Ivy VIP Natural Resources

Ivy VIP Natural Resources
06.30.19

Market Sector Update

  • Global equity markets posted modestly positive returns on the broad indexes. The energy and materials sectors were mixed with slightly positive returns for materials and slightly negative returns for energy during the quarter. Energy underperformed the broader equity markets, while materials were more in line.
  • After rebounding strongly in the first quarter, crude oil prices declined slightly with West Texas Intermediate, the U.S. benchmark, declining about 3% and Brent crude oil declining about 6%.
  • Toward the end of the quarter, OPEC signaled that it intended to extend its policy that was agreed to in December 2018 to maintain oil production cuts of approximately 1.2 million barrels per day (bpd). OPEC’s primary goals are to balance the oil market and keep inventories at a targeted level, which will support prices.
  • OPEC has found it necessary to reduce production because of the continued growth of U.S. production. Despite U.S. producers seeking to increase free cash flow by moderating capital expenditures, U.S. oil production again grew in the quarter. According to the U.S. Energy Information Administration, U.S. oil production in the second quarter grew by approximately 1.5 million bpd from the second quarter of 2018.
  • Other commodity prices were mixed in the quarter. Iron ore prices were up about 26% because of supply disruptions, while copper prices declined about 7% on decelerating demand trends.

Portfolio Strategy

  • The Portfolio posted a negative return for the quarter and slightly underperformed the return of its benchmark.
  • The five greatest equity detractors to the Portfolio's performance relative to the benchmark were Halliburton Co., RPC Inc., Newmont Mining, WPX Energy Inc. and Centennial Resource Development, Inc.
  • The five greatest equity contributors to relative performance were BHP Group plc, Barrick Gold Corp., Rio Tinto plc, Occidental Petroleum Corp. and Canadian Pacific Railway Limited.
  • The Portfolio’s exposure to the energy sector remained stable from the prior quarter, ending at about 66% of equity assets. The remaining sector exposure was composed of materials, industrials and chemicals.
  • 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 OPEC production cuts to remain in place for the second half of the year and possibly longer. Non-OPEC oil production is expected to grow enough to satisfy global oil demand growth and could possibly exceed it. This would require additional cuts from OPEC to balance the market. U.S. production growth is expected to decelerate but still grow in excess of 1 million bpd in 2019.
  • Global demand for commodities is expected to slow as the market seeks clarity on the resolution of U.S. Federal Reserve policy and U.S. trade policy. Positive results on these two issues could lead to an improvement in global growth and commodity demand.
  • Energy equities continue to price-in a lower oil price than the current spot price, and it is expected that this gap will eventually converge.

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 June 30, 2019, 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 06/30/2019: Chevron Corp., 6.03%; BHP Group PLC, 4.83%; Rio Tinto PLC, 4.65%; Phillips 66, 4.60%; EOG Resources, Inc., 4.58%; Halliburton Co., 4.19%; Concho Resources, Inc., 4.07%; Diamondback Energy, Inc., 3.87%; Valero Energy Corp., 3.77%; Marathon Petroleum Corp., 3.71%.

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.