Ivy VIP Science and Technology

Ivy VIP Science and Technology
06.30.18

Market Sector Update

  • Global trade war rhetoric significantly increased over the course of the second quarter. While the U.S. markets tended to shrug off most of the headline risk early on, when the actual implementation of tariffs became more imminent later in the quarter, volatility and concern returned. While inflation and rising interest rates have taken a backseat to trade worries, they remain a key area of focus as we review the macroeconomic landscape. And while President Trump’s tendency to aggravate global leaders with his tweets continued, geopolitical concerns largely abated following Trump’s meeting with North Korea.
  • As anticipated, the U.S. Federal Reserve (Fed) raised rates in June and we expect two additional increases in 2018. With the latest 0.25% increase, the Fed’s benchmark rate now stands at 2%. History has shown the Fed will adapt to data, but with job growth and underlying confidence increasing, we fully expect rate increases to continue. The one key variable to these continued increases is whether the trade war sparks a falloff in economic activity and confidence. At this point, we do not except that to occur, but more significant tariffs slated for the fall would likely spook the markets on a short-term basis if implemented.
  • Technology stocks rebounded strongly from the late first quarter volatility. Late in the first quarter, revelations about Facebook Inc.’s use and sharing of user data captured headlines, casted a shadow over several stocks in the technology universe. As technology companies addressed these concerns and adapted policies in compliance with the General Data Protection Regulation (GDPR), a European Union law on data protection, the stocks more than retraced the value lost during that period. The discussion concerning user data and security will continue, but the significant concerns regarding an economic impact to key technology players have abated. We expect to hear continued policy discussions on this subject, but currently believe the companies are proactively addressing the issues which lower longer-term risks.
  • In health care, the quarter was relatively quiet outside of Trump’s vague “blueprint to lower drug prices” announcement. We expect more drug pricing discussions to occur in the second half of 2018 as the Trump Administration rolls out more details. These details will likely grab some headlines, but we expect the true impact to drug pricing and stock prices to be relatively benign.

Portfolio Strategy

  • The Portfolio posted a positive return, but underperformed its benchmark for the quarter. The Portfolio’s relative underweight to Amazon.com and exposure to health care (a sector not included in the benchmark) accounted for the vast majority of relative underperformance for the period.
  • At the subsector level, relative allocations to internet, semiconductors and health care technology detracted from relative performance.
  • Similar to the first quarter, Universal Display Corp. was a negative contributor due to delayed development of the OLED market. We expect a significant rebound in the stock during the second half of 2018 as the market recovers and grows strongly through 2019.
  • Top relative contributors to performance included Aspen Technology, Inc., WNS Holdings Ltd. ADR, Semtech Corp., Sarepta Therapeutics, Inc., and Euronet Worldwide, Inc.
  • At quarter end, the Portfolio had approximately 85% of assets in U.S. equities, 13% of assets in international stocks and the residual in cash and cash equivalents.

Outlook

  • Despite underperforming its benchmark for the quarter, the Portfolio performed well compared to the broader market. We expect continued volatility for much of 2018, although many of the same trends that drove a strong technology market should remain intact. Our exposure in biotechnology remains a key area of innovation within health care and an area where we expect our holdings to outperform over the balance of 2018.
  • Semiconductors have 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, will continue to support above-market returns in the sector. The Portfolio remains relatively overweight semiconductors. In the second quarter, semiconductors were impacted by merger and acquisition attempts and trade war rhetoric. While we expect volatility to continue within the subsector, we believe there are specific growth drivers within a number of names in the group.
  • In spite of trade war risks, underlying business confidence remains relatively high. We expect that optimism to continue, with tax reform bolstering the domestic economy in the face of other global threats. Globally, markets have been harder hit by trade war rhetoric, but 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. Through the second quarter, we have not seen any changes to these key variables. We believe these policy changes, along with threats of trade wars, remain the biggest risk to impact market sentiment. 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 June 30, 2018, 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 06/30/2018: Microsoft Corp. 7.5%, Micron Technology, Inc. 6.7%, Apple, Inc. 4.8%, WNS (Holdings) Ltd. ADR 4.7%, Facebook Inc., Class A 4.7%, Aspen Technology, Inc. 4.7%, Vertex Pharmaceuticals, Inc. 4.4%, Alibaba Group Holding Ltd. ADR 4.2%, Euronet Worldwide, Inc. 3.8% and Cypress Semiconductor Corp. 3.7%.

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.