Ivy VIP Science and Technology

09.30.20

Market Sector Update

  • Following the market’s strong rebound in the second quarter, the market continued to see periods of volatility as it ground its way higher in the third quarter.
  • Over the course of the quarter, businesses continued the gradual reopening process across the country and globe, with hotspots of COVID-19 outbreaks continuing to make headlines. In the U.S., the $600 per week unemployment insurance benefit expired at the end of July and President Donald Trump signed an emergency $300 per week bill for another six weeks. Concerns began to emerge towards the end of quarter with unemployment still high and both sides of the political divide unwilling to negotiate an extension of benefits.
  • Political concerns, including a food-fight-style U.S. Presidential debate, heightened market worries in an already contentious U.S. election cycle. The market is digesting current political polls, the potential for a contested election, and a possible Democratic sweep in both the U.S. Presidency and Congress. Additionally, the passing of U.S. Supreme Court Justice Ruth Bader Ginsburg brought about the issue of nominating a new Supreme Court Justice prior to the U.S. election.
  • The “stabilizing” force in the markets has been perpetually low interest rates and the Federal Reserve’s stated willingness to overshoot inflation on the upside, supporting current monetary policy for an extended period. The bar for raising interest rates is now extremely high, a backdrop that is positive for equities.
  • The S&P North American Technology Index, the benchmark for the strategy, increased almost 11% in the quarter after the roughly 32% increase last quarter. The information technology sector saw strong performance across sub-sectors, with the hardware, internet, and semiconductor sub-sectors the relative outperformers.

Portfolio Strategy

  • The strategy slightly underperformed the benchmark in the quarter. Despite strong performance across the strategy’s information technology holdings, it was unable to beat the relative performance of the all-technology benchmark due to the underperformance of the health care-related names.
  • Key biotechnology names were a drag on performance, largely due to profit-taking and company-specific issues. Vertex Pharmaceuticals, Inc. and Ionis Pharmaceuticals, Inc. were among the largest relative detractors for the Portfolio. Health care is absent from the strategy’s benchmark but remains a key aspect of the Portfolio’s long-term strategy.
  • Similar to last quarter, several semiconductor holdings, notably Qualcomm, Inc. and Taiwan Semiconductor Manufacturing Co., Ltd., while Alibaba Group Holding Ltd. was the top relative contributor.
  • The strategy’s relative underweights in a few large index constituents positively impacted 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. As mentioned last quarter, we raised additional levels of cash during the market sell-off early in the year and have begun to strategically deploy more of this cash. This capital is being invested in ideas that we believe will benefit long-term from changes in both company and consumer behavior as the world will adapt to life during and after the pandemic.
  • While we expect COVID-19 to continue to impact market volatility, we believe the upcoming U.S. elections and anticipated policy changes to have a greater impact in the near-term. We constantly assess various external scenarios and the impact on the Fund, an exercise we are currently deeply embedded in, as these changes may have both shortterm and long-term effects on the Portfolio.
  • The supportive factor for the technology and health care sectors is the constant pace of innovation, regardless of political outcomes or pandemics. While we are highly cognizant of moves in the market, our three-to-five year timeline for investing allows us to take a longer term approach. Data aggregation, data analytics, migration towards cloud computing, semiconductors – all are key areas we are positioned to take advantage of going forward. We continue to see strong cloud computing capital expenditure trends, as anticipated, and expect strength through the final months of 2020.
  • We continue to be optimistic on semiconductors. The space 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 above-market returns in the sector. While we remain constructive on semiconductors, we expect some level of volatility that likely creates compelling new opportunities for the strategy over the longer term.
  • We are carefully monitoring the technology supply chain and demand signals coming from key technology endmarkets as a result of COVID-19. The supply side and demand side are beginning to adapt to the new reality following the initial shock of the pandemic-driven shutdowns. 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. This quarter, we observed the U.S. move to restrict shipments of certain semiconductor manufacturing equipment tools used for Chinese semiconductors. These actions may have far-reaching results as China may retaliate in different ways to restrict certain U.S. company operations in China.
  • Despite detracting this quarter, biotechnology remains a key area of innovation within health care. We believe our holdings in this area should continue outperforming over the coming quarters. 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 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 9/30/2020: Microsoft Corp. 10.1%, Apple, Inc. 8.3%, Facebook Inc. 6.6%, Aspen Technology, Inc. 4.5%, Amazon.com, Inc. 4.4%, QUALCOMM, Inc. 4.4%, Vertex Pharmaceuticals, Inc. 4.2%, Micron Technology Inc. 4.1%, Alibaba Group Holding Ltd. ADR 3.7%, WNS (Holdings) Ltd. ADR 3.7%

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.