Ivy VIP Value

09.30.19

Market Sector Update

  • The third quarter brought with it heightened volatility due to the ongoing trade war and signs of the slowdown hitting the U.S. The market had a quick and violent rotation to value stocks at the beginning of September. This rotation faded almost as quickly as it appeared, leaving investors wondering if this was a preview of things to come or a one-time blip.
  • The Federal Reserve has now cut rates twice and the Institute for Supply Management (ISM) Manufacturing Index has gone from over 60 in the summer of 2018 to 47.8 in September 2019. A reading below 50 indicates a contracting economy. Add in stories on slower job growth and an impeachment inquiry, and there is plenty to be concerned about.

Portfolio Strategy

  • The Portfolio posted a positive return, outperforming the Russell 1000 Value Index (the Portfolio’s benchmark) during the quarter.
  • The Portfolio’s best-performing sectors on a relative basis were energy, consumer discretionary and information technology. The portfolio was equal weight energy versus the benchmark. Energy Transfer Partners, Valero and Phillips 66 were our largest holdings in the sector. While we continue to believe these names are the best way to be positioned within energy, sometimes performance comes from avoiding pitfalls. Not owning Exxon and Chevron, which underperformed in the quarter, added some additional return relative to the index. Target, our largest holding in consumer discretionary, had a strong quarter as company-specific revenue and margin initiatives are finally taking hold.
  • The Portfolio’s outperformance in the quarter came primarily from individual stock selection, specifically in the energy, consumer discretionary and information technology sectors. Stock selection was particularly impressive in the energy sector. Overall, the sector declined during the quarter, while our two refinery holdings, Phillips 66 and Valero, both rose. Consumer discretionary was powered ahead by Target. Our best performing information technology holding, Lam Research, also provided a positive return.
  • Our worst-performing sectors on a relative basis were financials and utilities. In financials, there were no exceptionally weak stocks, but rather a slew of slightly underperforming names. Although both our holdings in utilities rose, they did not provide enough of a boost to outperform the sector – the strongest individual sector for the quarter.
  • Our strategy does not attempt to make sector calls, rather focusing primarily on stock selection. We overweight or underweight sectors based on individual stock opportunity, with some limits to control risk or volatility. The Portfolio is overweight financials and information technology, where we currently find value and yield. In these areas, we have been able to find what we believe are good companies with repeatable business models generating high rates of free cash flow, and low stock prices relative to our estimation of each company’s true intrinsic value. The Portfolio is underweight utilities and industrials, simply due to lack of compelling ideas.

Outlook

  • The U.S. economy has enjoyed a long successful run from the end of the 2008 recession. There was an additional boost with the tax cut in early 2018. That boost faded in fourth quarter 2018, which has caused 2019 to be a year defined by sharp rotations in and out of sectors. This volatility leaves the outlook for stocks mixed. There is a lot to be worried about in the industrials complex given the heightened concerns around trade (thus the lack of compelling ideas). That said, the U.S. consumer remains a bright spot with solid job numbers, stable auto sales and generally positive confidence readings. Until this outlook shifts, our focus will be on investments where we feel more confident in the underlying trends.
  • While the economic forces listed above are clearly important factors, our first approach is from the company level. We seek to find quality, growing companies whose stocks are trading below what we consider their intrinsic values. This often is due to short-term negative factors, and we become larger owners of a company if we feel those negatives are about to dissipate. We continue to search for and make investments one company at a time to seek to benefit clients over the long run.

The opinions expressed are those of the Portfolio’s manager 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, 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 % of net assets as of 09/30/2019: Bank of America Corp. 4.3, Walmart Stores, Inc. 4.0, Comcast Corp. 3.9, Citigroup, Inc. 3.9, Pfizer, Inc. 3.5, Philip Morris International, Inc. 3.2, CVS Caremark Corp. 3.2, Valero Energy Corp. 3.1, Exelon Corp. 3.0 and AGNC Investment Corp. 2.9.

The Russell 1000 Value Index is an unmanaged index comprised of securities that represent the large-cap sector of the stock market. 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. 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. The value of a security believed by the Portfolio’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. Investing in companies in anticipation of a catalyst carries the risk that certain of such catalysts may not happen or the market may react differently than expected to such catalysts, in which case the Portfolio may experience losses. The securities of many companies may have significant exposure to foreign markets as a result of the company’s operations, products or services in those foreign markets. As a result, a company’s domicile and/or the markets in which the company’s securities trade may not be fully reflective of its sources of revenue. Such securities would be subject to some of the same risks as an investment in foreign securities, including the risk that political and economic events unique to a country or region will adversely affect those markets in which the company’s products or services are sold. 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.