Ivy VIP Value

Ivy VIP Value
06.30.19

Market Sector Update

  • 2019 started with a sharp “hockey stick” recovery in the equity markets. Throughout the second quarter, market jitters reemerged as mixed signals from the economy caused the Federal Reserve (Fed) to press its dovish tilt. Just six months ago, the market expected three interest rate hikes this year. Now, the market is anticipating the Fed will actually cut rates twice before year-end, as growth both inside and outside the U.S. has slowed.
  • The Institute for Supply Management (ISM) Purchasing Managers Index has gone from over 60 in the summer of 2018 to 51.7 in July 2019. While anything above 50 is expansionary, the slowdown is apparent. Extreme weather trends have made noise in the numbers, but the uncertainty caused by trade wars and tariffs have started to reveal a noticeable impact.

Portfolio Strategy

  • The Portfolio posted a positive return, slightly underperforming the Russell 1000 Value Index (Portfolio’s benchmark) during the quarter. Some good stock picks in Qualcomm, Metlife and Citigroup were hampered by the weak performance of a few other names.
  • State Street, the worst performer in the quarter, became inexpensive in mid-2018 when investors reacted negatively to the company’s announced purchase of Charles River Development (maker of investment management software). While we believe the purchase of Charles River has a good chance of eventually adding value, the pressure in the base business continued at an unacceptable pace. We saw no near-term solution and thus sold the position during the quarter.
  • Qualcomm, the best performer in the quarter, is a developer of digital telecommunication products that enable cellular communications. This stock was purchased in the second half of 2018 while the company was embroiled in a lawsuit with Apple over cellphone chip sales. The companies reached an agreement on future business in mid-April and the stock quickly soared over 50%. We sold our position in early May as the stock became fully valued.
  • The worst-performing sectors were industrials, consumer discretionary and financials. Industrials performance was weighed down by our holdings in Spirit AeroSystems, where the Boeing 737 Max issues put pressure on exposed aerospace suppliers. While the Boeing concerns are ongoing, we still view Spirit as a high-quality supplier and think the issues should be resolved in the next few quarters.
  • The best-performing sectors overall were information technology, energy and real estate. 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 the energy sector, sometimes performance comes from avoiding pitfalls. Not owning Exxon and Occidental, which underperformed in the quarter, added to the sector’s return relative to the benchmark.
  • 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 consumer discretionary, where we 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 health care, 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 yet support the concept of a recession. The ISM Purchasing Managers Index is one data point we are watching closely. The trends have slowed but are still indicating economic expansion. The Fed is in a difficult spot, now faced with the prospect of cutting interest rates to keep the economic expansion going.
  • 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 is often 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 June 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 06/30/2019: Walmart Stores, Inc. 4.6, Citigroup, Inc. 4.5, Bank of America Corp. 4.4, Comcast Corp. 4.4, Pfizer, Inc. 4.3, Broadcom Corp. 3.8, Phillips 66 3.6, Philip Morris International, Inc. 3.3, CVS Caremark Corp. 3.1 and MetLife, Inc. 3.1.

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.