Ivy VIP Natural Resources

09.30.20

Market Sector Update

  • Global equity markets posted positive returns on the broad indexes. The materials sector also posted a positive return in the quarter, while the energy sector was negative and underperformed the broader equity market. Energy underperformed the materials sector in the U.S. market by a wide margin.
  • Crude oil prices were slightly up in the quarter despite the negative performance of energy equities. The price remained in a very tight near $40/barrel throughout the quarter. Demand for oil products recovered slightly from the previous quarter but remained well below levels prior to the COVID-19 pandemic.
  • The energy sector was by the far the worst performing sector in the market. The dual impact of short-term demand issues and longer-term concerns about carbon intensity continued to weigh heavily on the group.
  • Other commodity prices also moved higher in the quarter as economic activity continued to recover. Iron ore prices were up by about 20% and copper prices were up by about 11%. Gold price also moved higher by about 5% in the quarter as real interest rates remain low and the need for monetary and fiscal stimulus remains.

Portfolio Strategy

  • The Portfolio posted a positive return in the quarter and outperformed the return of its benchmark, the S&P North American Natural Resources Sector Index, which posted a negative return. Outperformance was driven by an underweight position in the energy sector and overweight positions in various sectors in the materials space.
  • The five greatest equity contributors to the Portfolio’s performance relative to its benchmark index were underweight positions in Exxon Mobil Corporation and Chevron Corporation, and overweight positions in Reliance Industries Limited, Air Products and Chemicals Inc. and Canadian Pacific Railway Limited.
  • The five greatest detractors to relative performance were underweight positions in Freeport-McMoRan Inc., Newmont Corporation, Vulcan Materials Company, International Paper Company, and an overweight position in Phillips 66.
  • The Portfolio’s exposure to the energy sector decreased from the prior quarter, ending at about 23% of equity assets. The remaining sector exposure was composed of materials, solar, industrials, utilities and chemicals. The Portfolio’s gold mining position remained stable at around 19%.
  • 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

  • The economic impact of COVID-19 continues to dominate the outlook for the natural resource sectors. Demand levels are expected to continue improving on a sequential basis, but year over year demand growth is expected to be negative for the remainder of 2020.
  • With oil prices still hovering around $40/barrel, there is little incentive for additional supply growth. It is expected that supply will come back on the market in small increments as demand slowly improves. However, reduced travel for business and consumers, plus work-from-home trends, will likely keep demand for oil products lower for longer. Ample excess supply for oil remains available at $50/barrel and below.
  • The need for continued monetary and fiscal stimulus is likely in the coming months and quarters. If this is correct, the outlook for gold prices should remain favorable. Without increased stimulus from governments, economic activity would likely take another turn lower.
  • The Portfolio remains underweight energy and overweight materials in anticipation of continued low-growth conditions. Despite governments around the world attempting to reflate economies, deflation remains a real threat. Therefore, the gold mining sector outlook remains favorable due to government stimulus, currency devaluation and low mine supply.

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 Sept. 30, 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 09/30/2020: Barrick Gold Corp. 7.2, Franco-Nevada Corp. 4.1, Canadian Pacific Railway Ltd. 3.6, Reliance Industries Limited 3.6, Union Pacific Corp. 3.5, Phillips 66 3.1, Air Products and Chemicals, Inc. 3.1, Sherwin-Williams Company 3.1, Agnico Eagle Mines Ltd. 3.1 and BHP Group plc 3.0.

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. 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 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.