WPX Energy, Inc., Continental Resources, Inc., Union Pacific Corp. and RSP Permian, Inc. Continental Resources no longer was a holding at quarter’s end.
  • The five greatest detractors to relative performance were Seven Generations Energy Ltd., Crown Holdings, Inc., Patterson-UTI Energy, Inc., Randgold Resources Ltd. and Magellan Midstream Partners L.P.
  • The energy sector remains a key focus, although we reduced the allocation to the energy sector to about 54.5% at the quarter’s end. Exposure to areas outside of energy has been increasing, with the allocation to the materials sector ending at about 38.3%.
  • In energy in particular, we focus on owning companies that can create value over the full course of the energy cycle. We target companies that are low-cost operators, have strong balance sheets, have the ability to grow profitably and have strong return on capital.

Outlook

  • We believe the oil market is in the early stages of a cyclical recovery as oil fundamental have begun to improve. Worldwide oil inventories continue to fall as demand has been better than expected, supply growth has been constrained by lower oil prices and compliance by OPEC with output quotas remains high. But we believe OPEC in 2018 will have to bring back the oil from its production cuts.
  • Oil demand and supply are in deficit now as inventory drawdowns remain strong. We believe higher oil prices are needed to prompt growth in worldwide production. We also think U.S. shale oil production will be the major source of supply growth to meet demand.
  • Capital discipline by U.S. producers and oil services bottlenecks remain a concern related to how fast the U.S. can grow oil production.
  • Our outlook has not changed, as we believe we are in the early stages of a cyclical recovery. Demand was the biggest surprise in the quarter, and was led by improvement in emerging markets. We expect global economic growth to continue in 2018.

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, 2017, 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 12/31/2017: Halliburton Co., 6.75%; Rio Tinto plc, 3.68%; BHP Billiton plc, 3.63%; Phillips 66, 3.43%; Air Products and Chemicals, Inc., 3.37%; Dow Chemical Co., 3.37%; Potash Corp. of Saskatchewan, Inc., 3.34%; EOG Resources, Inc., 3.34%; Cabot Oil & Gas Corp., 3.15%; Concho Resources, Inc., 3.00%.

Ivy VIP Global Natural Resources was renamed Ivy VIP Natural Resources on April 28, 2017.

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. 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 Portfolio's 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.