Ivy VIP Science and Technology

Ivy VIP Science and Technology
06.30.19

Market Sector Update

  • Strong market performance in the first quarter of 2019 continued through the second quarter. The reasons for this strong continuation were the consistently dovish rhetoric by the Federal Reserve (Fed) on likely future interest rate cuts and late-quarter optimism around the China trade dispute as President Donald Trump made several conciliatory comments. While U.S. and China economic data continued to weaken through the quarter, the Fed’s actions and positive trade negotiation meetings supported the constructive equity environment.
  • The S&P North American Technology Index, the benchmark for the Portfolio, increased nearly 5% in the quarter after the roughly 20% increase in the first quarter of 2019.
  • The technology sector saw positive performance across the spectrum again in quarter, with the software and IT services sub-sectors as the stand-out performers.

Portfolio Strategy

  • Similar to the first quarter of 2019, the Portfolio had a positive return and significantly outperformed the benchmark during the second quarter. Stock selection within information technology was the primary driver of outperformance. Cypress Semiconductor was the top individual relative contributor, while allocations to Universal Display Corp. and Euronet Worldwide, Inc. also contributed to outperformance.
  • The Portfolio’s underweight in some of the largest benchmark constituents, namely Amazon.com, Inc., Visa Inc., and Mastercard Inc., was a drag during the period. The impact of the underweight positions was more than offset by the outperformance in the Portfolio.
  • The Portfolio’s allocation to health care, a sector absent from the benchmark, slightly detracted on a relative basis during the second quarter.

Outlook

  • The constant pace of innovation continues to be the key supportive factor for the technology and health care sectors. 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. For example, technology is increasingly critical for companies to gain competitive advantages. Data aggregation, data analytics, migration towards cloud computing, semiconductors – all are key areas we are positioned to take advantage of going forward. We still expect cloud computing capital expenditures to bounce back in the remainder of 2019, though likely at a rate lower than we expected earlier in the year.
  • 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, such as autos, machine learning and ubiquitous connectivity will continue to support above-market returns in the sector. While we remain constructive on semiconductors, we expect some level of volatility that we believe will create compelling new opportunities for the Portfolio over the longer term.
  • We are carefully monitoring the technology supply chain and demand signals coming from key technology endmarkets. Huawei’s addition to the U.S. “entity list” during the quarter created volatility within the supply chain, but relatively positive commentary from Trump in his meeting with President Xi Jinping of China reversed most of the initial negative equity reactions. The U.S.-China geopolitical risk remains, but we are optimistic on the trajectory of these relations along with an expected rebound in technology spending in the next few quarters.
  • 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 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 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 6/30/2019: Microsoft Corp. 10.1%, Euronet Worldwide, Inc. 6.4%, Aspen Technology, Inc. 5.4%, WNS (Holdings) Ltd. ADR 5.1%, Universal Display Corp.: 5.1%, Vertex Pharmaceuticals, Inc. 4.8%, Apple, Inc. 4.7%, ACI Worldwide, Inc. 4.5%, Alibaba Group Holding Ltd. ADR 3.9%, Cerner Corporation 3.8%.

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.

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.