Ivy VIP Value

Ivy VIP Value
03.31.18

Market Sector Update

  • Volatility re-emerged in the equity markets in the first quarter of 2018. After years of low volatility, this certainly felt uncomfortable and unwelcome, but is actually more of a return to normal. There were a number of contributing factors to this situation, including: the federal budget deal signed in February 2018, which we feel creates additional economic stimulus on top of the tax bill from December 2017; Jerome Powell taking over as new U.S. Federal Reserve (Fed) Chairman; and the Fed Open Market Committee’s seemingly hawkish pivot upon his appointment.
  • We now expect a minimum of three rate hikes for 2018 and continued increases into 2019. This is in response to inflation data that has rebounded recently. We believe the core consumer price index will be north of 2% by April, a level we have not seen for a few years. Otherwise, it appears that the U.S. economy remains solid, with the labor market and consumer spending holding at good levels.

Portfolio Strategy

  • In the first quarter, the Portfolio outperformed Russell 1000 Value Index, the Portfolio’s benchmark, before the effects of sales charges. Value investing, while still lagging, has begun performing better relative to the growth indices. As usual, we try to ignore short-term fluctuations and keep our focus longer-term.
  • Our best relative sector in the quarter was health care, led by our investments in Jazz Pharmaceuticals, Hospital Corp of America and Humana. The next best relative sector was technology, where our overweight position and stock picking both contributed. Micron Technology continues to be an outstanding performer in this space.
  • The biggest areas of underperformance in the quarter came from financials and materials. In both cases, long-term holdings failed to keep pace with the market: Dow Chemical in materials, and Synchrony Financial in financials. We remain committed to these names on strong business models and appealing valuations.
  • For the quarter, the portfolio’s biggest overweight positions were in the financials and consumer discretionary sectors. We believe the U.S. banking system is strong and well capitalized, with many equities attractively priced. Rising shortterm interest rates may also serve as a tailwind to the financials sector. In the consumer discretionary sector, our overweight position is more of a function of incidental names than any overall theme.
  • The Portfolio’s major underweight positions in the quarter were utilities, industrials and telecommunications. Years of declining interest rates have caused valuation expansion, especially in telecommunications and utilities. Value names are hard to find among these sectors and our lack of exposure helped as these sectors trailed the broader value index in the quarter.

Outlook

  • Recent economic data has been encouraging with strong job growth and rising, but still historically low, interest rates. We believe the new tax bill should provide a stimulus to the economy, and an accelerating economy typically bodes well for value investors. Headwinds do exist, however, including the Fed’s difficult job of tightening monetary policy. The goal is to prevent inflation via higher short-term rates and a shrinking of the Fed balance sheet, and the market is expecting three to four rate hikes in 2018. History shows a high probability of central bank mistakes in this process, however, and the Fed risks contributing to a recession if rates rise too much too quickly. This is of course 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. Oftentimes 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 potentially benefit clients over the long term.

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, 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 03/31/2018: JPMorgan Chase & Co. 5.2, Citigroup, Inc.4.4, Walmart Stores, Inc.4.2, Energy Transfer Partners 4.0, Capital One Financial Corp. 3.9, State Street Corp. 3.5, Dow Chemical Co. 3.3, HCA Holdings, Inc. 3.3, Welltower, Inc. 3.3 and SunTrust Banks, Inc. 3.2.

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.