Ivy VIP Science and Technology

12.31.20

Market Sector Update

  • Following the market’s rise in the third quarter, the market continued its strength in spite of a volatile news environment during the period.
  • Politics were a key focus as Joe Biden was eventually announced as the President-elect, despite President Donald Trump’s continuing claims of election fraud and a refusal to concede. Politically, the Senate majority remained in flux as the Senate race in the state of Georgia goes to a run-off. A democratic sweep would lead to a 50-50 Senate split, with Vice President-elect Kamala Harris providing the tie-breaking vote, effectively giving Democrats control of the presidency and Congress. Concern over rising taxes and increasing deficits under an all-Democrat government remained a key variable as the market considered the possible outcomes.
  • Congress passed phase 4 stimulus of $900 billion, including a $600 one-time stimulus check and an extension of the $300 weekly unemployment benefit through March 14. The battle over an even greater stimulus check of $2,000 was tabled, with the results of the Georgia Senate run-off likely to decide the fate of the additional stimulus.
  • Employment improved over the of course quarter; over half of the 22 million jobs lost due to the pandemic have now been recovered. As COVID-19 cases surged again in December and various parts of the country re-implemented stronger economic activity restrictions, employment did show signs of softness. Similar to employment trends, consumption held up well through the first couple months and then weakened late in the quarter.
  • The S&P North American Technology Index, the benchmark for the strategy, increased 13.5% in the quarter after the roughly 11% increase last quarter. The information technology sector saw strong performance across virtually all subsectors, with the internet and software sub-sectors lagging.

Portfolio Strategy

  • The Portfolio outperformed the benchmark in the quarter. Key holdings within semiconductors drove the majority of the outperformance.
  • Concern over China’s anti-monopoly actions and potential delisting by the U.S. drove a selloff in several key Chinese technology stocks, including Alibaba. Besides Alibaba, a key biotechnology holding, Vertex Pharmaceuticals, detracted as a miss in a key trial led to underperformance. Some profit taking in names like Teladoc Health, Inc. and QTS Realty Trust, Inc. also contributed negatively to relative returns. Health care is absent from the Portfolio s benchmark but remains a key aspect of the long-term strategy.
  • As mentioned above, several semiconductor holdings, notably Micron Technology, Inc. and Infineon Technologies AG, were the top relative contributors. The Fund's relative underweights in a few large index constituents, including Intel Corporation and Amazon.com, Inc., contributed to relative performance during the period.

Outlook

  • We continue to believe the changing technology landscape due to COVID-19 is likely to create significant innovation and innovation-driven investment opportunities. During times of crisis, innovation accelerates. Our optimism about the effectiveness of the COVID-19 vaccines leads us to have a positive market view as we look into 2021. That optimism is checked by some level of concern on relative valuation levels in certain areas of the technology market.
  • Politically, we believe that even a 50-50 Senate, along with a Democratic President and House, will make some of the extreme progressive policy proposals a non-starter. With some level of negotiation required in the Senate with moderate Democrats, we believe there will be some tax increases, but not to the extent that would have caused broad concern within the stock market. That situation should create a positive backdrop for stocks, though we do anticipate some increases in market interest rates as policies change and global economies rebound.
  • The supportive factor for the technology and health care sectors is the constant pace of innovation, regardless of these current political outcomes or pandemics. While we are highly cognizant of these evolving situations, our threeto- five-year timeline for investing allows us to take a longer-term approach. For example, technology has been critical for companies and the COVID-19 pandemic has only accelerated the adoption of key technologies required for companies to compete. Data aggregation, data analytics, migration towards cloud computing, semiconductors – all are key areas we are positioned to take advantage of going forward. Changes in how people work and where people work are driving shifts in technology utilization. We continue to see strong cloud computing capital expenditure trends, as anticipated, and expect strength to continue well into 2021.
  • Semiconductor stocks remain a key area of optimism. This sub-sector has contributed strongly 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 are likely to continue to support ongoing above-market returns in the sector. We always expect some level of volatility in this sub-sector that likely creates compelling new opportunities for the strategy over the longer term.
  • We think China will remain a key risk factor in assessing technology company stocks, as no signs point to a let-up in the hawkishness of U.S. foreign policy towards China’s growing technology capabilities. The U.S. continues to move forward with stricter controls on China, including blacklisting certain company stocks. The biggest impact on China’s key technology stocks may come from within, as the Chinese government has begun investigations into several of the key Chinese technology platform companies. Similar to the U.S. government, China has become concerned at the power being wielded by these technology giants and their influence on the day-to-day lives of citizens. These policy risks are a key consideration as we assess our ownership of stocks impacted by government reform or policy making.
  • Biotechnology remains a key area of innovation within health care. We believe our holdings in this area will outperform over the coming quarters, but we continue to expect volatility as new biotech innovation often brings times of uncertainty. Gene therapy and personalized advanced therapies are the areas of groundbreaking research and innovation that should provide significant opportunities for investment.

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, 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 12/31/2020: Microsoft Corp. 9.3%, Apple, Inc. 6.2%, Facebook Inc. 6.0%, Micron Technology Inc. 5.7%,&br;QUALCOMM, Inc. 4.9%, Aspen Technology, Inc. 4.1%, Amazon.com, Inc. 3.9%, ASML Holding N.V. 3.9%, WNS (Holdings) Ltd. ADR 3.6%, ACI Worldwide, Inc. 3.6%.

The S&P North American Technology Sector Index is a modified-capitalization weighted index representing U.S. securities classified under the GICS® technology sector and internet retail 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. Because the Portfolio invests more than 25% of its total assets in the science and technology industry, the Fund’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.