Ivy VIP Small Cap Core

Ivy VIP Small Cap Core
09.30.18

Market Sector Update

  • As a whole, 2018 has been a boon for small-capitalization companies given the asset class has been one of the biggest beneficiaries of corporate tax reform and stronger domestic growth relative to the rest of the world.
  • Building on a strong second quarter, the Russell 2000 Index, the Portfolio’s benchmark, continued to deliver solid performance, returning 3.58% for the third quarter. After a sluggish start to the year, the Russell 2000 has returned 11.49% year to date.
  • As has been the case for most of the year, growth-oriented sectors such as health care, information technology, and consumer discretionary were among the biggest contributors to return during the quarter. These three sectors were responsible for roughly 75% of the index’s total return while most other sectors underperformed the total index return.
  • Looking ahead to the near term, we believe a more tempered expectation for total market return might be appropriate. Economic growth and ultimately, earnings growth, stand to decelerate as we lap the benefits of tax stimulus. Taken in combination of with geopolitical concerns, the U.S. Federal Reserve continuing to raise interest rates, and the fact that we are late in this economic cycle, it is unlikely to be multiple enhancing.

Portfolio Strategy

  • The Portfolio outperformed its benchmark for the quarter, continuing to build on our year-to-date lead.
  • Stock selection was the key factor of the Portfolio’s outperformance, yet sector allocation was also a slight contributor. Uncharacteristically, performance was not driven at the top of the portfolio, which is often the case due to our higher concentration in our top 20 holdings. Across our top 20 average weights we batted 50%, with a majority of the winners in the second half, which caused the top of the portfolio to be roughly a 75 basis point (bps) headwind Across the 11 sectors in our benchmark, we had positive performance attribution in seven with technology, consumer discretionary and financials performing the best, and negative attribution in four as energy performed the worst, followed by real estate and consumer staples.
  • In terms of individual stock performance during the quarter, 11 holdings contributed to performance attribution greater than 25 basis points (bps) and three greater than 50 bps. From a negative performance perspective, only two holdings detracted greater than 25 bps.
  • Keeping our more tempered view of the overall market, we took a slightly more defensive posturing with our positioning during the period and increased the quality of the Portfolio. This includes transitioning out of some more volatile names into more stable, consistent holdings. In addition we trimmed some names that have had substantial gains in short periods while increasing weightings in some more defensive sectors like utilities and consumer staples.

Outlook

  • If we are correct in our assumption that we are in the later innings of this current business cycle, this should be tremendous news for active managers as a whole. Often during these later periods, dispersion and volatility rise, which could allow stock pickers a greater opportunity to add value.
  • We continue to be hopeful that deregulation, tax reform and strong gross domestic product growth will spur another leg to the rally; however, we are cognizant of a more hawkish U.S. Federal Reserve, difficult comparisons and high historical valuations.
  • Regardless of how the market performs 2018, we remain committed to the Portfolio’s process of identifying quality underappreciated companies, and believe we have good balance in the Portfolio’s construction that should stand to perform well versus our peers and benchmark independent of the environment over time.

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, 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.

Scott Sullivan served as a portfolio manager on the Fund until May 8, 2018.

The Russell 2000 Index is an index measuring the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. 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 is generally invested in a small number of stocks, the performance of any one security held by the Portfolio will have a greater impact than if the Portfolio were invested in a larger number of securities. Although larger companies tend to be less volatile than companies with smaller market capitalizations, returns on investments in securities of large capitalization companies could trail the returns on investments in securities of smaller companies. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Not all funds or fund classes may be offered at all broker/dealers. 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.