Ivy VIP Value

Ivy VIP Value
12.31.18

Market Sector Update

  • Equity markets had a sharp fall in the fourth calendar quarter of 2018. Value investments were not immune, but the Portfolio’s benchmark, the Russell 1000 Value Index, fell about 2% less than the broad market.
  • The economy and corporate earnings seem to be holding in fine, but there is fear of things worsening. Individual items such as the trade discussions with China, the lapsing of last year’s tax cut, the government shutdown and rising interest rates have soured investor enthusiasm.
  • Looking ahead, many are questioning how deep the pullback will be. Are we simply slowing back down to normal after a year in which corporate profits rose 24%, or are we headed into something more severe such as a recession? We are carefully watching job creation and interest rates as clues to answer this question.

Portfolio Strategy

  • In the fourth quarter, the Portfolio underperformed its benchmark, primarily due to individual stock selection.
  • Five holdings cost the portfolio more than 0.50% of relative performance. Four of them were in the financials sector: Synchrony Financial and Capital One Financial Group in the credit card space, and State Street and Citigroup in banking. DowDuPont was the other holding that notably impacted performance negatively. The names adding relative performance did not show the same sector concentration. Outperformers included Hospital Corporation of America, Energy Transfer Partners (pipelines), Welltower, Inc. (real estate) and Microsoft.
  • Economically facing sectors fared the worst, led by energy falling nearly 25%. Industrials, materials and financials also underperformed. Only the utilities sector had a positive return.
  • The Portfolio does not attempt to make sector calls. It focuses 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 consumer discretionary, where we find value and yield. In these areas, we have been able to find 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. However, these were some of the weakest areas in the fourth quarter. We are underweight consumer staples and telecommunications services, 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. Recent economic data supports the idea of a slowing economy but does not support the concept of a shrinking economy (recession). The current challenge will be for the Federal Reserve (Fed) to tighten money policy, yet not slow the economy into contraction. The Fed has slowed its projection to indicate a likelihood of two rate hikes in 2019. Slowing the economy and inflation via rate hikes is a difficult job. We liken it to stepping on a rolling egg to stop it without breaking it. History shows a high probability of failure, if interest rates rise too much thus helping create a recession. This is something we will watch carefully.
  • While the economic forces listed above are clearly important factors, the portfolio management team’s first approach is from the company level. We seek to find quality, growing companies whose stocks are trading below what we consider their intrinsic value. Often this 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 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 Dec. 31, 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.

Top 10 holdings (%) as of 12/31/2018: Citigroup, Inc. 4.5, Walmart Stores, Inc. 4.5, Comcast Corp. 4.0, Broadcom Corp. 4.0, JPMorgan Chase & Co. 3.9, Pfizer, Inc. 3.7, CVS Caremark Corp. 3.7, Welltower, Inc. 3.6, Energy Transfer Partners 3.5 and American Capital Agency Corp. 3.3.

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. 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. 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. These and other risks are more fully described in the Portfolio’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.