Ivy VIP Science and Technology

Ivy VIP Science and Technology
09.30.17

Market Sector Update

  • The third quarter witnessed heightened North Korean rhetoric from both President Trump and Korean leadership. While the headlines and tweets suggested an escalation of potential unsettling military conflict, the markets largely shrugged off the risk of war in Asia. Domestically, the failure to make progress on the Affordable Care Act changes continued, while the prospects for tax reform and a cash repatriation window look promising based on early drafts and conversations. We believe positive developments on tax reform should continue to create a helpful tailwind for equities.
  • Interest rates are expected to increase through the remainder of calendar year 2017 and into 2018. As history has shown, the U.S. Federal Reserve (Fed) will adapt to the incoming data, but with job growth and underlying confidence increasing, we fully expect rate increases to occur. A combination of these rate increases and the Fed’s balance sheet reduction will lead to tighter monetary policy by the middle of 2018. Tighter monetary policy will contribute to greater equity market risk longer term, but we believe these changes will be gradual and interest-rate increases, accompanied by stronger growth, are still supportive of equity prices.
  • Anticipation of the new Apple iPhone dominated discussions in the technology sector, and concerns about a delayed shipping of the iPhone X were confirmed. The delay creates some volatility across the technology supply chain, but we believe should largely be corrected by the end of the fourth quarter. In healthcare, the lack of any legislative changes provided a stable sector backdrop in a quarter that was also bolstered by a few strategic mergers-and-acquisitions (M&A) deals.

Portfolio Strategy

  • The Portfolio outperformed its benchmark (before the effects of sales charges) for the quarter, driven by the Portfolio’s exposure to biotechnology and key names exposed to the memory and display technology subsectors. Additionally, relative underexposure to “FANG” technology names helped overall performance. More specifically, the Portfolio’s outperformance came in each of the key sectors – information technology, healthcare and consumer discretionary.
  • At the subsector level, allocations to semiconductors (in particular, a sizable position in Micron Technology Inc.) and internet industries provided relative outperformance. We believe recognition of Micron’s strong competitive position and secular demand for memory in the data center, along with tight industry supply, provides a backdrop for further appreciation of the stock. Within healthcare, biotechnology holdings were also a significant positive contributor, largely due to positive trial data and M&A.
  • Top individual contributors to performance included Micron Technology Inc., Kite Pharma Inc., Vertex Pharmaceuticals Inc., Alibaba Group Holding Ltd. ADR, and Universal Display Corp.
  • At quarter end, the Portfolio had approximately 82% of assets in U.S. equities, 12% of assets in international stocks and the residual in cash and cash equivalents.

Outlook

  • The Portfolio has performed well through the first three quarters of 2017. As a reminder, the healthcare portion of the Portfolio accounted for virtually all of the underperformance in 2016 and, as we saw during this third quarter, we believe the sector will continue to outperform. Our exposure to biotechnology remains a key area of innovation within healthcare and an area where we expect our holdings to continue to perform well.
  • Semiconductors have been a very strong contributor to information technology performance over the past couple years and we believe the emergence of new secular growth opportunities, like autos, machine learning and ubiquitous connectivity, will continue to support above-market returns in the sector. We remain relatively overweight semiconductors.
  • In spite of unsettling political headlines and domestic natural disasters, underlying business confidence remains relatively high. We expect that optimism to continue, especially if the probability of tax reform increases over the coming months. Globally, growth and hiring trends are strong and we are seeing these trends reflected in accelerating capital spending and improving earnings outlooks across our portfolio. We are watching Fed policy changes carefully to make sure that a shrinking central bank balance sheet and rising interest rates do not damage credit availability or confidence in the management suite. These policy changes, along with military conflict, are currently the biggest risk to impact sentiment in the markets. Additionally, we are watching equity valuations carefully in the context of higher levels of growth.
  • Our focus remains primarily on security-specific fundamental research. We strongly believe this attention to bottomup research, coupled with the innovation and transformation under way across the globe, will continue to provide investment opportunities for the Portfolio.

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, 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 09/30/2017: Micron Technology, Inc. 7.2%, Microsoft Corp. 5.6%, Vertex Pharmaceuticals, Inc. 4.8%, Microsemi Corp. 4.5%, Facebook Inc., Class A 4.2%, Euronet Worldwide Inc. 4.1%, Alibaba Group Holding Ltd. ADR 4.0%, WNS (Holdings) Ltd. ADR 3.8%, Universal Display Corp. 3.7% and Apple Inc. 3.6%.

Risk factors: The value of the Portfolio’s shares will change, and you could lose money on your investment. Because the Portfolio invests more than 25% of its total assets in the science and technology industry, the Portfolio’s performance may be more susceptible to a single economic, regulatory or technological occurrence than a fund that does not concentrate its investments in this industry. Securities of companies within specific industries or sectors of the economy may periodically perform differently than the overall market. In addition, the Portfolio’s performance may be more volatile than an investment in a portfolio of broad market securities and may underperform the market as a whole, due to the relatively limited number of issuers of science and technology related securities. Investment risks associated with investing in science and technology securities, in addition to other risks, include: operating in rapidly changing fields, abrupt or erratic market movements, limited product lines, markets or financial resources, management that is dependent on a limited number of people, short product cycles, aggressive pricing of products and services, new market entrants and obsolescence of existing technology. 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.