Ivy VIP Science and Technology

Ivy VIP Science and Technology
03.31.19

Market Sector Update

  • Equities rebounded from the significant decline in the final months of 2018 and largely recovered all losses from last quarter.
  • The reasons for this strong rebound were the dovish pivot by the Federal Reserve (Fed) on future interest rate tightening and optimism around the China trade dispute. While U.S. and China economic data continued to weaken through the quarter, the Fed’s actions and positive trade negotiation meetings supported a significant equity rally.
  • The S&P North American Technology Index, the benchmark for the strategy, increased nearly 20% in the quarter after the roughly 18% decline in the fourth quarter of 2018.
  • The broad snapback within the technology sector drove positive performance across the spectrum, regardless of market capitalization or subsector.

Portfolio Strategy

  • The Portfolio’s double-digit return significantly outperformed the benchmark during the period. Stock selection within information technology was the primary driver of outperformance. Euronet Worldwide, Inc. was the top individual relative contributor, while allocations to Universal Display Corp. and Aspen Technology, Inc. also contributed to outperformance.
  • The Portfolio’s underweight in some of the largest benchmark constituents, namely Amazon.com, Inc., Facebook, Inc., Apple, Inc., and Cisco was a drag during the period. The impact of the underweight positions was more than offset by the outperformance in the portfolio.
  • Despite strong performance, the Portfolio’s allocation to health care, a sector absent from the benchmark, detracted on a relative basis due to the strong rebound in technology equities.

Outlook

  • The supportive factor for the technology and health care sectors is the constant pace of innovation. 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 going to be more critical going forward for companies to gain advantages. Data aggregation, data analytics, migration towards cloud computing, semiconductors – all are key areas we are positioned to take advantage of going forward. We expect cloud computing capex to bounce back in the second half of 2019, a meaningful contributor to how we view our investable universe right now.
  • 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 will 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 Portfolio over the longer term.
  • We are carefully monitoring the technology supply chain and demand signals coming from key technology endmarkets. 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 March 31, 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 3/31/2019: Microsoft Corp. 9.2%, Euronet Worldwide, Inc. 5.8%, Aspen Technology, Inc. 5.1%, WNS (Holdings) Ltd. ADR 5.0%, Vertex Pharmaceuticals, Inc. 4.8%, ACI Worldwide, Inc. 4.7%, Apple, Inc. 4.5%, Universal Display Corp.: 4.4%, Micron Technology, Inc. 4.3%, Alibaba Group Holding Ltd. ADR 4.2%.

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 Fund’s shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

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.