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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-5017 Ivy Funds Variable Insurance Portfolios (Exact name of registrant as specified in charter) 6300 Lamar Avenue, Overland Park, Kansas 66202 (Address of principal executive offices) (Zip code) Kristen A. Richards 6300 Lamar Avenue Overland Park, Kansas 66202 (Name and address of agent for service) Registrant's telephone number, including area code: 913-236-2000 Date of fiscal year end: December 31 Date of reporting period: December 31, 2009 ITEM 1. REPORTS TO STOCKHOLDERS.
Henry J. Herrmann, CFA
Dear Shareholder:
Over the last 12 months, investors have endured what is perhaps best described as a Tale of Two Markets. The first market occurred in the first three months of the year, as the global financial crisis that began in 2008 persisted. Despite a $787 billion federal stimulus package, the U.S. economy, like other developed markets receiving governmental stimulus, continued to struggle. Unemployment rose, banks failed at an alarming rate and the federal deficit soared. By March 9, 2009, U.S. equities had fallen to their lowest levels since 1997. Many millions of Americans had watched their savings evaporate, their investment portfolios shrink, and many lost their homes.
The second market emerged later that same month, when several stimulus programs were implemented, including a $75 billion housing rescue plan, the Federal Reserve Bank's plan to buy long-term Treasury securities and mortgage-backed securities and the Treasury decision to buy toxic real estate assets from banks. These aggressive efforts, and similar monetary and fiscal policies being implemented in foreign developed markets, did much to deter the global financial and economic meltdown that had just months earlier been feared inevitable.
Despite a steady stream of relatively weak economic and earnings data, investors began to demonstrate a return of some appetite for risk. In early spring, a rise in existing home sales suggested that the housing market may have found its floor. In the third quarter, gross domestic product expanded at a 2.8 percent annualized rate. Progress continued into the fourth quarter, despite a minor stumble in November when the Dubai World conglomerate in the Persian Gulf asked creditors for a suspension of interest payments on $60 billion of its $80 billion in debt. The year ended with all the major indexes posting double-digit returns, and some posting record single-year gains. Specifically, the S&P 500 Index gained 26.47 percent for the year ended December 31, 2009. Fixed-income markets, as measured by the Citigroup Broad Investment Grade Index, did well, increasing 5.07 percent for the year.
Although numerous problems remain, we are optimistic that better days are ahead.
As always, we thank you for your continued trust, and encourage you to share in our optimism for the future.
Respectfully,
Henry J. Herrmann, CFA The opinions expressed in this letter are those of the President of Ivy Funds Variable Insurance Portfolios, and are current only through the end of the period of the report, as stated on the cover. The President's views are subject to change at any time, based on market and other conditions, and no forecasts can be guaranteed.
As a shareholder of a Portfolio, you incur ongoing costs, including management fees, distribution and service fees, and other Portfolio expenses. The following tables are intended to help you understand your ongoing costs (in dollars) of investing in a Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six-month period ended December 31, 2009.
The first line in the following tables provides information about actual investment values and actual expenses. You may use the information in this line, together with your initial investment in Portfolio shares, to estimate the expenses that you paid over the period. Simply divide the value of that investment by $1,000 (for example, a $7,500 initial investment divided by $1,000 = 7.5), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your investment during this period. In addition, there are fees and expenses imposed under the variable annuity or variable life insurance contract through which shares of the Portfolio are held. Additional fees have the effect of reducing investment returns.
The second line in the following tables provides information about hypothetical investment values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of five percent per year before expenses, which is not the Portfolio's actual return. The hypothetical investment values and expenses may not be used to estimate the actual investment value at the end of the period or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this five percent hypothetical example with the five percent hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the tables are meant to highlight your ongoing costs as a shareholder of the Portfolio and do not reflect any fees and expenses imposed under the variable annuity or variable life insurance contract through which shares of the Portfolio are held.
Below, Michael L. Avery, portfolio manager of each of the five Ivy Funds VIP Pathfinder Portfolios, discusses positioning, performance and results for the fiscal year ended December 31, 2009. Mr. Avery has managed each Pathfinder Portfolio since their inception in March 2008. He has 31 years of industry experience.
Michael L. Avery
At the time of our last annual report to you, the global financial system tottered on the edge of collapse and the world's economies had slipped into the greatest recession since the 1930s. The malaise continued into 2009, as America's balance sheet recession deepened, home prices plummeted and unemployment spiraled. And then we witnessed the seminal event of the year, on March 6, 2009, the Dow Jones Industrial Average broke below 6500 and the S&P 500 Index declined to 666.79, falling another 25 percent from the end of 2008 and recording losses of more than 50 percent from their 2007 peaks. This ultimately proved to be the turning point.
Since then, due to massive stimulus implemented by governments in many developed economies, markets rallied impressively. Investors once again discovered their appetite for risk and demonstrated their preference for lower-quality or less financially secure businesses, driving a low-quality rally that ultimately drove up the prices of those businesses that had declined the most in the credit crisis. By May, news of improving earnings and better consumer sentiment bolstered equities. Global stocks fared even better due to renewed strength in developed markets and a powerful rise in emerging markets. In the third quarter, U.S. gross domestic product registered growth for the first time in more than a year, and the final quarter of 2009 saw improvements in many economic indicators in the U.S and abroad, particularly in non-Japan Asia.
The U.S. stock market's breathtaking decline and subsequent recovery were mirrored by the bond market, which staged its own roller coaster ride. As the year progressed and investors' risk tolerance returned to more normal levels, demand for corporate bonds increased, driving their prices higher and weighing on yields. During the 12 months, both taxable and municipal bonds returned more than 13 percent. At the same time, low interest rates had a negative effect on short-term instruments, such as money market funds.
As 2009 wound to a close, stock indices hit new recovery highs; the S&P 500 Index surged more than 65 percent from its March 2009 lows to record a 26.47 percent gain. Many global markets did even better; the MSCI EAFE Index ended the year with an annual gain of more than 32 percent. The Hang Seng Hong Kong Index returned 53.94 percent, while MSCI's emerging market index surged nearly 110 percent since early March.
For the fiscal year ended December 31, 2009, each of the underlying portfolios within the Pathfinder Portfolios posted positive returns for the year, as did each of the Pathfinder Portfolios. The top-performing underlying portfolio included Ivy Funds VIP Mid Cap Growth. Most categories of stocks rose during the year, but growth stocks, in particular, were strong as investors' faith in the economic recovery strengthened as the year progressed. In this environment, they rewarded primarily small and mid-cap technology, retailing and energy companies, which were areas of emphasis for the underlying portfolio.
Other strongly contributing underlying portfolios were Ivy Funds VIP International Value and Ivy Funds VIP International Growth. The stronger performance of these underlying portfolios reflects, in part, the historical tendency exhibited by investors at the end of bear markets to buy cheap - in other words, lower-quality stocks and value stocks (those that appear to be undervalued relative to their prospects). It also reflects their eagerness to capitalize on the dramatic growth occurring in many foreign - especially Asian - economies. Ivy Funds VIP International Value benefited from strong individual stock selection, particularly among technology and insurance holdings. Also beneficial was that portfolio's strategic underweight exposure to banks during the earliest part of the year when banks were struggling; the manager subsequently invested at attractive valuations in the second quarter and enjoyed rising performance through year end.
The greatest factor working against the more conservative Pathfinder Portfolios was their larger stakes in more conservative underlying portfolios, such as Ivy Funds VIP Money Market and Ivy Funds VIP Bond. While both of these underlying portfolios produced absolute returns, they were somewhat overlooked by investors with an eye for higher-yielding, lower-quality securities. By the end of the first quarter, investors were largely convinced that the Federal Reserve monetary policies and the Treasury Department's fiscal stimulus had helped establish a level of financial stability not seen in over a year. Within six months, Treasury bond yields returned to their pre-crisis levels. In the case of Ivy Funds VIP Bond, the portfolio's duration was simply too long, which restrained performance. At the same time, demand for spread product exploded. The portfolio's managers had increased Ivy Funds VIP Bond's exposure to spread product at the end of first-quarter 2009, which helped, but its preference for high-quality
over yield ultimately restrained performance.
We believe 2010 will likely be a volatile year for investors, due largely to concerns about sovereign credit risk. What we went through 18 months ago was a crisis of confidence; confidence may well have been restored, but a tremendous debt is still there, it's just been absorbed by governments that injected massive fiscal stimulus to create liquidity. We very well may encounter an environment in which volatility is punctuated by concern about what policy makers are going to do and what outcomes that may drive.
One of the significant themes we're anticipating in the months ahead is a transition from a liquidity-driven market to a "stock picker's" market. For that reason, we are less concerned with where a stock is domiciled - its geographical location - than we are in identifying what we feel are the steady-growth companies that fit our criteria for sustainable competitive advantage. We believe the way to succeed in 2010 is to spend less time on the macro view and more time on micro analysis and individual security selection. This plays very well into the investment theme that we've had in place for some time - our belief in the opportunities presented by the emerging middle class as the global economy rebalances.
Over all, we believe our flexibility to select a broad range of underlying portfolios is a strategic advantage in navigating the uncertain and potentially volatile markets in 2010. We are evaluating the global market as well as each of our underlying portfolio options as we allocate each Pathfinder Portfolio while the economy and markets continue on what appears to be a path of recovery.
As with any mutual fund, the value of each Portfolio's shares will change, and you could lose money on your investment.
International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country and differences in accounting standards and foreign regulations.
These and other risks are more fully described in each Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio manager and are current only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of any Pathfinder Portfolio.
PATHFINDER S&P 500 CITIGROUP CITIGROUP 3/4/08 10,000 10,000 10,000 10,000 6/30/08 9,903 9,713 9,961 10,094 9/30/08 8,975 8,900 9,950 10,159 12/31/08 7,618 6,947 10,512 10,237 12/31/09 9,395 8,786 11,045 10,270
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
PATHFINDER S&P 500 CITIGROUP CITIGROUP 3/13/08 10,000 10,000 10,000 10,000 6/30/08 10,052 9,786 9,957 10,094 9/30/08 9,582 8,967 9,946 10,159 12/31/08 8,906 6,999 10,508 10,237 12/31/09 10,060 8,851 11,041 10,270 (1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions. PATHFINDER S&P 500 CITIGROUP CITIGROUP 3/4/08 10,000 10,000 10,000 10,000 6/30/08 9,817 9,713 9,961 10,094 9/30/08 9,123 8,900 9,950 10,159 12/31/08 8,126 6,947 10,512 10,237 12/31/09 9,585 8,786 11,045 10,270
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
PATHFINDER S&P 500 CITIGROUP CITIGROUP 3/4/08 10,000 10,000 10,000 10,000 6/30/08 10,049 9,713 9,961 10,094 9/30/08 9,231 8,900 9,950 10,159 12/31/08 8,028 6,947 10,512 10,237 12/31/09 9,690 8,786 11,045 10,270 (1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions. PATHFINDER S&P 500 CITIGROUP CITIGROUP 3/12/08 10,000 10,000 10,000 10,000 6/30/08 10,054 9,836 9,934 10,094 9/30/08 9,459 9,013 9,923 10,159 12/31/08 8,620 7,035 10,483 10,237 12/31/09 9,923 8,897 11,015 10,270
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
Pathfinder Aggressive
Notes to Schedule of Investments
Notes to Schedule of Investments
Notes to Schedule of Investments
Pathfinder Moderately Aggressive
Notes to Schedule of Investments
Pathfinder Moderately Conservative
Notes to Schedule of Investments
Below, Michael L. Avery and Ryan F. Caldwell, portfolio managers of Ivy Funds VIP Asset Strategy, discuss positioning, performance and results for the fiscal year ended December 31, 2009. Mr. Avery has managed the Portfolio for 13 years and has 31 years of industry experience. Mr. Caldwell has managed the Portfolio for three years and he has 12 years of industry experience.
Michael L. Avery
Ryan F. Caldwell
At the time of our last annual report to you, the global financial system tottered on the edge of collapse as the burgeoning credit crisis in the United States served as the catalyst for the greatest worldwide recession since the 1930s. The malaise continued into 2009, as America's balance sheet recession deepened, home prices plummeted and unemployment spiraled. And then we witnessed the seminal event of the year; On March 6, 2009, the Dow Jones Industrial Average broke below 6500 and the S&P 500 declined to 666.79, falling another 25 percent from the end of 2008 and recording losses of more than 50 percent from their 2007 peaks. This ultimately proved to be the turning point.
Since then, due to massive stimulus implemented by governments in many developed economies, markets rallied impressively. Investment banks, particularly those that had received TARP assistance, began predicting a positive first quarter, which in turn sparked a reversal in investor sentiment. Investors once again discovered their appetite for risk and demonstrated their preference for lower-quality or less financially secure businesses, driving a low-quality rally that ultimately drove up the prices of those businesses that had declined the most in the credit crisis. In April, all capitalization segments of stocks recorded double-digit gains, and eight of the nine market sectors in the broad-based Russell 3000 Index were in positive territory. By May, news of improving earnings and better consumer sentiment about the global economic outlook bolstered equities, and the S&P 500 completed its third consecutive months of gains. Global stocks fared even better due to renewed strength in developed markets and a
powerful rise in emerging markets. The upward trajectory continued through the summer months.
During the third quarter of 2009, and for the first time in more than a year, U.S. gross domestic product registered growth, and the final quarter of 2009 saw improvements in rising home sales, better retail sales, less-negative employment trends and continued low interest rates. Manufacturing indices from Europe to Asia showed positive momentum, reflecting a potentially broad manufacturing recovery. Auto sales in places such as China surged as a burgeoning middle class there demonstrated its growing buying power. Strong investment in infrastructure also recovered, as did prices of commodities that support infrastructure build out.
The U.S. stock market's breathtaking decline and subsequent recovery were mirrored by the bond market, which staged its own roller coaster ride. When 2009 opened, the credit markets were virtually frozen and investors sought the relative safety of U.S Treasuries, ultimately driving the yield curve to nearly unprecedented levels. As the year progressed and investors' risk tolerance returned to more normal levels, demand for corporate bonds increased, driving their prices higher and weighing on yields. During the 12 months, both taxable and municipal bonds returned more than 13 percent. At the same time, low interest rates had a negative effect on short-term instruments, such as money market funds.
As 2009 wound to a close, stock indices hit new recovery highs; the S&P 500 Index surged more than 65 percent from its March 2009 lows to record a 26.47 percent gain. Many global markets did even better; the all-country MSCI EAFE Index ended the year with an annual gain of more than 32 percent. The Hang Seng Hong Kong Index returned 53.94 percent, while MSCI's emerging market index surged nearly 110 percent since early March.
Our strategies during the year were taken to some extent in response to market events.
As the second quarter opened and investor confidence grew, we began reducing cash and fixed income and increasing allocations into equities we believed were likely to benefit from continued economic recovery in China. We favored banks, insurance companies and consumer/industrial companies we felt were likely to benefit from China's stimulus actions. It was a strategy that worked well for the Portfolio, as a number of these securities emerged as top contributors for the period. In general, we believe China's stimulus programs are more likely to be effective than fiscal stimulus efforts in the United States. Unlike their American counterparts, Asian consumers not only have healthier balance sheets but are also enjoying rising incomes. We think they're more likely than not to increase their use of financial leverage. In retrospect, despite our actions, we likely were a little too defensive in the second quarter and missed a bit of the growth out of the gate when sentiment abruptly turned.
The second half of the year was largely positive. The equity portion of the Portfolio, which remained focused on the emerging middle class, was the primary driver of gains in the third quarter. We maintained a low fixed-income weighting and continued to reduce the Portfolio's cash position. Sectors in which the Portfolio was most heavily concentrated included consumer discretionary, financials, property, information technology and entertainment, on the premise that they offer the greatest potential, despite a de-leveraging cycle on the part of the consumer.
Two events worth noting occurred in the final quarter of the year - the most important, in our view, was the evolving strength of the dollar. This was driven by improving investor sentiment, and the tendency for investment managers and investors who did well in 2009, particularly outside the United States, to rebalance their portfolios at year end and bring those profits home. This created a bit of a headwind for the Portfolio due to its hefty stake in gold bullion (15.33% of net assets as of 12/31/09), long a source of significant contribution, which pulled back as the dollar gained in strength versus foreign currencies.
The other event was the global response to an $80 billion debt default in Dubai, when the state-owned Dubai World development company asked for more time to pay its debts. The event, which initially shook global markets, served both as a harsh reminder that though the credit crisis may be forgotten, it's not gone, and re-ignited concerns about the economic dire straits facing some of the weakest European countries - namely, Portugal, Ireland, Italy, Greece and Spain.
We believe 2010 will likely be a volatile year for investors, due largely to concerns about sovereign credit risk. What we went through 18 months ago was a crisis of confidence; confidence may well have been restored, but a tremendous debt is still there, it's just been absorbed by governments that injected massive fiscal stimulus to create liquidity. We very well may encounter an environment in which volatility is punctuated by concern about what policy makers are going to do and what outcomes that may drive.
As we mentioned earlier, the Portfolio has benefited greatly due to its heavy stake in gold bullion, which has remained steady at around 15 percent of assets. We may pare this stake down a bit, due to the extent that the market in general is on board with the notion of gold as a currency play. In addition, when people are concerned about sovereign credit, the dollar has often become more attractive - a trend we witnessed in late 2009. We believe that we may see even more flight to the dollar in 2010. With respect to fixed income, although these products have outperformed equities over the last decade, we don't believe this trend to be sustainable. In our view, corporate bond spreads are tight and likely to grow tighter, and we think Treasuries are range bound, so equities simply look more attractive. We do not anticipate any near-term moves into that arena.
One of the significant themes we're anticipating in the months ahead is a transition from a liquidity-driven market to a "stock picker's" market. For that reason, we are less concerned with how the Portfolio is domiciled - its geographical exposure - than we are in identifying what we feel are the steady-growth companies that fit our criteria for sustainable competitive advantage. We believe the way to succeed in 2010 is to spend less time on the macro view and more time on micro analysis and individual security selection. This plays very well into the investment theme that's been in place in the Portfolio's management for some time - our belief in the opportunities presented by the emerging middle class as the global economy rebalances. As we have discussed previously, we have been and remain heavily focused on China, with nearly a quarter of the Portfolio's assets currently invested there, and which we think remains very attractive despite concerns about inflation. We believe the Portfolio is ver
y well positioned to take advantage of China's burgeoning growth.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment.
International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country and differences in accounting standards and foreign regulations.
Fixed-income securities are subject to interest rate risk, so the Portfolio's net asset value may fall as interest rates rise. Investing in high-income securities may carry a greater risk of non-payment of interest or principal than higher-rated bonds. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio managers and are current only through the end of the period of the report as stated on the cover. The managers' views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP Asset Strategy.
Date ASSET STRATEGY S&P 500 CITIGROUP CITIGROUP LIPPER 12/31/99 10,000 10,000 10,000 10,000 10,000 12/31/00 12,253 9,082 11,159 10,653 11,228 12/31/01 11,033 8,000 12,110 11,094 11,170 12/31/02 11,395 6,232 13,332 11,293 10,506 12/31/03 12,703 8,022 13,892 11,428 12,721 12/31/04 14,392 8,895 14,514 11,590 13,883 12/31/05 17,886 9,332 14,887 11,975 14,660 12/31/06 21,489 10,806 15,532 12,591 16,120 12/31/07 30,969 11,400 16,653 13,272 17,179 12/31/08 22,981 7,182 17,822 13,677 13,638 12/31/09 28,736 9,083 18,724 13,721 16,161
Below, Cynthia P. Prince-Fox, portfolio manager of Ivy Funds VIP Balanced, discusses positioning, performance and results for the fiscal year ended December 31, 2009. She has managed the Portfolio for 15 years and has 26 years of industry experience.
Cynthia P. Prince-Fox
The Ivy Funds VIP Balanced underperformed for the year primarily due to stock selection versus sector selection. Some of the Portfolio's underperformance can be traced to the market environment in which lower-quality stocks outperformed higher-quality stocks, which is where we have traditionally positioned the Portfolio over the long-term. Additionally, we were overweight in traditional defensive sectors such as consumer staples and health care. These holdings served us well during the financial crisis but substantially lagged the rebound in sectors that had been hit the hardest. Within our fixed-income holdings, we were primarily in government Treasuries and highly rated corporate bonds, both of which trailed lower-rated bonds for most of the year. Lastly, we did carry cash early in the year, which was a drag on performance when the markets started to rebound off the March bottom. Cash was our strongest defense during the financial crisis that hit its crescendo in March with the S&P 500 hitting a low of
667 before rebounding. As we put our cash to work, we remained focused on companies that we felt were well-positioned to weather further economic fallout in the event that credit availability remained challenged.
Our top contributors (on an absolute basis) for the year were populated by our technology positions as six of our top 10 performers were in this sector. The technology sector turned in the best performance for the year, up over 60 percent on a year-to-date basis. Apple Inc. was our lead contributor. As we have commented in past commentaries, the rapid growth of new mobile devices is moving beyond the simply "better devices on better networks" of the last two years. For now, Apple's iTunes/AppStore is the dominant mobile applications set, with more than 100,000 applications available. The second best sector was consumer discretionary. Cosmetics leader Estee Lauder Companies Inc. (The) was a top contributor to performance as the company cut costs under new leadership and appears set to benefit from recent signs of an improving operating environment in key areas, such as travel, retail, emerging markets and restocking of department store inventories in the U.S.
Another holding that had a positive overall impact on performance was Ford Motor Company. In some ways Ford is symbolic of what corporate America has been dealing with over the past several years. It came into this downturn with a heavily leveraged balance sheet, only to watch the annualized selling rate of autos collapse by 35 percent. However, in the same year that we witnessed the near collapse of General Motors and Chrysler, Ford turned in a profit for the third quarter, gained market share and had a 33 percent increase in sales in the final month of the year. They were able to produce these results because of aggressive moves to refocus the company to be a world competitor. This will be critical in the globalization race, as China surpassed the United States as the largest car maker in the world with 13.5 million cars sold in 2009.
The biggest detractors to performance were in financials and utilities. The financial group rallied significantly off the March lows, turning in double digit gains in both the second and third quarters. Some of our larger positions in the trust banks and insurance stocks lagged the initial rally in March, primarily because they had held up well during the crisis. As we began the year our interest was in owning the financial institutions that we believed would be the survivors and that remains our focus as we head into 2010. In utilities our largest holding was Exelon Corporation, which was hit by lower power prices and volumes. We continue to maintain our position as we believe the company has the most leverage to a power price recovery and would also benefit from passage of federal climate change regulation.
We began 2009 with a euphoria associated with a new American president. This wore off quickly as the state of our economy and the procession of bad news coming out of corporate America overwhelmed the change in command. As we moved through the year, markets focused on the $800 billion stimulus package and the role it was playing in restoring the credit markets. Junk bond yields plunged from their all time high as did other credit spreads, providing a very positive backdrop for equities.
Given the rally in equity markets in 2009, we expect returns to be more muted in 2010 as countries and economies continue to work through the lasting effects of the global financial crisis. While uncertainties remain, we do not think that improved sentiment is the only driving factor behind the current rebound. Across numerous industries we have seen corporate earnings improve on the back of cost cutting efforts. We feel that this should open the door for powerful earnings growth when top line sales recover. We believe that one of the key drivers of markets from here is the speed and extent to which we see a recovery in top line growth.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment.
Fixed-income securities are subject to interest rate risk, so the Portfolio's net asset value may fall as interest rates rise. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio manager and are current only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP Balanced.
BALANCED S&P 500 CITIGROUP LIPPER 12/31/99 10,000 10,000 10,000 10,000 12/31/00 10,714 9,082 11,175 9,916 12/31/01 10,078 8,000 12,144 9,336 12/31/02 9,230 6,232 13,457 8,105 12/31/03 10,992 8,022 14,108 9,842 12/31/04 11,974 8,895 14,722 10,786 12/31/05 12,574 9,332 15,087 11,469 12/31/06 13,984 10,806 15,667 12,835 12/31/07 15,895 11,400 16,823 13,740 12/31/08 12,558 7,182 17,845 9,652 12/31/09 14,218 9,083 18,641 12,023
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
Below, Mark J. Otterstrom, CFA, portfolio manager of Ivy Funds VIP Bond, discusses positioning, performance and results for the fiscal year ended December 31, 2009. He has managed the Portfolio since September 2008 and has 23 years of industry experience.
Mark J. Otterstrom
The fiscal year ending December 31, 2009 witnessed dramatic changes throughout the financial markets. At the end of 2008, Ivy Funds VIP Bond was well positioned to take advantage of the market turmoil. The Portfolio was underweight in spread product at a time when spread product greatly underperformed. We lengthened our duration and maintained a very high credit quality, thus benefiting from the rally in long Treasury yields experienced at the end of last year.
That all changed in early 2009. By the end of the first quarter, market participants had become convinced that the Federal Reserve monetary policies and the Treasury Department's fiscal stimulus had helped establish a level of financial stability not seen in over a year. Within six months, Treasury bond yields returned to their pre-crisis levels. The duration of the Portfolio was too long and consequently did not perform well during this period. At the same time, demand for spread product exploded. The funds that performed the worst in 2008 experienced the largest rebound in 2009. We had increased Ivy Funds VIP Bond's exposure to spread product at the end of first-quarter 2009 and benefited from this rally in spread product. However, we still maintained our high credit quality, which caused the Portfolio to significantly underperform its peer funds that had overweighted low-grade and non-investment-grade debt. As a result, Ivy Funds VIP Bond significantly underperformed its Lipper average over the last 12 mo
nths.
The market turbulence of the last year has provided significant challenges for bond fund managers. Bond market volatility soared at the end of 2008 and has yet to return to pre-crisis levels. There was a massive amount of fiscal and monetary stimulus pumped into the system at the end of 2008 and early 2009. The Fed has more than doubled the size of its balance sheet as it purchased a broad range of securities that added much-needed liquidity into the U.S. banking system. There was a massive flight-to-quality trade that occurred during that period. Cash flows into the funds were very healthy during the fourth quarter of 2008. Return of capital became much more important to investors than return on capital.
In addition to keeping the Fed funds rate near zero, the Fed also began several quantitative easing programs. One of these programs, designed to keep home mortgage rates low and stabilize the collapsing residential real estate markets, was to begin directly purchasing agency-backed mortgage pools. This direct purchasing program had the effect of significantly lowering the spreads between agency-backed mortgage pools and Treasury bonds. Ivy Funds VIP Bond was underweight in agency-backed mortgage pools during a period of rapid price appreciation. The portfolios in our Lipper peer group that were overweight in agency-backed mortgage pools experienced returns far in excess of the Lipper average. The benchmark index was also significantly overweight in the agency-backed mortgage pool asset class when prices were appreciating rapidly.
The driving forces behind the Portfolio's performance are typically duration management and sector selection. We were very concerned about the size of the Treasury bond auctions that were in the pipeline for this year and several years to come. We had shortened our duration by mid-2009, ahead of the slate of new Treasury auctions. The aggressive yields received at auction surprised many market participants. Throughout the summer it became apparent that the worldwide fiscal and monetary easing was having an effect on bond yields. The liquidity that was pumped into the system is finding its way into equity and bond investment vehicles, and drove very strong demand for bonds in the third quarter of 2009. That demand has diminished slightly through the end of the year.
As economies worldwide begin their recoveries and monetary policies become less accommodating, we believe that these extraordinary measures will have a reduced influence on the fixed-income markets. As demand for other asset classes continues to grow, we feel that we may see a reduction in the demand for Treasury bonds even as the U.S. continues its healthy supply of new issuance. We could begin to see these relatively low Treasury bond yields come under pressure.
Being focused on Treasury bonds, FDIC insured bonds and high-grade corporate bonds at the end of last year allowed the Portfolio to ride out a very turbulent investment cycle. Under normal market conditions, Treasury bonds will play a smaller role in the total returns of this Portfolio. Even with the Fed slowing its purchase of new mortgage pools, demand for these securities remains strong. These securities offer stable income while providing a versatile duration management tool. Going forward, we anticipate that agency-backed mortgage securities will play a bigger role in the Portfolio.
While long-duration portfolios have benefited from the recent rally in Treasury yields, we feel that the biggest challenge going forward will be to preserve the recent gains we have seen. Growing fiscal deficits will require the Treasury to continually increase the size of the Treasury bond actions. These auctions have been well received with significant purchases made by foreign investors. With the supply of new bonds growing and weakness in the dollar emerging, we believe that this reliance on foreign purchases will provide a major vulnerability to the current Treasury bond yields.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment.
Fixed-income securities are subject to interest rate risk, so the Portfolio's net asset value may fall as interest rates rise. These and other risks are more fully described in the Portfolio's prospectus.
Certain U.S. government securities in which the Portfolio may invest, such as Treasury securities and securities issued by the Government National Mortgage Association (Ginnie Mae), are backed by the full faith and credit of the U.S. Government. However, other U.S. government securities in which the Portfolio may invest, such as securities issued by the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal Home Loan Banks (FHLB) are not backed by the full faith and credit of the U.S. Government, are not insured or guaranteed by the U.S. Government and, instead, may be supported only by the right of the issuer to borrow from the U.S. Treasury or by the credit of the issuer.
On Sept. 7, 2008, the Federal Housing Finance Agency (FHFA), an agency of the U.S. government, placed Fannie Mae and Freddie Mac into conservatorship, a statutory process with the objective of returning the entities to normal business operations. FHFA will act as the conservator to operate Fannie Mae and Freddie Mac until they are stabilized. It is unclear what effect this conservatorship will have on the securities issued or guaranteed by Fannie Mae or Freddie Mac.
The opinions expressed in this report are those of the portfolio manager and are current only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP Bond.
BOND CITIGROUP LIPPER VA 12/31/99 10,000 10,000 10,000 12/31/00 10,983 11,159 10,997 12/31/01 11,804 12,110 11,838 12/31/02 12,864 13,332 12,876 12/31/03 13,402 13,892 13,521 12/31/04 13,922 14,514 14,109 12/31/05 14,147 14,887 14,420 12/31/06 14,747 15,532 15,027 12/31/07 15,583 16,653 15,815 12/31/08 15,632 17,822 14,931 12/31/09 16,752 18,724 16,956 Below, Erik R. Becker, CFA, and Gustaf C. Zinn, CFA, portfolio managers of Ivy Funds VIP Core Equity, discuss positioning, performance and results for the fiscal year ended December 31, 2009. They have managed the Portfolio since July 2006. Mr. Becker has 10 years of industry experience while Mr. Zinn has 11.
Erik R. Becker
Gustaf C. Zinn
During 2009, market performance was led by technology, materials and consumer discretionary, though all sectors were positive for the year. Telecomm, utilities, energy and consumer staples were the worst performing S&P 500 sectors for the year. For the year, the Portfolio's underperformance was driven primarily by negative stock selection within the technology and health care arenas and largely tied to the fourth quarter. Fiscal year 2009 was certainly a wild one for equity returns. After falling almost 11 percent in the first quarter of 2009, the S&P 500 surged 16 percent in the second quarter, 16 percent in the third quarter and 6 percent in the fourth quarter.
First-quarter returns were negative as most business indictors continued their downward trajectory from 2008. However, two very important policy responses occurred in the first quarter and likely created a market floor. The first was the Financial Stability Plan released by Treasury Secretary Geithner. The plan had multiple components but central was a "stress test" of the nation's 19 largest banks to see how much additional capital was needed under varying economic scenarios. This stress test was critical in boosting confidence in the nation's financial system. Other aspects of the plan included plans to purchase illiquid assets from bank balance sheets and efforts to temporarily replace broken securitization markets. The second major policy response was the signing in February of the $787 billion stimulus program called the American Recovery and Reinvestment Act. While initial spending under this program was minimal, expectations for stimulus-related economic benefits rose
for future quarters, again adding support to financial markets.
After a rocky start for the markets in early 2009, business indicators began to turn up in the second quarter, providing much needed support for the market. Among them were existing home sales which increased in the second quarter to nearly 4.8 million units versus 4.6 million units in the first quarter. Low interest rates and record home affordability drove buyers into the market that had led the economic downturn since the housing peak in the third quarter of 2005. Auto sales bottomed at 9.7 million units at an annual rate in the second quarter as well, after having declined from more than 17 million units at the peak. Initial claims for unemployment insurance, a leading indicator for broader employment indicators, also began to decline in April of '09 after a steady march higher. Additionally, the banking system was highly successful in the second quarter, raising more than $500 billion in fresh capital to help offset losses on bad loans.
The third and fourth quarters were marked by a general improvement in most key economic indicators, which were suggestive of a continued improvement in real economic growth in the U.S. as well as abroad. In fact, economic indicators seemed to suggest that the extremely rapid deterioration in economic activity in the latter half of 2008 and early 2009 would be met by a stronger-than-normal recovery, or a "V" shaped recovery, if you will. For example, non-farm jobs lost totaled 11,000 in the month of November versus 139,000 jobs lost in June and 741,000 at the peak in January of 2009. The Institute for Supply Management's survey of industrial activity rose to 55.9 in December after 52.6 in September and 32.9 at the trough in December of 2008. Existing home sales, after falling to 4.9 million at an annualized rate in January of 2009, improved to a level of 6.5 million in November. Auto sales improved to 11.4 million on an annual basis in the month of December after falli
ng to 9.3 million in the month of February. And Christmas season sales, after much trepidation, actually surprised retailers and economists to the upside.
Importantly, economic indicators outside the U.S. also appear robust. Manufacturing indices from Europe to Asia appear to be on the upswing and are suggestive of a potential broad manufacturing recovery. Auto sales in places such as China are surging as her growing middle class flexes newfound buying power. Investment in infrastructure - from roads and bridges to electrical generation capacity, high speed trains, airports and tourist destinations - has recovered (as have the prices of commodities that go into many of those investments).
The outlook over the next six to 12 months appears reasonably bright, in our opinion, as it relates to both economic activity and potential stock market returns. For one, companies have yet to engage in inventory replenishment on a broad scale. After seven consecutive quarters of inventory liquidation in the private sector and considering an improved sales environment in a number of areas, it seems reasonable to expect a significant inventory benefit to GDP growth through the next four quarters. Employment could improve meaningfully as it is our belief that the swiftness of the onset of the credit crisis, efforts to slash inventories, and falling sales led employers to over-cut headcount in an effort to preserve cash flow and profitability. The result of better employment, we believe, will be improved sales even if consumers decide to continue to boost the rate at which they save. We feel that government stimulus should continue to benefit the economy for at least the next two quarters with wanin
g benefits thereafter. And after spending the last six to eight quarters dealing with problem loans and trying to fix their balance sheets, we believe it will be only natural for banks to capitalize on their relatively low borrowing costs and high lending rates by increasing lending and further supporting economic recovery. We believe that equity markets should respond favorably for a number of reasons. First, S&P earnings growth could approximate 30 percent or so in 2010, with further gains possible should financial companies return to profitability faster than currently expected. Second, equity investors have largely not increased participation in the market as evidenced by the $351 billion in total fund flows into bond funds and only $6.2 billion into equity funds throughout 2009. We believe that significant buying capacity exists that could push equity prices higher. And finally, market valuations at approximately 14 times estimated 2010 earnings appear reasonable.
Areas of emphasis for the Portfolio continue to be groups or themes and companies where we continue to have high conviction in the ability to meaningfully exceed earnings forecasts on a multi-year basis. The most glaring opportunity to us today lies in the financial sector where companies appear poised to embark on a multiyear improvement in profitability as the result of a normalization in credit losses, significant consolidation in the financial landscape, and wider lending spreads. We continue to focus on those companies that as a result of the recent credit crisis were able to augment their franchise with strategic asset purchases that enhanced their competitive positioning. Other key themes include energy services and mobile internet adoption.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio managers and are current only through the end of the period of the report as stated on the cover. The managers' views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP Core Equity.
CORE EQUITY S&P 500 LIPPER 12/31/99 10,000 10,000 10,000 12/31/00 10,928 9,082 9,744 12/31/01 9,299 8,000 8,623 12/31/02 7,288 6,232 6,783 12/31/03 8,546 8,022 8,652 12/31/04 9,364 8,895 9,553 12/31/05 10,207 9,332 10,135 12/31/06 11,941 10,806 11,587 12/31/07 13,616 11,400 12,192 12/31/08 8,882 7,182 7,563 12/31/09 11,015 9,083 9,670 Below, David P. Ginther, CPA, portfolio manager of Ivy Funds VIP Dividend Opportunities, discusses positioning, performance and results for the fiscal year ended December 31, 2009. He has managed the Portfolio for six years and has 14 years of industry experience.
David P. Ginther
Fiscal year 2009 proved to be a year of dramatic change in the investment markets. When the year began, the U.S. financial system stood at the brink of collapse and the global economy threatened to slip into the greatest worldwide recession since the 1930s. The malaise continued into the first quarter of 2009, as our balance sheet recession deepened, home prices plummeted and unemployment spiraled. But then, on March 6, 2009, the Dow Jones Industrial Average broke below 6500 and the S&P 500 declined to 666.79, falling another 25 percent from the end of 2008 and recording losses of more than 50 percent from their 2007 peaks. The market found its floor.
Since then, markets rallied impressively. Investment banks began predicting a positive first quarter of 2009, which in turn sparked a reversal in investor sentiment. Investors once again discovered their appetite for risk and demonstrated their preference for lower-quality or less financially secure businesses, driving a low-quality rally that ultimately drove up the prices of those businesses that had declined the most in the credit crisis. By mid-year news of improving earnings and better consumer sentiment about the global economic outlook bolstered equities, and the S&P 500 completed its third consecutive month of gains.
This upward trajectory continued during the second half of the year. U.S. gross domestic product registered growth in the third quarter for the first time in more than a year, while the final quarter of 2009 saw a broad based advance, with all sectors recording gains and a number of economic indicators improving, suggesting that continued recovery may be moving toward sustainability. Also notable during the fourth quarter was the strengthening of the dollar versus many foreign currencies and the global response to the debt default by Dubai World, a state-owned development company in the United Arab Emirates. This event served as a harsh reminder that while the credit crisis may have faded from the forefront of investors' minds, it's not over. Although U.S. markets stumbled only briefly in response, the default re-ignited concern about the economic challenges facing some of the weakest European countries - particularly Greece. But the year ended on a decidedly positive note, with the market rebounding nearly
65 percent off the bottom to end 2009 near its high for the year.
Despite the rapidly evolving market that characterized fiscal year 2009, we did not stray from our long-held approach to identifying those companies that we feel possess the balance-sheet strength, sustainable business models and earning power and that we believe stand to benefit the most in the early stages of economic recovery. We entered the year defensively positioned, emphasizing stocks that we thought were less sensitive to the recession, but this overly defensive posture ultimately restrained the Portfolio's performance relative to its benchmark and peers. On the plus side, absolute performance was helped by the Portfolio's substantially overweight stake in energy - a position we undertook on the belief that the oil and gas oversupply that characterized the market earlier in the year was temporary and that energy prices would move higher. An overweight in consumer staples also proved beneficial.
As the year progressed, earnings growth, driven by revenue growth and the ongoing benefits of cost cutting, continued to surprise on the upside. We did make some tactical shifts in an effort to take advantage of this changing environment during the quarter. One of our larger efforts was to position a bit more aggressively. Specifically, we increased exposure to the consumer discretionary, industrials and materials sectors and also added selected names in information technology and financials, bringing the Portfolio's weighting there more in line with that of its index. We eliminated some higher-yielding telecom names - firms that did not appear to us to have upside opportunity - in favor of other holdings that we think are more likely to provide dividend growth and capital appreciation for total return as the economy improves. Our thinking regarding energy remains unchanged, and we have added to our stake in selected firms we think are well positioned to benefit from demand for energy that we believe will li
kely outstrip supply.
The economic outlook continues to improve, although concerns remain about the strength and sustainability of recovery. We fully expect credit to continue to improve in 2010, although we think stimulus will begin to slow in the latter half of the year. We are not yet concerned about inflation, despite the enormous liquidity that was injected by the Federal government in an effort to stimulate the economy, because unemployment remains high - a factor that we believe will keep wages from rising too quickly. We are concerned, however, about the effect of increased regulation and taxes, which could restrain economic growth and recovery. In the near term, we remain cautious on consumer spending due to the high unemployment rate. We are encouraged by the growth in temporary jobs, which we believe is an early indicator of employment growth that we anticipate will emerge in early 2010. Finally, we believe that dividend-paying stocks should benefit from a continued low-interest-rate environment in which total returns
become increasingly important.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio manager and are current only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP Dividend Opportunities.
DIVIDEND RUSSELL 1000 LIPPER 12/31/03 10,000 10,000 10,000 12/31/04 10,996 11,140 11,352 12/31/05 12,429 11,839 11,950 12/31/06 14,407 13,671 14,155 12/31/07 16,815 14,461 14,479 12/31/08 10,776 9,023 9,268 12/31/09 12,703 11,588 11,420
Below, David P. Ginther, CPA, portfolio manager of Ivy Funds VIP Energy, discusses positioning, performance and results for the fiscal year ended December 31, 2009. He has managed the Portfolio since its inception in May 2006 and has 14 years of industry experience.
David P. Ginther
Fiscal year 2009 proved to be a year of dramatic change in the investment markets. When the year began, the U.S. financial system stood at the brink of collapse and the global economy threatened to slip into the greatest worldwide recession since the 1930s. The malaise continued into the first quarter of 2009, as our balance sheet recession deepened, home prices plummeted and unemployment spiraled. But then, on March 6, 2009, the Dow Jones Industrial Average broke below 6500 and the S&P 500 declined to 666.79, falling another 25 percent from the end of 2008 and recording losses of more than 50 percent from their 2007 peaks. The market found its floor.
Since then, markets rallied impressively. Investment banks began predicting positive first-quarter 2009 results, which in turn sparked a reversal in investor sentiment. Investors once again discovered their appetite for risk and demonstrated their preference for lower-quality or less financially secure businesses, driving a low-quality rally that ultimately drove up the prices of those businesses that had declined the most in the credit crisis. By mid-year news of improving earnings and better consumer sentiment about the global economic outlook bolstered equities, and the S&P 500 completed its third consecutive month of gains.
This upward trajectory continued during the second half of the year. U.S. gross domestic product registered growth in the third quarter for the first time in more than a year, while the final quarter of 2009 saw a broad-based advance, with all sectors recording gains and a number of economic indicators improving, suggesting that continued recovery may be moving toward sustainability. Also notable during the fourth quarter was the strengthening of the dollar versus many foreign currencies and the global response to the debt default by Dubai World, a state-owned development company in the United Arab Emirates. This event served as a harsh reminder that while the credit crisis may have faded from the forefront of investors' minds, it's not over. Although U.S. markets stumbled only briefly in response, the default re-ignited concern about the economic challenges facing some of the weakest European countries - particularly Greece. But the year ended on a decidedly positive note, with the market rebounding nearly
65 percent off the bottom to end 2009 near its high for the year.
Although the market environment was fluid and rapidly changing throughout the Portfolio's fiscal year, we remained focused on long-term fundamentals. An underweight stake in the energy sector proved very beneficial, providing the bulk of the Portfolio's dramatic outperformance of its benchmark. We maintained our preference for globally-diversified oil service and production companies, given our belief that they would be well positioned to gain from increased international exploration and spending and an upturn in the global economy. We also continued to pursue natural gas suppliers as fundamentals deteriorated and we anticipated the market was nearing a bottom, suggesting production would decrease due to falling rig count and lower prices.
The Fund's top contributor during the year was Bucyrus International, Inc., (1.75% of net assets as of 12/31/09), a maker of equipment for extracting coal and oil sands, among other minerals, that's benefiting from rising global demand. Bucyrus is also about to purchase a division of Terex Corp., another construction equipment manufacturer, which we feel bodes well for the company's ability to take market share. New holdings acquired during the year included Clean Energy Fuels Corp. and SandRidge Energy, Inc. (0.85% and 0.30% of net assets, respectively, as of 12/31/09). Clean Energy Fuels Corp. is the country's leading provider of natural gas for transportation. It owns two natural gas production plants and a landfill gas facility that produces renewable methane gas for delivery in the nation's gas pipeline network. It also owns BAF Technologies, Inc., a leading provider of natural gas vehicle systems. Rising public and government demand for clean air initiatives is driving success for the firm, whose alter
native-fuel vehicles and environment-friendly solutions play to burgeoning environmental concerns. SandRidge Energy, Inc. is a high-quality, rapidly growing natural gas and oil company focused primarily on Texas exploration and one that in our view is strategically positioned to prosper in line with continued economic recovery.
The economic outlook continues to improve, although concerns remain about the strength and sustainability of recovery. We fully expect credit to continue to improve in 2010, although we think stimulus will begin to slow in the latter half of the year. We believe oil prices will continue to move higher as the world economies continue to recover. We could see $100-a-barrel prices again, in our opinion. Supply and demand remain tight, and we think demand will get even higher, led by Asia - mainly China, which now has the largest auto market in the world. Demand in China over the last year was up around a half-million barrels. We also anticipate oil production growth may be limited because capital expenditures for oil fell in 2009. We are hopeful that oil companies will start to spend more in the months ahead, given that the price of oil has moved higher.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment.
Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. Investing in the energy sector can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments, and the cost assumed by energy companies in complying with environmental safety regulations. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio manager and are current only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP Energy.
ENERGY S&P LIPPER 5/1/06 10,000 10,000 10,000 12/31/06 9,319 10,638 9,969 12/31/07 14,099 14,310 13,655 12/31/08 7,593 9,188 7,264 12/31/09 10,667 10,696 10,866
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
Ivy Funds VIP Global Natural Resources is subadvised by Mackenzie Financial Corp. of Canada.
Below, Frederick Sturm, CFA, portfolio manager of Ivy Funds VIP Global Natural Resources, discusses positioning, performance and results for the fiscal year ended December 31, 2009. He has managed the Portfolio for five years and has 29 years of industry experience.
Frederick Sturm
Last year was primarily one of implementing aggressive global reflationary policy as the first stage in restoring financial markets, investor confidence and economic activity. It was an important year for the Portfolio for two important reasons. First, we suggested that investors who were discouraged by 2008 should stay the course for the immediate recovery and long-term potential. Though a full recovery of all-time highs will take more time, we were encouraged by market gains. Second, it goes a long way to restoring credibility to the secular bull market trend we argued in the late 90s would last into the coming decade. We feel that the new year is likely to carry over the same theme, but we expect the first half to begin an important transition process. Specifically, the market will be looking for a necessary hand-off from government policy push to self-sustaining business and consumer spending. The good news is that we expect this transition to be successful over the next 12 months. However, we expect inv
estors' memories of 2008 are too fresh to not temporarily reduce holdings that have rallied strongly over the past year. This would be consistent with market history following the first recovery year where markets rise in anticipation of economic recovery, but then briefly sell off on confirming news. This does suggest lower total returns than in 2009, but multi-month wiggles that will probably not prove meaningful in the context of 3-5 year investment plans, where we still expect equities to keep the pole position. Superior stock selection was the single largest contributor to the Portfolio's strong outperformance of its benchmark index and Lipper peer group during the period.
The new year starts with many parts of the global economy likely out of recession and embarking on the next potential period of growth, while last year provided further evidence of a growing leadership role in emerging markets. Historically, emerging markets were the assembly plants for excess Organization for Economic Cooperation and Development (OECD) demand that could not be supplied by local manufacturing and, as such, they tended to follow Western world leadership. This time China was the first out of the gate, already in growth mode and with many of their companies likely in position to post profitable results in 2010. The better companies in OECD countries lag in this process, probably by six to 24 months depending on industry and company specific dynamics. With double-digit unemployment and excess productive capacity, we believe that OECD policymakers will be reluctant to tighten early or dramatically this year. We believe emerging market policy will be more proactive in an effort to defend the hard-
fought battle over the past decade of lowering local inflation. Given these circumstances, we expect economic growth somewhat below past recovery standards but growth, nonetheless, in 2010, 2011 and 2012.
The substantial realignment of unpegged currencies is well advanced. The U.S. dollar reached moderately undervalued levels on a purchasing power basis at the end of last year, providing rally support against a long-term trend that we feel should carry lower. The Portfolio has introduced partial hedges for Europe, the U.K, Canada, Brazil and Africa; China remains unhedged. The declining dollar was cited last year as a support for rising commodity prices, so a natural question is whether a rising dollar is necessarily bad for commodity prices. History suggests it depends on what the underlying economic conditions are that are causing the currency shift. If the dollar's increase is associated with global weakness, the prices likely would suffer. However, if the increase is associated with strong U.S. growth, then we feel industrial commodity prices can continue to rise. Gold has a more direct inverse link, and we feel it is likely that precious metals, having had a good run, will continue to trade around the lo
ng-term uptrend established since 2000. We maintain neutral- to moderately below-neutral holdings focused in a few select stocks. We expect the dollar to continue to feel the weight of trade deficits and drift lower over time, but we also expect all currencies to depreciate relative to baskets of hard assets.
We believe that the first revaluation trade in resource equity markets should largely be completed by the first quarter of 2010, so the year-to-year rate of change for the new bull market likely will peak. Valuations are not excessive, nor are they cheap in our opinion. Relative to other investment classes, we believe that resource equities still appear attractive for multiyear return potential. Investment markets have been hugely impacted by global macro factors for the past two years. Over the next two, we do not expect everything to be good or everything to be bad, which translates into industry- and company-specific factors being more dominant issues in investment returns. Stock picking will matter, as it did in 2009. Achieving above-historical returns will require a tighter focus on deeper relative value or stronger growth prospects.
Sustained low interest rates, increasing evidence of economic improvement and a persistent rise in equity markets have improved investor psychology, but there is little evidence of exuberance in our view. Investments have been focused on the rebound in companies that were excessively discounted in 2008 (particularly those with leverage), and more specifically companies that are more sensitive to a resumption of global growth. Emerging market consumer stocks, technology, and basic materials were the winners last year. The flow of funds continues to highlight a particular reluctance to reinvest in OECD markets; Japan has been the notable laggard. The health care sector was held back by policy risk in the U.S., while consumer stocks continue to await better employment numbers. More clarity in lagging sectors will help to substantially narrow the spread in returns in 2010, and we may see a brief rotation favoring the laggards, but we do not expect a major shift in long-term leadership. Meanwhile, the Portfolio h
as gradually reduced exposure to emerging markets like Brazil and increased OECD exposure for valuation reasons. Within the resources sectors, the highlight was "that which China must buy," like copper, iron ore and coal. Basic materials have historically been early market leaders, but often sell off thereafter. Major integrated energy companies were the laggards. Historically, energy's relative performance picks up with economic recovery, into the first hikes, and continues solid past the first hikes. The Portfolio has therefore been progressively harvesting profits out of basic materials and increasing exposure to energy.
We believe that investors will need to incorporate inflation protection within their portfolios in the years ahead as the economy recovers more fully. A lack of demand has been the overriding issue during the economic shutdown, and there remains sufficient spare capacity to produce almost anything, so aggregate inflation rates should remain muted for the next 18 months, we believe. Investors will therefore be sensitive to central bank policy tightening, potentially impacting demand and restricting profit growth. However, one of the biggest unintended consequences of the financial market disarray has been a drastic reduction in investment in new and additional capacity, as companies try to protect liquidity and await evidence of demand. For the first time in 50 years, U.S. companies are investing less than depreciation. Oil is a good example. We suspect spare capacity is near its peak, and for years to come supply growth likely will trail demand growth, causing prices to trend higher. It bears repeating that
inventories for several commodities appear to be peaking now, effectively launching our multi-decade blueprint into the third "scarcity" phase. We feel that the full weight of scarcity pricing pressures should not be felt until the middle of this decade, but select commodities like garlic, cocoa, coal and sugar are already giving evidence to supply constraint pricing pressures. From time to time, share prices may get ahead of projected earnings growth - justifying trading around core positions - but investors should remember that multi-year peaks in resource sectors tend to come after a period of global economic expansion, not at the beginning of one. This five-year perspective magnifies the importance for both current investors and potential investors to put last year's strong returns into context and remain committed.
While from a thought leadership position we highlight the "scarcity" phase, the Portfolio is more interested in investing in what we feel are the solutions and companies that will be able to expand volumes. Over the past two quarters the Portfolio correctly augmented holdings of coal producers, both steam and metallurgical, in anticipation of tighter supply demand conditions. As we start this year, select coal-based electricity producers in China are restricting usage by some customers because coal inventories have fallen to critical levels below one week's supply. Elsewhere, we believe that natural gas prices likely have seen their lows, but we do not expect a runaway to the upside. We continue to advocate a strong focus on companies that we feel can deliver low-cost growth deploying multi-stage fracturing. We may well take moderate profits into seasonal strength. Meanwhile, global expenditures on energy drilling and service could rise considerably in 2010, in our view. While we are monitoring val
ue parameters to judge whether stocks temporarily get too far ahead of fundamentals, we are inclined to allow some overvaluation on near-term earnings as we feel it is too early to handicap how far earnings may advance over the course of this up cycle.
We believe that a new bull market in equities has taken hold, delivering a solid initial lift from the unprecedented liquidation in 2008. As every market goes through a number of stages, so too, must this one go through a process of advance and consolidation. Given our outlook that equities will be the better performing multi-year asset class, we feel that investors should continue to make commitments to equities. We stand prepared to redeploy partial hedging if equities spurt higher in the months ahead and investors may then also want to defer additional purchase. In the context of the launch of the third phase in the secular trend, our mindset remains to "buy the dips."
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment.
Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country and differences in accounting standards and foreign regulations. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio manager and are current only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP Global Natural Resources.
GLOBAL NATURAL MORGAN STANLEY COMMODITY LIPPER VA 4/28/05 10,000 10,000 10,000 12/31/05 12,604 12,580 13,526 12/31/06 15,818 15,283 16,216 12/31/07 22,699 21,929 22,214 12/31/08 8,748 12,675 11,817 12/31/09 15,190 19,310 17,676
Below, Daniel P. Becker, CFA, and Philip J. Sanders, CFA, portfolio managers of Ivy Funds VIP Growth, discuss positioning, performance and results for the fiscal year ended December 31, 2009. Mr. Becker has managed the Portfolio for three years and has 21 years of industry experience, while Mr. Sanders has managed the Portfolio for 11 years and has 21 years of industry experience.
Daniel P. Becker Philip J. Sanders
Ivy Funds VIP Growth posted a strong positive return during the fiscal year as the U.S. financial system stabilized and investor confidence in the sustainability of the economic recovery continued to build. The market experienced a historic rebound off the early March lows, surging about 65 percent off the bottom to end 2009 near its highs for the year. Despite the Portfolio's healthy absolute return, its performance meaningfully lagged the Russell 1000 Growth benchmark return.
The Portfolio's underperformance was driven by several factors. First, relative performance was hampered by the Portfolio's ongoing focus on what we believe are high-quality companies with structurally advantaged business models. This strategy served as a headwind in 2009 as the market rally was largely led by lower-quality, higher-beta stocks of companies whose business models were the most distressed and valuations were the most depressed. Once market conditions stabilized and prospects for an economic recovery improved, these low-quality companies experienced a much more dramatic rebound than the dominant market leaders with strong balance sheets that many investors had previously favored. Portfolio performance also was hindered by unfavorable stock selection in the consumer discretionary and health care sectors as key holdings such as McDonald's Corporation, Home Depot Inc., Gilead Sciences Inc. and Abbott Laboratories lagged the broad market advance. Additional holdings posting disappointing relative pe
rformance included Wells Fargo & Company, Wal-Mart, General Dynamics and Monsanto Company. On a positive note, the Portfolio did benefit from favorable stock selection in the energy sector (Schlumberger Limited, National Oilwell Varco Inc.) and strong performance from key technology holdings such as Apple Inc., Google, Inc. and Visa Inc.
The strong market rebound in 2009 clearly provided a favorable backdrop for Portfolio performance. While the early underpinnings of the rally were rooted in the stabilization of global credit markets and renewed confidence in the U.S. financial system, the market advance has recently been sustained by stronger-than-expected corporate profits, incrementally better employment data, strengthening confidence surveys and gradual improvements in the auto and housing markets. These factors have all combined to reinforce the "positive feedback loop" in the economy and aid investor sentiment. The U.S. economy has emerged from one of the longest and deepest recessions in recent memory and is now once again experiencing solid growth.
Our investment strategy has remained consistent over time and continues to focus on identifying what we feel are dominant companies that we believe can take a durable competitive advantage and sustain high levels of profitability and growth over the long term. While our high-quality focus did not particularly benefit Portfolio performance this year in relation to our index, we remain steadfast in our conviction regarding the merits of our investment philosophy and process.
As the year unfolded, we became less defensive with respect to sector exposure and increasingly sought to position the Portfolio to benefit from the economic and corporate profit recovery. Areas of emphasis included the technology, consumer discretionary, financial and energy sectors as these sectors offer the best combination of valuation and earnings growth, in our view. The technology sector represents the Portfolio's largest overweight and appears particularly well positioned to benefit from the ongoing global economic rebound. We feel that many of these companies have a strong global presence, possess solid balance sheets, generate strong free cash flow and should benefit from a rebound in corporate spending and continued build out of advanced telecom networks. Key underweighted sectors for the Portfolio included consumer staples and health care, given their more defensive growth attributes and lower degree of operating leverage in a recovering economy.
Although the market and economic recovery over the last year has clearly surpassed most expectations, notable headwinds such as high unemployment, the end of monetary and fiscal stimulus, increased regulation, consumer de-leveraging and the potential for higher taxes still remain. However, given the lean cost structures of many U.S. corporations, we expect operating leverage to be meaningful even with only a modest recovery in revenues. Consequently, we believe that corporate earnings could continue to surpass expectations, resulting in a profit recovery that could potentially prove to be more robust than the economic recovery. While cost cutting and inherent operating leverage have played a key role in the early stages of the profit recovery, we expect top-line growth will be an increasingly important driver to profit growth as the year progresses. In our view, this will benefit higher quality companies with strong balance sheets, superior margin profiles and structural advantages in the marketplace - provi
ding a favorable backdrop for our investment style. We believe companies with these attributes have the best chance of emerging from the downturn in an even stronger competitive position relative to weakened competitors. As the market's focus shifts from "recovery" to "sustainability" in 2010, we are optimistic that our high-quality growth strategy will show improved relative performance.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio managers and are current only through the end of the period of the report as stated on the cover. The managers' views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP Growth.
IVY RUSSELL LIPPER 12/31/99 10,000 10,000 10,000 12/31/00 10,141 7,758 8,701 12/31/01 8,687 6,176 6,967 12/31/02 6,837 4,455 5,072 12/31/03 8,414 5,782 6,543 12/31/04 8,692 6,145 7,103 12/31/05 9,668 6,469 7,649 12/31/06 10,155 7,057 8,169 12/31/07 12,776 7,892 9,351 12/31/08 8,142 4,858 5,479 12/31/09 10,346 6,666 7,552 (1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
Below, William M. Nelson, portfolio manager of Ivy Funds VIP High Income, discusses positioning, performance and results for the fiscal year ended December 31, 2009. He has managed the Portfolio for 11 years and has 21 years of industry experience.
William M. Nelson
Ivy Funds VIP High Income produced a solid return for the year and solid performance relative to its peer group average, yet underperformed its benchmark index.
The Portfolio's underperformance relative to its benchmark index can be traced to the fact that, throughout the year, the Portfolio maintained a shorter duration and was also underweight the "risky" CCC sector, which performed surprisingly well during the year.
Another factor that influenced the Portfolio's performance during the period was the massive spread widening that occurred following the 2008 bankruptcy of Lehman Brothers. In early 2009, spreads were still near historically wide levels. As government intervention calmed the markets, high-yield bonds, along with other asset classes, rallied. Bonds that had widened significantly and underperformed in 2008 were the beneficiaries of a year-long rally in 2009. Those names that were highly leveraged and "beaten up" the most in 2008 were, for the most part, the stellar outperformers in 2009. Even though the Portfolio took on additional risk as the year unfolded, the technicals favored the lower-quality issuers, which continue to be highly leveraged and most susceptible to default, in our opinion.
From a sector standpoint, the Portfolio was overweight in the health care, retail and services sectors, among others. As the recovery continues, we intend to reallocate the Portfolio to potentially benefit from sectors and issues that we feel appear undervalued.
Going forward, our view is with an eye toward recovery. We would expect continued spread compression, though at a much more moderate pace than in 2009. In addition, we would expect some volatility throughout the year as investors, in general, react to economic data as the year progresses. To be sure, we believe 2009 was an extraordinary year for returns in high-yield. Finally, we feel that credit selection and the macro environment will drive overall performance in the year ahead.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment.
Fixed-income securities are subject to interest rate risk and, as such, the Portfolio's net asset value may fall as interest rates rise. Investing in high income securities may carry a greater risk of non-payment of interest or principal than higher-rated bonds. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio manager and are current only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP High Income.
HIGH CITIGROUP LIPPER VA 12/31/99 10,000 10,000 10,000 12/31/00 9,028 9,432 9,180 12/31/01 9,856 9,945 9,255 12/31/02 9,657 9,793 9,199 12/31/03 11,563 12,793 11,423 12/31/04 12,703 14,173 12,586 12/31/05 13,026 14,467 12,947 12/31/06 14,363 16,181 14,233 12/31/07 14,918 16,479 14,598 12/31/08 11,663 12,209 10,731 12/31/09 17,077 18,948 15,381
Below, Chace Brundige, CFA, portfolio manager of Ivy Funds VIP International Growth, discusses positioning, performance and results for the fiscal year ended December 31, 2009.
Chace Brundige
The fiscal year ended December 31, 2009 was a period in which the market demonstrated two distinctly different psychologies. The year began on a note of heightened anxiety, as the global financial system teetered on the brink of collapse in the aftermath of the western housing slump and the worst credit crunch in decades. However, thanks to unprecedented intervention by governments in many developed and emerging markets, markets began to anticipate a global recovery in March. As the U.S. launched into quantitative easing and China's rapid loan growth materialized, markets correctly bid up assets - gold, real estate and equities - and left the U.S. dollar in the dust. All of this provided a strong environment for international equities for the year.
This positive momentum continued largely unabated throughout the second and third quarters. Equity valuation spreads had widened to unprecedented levels at the beginning of the year. The value style began to dramatically outperform its growth counterpart and the dollar continued to weaken against international currencies as investors moved away from safety and increasingly used it as a source of funds. Credit spreads that had been so wide tightened dramatically causing the credit window to open once again (at least for large corporations). European and Japanese banks began to recapitalize and leveraged companies of all kinds began to refinance.
As the year wound to a close, however, momentum slowed perceptibly, and the U.S. dollar began to strengthen versus the index basket of international currencies, breaking a sixth-month trend of significant weakening. In general, the availability and cost of money continued to improve globally, although credit availability to consumers and small businesses remains tight in most developed markets. The Dubai World credit default issues and growing concern over Greek sovereign financing during the final quarter served as a reminder that credit has improved but significant risks remain. Global GDP growth has rebounded, led by China and other emerging economies, while many in the west face a tepid rebound, especially once the inventory effect fades.
Sector returns for 2009 were fairly balanced, with both stable and cyclical sectors sprinkled among the outperformers. One of the strongest sectors during the year was the materials sector, which provided outperformance in each quarter of the year. Unfortunately, the Portfolio's exposure in this arena was underweight, which weighed on the Portfolio's relative results. While we do like certain companies within that sector, primarily those in resources and metals, we have not forced a particular sector weighting into the Portfolio as our process is generally focused on finding companies that fit our investment style, rather than making broad sector bets.
With respect to geographical allocation, the Portfolio benefited from its stock selection in China, particularly among banks and life insurance providers, and in France, where top producers were found in the energy and consumer discretionary sectors. The Portfolio also benefited from a strategic underweight in slow-growing Japan, which continues to struggle with a deep and prolonged recession, although several Japanese materials and information technology holdings there added to results.
We have made some changes near the end of the year to position for a different market in 2010. We have increased our weight in Japan (though still well below the index) and have focused on export-driven companies that we feel are competitively well-positioned and stand to gain from a weakening of the Japanese yen. While currencies are always difficult to call, from our vantage point the risk to the yen versus the USD is solidly skewed to the downside. Therefore, we have entered 2010 having hedged our entire yen exposure.
As the year wound to a close, the Portfolio's cyclical exposure was focused in information technology and energy through a handful of companies in oilfield services. While this is an outcome of stock picking versus an outright sector bet, we feel information technology will benefit over this business cycle as companies generally focus precious cap-ex budgets on driving efficiencies and cost savings versus increasing production. We believe that our oil service positions could benefit from a global recovery and we prefer that commodity to others based upon secular consumer demand in emerging economies as well as a relatively unresponsive global supply. Our concern regarding the materials sector, generally speaking, is that much near-term demand has been generated through stimulus policy decisions in China combined with a focused inventory build ahead of the use of those materials at prices that were considered attractive. Therefore, we feel that the demand outlook, while solid, could be bumpy in 2010.
We entered 2010 on the tailwind of a recovery that we feel was largely driven by a collective global policy response to the credit-driven recession of 2009. Massive fiscal stimulus and monetary accommodation were the rule last year. As monetary impact fades and government debt piles up globally, we anticipate a more difficult market environment in 2010.
We think a number of positives and negatives will play tug-of-war in the equity markets in the months ahead. Unprecedented corporate cuts in fixed expenses and capital spending have generally prepared companies for strong margin expansion in the recovery. Earnings estimates that came down so sharply since late 2007 appear to have bottomed and begun to turn up. We believe stocks have anticipated this, but strengthening economic growth could drive marked positive earnings estimate revisions - a clear positive for the market.
As the credit crunch in developed markets caused companies to cut expenses and conserve working capital, inventories broadly drew down to very low levels. We think those markets should see at least a couple quarters of traditional inventory restocking. With a pickup in end demand, the effect may be pronounced. While we often hear anecdotes of companies and supply chains having learned to exist with lower inventories, any hint of shortages would quickly result in a snapback. This will probably occur in certain industries and geographies.
The elephant in the room is that developed economies will eventually be forced to increase taxes and cut spending. Budget deficits cannot perpetually expand, and without a strong multi-year recovery, this mess won't be outgrown. China injected $1 trillion into its economy in the first half of 2009 through a policy-driven increase in bank lending. This had an immediate and positive effect on the economy and more directly on asset prices. We believe a good chunk of that is likely still to be deployed into the real economy through infrastructure projects. However, loan growth has slowed and we believe will continue at a slower rate. Also, the dramatic effect on the property market has caused the government to tighten real estate policies somewhat in an effort to avoid a bubble. As non-traditional monetary measures are unwound, short-term rates are increased and stimulus spending growth fades, we believe the effects will weigh on equity markets.
As always, we will continue to augment our economic view with focused fundamental analysis, attempting to find companies that we feel are erecting long-term competitive advantages and benefiting from secular tailwinds.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment.
International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country and differences in accounting standards and foreign regulations. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio manager and are current only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP International Growth.
INTERNATIONAL MSCI EAFE LIPPER 12/31/99 10,000 10,000 10,000 12/31/00 7,634 7,548 8,016 12/31/01 5,937 5,693 6,060 12/31/02 4,859 4,780 4,976 12/31/03 6,069 6,310 6,738 12/31/04 6,919 7,327 7,964 12/31/05 8,058 8,301 9,296 12/31/06 9,750 10,154 11,730 12/31/07 11,826 11,825 13,745 12/31/08 6,842 6,776 7,380 12/31/09 8,681 8,766 10,209 (1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
Below, John C. Maxwell, CFA, portfolio manager of Ivy Funds VIP International Value, discusses positioning, performance and results for the fiscal year ended December 31, 2009. He has managed the Portfolio since May 27, 2009, when Waddell & Reed Investment Management Company assumed direct investment management responsibilities of the Portfolio from Templeton Investment Counsel, LLC, the Portfolio's former investment subadviser. Mr. Maxwell has 16 years of industry experience.
John C. Maxwell
While the return was quite strong last year, the Portfolio's underperformance relative to the benchmark was driven by its below-index weighting and underperformance in the cyclical financial and basic materials sectors - two of the best-performing sectors during the period. Additionally, from a geographic stand point, our direct exposure to emerging markets was significantly smaller than that of the benchmark. Collectively, the emerging markets were the best performing "region" in the index by a wide margin. In utilities, consumer staples, industrials and consumer discretionary the Portfolio outperformed the index on stock selection, and astute weightings also added to the outperformance in these sectors. On a geographic basis, Germany, Japan and the U.K. all outperformed the index and our weightings also contributed to our performance. In the end, the Portfolio took significantly less risk than the index, resulting in lower returns. However, we outperformed our Lipper peer group during the period.
Fiscal year 2009 was a welcome relief from the very difficult year that was 2008. In our view, there were three parts to the year. The first part was the continued negative momentum from 2008, in which forced selling of stocks pushed the index down at a rapid clip and a depression began to be discounted in stocks. This phase ended in early March when February economic data surprised on the upside; it did not continue to deteriorate. The second phase also lasted two months, and it was driven by some investors buying oversold stocks in the wake of the February inflection. In May, the economic forecasts caught up with the economic data and the consistent string of positively surprising economic data stopped - at least in the developed markets. This led to the third and final phase, which lasted the balance of the year. Here the news generally was that of an increasingly likely tepid developed markets recovery with most emerging markets returning to strong growth trajectories. Thoughout the year, companies surpr
ised on cost cutting and earnings - this was particularly powerful in the June quarter. All three phases led to moves of similar magnitude.
As the year comes to the close the market is anticipating the next phase and some of the big questions are: How will governments remove all the stimulus without damaging the recovery? Will the bloated government debt burdens lead to a crisis in credit? It is estimated that the stimulus measures to resurrect the global economy are five times greater than any previous peacetime program. Removing the punchbowl (i.e. stimulus) without spoiling the party (recovery) will be a delicate process.
In late May, upon assuming direct investment management responsibilities of the Portfolio, we began to reallocate the Portfolio's positions to reflect our stock selection methodology. This process was mostly complete by the end of the third quarter. From a sector standpoint, we reduced the large overweight positions in telecom services and consumer discretionary stocks to market weight while taking energy and consumer staples to an overweight from an underweight. We moved industrials from a market weight to an overweight. In general, we wanted to increase the Portfolio's emerging markets exposure, so we substituted global staples for developed markets' telecom companies. And, we bought global energy and industrial names funded with developed markets consumer discretionary names.
Since implementing those changes, we have had a positive bias on the market and have kept cash in the zero to five percent range, meaning the Portfolio generally has been fully invested. Direct investment in emerging markets is just over 10 percent of assets as of December 31, 2009. Thematically, we moved the Portfolio to better align with the major themes we think will drive outperformance: Disproportionate growth of emerging markets consumers, particularly in Asia; strong growth in infrastructure; and, strong and believable dividend yield.
As we enter 2010 the outlook among market forecasters is almost universal. They believe emerging markets will continue to grow at a strong pace. They believe that developed markets will grow in the low- to mid-single digits during the first half of the year, but will slow to a 1 to 3 percent pace in the second half of the year, and a subdued recovery will ensue. The biggest risks cited are the pace of stimulus removal and the potential for heavily indebted countries to have problems financing their debt. In the end, most expect an up market and favor cyclicals over stable companies.
The global stimulus that has been estimated at five times the size of any previous non-war program is probably going to have a few major surprises along the way, and it is hard to believe that the consensus "Goldilocks" scenario is so universally embraced. We think there has to be a significant probability that the enormous stimulus coupled with the still very low levels of available credit and inventory in the system could lead to surprisingly strong growth across the globe. Additionally, we think there has to be a significant probability that excessive debt which has been transferred to the public sector from the private sector leads to a reversal of the recovery.
Today we place a higher probability on global growth exceeding current expectations, but our confidence is not high. It seems unlikely to us that governments will remove stimulus at a pace that will damage the recovery.
From a positioning standpoint we have moved slightly over ten percent of the Portfolio directly into what we feel are reasonably priced emerging market equities. We have a strong weighting in developed market multinationals that we believe should benefit from economic growth in the emerging markets while keeping a slightly below market weighting in stable/defensive stocks. On the inflation front, we are not concerned in most developed markets over the next 12 months but we will watch this data closely in faster growing emerging markets.
Investor directed/retail money flows into developed market equities remain surprisingly weak considering the strong run from March 2009. Investor exposure to low yielding bonds and cash remain very high when compared to history across the developed markets. In the short term we think it is likely that investors will increasingly allocate these low yielding investments to higher return opportunities in the equity markets. However this is far from certain as buy and hold investors have lost money over the last 10 years in equities and many people who chased performance performed even worse.
For the long term, we continue to believe that the emerging populations in countries like China, India, Russia and Brazil will continue to try to create a standard of living closer to that in the United States. To accomplish this, they will require vast amounts of infrastructure and increasingly productive economies. We believe that these trends will help drive consumer-facing companies serving these markets and infrastructure companies. We remain focused on solid dividend yields. We will continue to emphasize strong cash generation, less leveraged balance sheets and solid top-line growth in our stock selection.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment.
International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country and differences in accounting standards and foreign regulations. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio manager and are current only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP International Value.
INTERNATIONAL MSCI AC LIPPER VA 12/31/99 10,000 10,000 10,000 12/31/00 10,081 8,469 9,423 12/31/01 8,951 6,797 7,788 12/31/02 7,356 5,781 6,653 12/31/03 10,802 8,142 9,170 12/31/04 13,252 9,844 11,079 12/31/05 14,731 11,480 12,508 12/31/06 19,094 14,540 15,881 12/31/07 20,980 16,962 17,320 12/31/08 12,114 9,240 9,791 12/31/09 16,592 13,070 12,985
Ivy Funds VIP Micro Cap Growth is subadvised by Wall Street Associates.
Below, Paul J. Ariano, CFA, William Jeffrey III, Paul K. LeCoq, Kenneth F. McCain and Carl Weise, CFA, portfolio managers of Ivy Funds VIP Micro Cap Growth, discuss positioning, performance and results for the fiscal year ended December 31, 2009.
Paul J. Ariano
William Jeffery III
Paul K. LeCoq
Kenneth F. McCain
Carl Wiese
As the year began, stock market indices plunged to levels not seen in well over a decade. On March 6th, the Dow Jones Industrial Average broke below 6500 and the S&P 500 declined to 666.79, falling another 25 percent from the end of 2008 and yielding losses of over 50 percent from their 2007 peaks.
Since that time, investors have enjoyed one of the most massive stock and commodities market rallies in decades. Investors began their re-entry to the markets as the depression fears faded out. The fourth quarter capped a year of sharp contrasts and strong equity returns typical of an emerging cyclical recovery. Markets extended their dramatic gains as the economy - having experienced its worst downturn since WWII - entered a recovery phase. Indeed, the global economy appears to be improving and the U.S. is participating thanks to "shock and awe" monetary and fiscal stimulus, Cash-for-Clunkers, rising home sales, better retail sales, less negative employment trends and sustained rock bottom interest rates. In their last meeting of the year, the Federal Reserve resolved to maintain "exceptionally low" interest rates for "an extended period" and by the end of the quarter, stock indices hit new recovery highs (the S&P 500 surged more than 65 percent from its March 2009 lo
ws).
Micro-cap stocks generally outperformed their small-cap counterparts for the year, despite lagging them in the fourth quarter. Investments in the technology group produced the largest contribution to return for the year, as tech stocks were one of the leaders coming out of the downturn. An overweight position and strong stock selection helped to drive performance for the Portfolio. Investments in the energy sector produced the largest absolute returns as commodity prices rebounded dramatically from their lows. Stock selection was again very additive to the Portfolio's performance. Consumer stocks rebounded nicely, despite the many headwinds faced by consumers. Drastic cost cutting drove an improvement in earnings for the group. The one area that diminished performance was the health care sector, which was under significant pressure as Congress fought over health care reform throughout the year.
The Portfolio's current portfolio structure reflects an emphasis on several long-term themes (in place throughout 2009) expected to benefit from the unfolding market environment. We see a positive long-term trend continuing to develop in the energy sector and so we remain overweight there, with particular emphasis on oil and gas drilling, service, exploration, production, infrastructure building and associated technologies. While short-run demand destruction, deleveraging and a "speculative unwind" negatively impacted these groups in 2008, energy and resource-oriented companies have performed well during the recent market recovery - in recognition that they remain tied to a global secular infrastructure theme.
Many of the same short- and long-term factors that drive the energy markets also affect materials and processing stocks. We still view "infrastructure" as a popular investment theme and believe that the market is now beginning to recognize its merits. We believe that there's a strong secular infrastructure and commodities cycle ahead, resulting directly from industrialization efforts and fiscal stimulus plans in developed and emerging markets, particularly in China and the U.S. We feel that this long-term cycle creates an extremely profitable opportunity for companies leveraged toward energy/power/transportation infrastructure, engineering components, water projects, agriculture and manufacturers of pipeline and dredging machinery. We believe that these types of companies have the potential to experience strong revenue and earnings growth, large and growing backlogs and prolonged periods where demand outstrips supply. We continue to hold materials and processing positions in anticipation of what we
see as a rewarding time for these stocks.
We continue to believe health care companies will become important contributors to long-term performance and maintain an overweight target for our Portfolio versus comparable benchmarks in this sector. Despite short-term underperformance as investor uncertainty increased regarding the fate of the health care industry (in large part due to intense regulatory pressures), we believe there's a clear fundamental positive case for health care companies as many are experiencing high relative profitability, attractive valuations and improving profit margins. Demographic trends and revenue increases are positive factors for health care technology, equipment, services and pharmaceutical companies. Biotechnology companies should continue to see above-average prospects, in our opinion, as they experience a greater share of new drug approvals and "big pharma" pushes hard via partnerships to replace many large drugs coming off patent. So while health care-related companies historically have been resistant to eco
nomic downturns, the intense political scrutiny recently faced by this sector has raised investors' concern.
Many factors continue to negatively affect household budgets, making stock selection extremely challenging and important within the consumer discretionary sector. This has been a difficult period, yet consumers appear to have come out of hibernation - spurred by the fiscal stimulus, Cash-for-Clunkers, a rebounding stock market and pent-up demand that needs to be satisfied. We remain very cautious and maintain an equal-weight target weighting versus comparable benchmarks in this sector. We favor higher-end/niche retailers that we feel possess the strongest fundamentals and growth prospects. The companies most attractive to us are those with rapidly expanding consumer products and high unit growth rates, as well as Internet-based versions of traditional industries such as online education providers (which experience a boost in enrollment as unemployment goes up), advertising, retail and digital media that allow businesses to enhance productivity and lower costs.
Our themes worked well in 2009, which lends confidence to our strategy moving forward. Yes, market psychology has improved and there are fewer price opportunities present now compared to early March 2009, but we feel opportunities still abound. Indeed, we believe that much of the economic upheaval has been reflected in the stock market, policy makers have intervened and we must no longer wait for investor panic to mount and run its course. The economy has transitioned through a low point and we see a prolonged period of sluggishness ahead. History suggests to us that at points like this, company fundamentals become the primary driver for stock market action and a positive scenario for small- and mid-cap growth stocks begins to unfold. We feel that our Portfolio remains actively and optimistically positioned.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment.
Investing in micro cap stocks may carry more risk than investing in stocks of larger, more established companies. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio managers and are current only through the end of the period of the report as stated on the cover. The managers' views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP Micro Cap Growth.
MICRO CAP RUSSELL RUSSELL LIPPER 12/31/99 10,000 10,000 10,000 10,000 12/31/00 7,895 7,763 7,102 9,059 12/31/01 7,001 7,048 7,479 7,884 12/31/02 3,945 4,918 5,308 5,571 12/31/03 6,092 7,306 9,016 7,862 12/31/04 6,704 8,351 9,729 8,848 12/31/05 8,103 8,695 9,929 9,516 12/31/06 9,097 9,855 11,060 10,542 12/31/07 9,687 10,545 10,764 11,521 12/31/08 5,034 6,479 5,958 6,792 12/31/09 7,112 8,711 8,291 9,215 (1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
Notes to Schedule of Investments
Below, Kimberly A. Scott, CFA, portfolio manager of Ivy Funds VIP Mid Cap Growth, discusses positioning, performance and results for the fiscal year ended December 31, 2009. She has managed the Portfolio since inception and has 22 years of industry experience.
Kimberly A. Scott
The market was very weak early in the year as it worked through the late stages of the credit crisis and economic recession that gripped the globe for much of 2007, 2008, and early 2009. This factor had us conservatively holding our cash position at close to 10 percent during the first quarter, and throughout much of the rest of the year. However, we became encouraged by a number of economic data points, both domestic and international, as the first quarter progressed into the second quarter of the year. This lead us to focus our portfolio investments on the front end of the economy in an effort to take advantage of an anticipated turn in economic and market conditions. As such, we were overweight the consumer discretionary, information technology, and energy sectors early in the year. We also increased our exposure to the materials sector to try to take advantage of an economic turn here and in emerging markets. These were very important moves that positively impacted the portfolio's return in 2009, as we w
ere correct in our assessment that the economy and the stock markets were on the cusp of a turn for the better - and as it turned out, much better.
In particular, our consumer discretionary investments made the greatest contribution to the Portfolio's overall return in 2009, with a gain of 96.78 percent, twice that of the sector in the benchmark. Every holding had positive returns for the year. J Crew Group, Inc. (2.15% of net assets at 12/31/09), Nordstrom, Inc. (1.12% of net assets as of 12/31/09), Urban Outfitters, Inc. (1.71% of net assets at 12/31/09) and Royal Caribbean Cruises Ltd. (1.00% of net assets at 12/31/09) all posted returns of greater than 100 percent. Our information technology investments also performed well, with NetApp, Inc. (2.53% of net assets at 12/31/09) and NVIDIA Corporation (1.86% of net assets as of 12/31/09) notable investments. Our exposure to the energy sector boosted our return relative to the benchmark. Our oil service investments, Dresser-Rand Group Inc. (1.16% of net assets as of 12/31/09) and National Oilwell Varco, Inc. (1.45% of net assets as of 12/31/09), in particular, posted strong returns. Our health care inves
tments also posted superior returns as a group last year.
The Portfolio's return was limited somewhat by some weak stock selection in the industrials and financial services sectors, and by a cash position of roughly ten percent during much of the year. However, all sectors posted positive returns overall for the year.
We emphasized consumer discretionary, information technology, financial, energy and even consumer staples stocks during much of the fiscal year. The Portfolio maintained a slight overweight in these sectors as the year wound to a close, with the exception of information technology, which is now underweight in favor of a significant overweight in the industrials sector.
Our outlook for the market in 2010 is constructive. We believe we'll see a continued rebound in the global economy based on the ongoing effects of stimulus programs worldwide, and an evolution to self-sustaining economic growth. In our opinion, valuations on the market are still reasonable, and the interest rate environment is still stimulative. However, the course of interest rates and government policy and regulation are two areas to watch as potential sources of negative pressure on the markets. We think we'll see the U.S. equity market as transitioning to a fundamentally focused "stock-picker's" market from the macro-economic focus of the past two years. We also feel current profitability profiles and demographic trends favor U.S. companies. In our view, domestic mid-cap growth companies potentially can be strong investments in this environment, as they tend to be innovation leaders that take share in the broad and diverse U.S. economy, and they also have significant exposure to vibrant global
markets.
We intend to continue to overweight industrials in an effort to take advantage of the economic recovery that is rolling from the front end of the economy to the back end. Broadly across the Portfolio, we intend to concentrate less on sector calls and more on stock-specific investments as the market transitions to one that rewards the stocks of companies with sustainable and innovative growth opportunities across the economic cycle.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio manager and are current only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP Mid Cap Growth.
MID CAP RUSSELL MID CAP GROWTH INDEX LIPPER VA MID-CAP GROWTH FUNDS 4/28/05 10,000 10,000 10,000 12/31/05 12,131 11,948 11,934 12/31/06 13,169 13,223 12,986 12/31/07 14,830 14,735 15,223 12/31/08 9,458 8,204 8,399 12/31/09 13,871 12,002 12,033
Below, Mira Stevovich, CFA, portfolio manager of Ivy Funds VIP Money Market, discusses positioning, performance and results for the fiscal year ended December 31, 2009. She has managed the Portfolio for 11 years and has 22 years of industry experience.
Mira Stevovich
The Portfolio's returns were competitive with the peer group money market funds over the fiscal year. The Portfolio's fiscal year started with the Federal Funds rate at the target rate of a range of between 0 percent and 0.25 percent, where it remains to date.
The drastically low Federal Funds rate during the Portfolio's fiscal year affected the performance of the Portfolio and rates on money market investments in general. We sought to maintain the Portfolio's yield initially by purchasing longer dated maturities prior to the lowering of rates, and later by investing in floating rate notes based on the three-month LIBOR (London Interbank Offered Rate), which remained high.
Credit quality remained an important factor in the management and performance of the Portfolio. We have been especially mindful of this as the sub prime mortgage market problems, and subsequent financial system problems, negatively affected the money markets. As always, we are vigilant in our review of the companies and securities in which we invest. We select investments that we believe to be of the highest credit quality, based on our strict credit risk constraints. However, these securities do not always pay the highest rates of interest, meaning that the overall yield can be held down somewhat by the higher-quality bias.
The overall money market was seriously affected by the financial market crisis, which created a credit crisis. All short-term borrowing by corporations and financial institutions was affected. As a result, the Portfolio invested at rates below the Federal Funds rate, because higher quality securities were issued at rates below the Federal Funds rate, therefore causing the return on the Portfolio to decrease. However, as we increased exposure to floating rate securities with rates based on three-month LIBOR, which remained high, the yield on the Portfolio increased.
In an effort to help ease the pressure on the money markets, the Federal Reserve injected liquidity into the market. It also provided various facilities whereby banks, broker-dealers, and even money market funds could submit securities to the Federal Reserve and obtain liquidity. The FDIC provided its insurance protection to major banking institutions, as well as some regional banks, to back securities issued by these banks based on a set of guidelines. In addition, the U.S. Treasury instituted a temporary insurance program in September 2008 to insure money market funds that applied and paid a fee based on assets under management. This measure, which helped stop a potential run on money market funds, was extended twice for original participants. Our Portfolio participated in this program until its conclusion on September 18, 2009.
As the fiscal year ended, the credit markets were more settled and credit spreads had substantially narrowed. The markets had been helped by the various forms of government support; the economy was slowly emerging from the recession; and investment grade money market rates remained at historic lows.
As always, we carefully select securities that we feel are of the highest credit quality. This approach ultimately affects the Portfolio's yield, because high-quality securities are issued at premium rates of interest (lower-yielding securities). However, this conservative approach kept us out of much of the problematic situation that developed in the money markets over the last year.
In an effort to compensate for this, we have purchased some longer-dated (higher-yielding) high-quality securities as opportunities presented themselves. Floating rate corporate and taxable municipal securities proved to be excellent investment vehicles for the portfolio, especially in the current environment, as LIBOR rates, off of which these securities are priced, remain above the Federal Funds rate.
Corporate credit spreads were very wide early during the fiscal year. As a result, we took advantage of this by purchasing longer-dated corporate securities with substantially higher yields. This move positively affected the performance of the Portfolio and supported the Portfolio's yield for most of the fiscal year.
We have emphasized investments of the highest credit quality this past year from all industries and sectors, and we intend to continue to do so going forward. Because banks have been particularly negatively affected by the financial crisis, we have been very selective in our investment in the banking sector. We have used floating rate securities this year, and we anticipate doing so in the coming fiscal year, pending future developments in the money markets. We have substituted short corporate notes for commercial paper, when possible, since the notes yield higher rates of return. We intend to continue to include U.S. Treasury and government agency securities in an effort to preserve the value of the Portfolio, as necessary.
Please remember that an investment in the Portfolio is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. Although the Portfolio seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Portfolio.
The opinions expressed in this report are those of the portfolio manager and are current only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
Ivy Funds VIP Mortgage Securities is subadvised by Advantus Capital Management, Inc.
Below, David W. Land, CFA, and Christopher R. Sebald, CFA, portfolio managers of Ivy Funds VIP Mortgage Securities, discuss positioning, performance and results for the fiscal year ended December 31, 2009. They have each managed the Portfolio for five years. Mr. Land has 19 years of industry experience while Mr. Sebald has 21 years of industry experience. David W. Land
During 2008, a historic credit crisis and deep recession kept our style of investing out of favor. In March of 2009, the market environment changed dramatically, and the Portfolio benefitted. To counter the biggest recession in more than 30 years and avoid another depression, the federal government threw most everything it had at the problem. Its support of broad sectors of the fixed-income market substantially expanded liquidity, and investors returned to the markets. The Portfolio's overweight positions in asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) had a significant impact on returns for the year.
With the recovery in the markets, long-term Treasury yields rose significantly during the year, while short-term yields were essentially unchanged. Additionally, after the largest drop in home prices in the past 100 years, we saw a nice string of gains in home prices, primarily driven by government programs to spur home buying (first-time home-buyer credit) and to forestall foreclosure (modification programs). The improvement in home prices, along with the government's other market liquidity programs, served to boost the Portfolio's non-agency mortgage-backed securities (MBS) and add to returns.
Because the timing and magnitude of the housing recovery remained in question, we believed it was prudent to increase our exposure to agency pass-throughs, even though there appears to be significant value on the non-agency market. We maintained this strategy throughout the year. When selecting mortgage pools we look for collateral characteristics that we believe will provide us some advantage over generic pools. Currently, we believe that mortgage pools originated between 2003 and 2005 are preferable to newer origination. These older pools tend to have more predictable prepayment behavior, which investors find desirable.
We added to our agency pass-through holdings during the year while maintaining exposures to non-agency mortgages, commercial real estate and asset-backed securities.
The good times for risk assets are likely to last a little while longer in our opinion. Government stimulus is still having a positive impact and that activity may now be shifted from the banking sector into more direct jobs programs as banks repay Troubled Asset Relief Program (TARP) funds. As a result, we believe growth in the near quarters is likely to continue to confound the pessimists and embolden the optimists. However, as the Fed eliminates its MBS and Treasury bond buying programs - and without a follow-on program of some sort - the first signals of tightening will effectively be in place. Normally, markets continue to improve somewhat after Fed tightening policy begins and growth continues. All else equal, we would expect a similar economic path to play out. But, no one can be certain that the withdrawal of the largest stimulus in the history of the Fed won't cause violent reactions. For example, we believe that a quick change in interest rates will likely cause a sell-off in risk assets. So we are
being especially cautious regarding our risk exposures, especially those more sensitive to long-term interest rates (agencies, MBS and CMBS), as the Fed makes some moves to remove stimulus.
The past year was great for risk assets, as we rebounded from the worst financial calamity since the Great Depression. And such a rebound merited overweighting risk assets. We expect that 2010 won't be nearly as strong for the markets. With the prospect of central banks raising rates around the world, we can definitely see a time in 2010 when our risk exposures are near neutral and our portfolios look more like the benchmark. Due to government and Fed measures, 2009 was the best year ever for corporate bonds, CMBS, ABS and other non-government investment-grade bonds. In 2010, we believe that bond performance will likely be ruled more by the market's interpretation of the huge imbalances that still exist in the economy and less by the government intervention. These can't be ignored forever.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment.
The risks incurred by mortgage securities include, but are not limited to, reinvestment of prepaid loans at lower rates of return. In addition, the net asset value of mortgage securities may fluctuate in response to changes in interest rates and are not guaranteed. Fixed-income securities are subject to interest rate risk, so the Portfolio's net asset value may fall as interest rates rise. These and other risks are more fully described in the Portfolio's prospectus.
Certain U.S. government securities in which the Portfolio may invest, such as Treasury securities and securities issued by the Government National Mortgage Association (Ginnie Mae) are backed by the full faith and credit of the U.S. government. However, other U.S. government securities in which the Portfolio may invest, such as securities issued by the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal Home Loan Banks (FHLB) are not backed by the full faith and credit of the U.S. government and, instead, may be supported only by the right of the issuer to borrow from the U.S. Treasury or by the credit of the issuer.
On Sept. 7, 2008, the Federal Housing Finance Agency (FHFA), an agency of the U.S. government, placed Fannie Mae and Freddie Mac into conservatorship, a statutory process with the objective of returning the entities to normal business operations. FHFA will act as the conservator to operate Fannie Mae and Freddie Mac until they are stabilized. It is unclear what effect this conservatorship will have on the securities issued or guaranteed by Fannie Mae or Freddie Mac.
The opinions expressed in this report are those of the portfolio managers and are current only through the end of the period of the report as stated on the cover. The managers' views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP Mortgage Securities.
At a meeting held on November 11, 2009, the Board of Trustees of Ivy Funds Variable Insurance Portfolios unanimously approved and recommended that shareholders of Ivy Funds VIP Mortgage Securities approve the merger of Ivy Funds VIP Mortgage Securities into Ivy Funds VIP Bond. Ivy Funds VIP Mortgage Securities shareholders of record on December 1, 2009 will be asked to vote on the proposed merger at a special meeting called for this purpose, tentatively scheduled for March 1, 2010.
MORTGAGE SECURITIES BARCLAYS CAPITAL LIPPER VA 5/27/04 10,000 10,000 10,000 12/31/04 10,497 10,461 10,414 12/31/05 10,707 10,735 10,621 12/31/06 11,218 11,295 11,093 12/31/07 11,600 12,081 11,636 12/31/08 10,330 13,088 11,564 12/31/09 11,194 13,859 12,333
Ivy Funds VIP Real Estate Securities is subadvised by Advantus Capital Management, Inc.
Below, Joseph R. Betlej, CFA, and Lowell R. Bolken, CFA, portfolio managers of Ivy Funds VIP Real Estate Securities, discuss positioning, performance and results for the fiscal year ended December 31, 2009. Mr. Betlej has managed the Portfolio since its inception in 2004 and has 25 years of industry experience, while Mr. Bolken has managed the Portfolio for four years and has 20 years of industry experience.
Joseph R. Betlej
Lowell R. Bolken
The performance of real estate investment trusts (REITs) was quite volatile during the past year. Performance of the index through the early part of March was dismal. Fundamentals were in the early stages of decline. Cost of capital increased substantially for REITs as the cost of debt skyrocketed, if you could find it. Many REITs cut back or suspended their dividends in order to hoard cash. In light of all this, the Portfolio was defensively positioned and had higher than normal cash levels, allowing it to generate better relative performance during the early part of the year.
As the second quarter of 2009 evolved, many REITs realized they had to deal with the unfortunate position of being over-leveraged and facing near-term maturities of debt. As such, many companies began to issue equity at very dilutive prices. This, however, allowed these entities to put aside the refinancing issues and better position themselves to take advantage of opportunities that might be created due to the dislocation in the financial markets. Investors began to recognize that the move to raise equity better positioned REITs and removed much of the near-term pressure on these stocks. With the continued issuance of equity, the benchmark index rebounded considerably by midyear, marking the beginning of another significant upward move that was largely driven by a rebirth of interest in mortgage financing for commercial real estate. The rebound in availability of capital allowed the lesser-quality companies to outperform. The Portfolio's weighting in higher quality names - coupled with more defensive positi
oning - did not allow it to participate to the same degree in the very impressive rebound in REIT share pricing.
Hotel REITs and regional mall companies led performance for the year, as both sectors started the year with very low expectations. The Portfolio's performance suffered with an underweight to both property types, though non-benchmark tower companies and real estate brokers positively impacted Portfolio performance. The worst performers were clearly the shopping center retail companies, largely due to their large development pipelines, excessive leverage and poor fundamental outlook. Fortunately, the Portfolio was underweight shopping centers. Above-average cash levels in the Portfolio also diminished returns as the market rallied substantially after March of this year.
As the year wore on, the market clearly regarded REITs as the favored way to own commercial real estate in today's market. The liquidity of REITs during this downturn has been magnified versus illiquid private options. REITs have used their improved balance sheets and liquidity to lease more aggressively, resulting in more stable cash flow. With the relative balance sheet strength, we believe REITs are positioned to take advantage of attractive acquisition opportunities that we feel should be available as the significant mortgage debt coming due in the next few years forces assets onto the market.
REIT stock prices suggest to us that the companies are now trading modestly above the underlying value of assets, helping to confirm the status of the REIT business model. We believe that REITs should trade at above the value of their assets due to their liquidity, company management teams and systems, all of which are part of the value proposition. Additionally, REITs are trading at cash flow multiples that are above historic averages, although this is typical of markets as they trade on trough earnings.
Contrary to the positive move in valuations, the fundamental earnings drivers of market occupancy and rental rate declined through the year. We believe that it will likely be late in 2010 or early 2011 before these fundamentals begin to turn as real estate tends to be a trailing segment in the economy. Meanwhile, early signs indicate that the economy, in general, is improving. These signs will need to be well recognized by employers before they begin to seek new offices for their employees or retail space and warehouses for their goods. Seeing weakness in near-term fundamentals, we applaud the companies that have been aggressive in leasing their portfolios, extending lease terms in an effort to stabilize earnings through a tough operating environment, and "right sizing" expenses to the new operating environment. REITs benefit from scale and stronger balance sheets to bring out these efficiencies and market share gains.
Early in the year, the Portfolio was positioned defensively, favoring health care and net lease companies. As availability of capital to the real estate sector improved in the second half of the year, we began to seek companies with balance sheet issues that could be corrected. Equity raises, asset sales and joint ventures were among opportunities used by some of these companies to create cash to pay down debt and, in particular, short-term maturities. The result has been a better foundation to operate their assets in the future. To this end, we added exposure to companies that we feel have the potential for acquisitions that are accretive to their cost of capital. Nonetheless, concerns about the timing of a rebound in real estate fundamentals had us remaining cautious, continuing our solid exposure to high-quality companies with more predictable cash flow. Unfortunately, it was the poorest quality stocks that had very strong outperformance in the second half of the year, impacting the Portfolio's performanc
e negatively.
As REITs pivoted from capital starvation during 2009 to relative balance sheet stability, their share prices rebounded. Fundamentals likely will continue to weaken through 2010, but the market has already begun to focus on a 2011 fundamental rebound. The best opportunities may be with the best operators who can run their operating expenses efficiently while seeking to optimize Portfolio occupancy. In our opinion, these companies with higher cash flow stability will likely be favored by investors. Investment portfolios with broader mandates that are underweight to REITs may begin to accumulate some of the higher quality, bellwether names. As REIT stocks trade at higher levels, acquisition and merger opportunities may be found for companies or properties that are inadequately capitalized.
REITs have established themselves as the preferred way to own real estate, and they have survived a major test to their capital structure. Many are well-positioned to go on the offensive when a large number of undercapitalized and foreclosed properties are forced onto the market. The REIT model has benefited from scale opportunities and should, in our opinion, generate substantial cash flow growth once the economy picks up and real estate revenue growth gains traction. We expect REITs to increase their dividends once cash flow begins to grow, bringing further investor attraction to these companies.
Despite the competitive advantage, cost of capital to REITs may increase with rising interest rates and may face growing pressure as government deficit-related borrowing grows. In addition, state and local government budgets will be under significant pressures in 2010. Commercial real estate could become a source to cover these deficits through property tax and fee increases, reducing the profitability of a real estate venture. Pressures remain on a sector that potentially has strong prospects.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment.
Investment risks associated with real estate securities, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes and differences in real estate market values. Real estate securities are subject to interest rate risk and, as such, the Portfolio's net asset value may fall as interest rates rise. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio managers and are current only through the end of the period of the report as stated on the cover. The managers' views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP Real Estate Securities.
REAL ESTATE WILSHIRE LIPPER 5/27/04 10,000 10,000 10,000 12/31/04 13,266 12,987 13,017 12/31/05 14,703 14,783 14,710 12/31/06 19,126 20,056 20,028 12/31/07 16,053 16,511 17,045 12/31/08 10,269 9,935 10,290 12/31/09 12,694 12,837 13,525
Below, Zachary H. Shafran, portfolio manager of Ivy Funds VIP Science and Technology, discusses positioning, performance and results for the fiscal year ended December 31, 2009. He he has managed the Portfolio for nine years and has 21 years of industry experience.
Zachary H. Shafran
Although the Portfolio produced a solid absolute return and performed strongly relative to the broader equity market, results trailed those of our benchmark index. Three factors drove this relative underperformance. First, we entered the period conservatively positioned, both in our investment selections as well as our higher-than-normal cash reserves, and we remained in that position for too long. Second, we underestimated the very aggressive response so many companies took in reducing costs and expenses, particularly semiconductor companies. Finally, our bias toward high-quality companies worked against us, as lower-quality securities fueled much of the 2009 rally.
Due to the broader view that we employ in seeking to identify what we feel are compelling investment opportunities around the globe, we were affected by several other factors. Until quite late in the calendar year, health care stocks underperformed, in some cases quite significantly. This was largely due to the threat of potentially significant changes in the health care reform and the battle being waged in Congress. It became increasingly likely in the final weeks of the year that legislation, were it to be enacted in the near-term, would likely be much less onerous than initially feared. Some lingering issues related to reimbursement and other more company-specific issues also negatively impacted a portion of the Portfolio invested in biotechnology.
As we mentioned earlier, and something we have been suggesting for several years, we significantly increased our exposure to the biotechnology sector. We did so earlier in the year due to a number of clinical developments and increased our exposure yet again later in the year as the market made some previously overvalued stocks outright cheap in our view. It is also worth noting that, with respect to geographical exposure, the Portfolio is currently more globally diversified than it has ever been, as we have expanded our reach into Asia Pacific, South America and several less-developed markets around the globe.
Our strategy continues unchanged as we enter 2010. We are adhering to our long-held approach and methodology in seeking to identify what we feel are compelling investment opportunities around the globe that meet our investment criteria. We do this by applying a largely bottom-up, fundamentally driven research process with an overarching top-down perspective. We are looking to sectors and companies that we think will be relatively better prepared to weather a difficult economic environment - companies that appear to be more attractively valued and whose businesses we believe are stable and are largely self sufficient when it comes to the need for capital.
As for our global outlook, we remain mostly optimistic, despite some lingering concerns about the financial state of affairs in several pockets of the world. We're also concerned about potential geopolitical disruptions, most specifically the threat of terrorism in whatever form or forms it may materialize. We believe that the tremendous opportunities in science and technology remain as great as we have seen in several years, and we look forward to the ongoing innovation and discovery that characterize these two dynamic areas.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment.
Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country and differences in accounting standards and foreign regulations. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio manager and are current only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP Science and Technology.
SCIENCE AND S&P LIPPER 12/31/99 10,000 10,000 10,000 12/31/00 7,885 6,216 7,463 12/31/01 6,946 4,440 5,093 12/31/02 5,280 2,652 3,016 12/31/03 6,888 4,089 4,497 12/31/04 8,007 4,208 4,715 12/31/05 9,388 4,293 4,971 12/31/06 10,127 4,679 5,417 12/31/07 12,595 5,472 6,364 12/31/08 8,326 3,101 3,490 12/31/09 11,977 5,061 5,478
Below, Kenneth G. McQuade, portfolio manager of Ivy Funds VIP Small Cap Growth, discusses positioning, performance and results for the fiscal year ended December 31, 2009. He has managed the Portfolio for four years and has 14 years of industry experience.
Kenneth G. McQuade
This fiscal year ended December 31, 2009 was largely positive. The market began to recover in March and continued to climb in the second and third quarters as earnings reports improved and investor confidence revived. Positive momentum continued in the fourth quarter with the Russell 2000 Growth Index rising 4 percent, bringing the full year's gain to 34.4 percent, the biggest annual gain since 2003. These gains were accomplished with a market comeback of historic proportions lasting more than 3 quarters. Once the significant downturn exhausted in the first quarter, the subsequent upturn accumulated a return of approximately 80 percent (one of the market's strongest rebounds in history) with no setbacks lasting more than a few weeks. The Portfolio also produced a strong absolute return that was superior to the benchmark during the final quarter and slightly outperformed the benchmark for the year.
Extreme cost cutting, a general unclogging of the credit markets and huge government stimulus lie behind the stock market's impressive rise. Investor sentiment vastly improved tied to corporate earnings that generally beat expectations from expense management and on beliefs that U.S. policymakers were fully committed to backstop the financial markets and economy. Due to a sense of protection, investors once again attained a higher level of risk tolerance and appetite for less financially secure business models than we would have expected. As a result of this behavior, a low-quality rally endured, as investors seemingly ignored profitability levels to focus on stocks that simply dropped the most in the credit crisis. Therefore, the smallest of the small, unprofitable and highest-in-debt stocks tended to significantly outperform for the year, in total.
From a sector standpoint, every industry sector produced double-digit gains for the year. Technology produced the strongest annual returns which benefited the Portfolio given our overweight of the sector. Also benefiting the Portfolio were underweight positions of the three worst performing sectors - financials, industrials and health care. Consumer discretionary retail names significantly outperformed on "less bad" sales and cost cutting. The Portfolio remained cautious on retail due to concerns about household de-levering and high unemployment.
Looking forward, the Federal government's massive liquidity programs have given investors a big confidence boost to the stock market, but controversy continues over whether these initiatives are sufficient for lasting recovery and economic expansion. Still bothersome to us is the potential residual effect of high unemployment on housing, incomes, consumption and debt reduction. Uncertainty over government policy and huge deficits are another major concern. With so much debt leverage in all parts of the economy, we feel it likely that companies will remain downsized and overall consumption could slow. Therefore, we believe companies that can earlier and more substantially produce quality revenue growth non-dependent of government stimulus spending should be able to separate themselves in the market. Thus, we remain committed to focusing on what we feel are higher quality growth stocks that we believe have a more structured and sustainable revenue and earnings stream and can grow organically with positive cash
flows.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment.
Investing in small-cap stocks may carry more risk than investing in stocks of larger, more established companies. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio manager and are current only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP Small Cap Growth.
SMALL CAP RUSSELL LIPPER 12/31/99 10,000 10,000 10,000 12/31/00 8,765 7,763 9,059 12/31/01 8,596 7,048 7,884 12/31/02 6,723 4,918 5,571 12/31/03 9,128 7,306 7,862 12/31/04 10,432 8,351 8,848 12/31/05 11,776 8,695 9,516 12/31/06 12,371 9,855 10,542 12/31/07 14,044 10,545 11,521 12/31/08 8,542 6,479 6,792 12/31/09 11,508 8,711 9,215
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
Notes to Schedule of Investments
Below, Timothy J. Miller, portfolio manager of Ivy Funds VIP Small Cap Value, discusses positioning, performance and results for the fiscal year ended December 31, 2009. He has managed the Portfolio since March of 2008 and has 31 years of industry experience.
Timothy J. Miller
The Russell 2000 Value Index recovery in 2009 was led by a sharp rebound in the low quality segment of the market. By March of 2009, the global economies were teetering on disaster and credit conditions were paralyzed, creating liquidity fears in many sectors of the market. The final plunge in many stocks reflected rising bankruptcy fears as a result of the chaos in the credit markets. As the favorable impact of federal intervention began to ease those fears, we experienced a sharp rebound in those stocks that were "left for dead." This rebound continued for the balance of the year, leading to spectacular gains for the highest-risk, most-leveraged companies in the Russell 2000 Value Index. Breaking down the index into quintiles of various quality metrics, the data confirms this pattern. In terms of return on equity (ROE), the lowest quintile of companies performed the best. Looking at price-to-earnings (P/E) ratios, it was the companies producing losses that performed the best for the year, and fin
ally the smallest companies dramatically outperformed the largest companies for the year.
Ivy Funds VIP Small Cap Value outperformed the index in 2009 by overweighting the best performing sectors and underweighting the worst. The top-three performing sectors in 2009 were materials, consumer discretionary and technology. Ivy Funds VIP Small Cap Value had an overweight exposure to all of those sectors by a cumulative measure of approximately 18 percentage points. The largest overweights were in technology and consumer discretionary. The worst- performing sectors were financial services, utilities and industrials. Once again, Ivy Funds VIP Small Cap Value was underweight in each of those sectors, particularly financial services. The weighting position was important in 2009 because the return difference between the best- and worst-performing sectors was dramatic. The top 3 sectors mentioned above were all up around 60 percent for the year while the financial services sector came in down 3 percent for the year.
The fundamental appeal of the technology sector was a function of strong balance sheets, favorable operating characteristics and low valuation of many groups within the sector. The sector had been through many years of restructuring and shake-out, which led to a healthy position for the survivors. Companies entered this past recession with cash-heavy balance sheets, favorable margin positions and lean operating structures. The Portfolio emphasized the lower-valued companies in the software, semiconductor and contract-manufacturing industries. The technology distribution industry also generated a number of successful investments for the Portfolio, among them two leading semiconductor distributors and a broad line technology distributor that performed well. These companies adjusted quickly to the economic slowdown and generated substantial free cash flow from reductions in working capital, further bolstering their strong balance sheets.
Our strategy in the consumer discretionary sector in 2009 started defensively with an emphasis on the education services and low-end retail companies. As the market began to recover, we repositioned the Portfolio to areas such as casinos, media and entertainment. The focus was on "close to home" entertainment venues, including a riverboat casino operator and a theatre operator.
The Portfolio held a significant underweight position in financial services, which boosted its relative performance. In addition, our stock selection within the sector contributed positively to the Portfolio. The strategy in the banking sector had been to favor the strongest capitalized of the small community banks and then focus on the potential consolidators. We felt that banks with sound franchises and strong capital were the likely candidates to successfully take advantage of FDIC-assisted acquisition opportunities. Finally, the Portfolio was significantly underexposed to the REIT sector for the year, which helped in the first half but was a drag in the second half of the year as the group rallied strongly off of its lows.
Small caps as a group generally tend to do well in the early stages of economic recovery when investors are often willing to take on more risk. Some of this was earned in 2009 but the value category significantly underperformed growth, and now appears poised for a good year. Much of that underperformance was due to the financial services sector, which is a heavy weighting in the index. We believe that financials should perform much better in 2010 as earnings growth recovers and capital positions are bolstered. Ivy Funds VIP Small Cap Value has boosted its weighting in financials with a continued emphasis on what we feel are the strong community banks, brokers and asset managers and an increased weighting in REITs. We also believe that the technology sector will be favored again in 2010, due to a strong earnings growth outlook and the potential lift from a renewed capital spending environment triggered by Windows 7, wireless, and other factors. Anticipated potential changes for the year also include a reducti
on in emphasis on the retail-oriented consumer sector in favor of advertising companies and increased interest in the later cycle industrials.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment.
Investing in small-cap stocks may carry more risk than investing in stocks of larger, more established companies. Value stocks are stocks of companies that may have experienced adverse business or industry developments; or may be subject to special risks that have caused the stocks to be out of favor and, in the opinion of the Portfolio's manager, undervalued. 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. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio manager and are current only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP Small Cap Value.
SMALL CAP RUSSELL 2000 LIPPER VA 12/31/99 10,000 10,000 10,000 12/31/00 12,800 12,309 12,201 12/31/01 14,795 14,028 13,751 12/31/02 11,839 12,432 12,030 12/31/03 17,697 18,159 16,943 12/31/04 20,355 22,203 20,503 12/31/05 21,200 23,241 22,085 12/31/06 24,770 28,694 25,947 12/31/07 23,748 25,878 24,692 12/31/08 17,542 18,389 16,595 12/31/09 22,655 22,164 21,681
Below, Matthew T. Norris, CFA, portfolio manager of Ivy Funds VIP Value, discusses positioning, performance and results for the fiscal year ended December 31, 2009. He has managed the Portfolio for six years and has 18 years of industry experience.
Matthew T. Norris
The equity market had a strong year, with most indices returning north of 20 percent. The first quarter was weak along with the economy. Then various governmental economic stimulus packages began to have an effect, and the market was up the rest of the year. The market advance was lead by technology, consumer discretionary and basic industry sectors. Lagging sectors included financials, telecommunications and energy. In this environment, Ivy Funds VIP Value performed well, handily beating the Russell 1000 Value Index. The Portfolio benefited from strong individual stock selection and a consistent approach to managing portfolio risk. We did not make large sector bets during the year, but rather focused on individual names that we identified as inexpensive with improving business fundamentals.
An important strategy of the Portfolio is to invest in individual equities that we feel are undervalued relative to their prospects, while also attempting to diversify investments in an effort to minimize the impact from macro events, which we think are primarily unpredictable. Individual stock selection was the primary contributor to the Portfolio's strong outperformance. A number of compelling value ideas presented themselves at the end of 2008 and early in 2009. The Portfolio invested and was rewarded.
Market watchers may recall that banking stocks were down notably through the first quarter, before suddenly rising strongly over the rest of the year. The Portfolio was absent from this area during the downturn, but invested at attractive valuations in the first half of the year and enjoyed rising performance through year end.
The Portfolio, on average, was overweight in technology and insurance while being underweight in the utilities and telecommunications sectors. Areas of emphasis include technology and insurance. The technology area contains a number of large companies producing copious amounts of free cash flow that we feel will be re-deployed to shareholders benefit over time. The property and casualty insurance area contains a number of companies that we believe are trading below book value.
We view the current valuation of the equity markets as fair. On the plus side, we have an economic backdrop that is improving; offset by the possibility of higher interest rates, we are left decidedly neutral on the total-return prospects of equities in the near future. A positive return is expected, but seems unlikely to repeat the 20 percent return of 2009, in our opinion.
Many U.S. corporations are nicely profitable with excess cash available to them, yet most are also at a loss to find growing areas to deploy that cash. This leads to the use of cash to pay higher dividends, and/or repurchase their own stock. Accordingly, we believe that more of an investors' return may be coming from these actions as opposed to significantly higher earnings or P/E multiple expansion.
Going forward, we do not anticipate meaningful change in our investment process or the management philosophy of the Portfolio, which remains close to fully invested. We continue to search diligently, one company at a time, for names that we think may offer good value investment opportunities. We continue to believe this is the best way to achieve strong, consistent returns over a full market cycle.
As with any mutual fund, the value of the Portfolio's shares will change, and you could lose money on your investment.
Value stocks are stocks of companies that may have experienced adverse business or industry developments; or may be subject to special risks that have caused the stocks to be out of favor and, in the opinion of the Portfolio's manager, undervalued. 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. These and other risks are more fully described in the Portfolio's prospectus.
The opinions expressed in this report are those of the portfolio manager and are current only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.
The index (indexes) noted are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of Ivy Funds VIP Value.
VALUE RUSSELL 1000 LIPPER 5/1/01 10,000 10,000 10,000 12/31/01 10,203 9,557 9,579 12/31/02 8,907 8,074 7,888 12/31/03 11,144 10,499 10,096 12/31/04 12,783 12,230 11,360 12/31/05 13,348 13,092 11,853 12/31/06 15,601 16,005 14,190 12/31/07 15,897 15,978 14,413 12/31/08 10,522 10,090 8,988 12/31/09 13,325 12,076 11,073
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
Notes to Schedule of Investments STATEMENT OF ASSETS AND LIABILITIES
STATEMENT OF ASSETS AND LIABILITIES
STATEMENT OF OPERATIONS
STATEMENT OF OPERATIONS
STATEMENT OF OPERATIONS
STATEMENT OF OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS
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STATEMENT OF CHANGES IN NET ASSETS
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STATEMENT OF CHANGES IN NET ASSETS
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STATEMENT OF CHANGES IN NET ASSETS
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
Ivy Funds Variable Insurance Portfolios, a Delaware statutory trust (the Trust), is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a diversified, open-end management investment company. The Trust is divided into twenty-five series (each a Portfolio). The assets belonging to each Portfolio, except the Pathfinder Portfolios, are held separately by the custodian. The investment objective, policies and risk factors of each Portfolio are described more fully in the prospectus and Statement of Additional Information. The Trust's investment adviser is Waddell & Reed Investment Management Company (WRIMCO).
The following is a summary of significant accounting policies consistently followed by each Portfolio.
Securities Valuation. Each Portfolio calculates the net asset value of its shares as of the close of the New York Stock Exchange (the NYSE), normally 4:00 P.M. Eastern time, on each day the NYSE is open for trading.
Securities traded on U.S. or foreign securities exchanges or included in a national market system are valued at the official closing price at the close of each business day unless otherwise stated below. Over-the-counter securities and listed securities for which no price is readily available are valued at the average of the last bid and asked prices. Security prices are based on quotes that are obtained from an independent pricing service approved by the Board of Trustees.
To determine values of fixed-income securities, the independent pricing service utilizes such factors as current quotations by broker/dealers, coupon, maturity, quality, type of issue, trading characteristics, and other yield and risk factors it deems relevant in determining valuations. Securities which cannot be valued by the independent pricing service are valued using valuations obtained from dealers that make markets in the securities.
Gold bullion is valued at the last traded spot price reported by a pricing service prior to the close of the NYSE.
Options and swaps are valued by the independent pricing service unless the price is unavailable, in which case they are valued at either the mean between the last bid and asked price or using a valuation obtained from a dealer in that security. Futures contracts traded on an exchange are generally valued at the settlement price. Mutual funds, including investment funds, are typically valued at the net asset value reported at the close of each business day.
Forward foreign currency contracts are valued daily based upon the closing prices of the forward currency rates determined at the close of the NYSE as provided by a bank, dealer or independent pricing service.
Senior loans are valued using a composite price from more than one broker or dealer as obtained from an independent pricing service.
All securities held by Money Market and short-term securities with maturities of 60 days or less are valued on the basis of amortized cost (which approximates market value), whereby a portfolio security is valued at its cost initially, and thereafter valued to reflect a constant amortization to maturity of any discount or premium.
Because many foreign markets close before the U.S. markets, events may occur between the close of the foreign market and the close of the U.S. markets that could have a material impact on the valuation of foreign securities. The Portfolios, under the supervision of the Board of Trustees, evaluate the impact of these events each day and may adjust the valuation of foreign securities to reflect the fair value as of the close of the U.S. markets. In addition, all securities for which market values are not readily available or are deemed unreliable are appraised at fair value as determined in good faith under the direction of the Board of Trustees. As of December 31, 2009, the following had aggregate investments valued at fair value (unrealized appreciation (depreciation) for futures contracts) as shown:
Security Transactions and Related Investment Income. Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses are calculated on the identified cost basis. Interest income is recorded on the accrual basis and includes paydown gain (loss) and accretion of discounts and amortization of premiums. Dividend income is recorded on the ex-dividend date, except certain dividends from foreign securities where the ex-dividend date may have passed, which are recorded as soon as the Portfolio is informed of the ex-dividend date. Upon notification from issuers, some of the distributions received from a real estate investment trust or publically traded partnership may be redesignated as a reduction of cost of the related investment and/or realized gain. Securities on a When-Issued or Delayed Delivery Basis. Certain Portfolios may purchase securities on a "when-issued" basis, and may purchase or sell securities on a "delayed delivery" basis. "When-issued" or "delayed delivery" refers to securities whose terms and indenture are available and for which a market exists, but which are not available for immediate delivery. Delivery and payment for securities that have been purchased by the Portfolio on a when-issued basis normally take place within six months and possibly as long as two years or more after the trade date. During this period, such securities do not earn interest, are subject to market fluctuation and may increase or decrease in value prior to their delivery. The purchase of securities on a when-issued basis may increase the volatility of the Portfolio's net asset value to the extent the Portfolio executes such transactions while remaining substantially fully invested. When a Portfolio en
gages in when-issued or delayed delivery transactions, it relies on the buyer or seller, as the case may be, to complete the transaction. Their failure to do so may cause the Portfolio to lose the opportunity to obtain or dispose of the security at a price and yield it considers advantageous. The Portfolio maintains internally designated assets with a market value equal to or greater than the amount of its purchase commitments. The Portfolio may also sell securities that it purchased on a when-issued basis prior to settlement of the original purchase. Mortgage Dollar Roll Transactions. Certain Portfolios enter into dollar roll transactions on securities issued or to be issued by the Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, in which the Portfolio sells mortgage securities and simultaneously agrees to repurchase similar (same type, coupon and maturity) securities at a later date at an agreed upon price. During the period between the sale and repurchase, the Portfolio forgoes principal and interest paid on the mortgage securities sold. The Portfolio is compensated from negotiated fees paid by brokers offered as an inducement to the Portfolio to "roll over" their purchase commitments. These fees, if any, are recognized over the roll period and are included in Interest and amortization in the Statement of Operations. Interest Only Obligations. These securities entitle the owner to receive only the interest portion from a bond, Treasury note or pool of mortgages. These securities are generally created by a third party separating a bond or pool of mortgages into distinct interest-only and principal-only securities. As the principal (par) amount of a bond or pool of mortgages is paid down, the amount of interest income earned by the owner will decline as well. Credit Risk. Certain Portfolios may hold high-yield and/or non-investment-grade bonds, which may be subject to a greater degree of credit risk. Credit risk relates to the ability of the issuer to meet interest or principal payments or both as they become due. The Portfolios may acquire securities in default, and are not obligated to dispose of securities whose issuers subsequently default. As of December 31, 2009, High Income held defaulted securities with an aggregate market value of $2,091, representing 0.98% of the Portfolio's net assets. Foreign Currency Translation. Each Portfolio's accounting records are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars daily, using foreign exchange rates obtained from an independent pricing service authorized by the Board of Trustees. Purchases and sales of investment securities and accruals of income and expenses are translated at the rate of exchange prevailing on the date of the transaction. For assets and liabilities other than investments in securities, net realized and unrealized gains and losses from foreign currency translation arise from changes in currency exchange rates. Each Portfolio combines fluctuations from currency exchange rates and fluctuations in market value when computing net realized gain (loss) and net change in unrealized appreciation (depreciation) on investments. Foreign exchange rates are valued as of the close of the NYSE, normally 4:00 P.M. Eastern time, on each day the NYSE is open f
or trading, primarily using an independent pricing service authorized by the Board of Trustees. Repurchase Agreements. Each Portfolio may purchase securities subject to repurchase agreements, which are instruments under which the Portfolio purchases a security and the seller (normally a commercial bank or broker-dealer) agrees, at the time of purchase, that it will repurchase the security at a specified time and price. Repurchase agreements are collateralized by the value of the resold securities which, during the entire period of the agreement, generally remains at least equal to the value of the agreement, including accrued interest thereon. The collateral for the repurchase agreement is held by a custodian bank. Investments with Off-Balance Sheet Risk. Certain Portfolios may enter into financial instrument transactions (such as swaps, futures, options and other derivatives) that may have off-balance sheet market risk. Off-balance sheet market risk exists when the maximum potential loss on a particular financial instrument is greater than the value of such financial instrument, as reflected in the Statement of Assets and Liabilities. Segregation and Collateralization. In cases in which the 1940 Act and the interpretive positions of the Securities and Exchange Commission (SEC) require that a Portfolio either delivers collateral or segregates assets in connection with certain investments (e.g., dollar rolls, financial futures contracts, foreign currency exchange contracts, options written, securities with extended settlement periods and swaps), the Portfolio will segregate collateral or designate on its books and records cash or other liquid securities having a market value at least equal to the amount that is required to be physically segregated for the benefit of the counterparty. Furthermore, based on requirements and agreements with certain exchanges and third party broker-dealers, each party has requirements to deliver/deposit securities as collateral for certain investments. Income Taxes. It is the policy of each Portfolio to distribute all of its taxable income and capital gains to its shareholders and otherwise qualify as a regulated investment company under Subchapter M of the Internal Revenue Code. In addition, each Portfolio intends to pay distributions as required to avoid imposition of excise tax. Accordingly, no provision has been made for Federal income taxes. Management of the Trust periodically reviews all tax positions to assess that it is more likely than not that the position would be sustained upon examination by the relevant tax authority based on the technical merits of each position. As of and for the fiscal year ended December 31, 2009, management believes that under this standard no liability for unrecognized tax positions is required. The Portfolios are subject to examination by U.S. federal and state authorities for returns filed for tax years after 2005. Dividends and Distributions to Shareholders. Dividends and distributions to shareholders are recorded by each Portfolio on the business day following record date. Net investment income dividends and capital gains distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. Custodian Fees. "Custodian fees" in the Statement of Operations may include interest expense incurred by a Portfolio on any cash overdrafts of its custodian account during the period. Such cash overdrafts may result from the effects of failed trades in portfolio securities and from cash outflows resulting from unanticipated shareholder redemption activity. A Portfolio pays interest to its custodian on such cash overdrafts, to the extent they are not offset by positive cash balances maintained by that Portfolio, at a rate equal to the custodian's prime rate less 150 basis points. The "Earnings credit" line item, if shown, represents earnings on cash balances maintained by that Portfolio during the period. Such interest expense and other custodian fees may be paid with these earnings. Trustees' Fees. Fees paid to the Trustees can be paid in cash or deferred to a later date, at the election of each Trustee according to the Deferred Fee Agreement entered into between the Trust and the Trustee(s). Each Portfolio records its portion of the deferred fees as a liability on the Statement of Assets and Liabilities. All fees paid in cash plus any appreciation (depreciation) in the underlying deferred plan are shown on the Statement of Operations. Indemnifications. The Trust's organizational documents provide current and former Trustees and Officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Trust. In the normal course of business, the Trust may also enter into contracts that provide general indemnifications. The Trust's maximum exposure under these arrangements is unknown and is dependent on future claims that may be made against the Trust. The risk of material loss from such claims is considered remote. Treasury's Temporary Guarantee Program. On October 3, 2008, the Board of Trustees of the Trust approved the participation by Money Market in the U.S. Department of the Treasury's Temporary Guarantee Program for Money Market Funds through December 18, 2008 (the Program). Participation in the Program required a payment to the Treasury Department of 0.01% based on the net asset value of Money Market as of September 19, 2008. On November 24, 2008, the Treasury Department announced its decision to extend the Program for the period from December 19, 2008 through April 30, 2009; on March 31, 2009, the Program was further extended to September 18, 2009 (the Extended Program). The Board of Trustees of the Trust unanimously approved the continued participation of Money Market in the Extended Program. Participation in the Extended Program required a payment at each extension to the Treasury Department of 0.015% of the net asset value of Money Market as of September 19, 2008. The above expenses of $
45 have been borne by Money Market and are reflected as other expenses in the Statement of Operations for the fiscal year ended December 31, 2009 without regard to any contractual or voluntary expense limitation currently in effect for the Portfolio. At September 18, 2009, the Treasury Department allowed the Program to expire. Concentration of Risk. Certain Portfolios may have a concentration of risk which includes, but is not limited to, investing in international securities. International investing involves additional risks including, but not limited to, currency fluctuations, political or economic conditions affecting the foreign country and differences in accounting standards and foreign regulations. Other. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Management has performed a review for subsequent events through February 15, 2010, the date this report was issued.
WRIMCO, a wholly owned subsidiary of Waddell & Reed, Inc. (W&R), serves as the Trust's investment adviser. WRIMCO provides advice and supervises investments, for which services it is paid a fee. Until September 30, 2006, the fee was payable by each Portfolio, except for Pathfinder Aggressive, Pathfinder Conservative, Pathfinder Moderate, Pathfinder Moderately Aggressive and Pathfinder Moderately Conservative (collectively, the Pathfinder Portfolios) at the following annual rates and is accrued and paid daily:
Effective October 1, 2006, under terms of a settlement agreement reached in July 2006 (see Note 14), the fee is payable by each Portfolio, except the Pathfinder Portfolios, at the following annual rates for those Portfolios included in the settlement agreement:
Effective August 6, 2007, the fee is contractually payable by Bond as follows:
The Pathfinder Portfolios pay no management fees; however, WRIMCO receives management fees from the underlying funds.
WRIMCO has agreed to waive a Portfolio's investment management fee on any Portfolio, except the Pathfinder Portfolios, that is not subadvised on any day that the Portfolio's net assets are less than $25 million, subject to its right to change or modify this waiver.
WRIMCO has entered into Subadvisory Agreements with the following entities on behalf of certain Portfolios.
Under agreements between WRIMCO and the named entities, the following serve as subadvisors to certain Portfolios: Mackenzie Financial Corporation serves as subadvisor to Global Natural Resources. Wall Street Associates serves as subadvisor to Micro Cap Growth. Advantus Capital Management, Inc. serves as subadvisor to Mortgage Securities and Real Estate Securities. Each subadvisor makes investment decisions in accordance with the Portfolio's investment objectives, policies and restrictions under the supervision of WRIMCO and the Board of Trustees. WRIMCO pays all costs associated with retaining the subadvisors. From August 20, 2003 to May 27, 2009, Templeton Investment Counsel, LLC served as subadvisor to International Value. Effective May 27, 2009, WRIMCO serves as investment advisor to International Value.
Accounting Services Fees. The Trust has an Accounting Services Agreement with Waddell & Reed Services Company (WRSCO), doing business as WI Services Company (WISC), an affiliate of W&R. Under the agreement, WISC acts as the agent in providing bookkeeping and accounting services and assistance to the Trust, including maintenance of Portfolio records, pricing of Portfolio shares and preparation of certain shareholder reports. For these services, each Portfolio (excluding Pathfinder Portfolios) pays WISC a monthly fee of one-twelfth of the annual fee shown in the following table:
Under the Accounting Services Agreement, each Pathfinder Portfolio pays WISC a monthly fee of one-twelfth of the annual fee shown in the following table.
Administrative Fee. Each Portfolio also pays WISC a monthly fee at the annual rate of 0.01%, or one basis point, for the first $1 billion of net assets with no fee charged for net assets in excess of $1 billion. This fee is voluntarily waived by WISC until a Portfolio's net assets are at least $10 million. Shareholder Servicing. Under the Transfer Agency Agreement between the Trust and WISC, each Portfolio reimburses WISC for certain out-of-pocket costs. Service Plan. Under a Service Plan adopted by the Trust pursuant to Rule 12b-1 under the Investment Company Act of 1940, each Portfolio, except Money Market, may pay a service fee to W&R in an amount not to exceed 0.25% of the Portfolio's average annual net assets. The fee is to be paid to compensate W&R for amounts it expends in connection with the provision of personal services to Policyowners and/or maintenance of Policyowner accounts. Expense Reimbursements and/or Waivers. During the fiscal year ended December 31, 2009, the following amounts were waived as a result of the reduced management fees related to the settlement agreement:
During the fiscal year ended December 31, 2009, the following amounts were waived as a result of the reduced management fees related to the voluntary waiver of management fee to any Portfolio, excluding Pathfinder Portfolios, having less than $25 million in net assets:
Fair value is defined as the price that each Portfolio would receive upon selling an asset or would pay upon satisfying a liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a framework for measuring fair value and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the factors that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. An individual investment's fair value measureme
nt is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three-tier hierarchy of inputs is summarized below.
Level 1 - unadjusted quoted prices in active markets for identical securities
Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
Level 3 - significant unobservable inputs (including each Portfolio's own assumptions in determining the fair value of investments)
The following tables summarize the valuation of each Portfolio's investments by the above fair value hierarchy levels as of December 31, 2009:
The following tables are a reconciliation of Level 3 investments for which significant unobservable inputs were used to determine fair value:
*Not shown due to rounding.
Net realized gain (loss) and net unrealized appreciation (depreciation), shown on the reconciliation of Level 3 investments, if applicable, are included on the Statement of Operations in net realized gain (loss) on investments in unaffiliated securities and in net change in unrealized appreciation (depreciation) on investments in unaffiliated securities, respectively. Additionally, the net change in unrealized appreciation for all Level 3 investments still held as of December 31, 2009, if applicable, is included on the Statement of Operations in net change in unrealized appreciation (depreciation) on investments in unaffiliated securities.
Securities' values included in the reconciliations above have been primarily determined through the use of a single quote (or multiple quotes) from dealer(s) in the securities using proprietary valuation models. These quotes involve significant unobservable inputs, and thus the related securities are classified as Level 3 investments.
For the fiscal year ended December 31, 2009, the cost of purchases and the proceeds from maturities and sales of investment securities, other than U.S. Government and short-term securities, were as follows: Purchases of and proceeds from maturities and sales of U.S. Government securities were:
For Federal income tax purposes, the Portfolios' distributed and undistributed earnings and profit for the fiscal year ended December 31, 2009 and the related net capital losses and post-October activity were as follows:
Internal Revenue Code regulations permit each Portfolio to defer into its next fiscal year net capital losses or net long-term capital losses and currency losses incurred between each November 1 and the end of its fiscal year (post-October losses).
Capital loss carryovers are available to offset future realized capital gain net income incurred in the eight taxable years succeeding the loss year for Federal income tax purposes. The following tables show the totals by year in which the capital loss carryovers will expire if not utilized.
Net investment income dividends and capital gains distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences are due to differing treatments for items such as deferral of wash sales and post-October losses, foreign currency transactions, net operating losses and expiring capital loss carryovers.
At December 31, 2009, the following reclassifications were made: Asset Strategy reclassified permanent differences relating to differing treatments of investment fund expenses; Balanced reclassified permanent differences relating to differing treatments of partnership distributions and mortgage-backed security paydowns; Bond reclassified permanent differences relating to differing treatments of mortgage-backed security paydowns; Dividend Opportunities reclassified permanent differences relating to differing treatments of partnership distributions; Energy reclassified permanent differences relating to differing treatments of partnership distributions; Global Natural Resources reclassified permanent differences relating to differing treatments of PFIC transactions, net operating losses and partnership distributions; Growth reclassified permanent differences relating to expiring capital loss carryovers; High Income reclassified permanent differences relating to differing treatments of expiring capital loss carr
yovers; International Value reclassified permanent differences relating to differing treatments of PFIC transactions; Micro Cap Growth reclassified permanent differences relating to differing treatments of net operating losses and PFIC transactions; Mortgage Securities reclassified permanent differences relating to differing treatments of mortgage-backed security paydowns; Science and Technology reclassified permanent differences relating to differing treatments of net operating losses; Small Cap Growth reclassified permanent differences relating to differing treatments of net operating losses and expiring capital loss carryovers; Small Cap Value reclassified permanent differences relating to differing treatments of partnership distributions; Value reclassified permanent differences relating to differing treatments of partnership distributions.
The Trust has authorized an unlimited number of no par value shares of beneficial interest. Transactions in shares of beneficial interest were as follows:
In March 2008, the Financial Accounting Standards Board (FASB) amended and expanded disclosures about derivative instruments and hedging activities, which were adopted by each Portfolio during the fiscal year ended December 31, 2009; it requires qualitative disclosures about the objectives and strategies of derivative instruments, quantitative disclosures about the fair value amounts of and gains and losses on derivative instruments, and disclosures of credit-risk-related contingent features in hedging activities.
Forward Foreign Currency Contracts. Each Portfolio, other than Money Market and the Pathfinder Portfolios, may enter into forward foreign currency contracts (forward contracts) for the purchase or sale of a foreign currency at a negotiated rate at a future date. Forward contracts are reported on a schedule following the Schedule of Investments. Forward contracts will be valued daily based upon the closing prices of the forward currency rates determined at the close of the NYSE as provided by a bank, dealer or independent pricing service. The resulting unrealized appreciation and depreciation is reported in the Statement of Assets and Liabilities as a receivable or payable and in the Statement of Operations within the change in unrealized appreciation (depreciation). At contract close, the difference between the original cost of the contract and the value at the close date is recorded as a realized gain (loss) in the Statement of Operations.
Risks to a Portfolio include both market and credit risk. Market risk is the risk that the value of the forward contract will depreciate due to unfavorable changes in the exchange rates. Credit risk arises from the possibility that the counterparty will default. If the counterparty defaults, a Portfolio's loss will consist of the net amount of contractual payments that the Portfolio has not yet received.
Futures Contracts. Each Portfolio, other than Money Market and the Pathfinder Portfolios, may engage in buying and selling futures contracts. Upon entering into a futures contract, the Portfolio is required to deposit, in a segregated account, an amount equal to a varying specified percentage of the contract amount. This amount is known as the initial margin. Subsequent payments (variation margins) are made or received by the Portfolio each day, dependent on the daily fluctuations in the value of the underlying debt security or index.
Futures contracts are reported on a schedule following the Schedule of Investments. Securities held in collateralized accounts to cover initial margin requirements on open futures contracts are identified in the Schedule of Investments. Cash held by the broker to cover initial margin requirements on open futures contracts and the receivable and/or payable for the daily mark to market for the variation margin are noted in the Statement of Assets and Liabilities. The net change in unrealized appreciation (depreciation) is reported in the Statement of Operations. Realized gains (losses) are reported in the Statement of Operations at the closing or expiration of futures contracts.
Risks of entering into futures contracts include the possibility of loss of securities or cash held as collateral, that there may be an illiquid market where the Portfolio is unable to close the contract or enter into an offsetting position and, if used for hedging purposes, the risk that the price of the contract will correlate imperfectly with the prices of the Portfolio's securities.
Swap Agreements. Each Portfolio, other than Money Market and the Pathfinder Portfolios, may invest in swap agreements.
Credit default swaps involve the exchange of a fixed rate premium for protection against the loss in value of an underlying security in the event of a defined credit event, such as payment default or bankruptcy. Under a credit default swap one party acts as a guarantor by receiving the fixed periodic payment in exchange for the commitment to purchase the underlying security at par if the defined credit event occurs. A Portfolio may enter into credit default swaps in which either it or its counterparty act as the guarantor.
Total return swaps involve a commitment to pay periodic interest payments in exchange for a market-linked return based on a security or a basket of securities representing a variety of securities or a particular index. To the extent the total return of the security, index or other financial measure underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Portfolio will receive a payment from or make a payment to the counterparty.
Variance swaps involve a contract in which two parties agree to exchange cash flows based on the measured variance of a specified underlying security or index during a certain time period. On the trade date, the two parties agree on the strike price of the contract (the reference level against which cash flows are exchanged), as well as the number of units in the transaction and the length of the contract. Like an option contract, the value of a variance swap is influenced by both realized and implied volatility, as well as the passage of time. A Portfolio may enter into variance swaps to manage volatility risk.
The creditworthiness of firms with which a Portfolio enters into a swap agreement is monitored by WRIMCO. If a firm's creditworthiness declines, the value of the agreement would likely decline, potentially resulting in losses. If a default occurs by the counterparty to such a transaction, the Portfolio will have contractual remedies pursuant to the agreement related to the transaction.
Options Contracts. Options purchased by a Portfolio are accounted for in the same manner as marketable portfolio securities. The cost of portfolio securities acquired through the exercise of call options is increased by the premium paid to purchase the call. The proceeds from securities sold through the exercise of put options are decreased by the premium paid to purchase the put.
When a Portfolio writes (sells) an option, an amount equal to the premium received by the Portfolio is recorded as a liability. The amount of the liability is subsequently adjusted to reflect the current market value of the option written. The current market value of an option is the last sales price on the principal exchange on which the option is traded or, in the absence of transactions, the mean between the bid and asked prices or at a value supplied by a broker-dealer. When an option expires on its stipulated expiration date or a Portfolio enters into a closing purchase transaction, the Portfolio realizes a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the call option was sold) and the liability related to such option is extinguished. When a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether a Portfolio has realized a gain or loss. For each Portfolio, when a written put is exercise
d, the cost basis of the securities purchased by a Portfolio is reduced by the amount of the premium received.
Investments in options, whether purchased or written, involve certain risks. Writing put options and purchasing call options may increase a Portfolio's exposure to the underlying security (or basket of securities). With written options, there may be times when a Portfolio will be required to purchase or sell securities to meet its obligation under the option contract where the required action is not beneficial to the Portfolio, due to unfavorable movement of the market price of the underlying security (or basket of securities). Additionally, to the extent a Portfolio enters into over-the-counter (OTC) option transactions with counterparties, the Portfolio will be exposed to the risk that counterparties to these OTC transactions will be unable to meet their obligations under the terms of the transaction.
Collateral. The Portfolio may mitigate counterparty risk through credit support annexes (CSA) included with an International Swaps and Derivatives Association, Inc. (ISDA) Master Agreement which is the standard contract governing most derivative transactions between the Portfolio and each of its counterparties. The CSA allows the Portfolio to offset with its counterparty certain derivative financial instruments' payables and/or receivables with collateral, which is generally held by the Portfolio's custodian. The amount of collateral moved to/from applicable counterparties is based upon minimum transfer amounts specified in the CSA. To the extent amounts due to the Portfolio from its counterparties are not fully collateralized contractually or otherwise, the Portfolio bears the risk of loss from counterparty non-performance. See Note 1 "Segregation and Collateralization" for additional information with respect to collateral practices. Asset Strategy. The Portfolio's objectives in using derivatives during the period included hedging market risk on equity securities, increasing exposure to various equity markets, managing exposure to various foreign currencies, managing exposure to precious metals, and hedging certain event risks on positions held by the Portfolio. To achieve the objective of hedging market risk and increasing exposure to equity markets, the Portfolio utilized futures and purchased option contracts, both short and long, on foreign and domestic equity indices. To manage foreign currency exposure, the Portfolio utilized forward contracts to either increase or decrease exposure to a given currency. To manage exposure to precious metals, the Portfolio utilized gold futures contracts. To manage event risks, the Portfolio utilized options, both written and purchased, on individual equity securities owned by the Portfolio.
Fair values of derivative instruments as of December 31, 2009:
The effect of derivative instruments on the Statement of Operations for the fiscal year ended December 31, 2009:
During the fiscal year ended December 31, 2009, the Portfolio's average principal amount outstanding for forward contracts and market value outstanding for futures contracts were as follows: short forward contracts - $98,345, long forward contracts - $100,275, short futures contracts - $30,430, long futures contracts - $13,369. Additionally, the Portfolio's average number of purchased option contracts and written option contracts outstanding was 1 and 1, respectively.
Core Equity. The Portfolio's objective in using derivatives during the period was to hedge market risk for some or all of its existing equity security portfolio. To achieve this objective, the Portfolio utilizes futures contracts on broad domestic equity market indices.
There were no open derivative instruments as of December 31, 2009.
The effect of derivative instruments on the Statement of Operations for the fiscal year ended December 31, 2009:
During the fiscal year ended December 31, 2009, the Portfolio's average market value outstanding for short futures contracts was $2,834.
Global Natural Resources. The Portfolio's objectives in using derivatives during the period were to hedge market risk on equity securities, increase exposure to specific sectors or companies, and manage exposure to various foreign currencies. To achieve the objective of hedging market risk and increasing exposure to equity markets, the Portfolio utilized futures on equity indices and purchased and written option contracts on individual equity securities. To manage foreign currency exposure, the Portfolio utilized forward foreign currency contracts to either increase or decrease exposure to a given currency.
Fair values of derivative instruments as of December 31, 2009:
The effect of derivative instruments on the Statement of Operations for the fiscal year ended December 31, 2009:
During the fiscal year ended December 31, 2009, the Portfolio's average principal amount outstanding for forward contracts and market value outstanding for futures contracts were as follows: short forward contracts - $2,045, long forward contracts - $2,002, short futures contracts - $7,500. Additionally, the Portfolio's average number of purchased option contracts outstanding was 5.
High Income. The Portfolio's objective in using derivatives during the period was to hedge the exposure to foreign currencies from securities held in the portfolio. To achieve this objective, the Portfolio utilized forward contracts.
Fair values of derivative instruments as of December 31, 2009:
The effect of derivative instruments on the Statement of Operations for the fiscal year ended December 31, 2009:
During the fiscal year ended December 31, 2009, the Portfolio's average principal amount outstanding for short forward contracts and long forward contracts was $161 and $166, respectively.
International Growth. The Portfolio's objective in using derivatives during the period was to manage the exposure to various foreign currencies. To achieve this objective, the Portfolio utilized forward contracts to either increase or decrease exposure to a given currency.
Fair values of derivative instruments as of December 31, 2009:
The effect of derivative instruments on the Statement of Operations for the fiscal year ended December 31, 2009:
During the fiscal year ended December 31, 2009, the Portfolio's average principal amount outstanding for short forward contracts and long forward contracts was $3,412 and $3,484, respectively.
Mid Cap Growth. The Portfolio's objectives in using derivatives during the period were to both gain exposure to certain sectors and to hedge certain event risks on positions held by the Portfolio. To achieve these objectives, the Portfolio utilized options, both written and purchased, on either an index or on individual or baskets of equity securities.
There were no open derivative instruments as of December 31, 2009.
The effect of derivative instruments on the Statement of Operations for the fiscal year ended December 31, 2009:
During the fiscal year ended December 31, 2009, the Portfolio's average number of purchased option contracts and written option contracts outstanding was 1 and 1, respectively.
Mortgage Securities. The Portfolio's objective in using derivatives during the period was to adjust the overall duration of the portfolio. To achieve this objective, the Portfolio primarily utilized Treasury futures contracts of varying lengths to either shorten or lengthen, as determined by the Portfolio's subadvisor, the duration of the Portfolio.
There were no open derivative instruments as of December 31, 2009.
The effect of derivative instruments on the Statement of Operations for the fiscal year ended December 31, 2009:
During the fiscal year ended December 31, 2009, the Portfolio's average market value outstanding for short futures contracts was $1,148.
Science and Technology. The Portfolio's objective in using derivatives during the period was to hedge market risk on securities in its portfolio. To achieve this objective, the Portfolio utilized options, both written and purchased, on individual equity securities owned by the Portfolio.
There were no open derivative instruments as of December 31, 2009.
The effect of derivative instruments on the Statement of Operations for the fiscal year ended December 31, 2009:
During the fiscal year ended December 31, 2009, the Portfolio's average number of purchased option contracts and written option contracts outstanding was 2 and 2, respectively.
Small Cap Value. The Portfolio's objective in using derivatives during the period was to gain exposure to certain market sectors that it cannot get through the purchase of equity securities. To achieve this objective, the Portfolio utilized options, both written and purchased, on an index in the sector it wishes to gain exposure to.
There were no open derivative instruments as of December 31, 2009.
The effect of derivative instruments on the Statement of Operations for the fiscal year ended December 31, 2009:
During the fiscal year ended December 31, 2009, the Portfolio's average number of purchased option contracts and written option contracts outstanding was less than 1.
Value. The Portfolio's objective in using derivatives during the period was to generate additional income from written option premiums. To achieve these objectives, the Portfolio had primarily written put and call options on equity securities the Portfolio owns.
Fair values of derivative instruments as of December 31, 2009:
The effect of derivative instruments on the Statement of Operations for the fiscal year ended December 31, 2009:
During the fiscal year ended December 31, 2009, the Portfolio's average number of written option contracts outstanding was 9.
In connection with Asset Strategy's investment in Vietnam Azalea Fund Limited (VAF), the Portfolio is contractually committed to provide additional capital of up to $1,018 if and when VAF requests such contributions or draw downs. The total commitment is limited to $3,000. At December 31, 2009, Asset Strategy had made a total contribution of $1,982. No public market currently exists for the shares of VAF nor are shares currently redeemable by VAF. VAF intends to become listed within one year after the final commitment has been drawn down. VAF's investment strategy is to make minority investments in future blue-chip Vietnamese companies that are already listed or intend to be listed in the next 24 months.
A summary of the transactions in affiliated companies during the fiscal year ended December 31, 2009 follows:
Annual Report
Pathfinder Portfolios
Asset Strategy
Balanced
Bond
Core Equity
Dividend Opportunities
Energy
Global Natural Resources
Growth
High Income
International Growth
International Value
Micro Cap Growth
Mid Cap Growth
Money Market
Mortgage Securities
Real Estate Securities
Science and Technology
Small Cap Growth
Small Cap Value
Value
Economic Snapshot
(annualized yield to maturity)
Sources: Bloomberg, U.S. Department of Labor
President
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
December 31, 2009
Account Value
6-30-09
Account Value
12-31-09
Expense Ratio
Based on the
Six-Month Period
Paid During
Period*
*Portfolio expenses are equal to the Portfolio's annualized expense ratio (provided in the table), multiplied by the average account value over the period, multiplied by 184 days in the six-month period ended December 31, 2009, and divided by 365.
(1)This line uses the Portfolio's actual total return and actual Portfolio expenses. It is a guide to the actual expenses paid by the Portfolio in the period. The "Ending Account Value" shown is computed using the Portfolio's actual return and the "Expenses Paid During Period" column shows the dollar amount that would have been paid by an investor who started with $1,000 in the Portfolio. A shareholder may use the information here, together with the dollar amount invested, to estimate the expenses that were paid over the period. For every thousand dollars a shareholder has invested, the expenses are listed in the last column.
(2)This line uses a hypothetical five percent annual return and actual Portfolio expenses. It helps to compare the Portfolio's ongoing costs with other mutual funds. A shareholder can compare the Portfolio's ongoing costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
The above illustrations are based on ongoing costs only.
Performance Summary
total returns
Benchmark(s)
Ivy Funds VIP International Growth
Ivy Funds VIP Bond
Ivy Funds VIP Growth
Ivy Funds VIP International Value
Ivy Funds VIP Dividend Opportunities
Ivy Funds VIP Small Cap Value
Ivy Funds VIP Value
Ivy Funds VIP Mid Cap Growth
Ivy Funds VIP Small Cap Growth
Ivy Funds VIP Mortgage Securities
Cash and Cash Equivalents
Ivy Funds VIP Bond
Ivy Funds VIP Money Market(1)
Ivy Funds VIP Dividend Opportunities
Ivy Funds VIP Growth
Ivy Funds VIP International Growth
Ivy Funds VIP International Value
Ivy Funds VIP Mid Cap Growth
Ivy Funds VIP Value
Ivy Funds VIP Small Cap Value
Ivy Funds VIP Small Cap Growth
Cash and Cash Equivalents
Ivy Funds VIP Bond
Ivy Funds VIP Dividend Opportunities
Ivy Funds VIP International Growth
Ivy Funds VIP Growth
Ivy Funds VIP Money Market(1)
Ivy Funds VIP International Value
Ivy Funds VIP Value
Ivy Funds VIP Small Cap Value
Ivy Funds VIP Mid Cap Growth
Ivy Funds VIP Small Cap Growth
Ivy Funds VIP Mortgage Securities
Cash and Cash Equivalents
Ivy Funds VIP Bond
Ivy Funds VIP Dividend Opportunities
Ivy Funds VIP International Growth
Ivy Funds VIP Growth
Ivy Funds VIP International Value
Ivy Funds VIP Small Cap Value
Ivy Funds VIP Mid Cap Growth
Ivy Funds VIP Value
Ivy Funds VIP Money Market(1)
Ivy Funds VIP Small Cap Growth
Ivy Funds VIP Mortgage Securities
Cash and Cash Equivalents
Ivy Funds VIP Bond
Ivy Funds VIP Dividend Opportunities
Ivy Funds VIP Money Market(1)
Ivy Funds VIP International Growth
Ivy Funds VIP Growth
Ivy Funds VIP Value
Ivy Funds VIP International Value
Ivy Funds VIP Mid Cap Growth
Ivy Funds VIP Small Cap Value
Ivy Funds VIP Small Cap Growth
Cash and Cash Equivalents
(1)The percentage of investments in the underlying portfolio is currently not within the target allocation range disclosed in the Portfolio's prospectus due to market movements; this percentage is expected to change over time, and deviation from the target allocation range due to market movements is permitted by the prospectus.
Pathfinder Aggressive(1)
S&P 500 Index
Citigroup Broad Investment Grade Index
Citigroup Short-Term Index for 1 Month Certificates of Deposit(2)
AGGRESSIVE
INDEX
BROAD
INVESTMENT
GRADE
INDEX
SHORT-TERM
INDEX FOR
1 MONTH
CERTIFICATES
OF DEPOSIT
(2)Because the Portfolio commenced operations on a date other than at the end of a month, and partial month calculations of the performances of the index (including income) are not available, investment in the index was effected as of February 29, 2008.
(3)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
(4)3-4-08 (the date on which shares were first acquired by shareholders).
Pathfinder Conservative(1)
S&P 500 Index
Citigroup Broad Investment Grade Index
Citigroup Short-Term Index for 1 Month Certificates of Deposit(2)
CONSERVATIVE
INDEX
BROAD
INVESTMENT
GRADE
INDEX
SHORT-TERM
INDEX FOR
1 MONTH
CERTIFICATES
OF DEPOSIT
(2)Because the Portfolio commenced operations on a date other than at the end of a month, and partial month calculations of the performances of the index (including income) are not available, investment in the index was effected as of February 29, 2008.
(3)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
(4)3-13-08 (the date on which shares were first acquired by shareholders).
Pathfinder Moderate(1)
S&P 500 Index
Citigroup Broad Investment Grade Index
Citigroup Short-Term Index for 1 Month Certificates of Deposit(2)
MODERATE
INDEX
BROAD
INVESTMENT
GRADE
INDEX
SHORT-TERM
INDEX FOR
1 MONTH
CERTIFICATES
OF DEPOSIT
(2)Because the Portfolio commenced operations on a date other than at the end of a month, and partial month calculations of the performances of the index (including income) are not available, investment in the index was effected as of February 29, 2008.
(3)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
(4)3-4-08 (the date on which shares were first acquired by shareholders).
Pathfinder Moderately Aggressive(1)
S&P 500 Index
Citigroup Broad Investment Grade Index
Citigroup Short-Term Index for 1 Month Certificates of Deposit(2)
MODERATELY
AGGRESSIVE
INDEX
BROAD
INVESTMENT
GRADE
INDEX
SHORT-TERM
INDEX FOR
1 MONTH
CERTIFICATES
OF DEPOSIT
(2)Because the Portfolio commenced operations on a date other than at the end of a month, and partial month calculations of the performances of the index (including income) are not available, investment in the index was effected as of February 29, 2008.
(3)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
(4)3-4-08 (the date on which shares were first acquired by shareholders).
Pathfinder Moderately Conservative(1)
S&P 500 Index
Citigroup Broad Investment Grade Index
Citigroup Short-Term Index for 1 Month Certificates of Deposit(2)
MODERATELY
CONSERVATIVE
INDEX
BROAD
INVESTMENT
GRADE
INDEX
SHORT-TERM
INDEX FOR
1 MONTH
CERTIFICATES
OF DEPOSIT
(2)Because the Portfolio commenced operations on a date other than at the end of a month, and partial month calculations of the performances of the index (including income) are not available, investment in the index was effected as of February 29, 2008.
(3)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
(4)3-12-08 (the date on which shares were first acquired by shareholders).
AFFILIATED MUTUAL FUNDS
TOTAL AFFILIATED MUTUAL FUNDS - 99.80%
SHORT-TERM SECURITIES - 0.19%
Master Note
0.117%, 1-1-10 (B)
TOTAL INVESTMENT SECURITIES - 99.99%
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.01%
NET ASSETS - 100.00%
(B)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized depreciation
)
AFFILIATED MUTUAL FUNDS
TOTAL AFFILIATED MUTUAL FUNDS - 99.69%
SHORT-TERM SECURITIES - 0.22%
Master Note
0.117%, 1-1-10 (B)
TOTAL INVESTMENT SECURITIES - 99.91%
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.09%
NET ASSETS - 100.00%
(B)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
Cost
Gross unrealized appreciation
Gross unrealized depreciation
Net unrealized appreciation
See Accompanying Notes to Financial Statements.
Pathfinder Moderate
AFFILIATED MUTUAL FUNDS
TOTAL AFFILIATED MUTUAL FUNDS - 99.46%
SHORT-TERM SECURITIES - 0.70%
Master Note
0.117%, 1-1-10 (B)
TOTAL INVESTMENT SECURITIES - 100.16%
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.16%)
NET ASSETS - 100.00%
(B)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
Cost
Gross unrealized appreciation
Gross unrealized depreciation
Net unrealized appreciation
AFFILIATED MUTUAL FUNDS
TOTAL AFFILIATED MUTUAL FUNDS - 99.84%
SHORT-TERM SECURITIES - 0.06%
Master Note
0.117%, 1-1-10 (B)
TOTAL INVESTMENT SECURITIES - 99.90%
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.10%
NET ASSETS - 100.00%
(B)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
Cost
Gross unrealized appreciation
Gross unrealized depreciation
Net unrealized appreciation
See Accompanying Notes to Financial Statements.
AFFILIATED MUTUAL FUNDS
TOTAL AFFILIATED MUTUAL FUNDS - 99.51%
SHORT-TERM SECURITIES - 0.20%
Master Note
0.117%, 1-1-10 (B)
TOTAL INVESTMENT SECURITIES - 99.71%
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.29%
NET ASSETS - 100.00%
(B)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
Cost
Gross unrealized appreciation
Gross unrealized depreciation
Net unrealized appreciation
See Accompanying Notes to Financial Statements.
Fiscal year performance
Please note that the Portfolio returns include applicable investment fees and expenses, whereas the index returns do not include any such fees. Also, the Portfolio's performance data does not take into account any product expenses or charges associated with owning a variable life or annuity policy, which is invested in Ivy Funds Variable Insurance Portfolios. Multiple indexes are shown because the Portfolio invests in multiple asset classes.
Benchmark(s)/Lipper Category
investment objectives)
We entered the year cautious and with a largely defensive posture. The Portfolio's cash weighting was certainly much higher in the early part of the year than it was at the end. We view cash as not only defensive, but as a form of hedge that enables us to capitalize on opportunities as they present themselves. We also had a large hedge on the equities portion of the Portfolio and increased its fixed-income exposure from essentially zero at the start of the year to about 13 percent by the end of the first quarter.
Asset Allocation
Financials
Information Technology
Consumer Discretionary
Energy
Materials
Industrials
Consumer Staples
Telecommunication Services
Health Care
Corporate Debt Securities
United States Government and Government
Agency Obligations
Bond Portfolio Characteristics
Country Weightings
China
Taiwan
South Korea
Hong Kong
India
Other Pacific Basin
United States
Other North America
United Kingdom
Other Europe
Top 10 Equity Holdings
See your advisor for more information on the Portfolio's most recently published Top 10 Equity Holdings.
INDEX
BROAD
INVESTMENT
GRADE INDEX
SHORT-TERM
INDEX FOR
1 MONTH CERTIFICATE
OF DEPOSIT
VA FLEXIBLE
PORTFOLIO
FUNDS
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
(2)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
Apparel Retail - 0.21%
Automobile Manufacturers - 3.08%
Biotechnology - 0.49%
Casinos & Gaming - 5.99%
Coal & Consumable Fuels - 1.25%
H Shares (A)
Communications Equipment - 3.07%
Computer Hardware - 2.64%
Construction & Engineering - 1.91%
Company Limited, H Shares (A)
Construction & Farm Machinery &
Heavy Trucks - 1.12%
Construction Materials - 0.21%
Data Processing & Outsourced Services - 3.17%
Distributors - 1.06%
Diversified Banks - 10.69%
(Asia) Limited (A)
Diversified Metals & Mining - 3.34%
Education Services - 0.54%
Group Inc., ADR (B)
Fertilizers & Agricultural Chemicals - 1.38%
Heavy Electrical Equipment - 0.71%
Hotels, Resorts & Cruise Lines - 1.51%
Household Products - 0.65%
Integrated Oil & Gas - 1.03%
H Shares (A)
IT Consulting & Other Services - 1.15%
Life & Health Insurance - 4.61%
H Shares (A)
Mortgage REITs - 1.54%
Oil & Gas Drilling - 1.04%
Oil & Gas Equipment & Services - 3.64%
Oil & Gas Exploration & Production - 1.64%
Packaged Foods & Meats - 0.39%
Personal Products - 0.78%
Limited (A)
Real Estate Development - 0.92%
Real Estate Operating Companies - 0.84%
Limited (A)(C)
Semiconductors - 10.19%
Company Ltd. (A)
Specialized Finance - 1.67%
Steel - 1.49%
Thrifts & Mortgage Finance - 0.84%
CORPORATION LIMITED (A)
Tobacco - 1.14%
Trucking - 1.28%
Wireless Telecommunication Service - 0.89%
TOTAL COMMON STOCKS - 78.10%
INVESTMENT FUNDS - 0.13%
Multiple Industry
CORPORATE DEBT SECURITIES
Beverage / Bottling - 0.05%
10.500%, 12-15-11
Building Products - 0.03%
7.500%, 9-28-15
Consumer Products / Tobacco - 0.10%
8.000%, 7-25-12 (D)(G)
Finance Companies - 0.19%
6.196%, 12-31-49 (C)(H)
1.320%, 1-18-15 (H)
Forest Products - 0.05%
10.250%, 7-28-14 (C)
Metals / Mining - 0.16%
6.625%, 2-22-10 (C)
Utilities - 0.11%
9.750%, 1-15-15 (D)(G)
TOTAL CORPORATE DEBT SECURITIES - 0.69%
UNITED STATES GOVERNMENT AGENCY
OBLIGATIONS - 0.26%
Mortgage-Backed Obligations
REMIC/CMO (Interest Only): (I)
5.500%, 9-15-17
5.000%, 11-15-17
5.000%, 4-15-19
5.000%, 4-15-19
5.000%, 11-15-22
5.500%, 3-15-23
5.000%, 5-15-23
5.000%, 8-15-23
5.000%, 9-15-24
5.500%, 9-15-24
5.500%, 4-15-25
5.500%, 4-15-25
5.000%, 9-15-25
5.500%, 10-15-25
5.000%, 4-15-26
5.000%, 10-15-28
5.500%, 2-15-30
5.000%, 8-15-30
5.500%, 3-15-31
6.000%, 11-15-35
REMIC/CMO (Interest Only): (I)
5.500%, 11-25-17
5.000%, 5-25-22
5.000%, 7-25-23
5.000%, 8-25-23
5.000%, 11-25-23
5.000%, 9-25-30
5.500%, 6-25-33
5.500%, 8-25-33
5.500%, 4-25-34
5.500%, 11-25-36
Notes to Schedule of Investments
REMIC/CMO (Interest Only): (I)
5.000%, 1-20-30
5.000%, 6-20-31
5.500%, 3-20-32
5.000%, 7-20-33
5.500%, 11-20-33
5.500%, 6-20-35
5.500%, 7-20-35
5.500%, 7-20-35
5.500%, 10-16-35
BULLION - 15.33%
Ounce
SHORT-TERM SECURITIES
Commercial Paper (J) - 6.27%
0.150%, 1-13-10
0.110%, 1-20-10
0.140%, 1-6-10
0.070%, 1-4-10
0.110%, 1-19-10
0.010%, 1-4-10
0.280%, 1-15-10
Master Note - 0.31%
0.117%, 1-1-10 (K)
TOTAL SHORT-TERM SECURITIES - 6.58%
TOTAL INVESTMENT SECURITIES - 101.09%
LIABILITIES, NET OF CASH AND OTHER ASSETS - (1.09%)
)
NET ASSETS - 100.00%
*Not shown due to rounding.
Principal
Amount of Contract (Denominated
in Indicated
Currency)
Date
Appreciation
Depreciation
Buy
Australian
DollarBank of America
NT & SA
Sell
British Pound
Deutsche Bank
AG
Buy
Chinese Yuan
RenminbiDeutsche Bank
AG
Buy
Chinese Yuan
Renminbi
Citibank, N.A.
Buy
Euro
Deutsche Bank
AG
Sell
Euro
Citibank, N.A.
Sell
Euro
Deutsche Bank
AG
Sell
Euro
Deutsche Bank
AG
Sell
Japanese Yen
Bank of America
NT & SA
Sell
Japanese Yen
Deutsche Bank
AG
Sell
Japanese Yen
Citibank, N.A.
Buy
Norwegian
Krone
Citibank, N.A.
Buy
Norwegian
Krone
Citibank, N.A.
Sell
South African
RandDeutsche Bank
AG
Buy
Swedish
KronaDeutsche Bank
AG
Buy
Swedish
KronaDeutsche Bank
AG
Buy
Swedish
KronaDeutsche Bank
AG
Sell
Swiss Franc
Deutsche Bank
AG
Sell
Swiss Franc
Bank of America
NT & SA
Sell
Swiss Franc
Bank of America
NT & SA
(A)Listed on an exchange outside the United States.
(B)No dividends were paid during the preceding 12 months.
(C)Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities have been determined to be liquid under guidelines established by the Board of Trustees. At December 31, 2009, the total value of these securities amounted to $67,132 or 6.13% of net assets.
(D)Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities have been determined to be illiquid under guidelines established by the Board of Trustees. At December 31, 2009, the total value of these securities amounted to $2,285 or 0.21% of net assets.
(E)Illiquid restricted security. At December 31, 2009, the following restricted security was owned:
Vietnam Azalea Fund Limited
(F)Deemed to be an affiliate due to the Portfolio owning at least 5% of the voting securities. The Portfolio and other mutual funds managed by its investment manager, Waddell & Reed Investment Management Company, or other related parties together own 30% of the outstanding shares of this security at December 31, 2009.
(G)Principal amounts are denominated in the indicated foreign currency, where applicable (BRL - Brazilian Real and EUR - Euro).
(H)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009.
(I)Amount shown in principal column represents notional amount for computation of interest.
(J)Rate shown is the yield to maturity at December 31, 2009.
(K)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
The following acronyms are used throughout this schedule:
ADR = American Depositary Receipts
CMO = Collateralized Mortgage Obligation
REIT = Real Estate Investment Trust
REMIC = Real Estate Mortgage Investment Conduit
+Includes gold bullion, cash and cash equivalents and other assets and liabilities
For Federal income tax purposes, cost of investments owned at December 31, 2009 and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized appreciation
See Accompanying Notes to Financial Statements.
Fiscal year performance
Growth Funds Universe Average
similar investment objectives)
Asset Allocation
Information Technology
Consumer Staples
Consumer Discretionary
Financials
Health Care
Industrials
Energy
Utilities
Materials
Corporate Debt Securities
United States Government and
Government Agency Obligations
Other Government Securities
Top 10 Equity Holdings
See your advisor for more information on the Portfolio's most recently published Top 10 Equity Holdings
Bond Portfolio Characteristics
Balanced(1)
S&P 500 Index
Citigroup Treasury/Government Sponsored/Credit Index
Lipper Variable Annuity Mixed-Asset Target Allocation
Growth Funds Universe Average
INDEX
TREASURY/
GOVT SPONSORED/
CREDIT INDEX
VA MIXED-ASSET
TARGET ALLOC
GROWTH FUNDS
Average Annual Total Return(2)
(2)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
COMMON STOCKS
Aerospace & Defense - 1.37%
Apparel Retail - 0.81%
Apparel, Accessories & Luxury Goods - 1.25%
Auto Parts & Equipment - 0.96%
Automobile Manufacturers - 0.85%
Biotechnology - 1.72%
Casinos & Gaming - 1.15%
Communications Equipment - 4.04%
Computer Hardware - 5.01%
Data Processing & Outsourced Services - 1.02%
Department Stores - 1.21%
Distillers & Vintners - 1.32%
Diversified Chemicals - 1.46%
Electric Utilities - 1.47%
Electrical Components & Equipment - 2.16%
Footwear - 0.94%
General Merchandise Stores - 0.91%
Health Care Supplies - 2.07%
Home Improvement Retail - 1.70%
Hotels, Resorts & Cruise Lines - 1.26%
Household Products - 2.52%
Industrial Conglomerates - 0.91%
Industrial Machinery - 1.29%
Integrated Oil & Gas - 2.19%
Investment Banking & Brokerage - 0.61%
Oil & Gas Equipment & Services - 3.59%
Oil & Gas Exploration & Production - 0.92%
Other Diversified Financial Services - 4.03%
Packaged Foods & Meats - 0.69%
Personal Products - 1.64%
Pharmaceuticals - 4.46%
Property & Casualty Insurance - 3.66%
Railroads - 1.44%
Real Estate Management & Development - 0.39%
Regional Banks - 1.71%
Semiconductors - 2.46%
Soft Drinks - 3.90%
Systems Software - 1.91%
Tobacco - 1.09%
TOTAL COMMON STOCKS - 72.09%
CORPORATE DEBT SECURITIES
Agricultural Products - 0.43%
7.000%, 2-1-31
Automobile Manufacturers - 0.70%
4.250%, 11-15-16
Banking - 0.57%
4.650%, 6-1-14
7.900%, 4-29-49 (B)
4.200%, 5-15-14
Beverage / Bottling - 0.29%
3.000%, 10-15-12 (C)
5.375%, 11-15-14 (D)
Communications Equipment - 0.58%
5.250%, 2-22-11
Construction & Farm Machinery &
Heavy Trucks - 0.22%
5.250%, 10-1-12
Consumer Finance - 0.12%
5.125%, 8-25-14
Department Stores - 0.58%
6.300%, 3-1-11
Distillers & Vintners - 0.56%
4.375%, 5-3-10
Diversified Banks - 0.36%
7.550%, 6-21-10
Electric - 0.48%
8.000%, 2-1-13
Food Processors - 0.35%
6.375%, 6-1-12 (D)
Food Retail - 0.61%
6.200%, 6-15-12
Home Improvement Retail - 0.57%
5.200%, 3-1-11
Industrial Conglomerates - 0.10%
6.200%, 3-15-15
Industrial Gases - 0.44%
4.375%, 3-31-14
Industrial Machinery - 0.45%
5.150%, 4-1-14
Integrated Oil & Gas - 0.59%
3.450%, 3-3-12
4.750%, 2-1-14
Integrated Telecommunication Services - 0.29%
4.850%, 2-15-14
Life Insurance - 0.57%
6.250%, 2-15-12 (D)
4.750%, 9-17-15
Metals / Mining - 0.79%
3.000%, 2-15-12
8.950%, 5-1-14
Movies & Entertainment - 0.14%
4.375%, 9-15-14
Oil & Gas - 0.07%
4.500%, 9-15-14 (D)
Oil & Gas Exploration & Production - 0.31%
7.500%, 4-15-12
Other Non-Agency REMIC/CMO - 0.01%
7.916%, 7-25-09 (C)
8.000%, 3-31-11 (C)
6.750%, 6-25-28
Packaged Foods & Meats - 0.43%
5.900%, 11-15-32
Pharmaceuticals - 1.46%
3.750%, 3-15-11
4.450%, 3-15-12
5.000%, 3-1-14 (D)
Property & Casualty Insurance - 0.15%
4.000%, 4-15-12 (D)
Restaurants - 0.14%
4.250%, 9-15-15
Soft Drinks - 0.37%
6.700%, 10-15-36
3.750%, 3-1-14
Systems Software - 0.14%
2.950%, 6-1-14
TOTAL CORPORATE DEBT SECURITIES - 12.87%
OTHER GOVERNMENT SECURITIES - 0.21%
Qatar
4.000%, 1-20-15 (D)
UNITED STATES GOVERNMENT
AGENCY OBLIGATIONS
Agency Obligations - 0.28%
7.250%, 1-15-10
Mortgage-Backed Obligations - 2.94%
Rate Pass-Through Certificates:
6.000%, 9-1-17
5.000%, 1-1-18
5.500%, 4-1-18
5.000%, 5-1-18
4.500%, 7-1-18
7.000%, 9-1-25
6.500%, 10-1-28
6.500%, 2-1-29
7.500%, 4-1-31
7.000%, 7-1-31
7.000%, 9-1-31
7.000%, 9-1-31
7.000%, 11-1-31
6.500%, 2-1-32
7.000%, 2-1-32
7.000%, 2-1-32
7.000%, 3-1-32
7.000%, 7-1-32
6.000%, 9-1-32
6.000%, 2-1-33
5.500%, 5-1-33
5.500%, 5-1-33
5.500%, 5-1-33
5.500%, 6-1-33
Fixed Rate Pass-Through Certificates:
6.000%, 8-15-28
6.500%, 8-15-28
Guaranteed REMIC Pass-Through Certificates,
Vendee Mortgage Trust, 1997-A Class 3-A,
8.293%, 12-15-26
TOTAL UNITED STATES GOVERNMENT
AGENCY OBLIGATIONS - 3.22%
Notes to Schedule of Investments
UNITED STATES GOVERNMENT
OBLIGATIONS
Treasury Inflation Protected Obligations - 0.36%
3.000%, 7-15-12 (E)
Treasury Obligations - 9.08%
7.500%, 11-15-16
6.250%, 8-15-23
4.000%, 3-15-10
3.875%, 2-15-13
3.625%, 5-15-13
4.250%, 8-15-13
4.250%, 8-15-15
TOTAL UNITED STATES GOVERNMENT
OBLIGATIONS - 9.44%
SHORT-TERM SECURITIES
Commercial Paper (F) - 1.05%
0.090%, 1-4-10
Master Note - 0.75%
0.117%, 1-1-10 (G)
TOTAL SHORT-TERM SECURITIES - 1.80%
TOTAL INVESTMENT SECURITIES - 99.63%
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.37%
NET ASSETS - 100.00%
*Not shown due to rounding.
(A)No dividends were paid during the preceding 12 months.
(B)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009.
(C)Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities have been determined to be illiquid under guidelines established by the Board of Trustees. At December 31, 2009, the total value of these securities amounted to $502 or 0.14% of net assets.
(D)Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities have been determined to be liquid under guidelines established by the Board of Trustees. At December 31, 2009, the total value of these securities amounted to $6,497 or 1.80% of net assets.
(E)The interest rate for this security is a stated rate, but the interest payments are determined by multiplying the inflation-adjusted principal by one half of the stated rate for each semiannual interest payment date.
(F)Rate shown is the yield to maturity at December 31, 2009.
(G)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
CMO = Collateralized Mortgage Obligation
REMIC = Real Estate Mortgage Investment Conduit
For Federal income tax purposes, cost of investments owned at December 31, 2009 and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
Net unrealized appreciation
See Accompanying Notes to Financial Statements.
Fiscal year performance
Please note that the Portfolio returns include applicable investment fees and expenses, whereas the index returns do not include any such fees. Also, the Portfolio's performance data does not take into account any product expenses or charges associated with owning a variable life or annuity policy, which is invested in Ivy Funds Variable Insurance Portfolios.
Benchmark(s)/Lipper Category
the bond market)
Universe Average
with similar investment objectives)
Asset Allocation
Corporate Debt Securities
United States Government and Government Agency
Obligations
Municipal Bonds - Taxable
Other Government Securities
Bond Portfolio Characteristics
Quality Weightings
Ratings reflected in the wheel are taken from the following sources in order of preference: Standard & Poor's, Moody's or management's internal ratings, where no other ratings are available.
AAA
AA
A
BBB
BB
B
Below B
Universe Average
BROAD
INVESTMENT
GRADE INDEX
CORPORATE
DEBT FUNDS
A RATED
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
(2)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
Aerospace & Defense - 1.19%
5.000%, 2-15-19
6.125%, 2-1-19
Air Freight & Logistics - 0.36%
7.375%, 1-15-14
Banking - 4.40%
5.000%, 9-22-16
4.650%, 6-1-14
6.000%, 1-15-18
4.250%, 9-21-15
2.750%, 1-17-12 (A)
4.200%, 5-15-14
Beverage / Bottling - 1.22%
5.375%, 11-15-14 (B)
5.375%, 1-15-20 (C)
Biotechnology - 0.42%
6.150%, 6-1-18
5.700%, 2-1-19
Building Products - 0.55%
7.875%, 9-27-10
Cable & Satellite - 0.81%
8.500%, 5-1-27
6.375%, 10-1-11
4.700%, 12-1-12
CMBS Other - 2.13%
5.144%, 6-10-44
Commercial Mortgage Pass-Through Certificates,
Series 2004-C1,
4.719%, 1-15-38
4.949%, 7-12-38 (D)
Coal & Consumable Fuels - 0.21%
6.875%, 3-15-13
Computer Hardware - 1.33%
6.500%, 7-1-12
4.750%, 6-2-14
7.625%, 10-15-18
Conglomerate / Diversified Mfg - 0.12%
8.875%, 6-14-14
Consumer Finance - 0.80%
5.250%, 11-21-11 (C)
Diversified Banks - 0.34%
5.500%, 8-1-12
Diversified Chemicals - 1.53%
5.000%, 1-15-13
5.750%, 3-15-19
Diversified Metals & Mining - 0.58%
5.500%, 4-1-14
Electric - 3.04%
2.100%, 6-15-13
7.875%, 4-15-11
6.340%, 4-1-19
6.375%, 5-1-12
5.500%, 1-15-19
4.000%, 5-15-10
6.250%, 7-15-12
Electrical Components & Equipment - 0.54%
4.875%, 10-15-19
Finance - Other - 2.04%
6.720%, 1-15-10 (C)
3.750%, 11-14-14
5.625%, 5-1-18
0.000%, 10-3-22 (E)
5.125%, 10-10-12 (B)
Finance Companies - 0.11%
7.875%, 1-30-12 (C)
Food Processors - 0.87%
5.125%, 10-1-13
4.500%, 2-15-19
Gas - Local Distribution - 0.67%
7.125%, 1-14-11
Gas Pipe Lines - 2.06%
7.500%, 5-31-14 (B)
7.000%, 6-1-11 (C)
7.000%, 3-15-27
Health Care Facilities - 0.08%
8.750%, 9-1-10
Household Appliances - 0.20%
6.500%, 12-15-15 (C)
Household Products - 1.22%
4.950%, 8-15-14
8.000%, 9-1-24
Industrial Machinery - 0.69%
5.150%, 4-1-14
Integrated Telecommunication Services - 0.90%
4.950%, 1-15-13
5.800%, 2-15-19
7.875%, 3-1-11
Life Insurance - 1.08%
4.750%, 9-17-15
Metals / Mining - 1.27%
8.950%, 5-1-14
Multi-Utilities - 0.78%
5.250%, 8-1-33
6.250%, 1-15-12
Oil & Gas - 2.60%
3.250%, 9-22-15
8.750%, 2-15-14
Oil & Gas Equipment & Services - 0.65%
6.150%, 9-15-19
6.750%, 2-1-27
Oilfield Machinery & Service - 0.79%
5.950%, 6-15-12
Other Diversified Financial Services - 0.46%
6.500%, 8-1-16
Other Mortgage-Backed Securities - 0.54%
Mortgage Pass-Through Certificates, Series 2005-2,
4.783%, 7-10-43 (D)
Other Non-Agency REMIC/CMO - 2.37%
Trust 2005-28,
5.250%, 1-25-19
Trust 2005-J4,
5.500%, 11-25-35
Trust 2005-FA6,
5.500%, 9-25-35
7.000%, 1-25-34
Trust 2005-1,
4.481%, 3-25-35 (D)
Mortgage Pass-Through Certificates, Series 2004-1,
3.709%, 2-25-34 (D)
Mortgage Pass-Through Certificates, Series 2004-12,
3.708%, 9-25-34 (D)
Mortgage Pass-Through Certificates, Series 2004-18,
3.265%, 12-25-34 (D)
Mortgage Pass-Through Certificates, Series 2004-3AC,
3.258%, 3-25-34 (D)
Mortgage Pass-Through Certificates, Series 2004-5,
3.464%, 5-25-34 (D)
Mortgage Pass-Through Certificates, Series 2005-21,
5.644%, 11-25-35 (D)
Series 2005-22,
5.454%, 12-25-35 (D)
5.500%, 9-25-35
Series 2003-10,
4.500%, 9-25-18
Paper / Forest Products - 0.06%
7.500%, 6-15-27
Pharmaceuticals - 1.48%
5.650%, 5-15-18
5.150%, 7-15-18
5.000%, 3-1-14 (B)
Property & Casualty Insurance - 1.69%
4.000%, 4-15-12
4.750%, 5-15-12
5.000%, 8-15-13
Soft Drinks - 0.51%
5.350%, 11-15-17
Telecommunications - 2.33%
5.150%, 1-15-13
4.875%, 7-8-14
6.700%, 11-1-23
6.999%, 6-4-18
Utilities - Water - 0.44%
5.875%, 5-1-19
TOTAL CORPORATE DEBT SECURITIES - 45.46%
California - 1.96%
Bonds, Series A,
5.140%, 9-1-17
Massachusetts - 0.27%
Facilities Authority, Revenue Bonds,
Harvard University Issue, Series C (2008),
5.260%, 10-1-18
New York - 0.94%
11.000%, 3-1-29 (C)
TOTAL MUNICIPAL BONDS - TAXABLE - 3.17%
OTHER GOVERNMENT SECURITIES
Brazil - 0.11%
9.250%, 10-22-10
Canada - 0.36%
7.140%, 2-27-26
TOTAL OTHER GOVERNMENT SECURITIES - 0.47%
UNITED STATES GOVERNMENT
AGENCY OBLIGATIONS
Agency Obligations - 2.67%
4.350%, 9-2-14
5.200%, 11-28-16
4.600%, 1-29-20
Mortgage-Backed Obligations - 30.34%
Rate Participation Certificates:
4.500%, 6-15-27
4.500%, 5-15-32
4.000%, 11-15-36
5.508%, 12-1-36 (D)
REMIC/CMO:
5.000%, 5-15-19
5.000%, 5-15-23
5.000%, 3-15-25
7.500%, 9-15-29
5.000%, 5-15-31
5.500%, 9-15-31
5.000%, 9-15-32
Notes to Schedule of Investments
REMIC/CMO (Interest Only): (F)
5.500%, 12-15-13
5.000%, 6-15-24
5.000%, 7-15-29
5.000%, 9-15-31
5.500%, 10-15-31
Fixed Rate Participation Certificates:
4.500%, 3-1-19
4.500%, 10-1-20
5.000%, 6-1-21
5.000%, 11-1-21
6.000%, 8-1-22
5.000%, 7-1-25
6.000%, 2-1-27
5.000%, 3-1-35
5.500%, 10-1-35
5.500%, 8-1-36
Pass-Through Certificates,
3.427%, 12-1-36 (D)
REMIC/CMO:
4.780%, 1-25-17
5.000%, 3-25-18
5.000%, 6-25-18
5.000%, 9-25-18
5.000%, 3-25-29
5.500%, 2-25-32
5.500%, 10-25-32
5.000%, 7-15-33
3.500%, 8-25-33
4.500%, 12-25-34
5.500%, 7-15-36
4.000%, 3-25-39
REMIC/CMO (Interest Only): (F)
5.000%, 3-25-18
5.500%, 1-25-33
5.500%, 11-25-36
5.500%, 8-25-37
Participation Certificates (Interest Only), (F)
5.750%, 8-25-32
Pass-Through Certificates:
5.000%, 3-1-18
4.500%, 6-1-19
4.500%, 8-1-19
4.500%, 9-1-19
5.000%, 12-1-19
6.000%, 6-1-22
5.500%, 11-1-22
5.000%, 4-1-24
4.500%, 7-25-24
5.000%, 5-1-28
5.500%, 9-25-31
5.000%, 6-25-32
5.500%, 2-1-33
5.500%, 6-1-33
5.000%, 9-1-33
5.500%, 2-1-35
5.000%, 5-1-35
REMIC/CMO,
4.585%, 8-16-34
REMIC/CMO (Interest Only), (F)
5.000%, 7-16-22
TOTAL UNITED STATES GOVERNMENT
AGENCY OBLIGATIONS - 33.01%
UNITED STATES GOVERNMENT OBLIGATIONS - 12.13%
Treasury Obligations
0.000%, 11-15-21 (E)
8.000%, 11-15-21
6.125%, 11-15-27
4.500%, 8-15-39
4.125%, 8-31-12
4.250%, 8-15-13
4.000%, 2-15-14
3.625%, 8-15-19
SHORT-TERM SECURITIES
Commercial Paper (G) - 3.04%
0.010%, 1-4-10
0.170%, 1-19-10
0.130%, 2-16-10
Master Note - 0.47%
0.117%, 1-1-10 (H)
Notes - 1.14%
0.631%, 1-29-10 (D)
4.950%, 4-26-10 (D)
TOTAL SHORT-TERM SECURITIES - 4.65%
TOTAL INVESTMENT SECURITIES - 98.89%
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.11%
NET ASSETS - 100.00%
(A)Security is fully guaranteed by the Federal Deposit Insurance Corporation for both interest and principal under the Debt Guarantee Program of the Temporary Liquidity Guarantee Program. The guarantee expires at the earlier of the security's maturity date or December 31, 2012.
(B)Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities have been determined to be liquid under guidelines established by the Board of Trustees. At December 31, 2009, the total value of these securities amounted to $11,217 or 2.38% of net assets.
(C)Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities have been determined to be illiquid under guidelines established by the Board of Trustees. At December 31, 2009, the total value of these securities amounted to $14,968 or 3.17% of net assets.
(D)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009.
(E)Zero coupon bond.
(F)Amount shown in principal column represents notional amount for computation of interest.
(G)Rate shown is the yield to maturity at December 31, 2009.
(H)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
The following acronyms are used throughout this schedule:
CMBS = Commercial Mortgage-Backed Security
CMO = Collateralized Mortgage Obligation
REMIC = Real Estate Mortgage Investment Conduit
STRIPS = Separate Trading of Registered Interest and Principal Securities
For Federal income tax purposes, cost of investments owned at December 31, 2009
and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized appreciation
See Accompanying Notes to Financial Statements.
Fiscal year performance
similar investment objectives)
Please note that the Portfolio returns include applicable investment fees and expenses, whereas the index returns do not include any such fees. Also, the Portfolio's performance data does not take into account any product expenses or charges associated with owning a variable life or annuity policy, which is invested in Ivy Funds Variable Insurance Portfolios.
Asset Allocation
Information Technology
Financials
Consumer Discretionary
Energy
Industrials
Consumer Staples
Health Care
Materials
Top 10 Equity Holdings
See your advisor for more information on the Portfolio's most recently published Top 10 Equity Holdings.
Core Equity(1)
S&P 500 Index
Lipper Variable Annuity Large-Cap Core Funds Universe Average
INDEX
VA LARGE-CAP CORE
FUNDS
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
(2)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
COMMON STOCKS
Advertising - 2.19%
Asset Management & Custody Banks - 1.05%
Biotechnology - 2.76%
Brewers - 1.71%
Casinos & Gaming - 1.35%
Communications Equipment - 7.43%
Computer Hardware - 5.16%
Computer Storage & Peripherals - 1.09%
Construction & Farm Machinery & Heavy Trucks - 1.30%
Consumer Finance - 3.88%
Data Processing & Outsourced Services - 2.22%
Department Stores - 4.67%
Diversified Banks - 3.08%
Diversified Chemicals - 2.88%
General Merchandise Stores - 1.25%
Health Care Equipment - 2.08%
Hotels, Resorts & Cruise Lines - 1.50%
Hypermarkets & Super Centers - 1.99%
Industrial Conglomerates - 3.35%
Industrial Gases - 1.97%
Industrial Machinery - 2.33%
Integrated Oil & Gas - 1.61%
Internet Retail - 0.10%
Investment Banking & Brokerage - 4.16%
IT Consulting & Other Services - 0.49%
Oil & Gas Equipment & Services - 6.75%
Oil & Gas Exploration & Production - 2.63%
Other Diversified Financial Services - 6.47%
Personal Products - 0.91%
Pharmaceuticals - 1.23%
Railroads - 3.53%
Regional Banks - 0.68%
Semiconductor Equipment - 2.70%
Semiconductors - 2.82%
Soft Drinks - 3.01%
Specialized Finance - 1.36%
Tobacco - 2.73%
TOTAL COMMON STOCKS - 96.42%
Notes to Schedule of Investments
SHORT-TERM SECURITIES
Commercial Paper (B) - 3.24%
0.010%, 1-4-10
0.110%, 1-4-10
Master Note - 0.30%
0.117%, 1-1-10 (C)
TOTAL SHORT-TERM SECURITIES - 3.54%
TOTAL INVESTMENT SECURITIES - 99.96%
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.04%
NET ASSETS - 100.00%
(B)Rate shown is the yield to maturity at December 31, 2009.
(C)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
ADR = American Depositary Receipts
For Federal income tax purposes, cost of investments owned at December 31, 2009
and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized appreciation
See Accompanying Notes to Financial Statements.
Fiscal year performance
Please note that the Portfolio returns include applicable investment fees and expenses, whereas the index returns do not include any such fees. Also, the Portfolio's performance data does not take into account any product expenses or charges associated with owning a variable life or annuity policy, which is invested in Ivy Funds Variable Insurance Portfolios.
Benchmark(s)Lipper Category
the equity market)
Universe Average
with similar investment objectives)
Asset Allocation
Energy
Consumer Staples
Financials
Industrials
Information Technology
Materials
Consumer Discretionary
Health Care
Telecommunication Services
Utilities
Top 10 Equity Holdings
See your advisor for more information on the Portfolio's most recently published Top 10 Equity Holdings.
Company
OPPORTUNITIES
INDEX
VA EQUITY
INCOME
FUNDS
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
(2)Because the Portfolio commenced operations on a date other than at the end of a month, and partial month calculations of the performances of the indexes (including income) are not available, investment in the indexes was effected as of December 31, 2003.
Average Annual Total Return(3)
(3)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
(4)12-30-03 (the date on which shares were first acquired by shareholders).
COMMON STOCKS
Apparel, Accessories & Luxury Goods - 0.73%
Asset Management & Custody Banks - 1.34%
Brewers - 1.62%
Communications Equipment - 2.16%
Computer Hardware - 2.15%
Construction & Engineering - 1.88%
Construction & Farm Machinery &
Heavy Trucks - 2.80%
Consumer Finance - 2.59%
Data Processing & Outsourced Services - 1.43%
Department Stores - 2.18%
Distillers & Vintners - 1.13%
Diversified Banks - 0.96%
Diversified Capital Markets - 0.41%
Diversified Chemicals - 1.97%
Diversified Metals & Mining - 1.86%
Electrical Components & Equipment - 1.85%
Fertilizers & Agricultural Chemicals - 1.88%
Health Care Equipment - 2.83%
Home Improvement Retail - 0.95%
Homebuilding - 0.85%
Hotels, Resorts & Cruise Lines - 0.96%
Household Products - 4.21%
Industrial Gases - 2.92%
Industrial Machinery - 1.95%
Integrated Oil & Gas - 4.19%
Integrated Telecommunication Services - 1.67%
Multi-Utilities - 1.09%
Oil & Gas Equipment & Services - 10.95%
Oil & Gas Exploration & Production - 3.55%
Other Diversified Financial Services - 4.24%
Pharmaceuticals - 2.15%
Property & Casualty Insurance - 2.68%
Railroads - 4.08%
Restaurants - 1.67%
Semiconductors - 3.79%
Soft Drinks - 1.87%
Specialized Finance - 1.54%
Steel - 1.08%
Systems Software - 2.09%
Tobacco - 7.01%
TOTAL COMMON STOCKS - 97.26%
Notes to Schedule of Investments
SHORT-TERM SECURITIES
Commercial Paper (B) - 1.99%
0.230%, 1-13-10
Master Note - 0.44%
0.117%, 1-1-10 (C)
TOTAL SHORT-TERM SECURITIES - 2.43%
TOTAL INVESTMENT SECURITIES - 99.69%
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.31%
NET ASSETS - 100.00%
(A)No dividends were paid during the preceding 12 months.
(B)Rate shown is the yield to maturity at December 31, 2009.
(C)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
The following acronym is used throughout this schedule:
ADR = American Depositary Receipts
For Federal income tax purposes, cost of investments owned at December 31, 2009 and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized appreciation
See Accompanying Notes to Financial Statements.
Fiscal year performance
Universe Average
with similar investment objectives)
Please note that the Portfolio returns include applicable investment fees and expenses, whereas the index returns do not include any such fees. Also, the Portfolio's performance data does not take into account any product expenses or charges associated with owning a variable life or annuity policy, which is invested in Ivy Funds Variable Insurance Portfolios.
Asset Allocation
Energy
Industrials
Utilities
Information Technology
Materials
Country Weightings
United States
Canada
Top 10 Equity Holdings
See your advisor for more information on the Portfolio's most recently published Top 10 Equity Holdings.
Energy(1)
S&P 1500 Energy Sector Index(2)
Lipper Variable Annuity Natural Resources Funds Universe Average(2)
1500 ENERGY
SECTOR
INDEX
VA NATURAL
RESOURCES
FUNDS
(2)Because the Portfolio commenced operations on a date other than at the end of a month, and partial month calculations of the performances of the indexes (including income) are not available, investment in the indexes was effected as of April 30, 2006.
Average Annual Total Return(3)
(3)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
(4)5-1-06 (the date on which shares were first acquired by shareholders).
COMMON STOCKS
Coal & Consumable Fuels - 3.85%
Construction & Engineering - 3.87%
Construction & Farm Machinery & Heavy Trucks - 1.75%
Diversified Metals & Mining - 1.04%
Electric Utilities - 2.60%
Electrical Components & Equipment - 0.39%
Integrated Oil & Gas - 13.93%
Oil & Gas Drilling - 6.30%
Oil & Gas Equipment & Services - 23.98%
Oil & Gas Exploration & Production - 27.98%
Oil & Gas Refining & Marketing - 1.64%
Oil & Gas Storage & Transportation - 4.64%
Semiconductor Equipment - 1.25%
TOTAL COMMON STOCKS - 93.22%
Notes to Schedule of Investments
SHORT-TERM SECURITIES - 6.80%
Master Note
0.117%, 1-1-10 (B)
TOTAL INVESTMENT SECURITIES - 100.02%
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.02%)
)
NET ASSETS - 100.00%
(A)No dividends were paid during the preceding 12 months.
(B)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
ADR = American Depositary Receipts
+Includes cash and cash equivalents and other assets and liabilities
For Federal income tax purposes, cost of investments owned at December 31, 2009
and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized depreciation
)
See Accompanying Notes to Financial Statements.
Fiscal year performance
Please note that the Portfolio returns include applicable investment fees and expenses, whereas the index returns do not include any such fees. Also, the Portfolio's performance data does not take into account any product expenses or charges associated with owning a variable life or annuity policy, which is invested in Ivy Funds Variable Insurance Portfolios.
Benchmark(s)/Lipper Category
Universe Average
similar investment objectives)
Asset Allocation
Energy
Materials
Industrials
Utilities
Financials
Consumer Staples
Information Technology
Corporate Debt Securities
Country Weightings
United States
Canada
Russia
United Kingdom
Other Europe
Brazil
Other South America
Top 10 Equity Holdings
See your advisor for more information on the Portfolio's most recently published Top 10 Equity Holdings.
Gazprom, ADR
Universe Average(2)
RESOURCES
RELATED INDEX
NATURAL
RESOURCES
FUNDS
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
(2)Because the Portfolio commenced operations on a date other than at the end of a month, and partial month calculations of the performances of the indexes (including income) are not available, investment in the indexes was effected as of April 30, 2005.
Average Annual Total Return(3)
(3)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
(4)4-28-05 (the date on which shares were first acquired by shareholders).
COMMON STOCKS
Australia - 0.33%
Bermuda - 0.83%
Brazil - 5.05%
Canada - 10.28%
Cayman Islands - 1.36%
Group Co., Ltd. (A)
Chile - 0.21%
China - 3.24%
ADR (B)
Cyprus - 0.07%
Limited (A)(B)(C)
Germany - 0.49%
Hong Kong - 0.22%
Indonesia - 0.56%
Israel - 1.13%
Japan - 3.24%
Kazakhstan - 0.42%
Production, GDR (A)
Norway - 0.40%
Panama - 1.24%
Russia - 5.45%
Singapore - 0.95%
South Africa - 1.71%
South Korea - 0.72%
Switzerland - 2.81%
Thailand - 1.12%
Shares (A)
United Kingdom - 4.27%
United States - 41.00%
TOTAL COMMON STOCKS - 87.10%
PREFERRED STOCKS
Brazil - 3.44%
United States - 0.16%
TOTAL PREFERRED STOCKS - 3.60%
Notes to Schedule of Investments
CALL OPTIONS
Contracts
Apr $30.00, Expires 4-20-10
Apr $20.00, Expires 4-19-10
Jan $5.00, Expires 1-19-10
Apr $5.00, Expires 4-19-10
Feb $60.00, Expires 2-22-10
Mar $20.00, Expires 3-22-10
Feb $70.00, Expires 2-22-10
Feb $14.00, Expires 2-22-10
Feb $10.00, Expires 2-22-10
TOTAL CALL OPTIONS - 5.70%
CORPORATE DEBT SECURITIES - 0.06%
Brazil
8.614%, 12-1-12 (D)(E)(F)
SHORT-TERM SECURITIES
Commercial Paper (G) - 2.09%
0.090%, 1-4-10
0.110%, 1-4-10
Master Note - 1.72%
0.117%, 1-1-10 (H)
TOTAL SHORT-TERM SECURITIES - 3.81%
TOTAL INVESTMENT SECURITIES - 100.27%
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.27%)
)
NET ASSETS - 100.00%
The following forward foreign currency contracts were outstanding at December 31, 2009:
*Not shown due to rounding.
Principal
Amount
of Contract
(Denominated
in Indicated
Currency)
Date
Appreciation
Depreciation
Sell
Brazilian Real
Toronto-Dominion
Bank (The)
Sell
Brazilian Real
Mellon Bank N.A.
Sell
Brazilian Real
Royal Bank of
Canada
Sell
Brazilian Real
Toronto-Dominion
Bank (The)
Sell
British Pound
Royal Bank of
Canada
Sell
British Pound
Royal Bank of
Canada
Sell
Canadian
DollarToronto-Dominion
Bank (The)
Sell
Canadian
DollarMellon Bank N.A.
Sell
Euro
Toronto-Dominion
Bank (The)
Sell
Euro
Canadian Imperial
Bank of
Commerce
Sell
South African
RandToronto-Dominion
Bank (The)
Sell
South African
RandScotia Capital Inc.
(USA)
Sell
South African
RandRoyal Bank of
Canada
(A)Listed on an exchange outside the United States.
(B)No dividends were paid during the preceding 12 months.
(C)At December 31, 2009, the following restricted securities were owned (Buried Hill Energy and Konarka Technologies, Inc. are Illiquid):
Atacama Minerals Corp.
Buried Hill Energy (Cyprus)
Public Company Limited
Konarka Technologies, Inc.,
8.0% Cumulative
The total value of these securities represented approximately 0.26% of net assets at December 31, 2009.
(D)Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities have been determined to be illiquid under guidelines established by the Board of Trustees. At December 31, 2009, the total value of these securities amounted to $456 or 0.24% of net assets.
(E)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009.
(F)Principal amounts are denominated in the indicated foreign currency, where applicable (BRL - Brazilian Real).
(G)Rate shown is the yield to maturity at December 31, 2009.
(H)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
ADR = American Depositary Receipts
GDR = Global Depositary Receipts
+Includes options, cash and cash equivalents and other assets and liabilities
For Federal income tax purposes, cost of investments owned at December 31, 2009
and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized appreciation
Industry and geographical classifications are unaudited.
See Accompanying Notes to Financial Statements.
Fiscal year performance
large-cap growth market)
Universe Average
similar investment objectives)
Asset Allocation
Information Technology
Consumer Discretionary
Health Care
Financials
Consumer Staples
Energy
Materials
Industrials
Top 10 Equity Holdings
See your advisor for more information on the Portfolio's most recently published Top 10 Equity Holdings.
Growth(1)
Russell 1000 Growth Index
Lipper Variable Annuity Large-Cap Growth Funds
Universe Average
VIP GROWTH
FUND
1000 GROWTH
INDEX
VA LARGE-CAP GROWTH
FUNDS
Average Annual Total Return(2)
COMMON STOCKS
Aerospace & Defense - 1.08%
Air Freight & Logistics - 1.05%
Asset Management & Custody Banks - 2.92%
Automotive Retail - 0.53%
Biotechnology - 2.74%
Casinos & Gaming - 2.34%
Communications Equipment - 8.68%
Computer Hardware - 9.91%
Consumer Finance - 1.02%
Data Processing & Outsourced Services - 7.03%
Department Stores - 4.49%
Diversified Banks - 0.75%
Electrical Components & Equipment - 1.20%
Environmental & Facilities Services - 0.56%
Fertilizers & Agricultural Chemicals - 1.45%
General Merchandise Stores - 2.09%
Health Care Equipment - 5.03%
Home Improvement Retail - 2.94%
Hotels, Resorts & Cruise Lines - 1.19%
Household Products - 4.27%
Industrial Gases - 1.51%
Internet Software & Services - 4.79%
Investment Banking & Brokerage - 1.53%
Life Sciences Tools & Services - 1.32%
Oil & Gas Equipment & Services - 5.92%
Other Diversified Financial Services - 4.06%
Personal Products - 0.75%
Pharmaceuticals - 3.55%
Restaurants - 0.97%
Semiconductors - 7.11%
Soft Drinks - 1.00%
Specialized Finance - 0.76%
Specialty Chemicals - 1.00%
Systems Software - 3.28%
TOTAL COMMON STOCKS - 98.82%
Notes to Schedule of Investments
SHORT-TERM SECURITIES
Commercial Paper (B) - 0.58%
0.090%, 1-4-10
Master Note - 0.31%
0.117%, 1-1-10 (C)
TOTAL SHORT-TERM SECURITIES - 0.89%
TOTAL INVESTMENT SECURITIES - 99.71%
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.29%
NET ASSETS - 100.00%
(A)No dividends were paid during the preceding 12 months.
(B)Rate shown is the yield to maturity at December 31, 2009.
(C)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
ADR = American Depositary Receipts
For Federal income tax purposes, cost of investments owned at December 31, 2009 and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized appreciation
See Accompanying Notes to Financial Statements.
Fiscal year performance
Please note that the Portfolio returns include applicable investment fees and expenses, whereas the index returns do not include any such fees. Also, the Portfolio's performance data does not take into account any expenses or charges associated with owning a variable life or annuity policy, which is invested in Ivy Funds Variable Insurance Portfolios.
Benchmark(s)/ Lipper Category
the high yield bond market)
Universe Average
with similar investment objectives)
Asset Allocation
Corporate Debt Securities
Senior Loans
Bond Portfolio Characteristics
Quality Weightings
Ratings reflected in the wheel are taken from the following sources in order of preference: Standard & Poor's, Moody's or management's internal ratings, where no other ratings are available.
A
BBB
BB
B
CCC
Below CCC
Universe Average
INCOME
HIGH YIELD
MARKET INDEX
HIGH CURRENT
YIELD FUNDS
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
Average Annual Total Return(2)
(2)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
COMMON STOCKS
Broadcasting - 0.00%
Casinos & Gaming - 0.05%
Food Distributors - 0.23%
Oil & Gas Storage & Transportation - 0.17%
Wireless Telecommunication Service - 0.06%
TOTAL COMMON STOCKS - 0.51%
CORPORATE DEBT SECURITIES
Aerospace - 1.83%
14.000%, 8-15-13 (B)
8.000%, 7-15-11
Apparel, Accessories & Luxury Goods - 0.36%
11.375%, 7-15-15
Automobile Manufacturers - 2.64%
9.000%, 11-30-14
10.750%, 8-15-16 (B)
7.625%, 3-15-17
8.250%, 11-1-21
9.250%, 12-15-13 (C)(D)
7.750%, 12-15-16
Automotive Retail - 1.05%
8.250%, 8-15-13
Banking - 0.72%
7.900%, 4-29-49 (C)
Broadband - 0.42%
12.000%, 12-1-15 (B)
12.000%, 12-1-15 (B)
Notes to Schedule of Investments
Broadcast / Outdoor - 0.73%
9.625%, 12-15-16 (B)
9.625%, 8-1-13
Building Products - 3.23%
10.500%, 7-1-13
0.000%, 12-15-14 (B)(E)
13.500%, 2-15-16
9.750%, 9-1-12
10.500%, 12-15-15 (B)
11.750%, 6-15-13
Cable & Satellite - 2.02%
8.500%, 6-15-15 (B)
8.625%, 2-15-19 (B)
7.875%, 9-1-19 (B)
7.875%, 9-1-19
7.750%, 5-31-15
Capital Goods - 0.85%
9.500%, 8-1-14
9.500%, 8-1-14 (B)
11.750%, 8-1-16
Casinos & Gaming - 5.36%
9.250%, 6-1-14 (B)
12.000%, 11-15-10 (F)
8.500%, 9-15-10
10.375%, 5-15-14 (B)
7.625%, 1-15-17
11.125%, 11-15-17 (B)
11.375%, 3-1-18 (B)
8.375%, 8-15-15 (B)
10.750%, 8-15-17 (B)
8.250%, 3-15-12
8.625%, 8-1-17 (B)
Chemicals - 0.83%
8.250%, 11-15-19 (B)
10.500%, 5-15-20 (B)
Construction Materials - 2.14%
11.375%, 11-1-14 (B)
2.500%, 2-1-14
14.750%, 2-1-14 (G)
16.000%, 6-1-16 (B)
Consumer Finance - 2.79%
11.500%, 11-1-11
3.034%, 1-13-12 (C)
8.000%, 12-15-16
8.700%, 10-1-14
12.000%, 5-15-15
Consumer Products - 1.60%
8.750%, 12-1-13
Containers - 1.50%
9.875%, 10-15-14
7.375%, 1-1-15
5.500%, 6-30-16 (B)
8.500%, 12-15-15 (B)
10.625%, 8-15-19 (B)
Department Stores - 0.40%
6.375%, 3-15-37
Diversified Chemicals - 0.04%
8.750%, 11-1-17
Diversified Support Services - 0.22%
8.375%, 8-15-21
Diversified Telecom - 1.26%
8.125%, 10-1-18
8.000%, 10-1-15
8.375%, 5-1-16
Environmental Services - 0.28%
9.750%, 12-15-14 (B)
Finance - 1.79%
9.500%, 12-14-16 (B)
10.625%, 9-1-14 (B)
10.375%, 12-15-16 (B)
Food Distributors - 0.90%
13.875%, 3-15-14 (B)
9.875%, 1-15-18 (B)
General Merchandise Stores - 1.44%
10.625%, 7-15-15
11.875%, 7-15-17
Health Care Equipment - 1.07%
10.000%, 10-15-17
10.375%, 10-15-17
11.625%, 10-15-17
Health Care Facilities - 2.53%
9.625%, 11-15-16
9.875%, 2-15-17 (B)
8.500%, 4-15-19 (B)
7.875%, 2-15-20 (B)
10.750%, 6-15-16
8.125%, 2-15-20
Health Care Facilities / Supplies - 5.49%
7.750%, 4-1-14
9.500%, 4-15-15 (D)
9.750%, 4-15-17 (H)
Therapeutics Finance Corporation:
10.875%, 11-15-14
11.750%, 11-15-14
0.000%, 3-15-16 (I)
8.875%, 5-1-17
10.750%, 8-15-14
9.125%, 8-15-17
Hotels, Resorts & Cruise Lines - 1.80%
6.750%, 11-15-14
3.750%, 10-1-14 (B)
6.750%, 5-15-18
Household Products - 0.64%
7.875%, 1-15-14 (F)
10.000%, 12-15-14 (F)
Independent Finance - 0.16%
6.900%, 12-15-17
Industrial - Other - 0.13%
8.750%, 3-15-14
IT Consulting & Other Services - 0.87%
9.125%, 8-15-13
10.625%, 5-15-15
Leisure - 1.15%
8.625%, 6-15-19 (B)
8.750%, 6-1-16
Machinery - 0.52%
10.875%, 6-1-16
Metals / Mining - 2.07%
8.000%, 6-1-19 (B)
6.125%, 10-1-35
10.250%, 5-15-16
10.750%, 5-15-19
Movies & Entertainment - 1.12%
11.000%, 2-1-16
9.505%, 8-15-14
Office Services & Supplies - 2.01%
11.375%, 11-1-13
9.500%, 2-1-14
Oil & Gas Exploration & Production - 2.13%
9.500%, 2-15-15
9.125%, 7-15-13
10.500%, 8-1-14
7.875%, 6-1-15
Oil & Gas Storage & Transportation - 2.16%
8.125%, 3-1-16
8.250%, 2-15-16
8.750%, 3-1-15
8.250%, 3-1-16
Oil Refining & Marketing - 1.41%
13.500%, 10-15-14 (B)
11.875%, 11-15-14
11.750%, 1-1-16
7.125%, 4-1-16
Packaged Foods & Meats - 1.84%
9.125%, 2-1-13
Paper & Forest Products - 1.04%
11.375%, 12-31-14 (B)
12.000%, 8-1-14 (B)
Paper Packaging - 0.42%
7.875%, 6-15-17 (B)
Pharmaceuticals - 0.24%
7.750%, 11-15-16 (B)
Publishing - 0.97%
11.500%, 5-1-16
0.000%, 8-1-16 (I)
Railroads - 2.88%
12.500%, 4-1-16
13.000%, 12-15-13
9.375%, 5-1-12
Restaurants - 1.67%
9.500%, 5-1-14
Retail Propane Distributors - 0.49%
9.125%, 10-1-17 (B)
Retail Stores - 4.71%
8.500%, 6-15-19 (B)
6.700%, 7-15-34
7.750%, 2-15-14
7.500%, 10-1-19 (B)
9.750%, 6-12-16
9.250%, 11-15-14
10.500%, 11-15-16
8.625%, 8-15-13
Service - Other - 10.25%
Management Finance Corp.:
8.750%, 6-1-14
10.250%, 6-1-16
8.500%, 7-1-16 (B)
10.000%, 7-15-17
4.281%, 5-1-14 (C)
10.000%, 8-15-15 (B)
11.000%, 8-15-15 (B)(D)
11.750%, 8-15-17 (G)
9.500%, 12-30-14 (B)
10.500%, 11-1-12
9.500%, 10-15-14
11.000%, 10-15-16
Technology - 4.28%
8.500%, 12-15-17 (B)
7.750%, 7-15-16
8.250%, 3-15-18
12.000%, 6-15-17 (B)
8.000%, 2-1-27
Utilities - 0.90%
9.750%, 4-15-16 (B)
Wireless Telecommunication Service - 2.75%
7.750%, 5-15-16
9.000%, 1-15-15
7.125%, 11-1-19
9.250%, 11-1-14
8.000%, 8-15-16 (B)
8.250%, 8-15-19 (B)
8.375%, 8-15-17
11.750%, 7-15-17 (B)
TOTAL CORPORATE DEBT SECURITIES - 92.10%
SENIOR LOANS
Casinos & Gaming - 0.80%
2.010%, 5-23-14 (C)
2.010%, 5-23-14 (C)
Diversified Chemicals - 0.71%
7.250%, 2-28-14 (C)
Retail Stores - 1.35%
9.500%, 6-5-15 (C)
Technology - 0.58%
3.760%, 4-24-14 (C)
Utilities - 0.65%
Texas Competitive Electric Holdings Company, LLC:
3.735%, 10-10-14 (C)
3.751%, 10-10-14 (C)
TOTAL SENIOR LOANS - 4.09%
SHORT-TERM SECURITIES - 1.32%
Commercial Paper (J)
0.010%, 1-4-10
TOTAL INVESTMENT SECURITIES - 98.02%
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.98%
NET ASSETS - 100.00%
The following forward foreign currency contracts were outstanding at December 31, 2009:
Principal
Amount
of Contract
(Denominated
in Indicated
Currency)
Date
Appreciation
Depreciation
Sell
Euro
Citibank, N.A.
Sell
Euro
Citibank, N.A.
Sell
Euro
Citibank, N.A.
Sell
Euro
Citibank, N.A.
Sell
Euro
Citibank, N.A.
Sell
Euro
Citibank, N.A.
Sell
Euro
Citibank, N.A.
Sell
Euro
Citibank, N.A.
Sell
Euro
Citibank, N.A.
Sell
Euro
Citibank, N.A.
Sell
Euro
Citibank, N.A.
Sell
Euro
Citibank, N.A.
Sell
Euro
Citibank, N.A.
Sell
Euro
Citibank, N.A.
Sell
Euro
Citibank, N.A.
(A)No dividends were paid during the preceding 12 months.
(B)Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities have been determined to be liquid under guidelines established by the Board of Trustees. At December 31, 2009, the total value of these securities amounted to $50,925 or 23.81% of net assets.
(C)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009.
(D)Payment in kind bonds.
(E)Zero coupon bond.
(F)Non-income producing as the issuer has either missed its most recent interest payment or declared bankruptcy.
(G)Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities have been determined to be illiquid under guidelines established by the Board of Trustees. At December 31, 2009, the total value of these securities amounted to $2,189 or 1.02% of net assets.
(H)Principal amounts are denominated in the indicated foreign currency, where applicable (EUR - Euro).
(I)Securities do not bear interest for an initial period of time and subsequently become interest bearing.
(J)Rate shown is the yield to maturity at December 31, 2009.
For Federal income tax purposes, cost of investments owned at December 31, 2009
and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized appreciation
See Accompanying Notes to Financial Statements.
Mr. Brundige has managed the Portfolio for one year and has 16 years of industry experience.
Fiscal year performance
with similar investment objectives)
Please note that the Portfolio returns include applicable investment fees and expenses, whereas the index returns do not include any such fees. Also, the Portfolio's performance data does not take into account any product expenses or charges associated with owning a variable life or annuity policy, which is invested in Ivy Funds Variable Insurance Portfolios.
Asset Allocation
Consumer Staples
Financials
Industrials
Information Technology
Energy
Consumer Discretionary
Telecommunication Services
Materials
Health Care
Utilities
Country Weightings
United Kingdom
Switzerland
Germany
France
Italy
Other Europe
Japan
China
Australia
Other Pacific Basin
Top 10 Equity Holdings
International Growth(1)
Lipper Variable Annuity International Growth Funds
Universe Average
GROWTH
GROWTH
INDEX
VA INTERNATIONAL
GROWTH FUNDS
Average Annual Total Return(2)
COMMON STOCKS
Australia - 3.61%
Belgium - 1.88%
Brazil - 2.77%
Canada - 1.59%
China - 7.83%
(Asia) Limited (A)
Limited, H Shares (A)(B)
France - 7.41%
Germany - 5.26%
Hong Kong - 2.37%
Italy - 4.40%
Japan - 11.20%
Mexico - 1.18%
Netherlands - 2.51%
Spain - 2.40%
Sweden - 0.89%
Switzerland - 8.74%
United Kingdom - 26.55%
TOTAL COMMON STOCKS - 90.59%
PREFERRED STOCKS - 2.78%
Germany
SHORT-TERM SECURITIES
Commercial Paper (D) - 5.52%
0.110%, 1-11-10
0.090%, 1- 4-10
0.120%, 1-13-10
0.110%, 1- 4-10
Notes to Schedule of Investments
Master Note - 0.53%
0.117%, 1-1-10 (E)
TOTAL SHORT-TERM SECURITIES - 6.05%
TOTAL INVESTMENT SECURITIES - 99.42%
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.58%
NET ASSETS - 100.00%
The following forward foreign currency contracts were outstanding at December 31, 2009:
of Contract
(Denominated in
Indicated Currency)
Date
Appreciation
Depreciation
Sell
Japanese Yen
Citibank, N.A.
(B)Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities have been determined to be liquid under guidelines established by the Board of Trustees. At December 31, 2009, the total value of these securities amounted to $9,929 or 3.80% of net assets.
(C)No dividends were paid during the preceding 12 months.
(D)Rate shown is the yield to maturity at December 31, 2009.
(E)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
ADR = American Depositary Receipts
+Includes cash and cash equivalents and other assets and liabilities
For Federal income tax purposes, cost of investments owned at December 31, 2009
and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized appreciation
See Accompanying Notes to Financial Statements.
Fiscal year performance
Please note that the Portfolio returns include applicable investment fees and expenses, whereas the index returns do not include any such fees. Also, the Portfolio's performance data does not take into account any product expenses or charges associated with owning a variable life or annuity policy, which is invested in Ivy Funds Variable Insurance Portfolios.
Benchmark(s)/Lipper Category
securities markets)
Universe Average
with similar investment objectives)
Asset Allocation
Financials
Industrials
Energy
Information Technology
Consumer Staples
Consumer Discretionary
Telecommunication Services
Materials
Health Care
Utilities
Country Weightings
United Kingdom
France
Switzerland
Germany
Other Europe
Japan
Australia
China
Hong Kong
Singapore
Other Pacific Basin
Top 10 Equity Holdings
See your advisor for more information on the Portfolio's most recently published Top 10 Equity Holdings.
Kingdom
Kingdom
Services
Services
Discretionary
Discretionary
Universe Average
VALUE
WORLD ex
U.S.A. INDEX
INTERNATIONAL
VALUE FUNDS
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
Average Annual Total Return(2)
(2)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
COMMON STOCKS
Australia - 9.84%
Canada - 2.21%
China - 4.44%
(Asia) Limited (A)
H Shares (A)(B)
France - 14.64%
Germany - 5.52%
Greece - 1.29%
Hong Kong - 4.38%
India - 1.22%
Italy - 1.46%
Japan - 15.50%
Mexico - 1.10%
Netherlands - 1.41%
Singapore - 4.00%
Spain - 2.40%
Sweden - 1.37%
Switzerland - 5.59%
Taiwan - 1.65%
United Kingdom - 20.73%
TOTAL COMMON STOCKS - 98.75%
Notes to Schedule of Investments
SHORT-TERM SECURITIES
Commercial Paper (D) - 0.59%
0.120%, 1-13-10
Master Note - 0.53%
0.117%, 1-1-10 (E)
TOTAL SHORT-TERM SECURITIES - 1.12%
TOTAL INVESTMENT SECURITIES - 99.87%
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.13%
NET ASSETS - 100.00%
(A)Listed on an exchange outside the United States.
(B)Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities have been determined to be liquid under guidelines established by the Board of Trustees. At December 31, 2009, the total value of these securities amounted to $14,524 or 2.83% of net assets.
(C)No dividends were paid during the preceding 12 months.
(D)Rate shown is the yield to maturity at December 31, 2009.
(E)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
The following acronym is used throughout this schedule:
ADR = American Depositary Receipts
+Includes cash and cash equivalents and other assets and liabilities
For Federal income tax purposes, cost of investments owned at December 31, 2009
and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized appreciation
Industry and geographical classifications are unaudited.
See Accompanying Notes to Financial Statements.
Fiscal year performance
with similar investment objectives)
Please note that the Portfolio returns include applicable investment fees and expenses, whereas the index returns do not include any such fees. Also, the Portfolio's performance data does not take into account any product expenses or charges associated with owning a variable life or annuity policy, which is invested in Ivy Funds Variable Insurance Portfolios. Please note that the Russell Microcap Growth Index has been added as an additional comparative broad-based index for the Portfolio.
The outlook for technology-related companies is now improved and we believe the diverse thematic influences within technology sub-industry groups will positively impact select companies that are either gaining market share or bucking the trend and exhibiting strong growth rates. We expect our software- and hardware-related positions will benefit from outsourcing, security, data storage, business redundancy, disaster preparedness and digitization trends. Software as a Service (“SAAS”) and cloud computing companies have found a growth niche by focusing on underpenetrated “vertical” markets customer relationship management, Web site analytics, travel & entertainment booking, online education content management, payroll and workforce management with the added benefit that these companies provide a visible recurring revenue stream that is typically in the 15 percent to 30 percent growth range. Data storage and archiving solutions providers are also experiencing rapid gr
owth. The need for data storage much of which is required by law and regulatory bodies to be archived continues to expand with the vast amounts of information being created daily.
Asset Allocation
Information Technology
Health Care
Consumer Discretionary
Industrials
Energy
Materials
Consumer Staples
Top 10 Equity Holdings
Micro Cap Growth(1)
Russell 2000 Growth Index
Russell Microcap Growth Index
Lipper Variable Annuity Small-Cap Growth Funds
Universe Average
GROWTH
2000
GROWTH
MICROCAP
GROWTH
INDEX
VA SMALL-CAP
GROWTH FUNDS
Average Annual Total Return(2)
COMMON STOCKS
Advertising - 1.11%
Aerospace & Defense - 1.70%
Apparel Retail - 2.46%
Apparel, Accessories & Luxury Goods - 2.40%
Application Software - 5.71%
Auto Parts & Equipment - 2.23%
Biotechnology - 6.33%
Broadcasting - 0.63%
Communications Equipment - 3.67%
Computer Hardware - 1.44%
Computer Storage & Peripherals - 3.79%
Construction & Engineering - 1.38%
Data Processing & Outsourced Services - 0.47%
Distributors - 1.24%
Education Services - 3.70%
Electrical Components & Equipment - 1.08%
Electronic Manufacturing Services - 0.76%
Fertilizers & Agricultural Chemicals - 0.90%
Food Retail - 0.73%
Health Care Equipment - 7.60%
Health Care Services - 3.82%
Health Care Supplies - 0.72%
Health Care Technology - 2.23%
Household Appliances - 0.92%
Internet Software & Services - 1.06%
Life Sciences Tools & Services - 1.07%
Managed Health Care - 0.83%
Movies & Entertainment - 1.63%
Oil & Gas Drilling - 1.04%
Oil & Gas Equipment & Services - 3.38%
Oil & Gas Exploration & Production - 1.86%
Oil & Gas Refining & Marketing - 1.05%
Personal Products - 1.19%
Pharmaceuticals - 6.39%
Research & Consulting Services - 1.76%
Restaurants - 2.16%
Semiconductor Equipment - 0.62%
Semiconductors - 8.01%
Specialty Chemicals - 0.95%
Steel - 0.49%
Systems Software - 5.37%
Trucking - 2.75%
TOTAL COMMON STOCKS - 98.63%
SHORT-TERM SECURITIES - 1.45%
Master Note
0.117%, 1-1-10 (B)
TOTAL INVESTMENT SECURITIES - 100.08%
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.08%)
)
NET ASSETS - 100.00%
(B)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
ADR = American Depositary Receipts
For Federal income tax purposes, cost of investments owned at December 31, 2009
and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized appreciation
See Accompanying Notes to Financial Statements.
Fiscal year performance
Please note that the Portfolio returns include applicable investment fees and expenses, whereas the index returns do not include any such fees. Also, the Portfolio's performance data does not take into account any product expenses or charges associated with owning a variable life or annuity policy, which is invested in Ivy Funds Variable Insurance Portfolios.
Benchmark(s)/Lipper Category
the mid-cap sector of the stock market)
Universe Average
with similar investment objectives)
A turn for the better
Asset Allocation
Information Technology
Consumer Discretionary
Industrials
Health Care
Financials
Consumer Staples
Energy
Materials
Utilities
Corporate Debt Securities
Top 10 Equity Holdings
See your advisor for more information on the Portfolio's most recently published Top 10 Equity Holdings.
Company
GROWTH
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
(2)Because the Portfolio commenced operations on a date other than at the end of a month, and partial month calculations of the performances of the indexes (including income) are not available, investment in the indexes was effected as of April 30, 2005.
Average Annual Total Return(3)
(3)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
(4)4-28-05 (the date on which shares were first acquired by shareholders).
COMMON STOCKS
Air Freight & Logistics - 3.63%
Apparel Retail - 3.87%
Apparel, Accessories & Luxury Goods - 0.83%
Application Software - 2.85%
Auto Parts & Equipment - 1.00%
Automotive Retail - 0.86%
Brewers - 0.80%
Casinos & Gaming - 0.51%
Catalog Retail - 0.85%
Computer Storage & Peripherals - 3.53%
Construction & Engineering - 1.04%
Consumer Finance - 1.98%
Data Processing & Outsourced Services - 4.93%
Department Stores - 1.12%
Distillers & Vintners - 1.53%
Electrical Components & Equipment - 3.01%
Food Retail - 3.31%
Gas Utilities - 1.85%
Health Care Distributors - 1.79%
Health Care Equipment - 5.78%
Health Care Supplies - 2.00%
Hotels, Resorts & Cruise Lines - 2.01%
Industrial Machinery - 5.01%
Internet Software & Services - 1.48%
Investment Banking & Brokerage - 3.51%
Oil & Gas Equipment & Services - 2.61%
Oil & Gas Exploration & Production - 3.51%
Packaged Foods & Meats - 2.51%
Paper Packaging - 1.49%
Pharmaceuticals - 2.61%
Publishing - 2.26%
Real Estate Management &
Development - 0.23%
Regional Banks - 1.79%
Research & Consulting Services - 0.85%
Restaurants - 2.59%
Semiconductors - 6.76%
Specialized Finance - 1.53%
Specialty Chemicals - 1.02%
Specialty Stores - 1.95%
Systems Software - 0.82%
Thrifts & Mortgage Finance - 0.97%
Trading Companies & Distributors - 2.64%
Trucking - 1.53%
TOTAL COMMON STOCKS - 96.75%
CORPORATE DEBT SECURITIES - 0.13%
Health Care Equipment
2.625%, 12-1-14
Notes to Schedule of Investments
SHORT-TERM SECURITIES - 3.01%
Master Note
0.117%, 1-1-10 (B)
TOTAL INVESTMENT SECURITIES - 99.89%
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.11%
NET ASSETS - 100.00%
(A) No dividends were paid during the preceding 12 months.
(B) Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
For Federal income tax purposes, cost of investments owned at December 31, 2009
and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized appreciation
Industry classifications are unaudited.
See Accompanying Notes to Financial Statements.
Asset Allocation
Notes
Commercial Paper (backed by irrevocable bank letter of credit)
Commercial Paper
Notes (backed by irrevocable bank letter of credit)
Master Note
Government Agency Obligations
CORPORATE OBLIGATIONS
Commercial Paper (A)
1.370%, 2-12-10
1.140%, 4-13-10
1.090%, 10-5-10
1.110%, 10-15-10
Total Commercial Paper - 4.75%
Commercial Paper (backed by irrevocable
bank letter of credit) (A)
0.200%, 1-6-10
0.300%, 1-7-10
0.330%, 1-14-10
0.220%, 1-29-10
0.230%, 1-15-10
0.250%, 3-15-10
Total Commercial Paper (backed by irrevocable
bank letter of credit) - 8.82%
Master Note - 0.57%
0.117%, 1-1-10 (B)
Notes
5.610%, 12-12-10
0.631%, 1-29-10 (C)
0.678%, 2-5-10 (C)
1.773%, 2-16-10 (B)
4.500%, 8-1-10
(Federal Deposit Insurance Corporation),
0.284%, 3-15-10 (B)(D)
0.657%, 1-22-10 (B)
0.873%, 2-12-10 (B)
(JPMorgan Chase & Co.),
0.391%, 2-18-10 (B)
4.950%, 4-26-10 (C)
0.385%, 3-11-10 (B)
0.301%, 3-30-10 (B)(D)
1.325%, 2-8-10 (B)
0.423%, 2-16-10 (B)
0.421%, 2-18-10 (B)
Insurance Corporation),
0.381%, 1-29-10 (B)(D)
4.625%, 8-3-10
6.500%, 1-18-11
4.500%, 6-15-10
(International Business Machines Corporation),
0.496%, 2-26-10 (B)
0.706%, 2-26-10 (C)
0.783%, 1-22-10 (C)
0.331%, 3-25-10 (B)
0.346%, 2-26-10 (B)
0.285%, 2-8-10 (B)
(Procter & Gamble Company (The)),
0.525%, 2-8-10 (C)
0.273%, 2-16-10 (B)
1.262%, 2-25-10 (C)
0.981%, 1-28-10 (B)
1.304%, 1-15-10 (C)
4.200%, 1-15-10
Total Notes - 50.83%
Notes (backed by irrevocable bank letter of credit)
Variable/Fixed Rate Taxable Demand
Revenue Bonds, Series 2000
(Wachovia Bank, N.A.),
0.290%, 1-1-10 (B)
Taxable Variable Rate Demand Bonds,
Series 2008 (Wachovia Bank, N.A.),
0.240%, 1-1-10 (B)
Demand Bonds, Series 2005
(Wachovia Bank, N.A.),
0.240%, 1-1-10 (B)
Total Notes (backed by irrevocable bank
letter of credit) - 3.46%
TOTAL CORPORATE OBLIGATIONS - 68.43%
MUNICIPAL OBLIGATIONS
California - 1.86%
Environmental Improvement Revenue Bonds
(Atlantic Richfield Company Project),
Series 1997A (BP p.l.c.),
0.240%, 3-1-10
Revenue Bonds, Variable Rate Refunding,
Series 2008-G (Bank of America, N.A.),
0.190%, 1-4-10 (B)
Colorado - 2.02%
Rate Revenue Bonds (Exempla, Inc.),
Series 2009A (U.S. Bank N.A.),
0.200%, 1-6-10 (B)
City of Lafayette, Colorado, Special Improvement
District No. 02-01, Special Assessment Revenue
Refunding and Improvement Bonds, Series 2002
(Wells Fargo Bank, N.A.),
0.250%, 1-1-10 (B)
Certificates of Participation, Series 2008
(Wells Fargo Bank, N.A.),
0.250%, 1-4-10 (B)
Georgia - 2.60%
Taxable Industrial Development Revenue Bonds
(Junction City Mining Company, LLC Project),
Series 2000 (Wachovia Bank, N.A.),
0.240%, 1-4-10 (B)
0.470%, 1-6-10
0.680%, 2-4-10
Illinois - 5.09%
Notes, Taxable Series 2009 (U.S. Bank N.A.),
1.340%, 7-8-10
Demand Revenue Bonds, Series 2009
(The Carle Foundation) (JPMorgan Chase
Bank, N.A.),
0.200%, 1-4-10 (B)
of August, 2009,
2.000%, 6-10-10
of May, 2009,
4.000%, 4-26-10
Indiana - 0.33%
Facilities Revenue Bonds (BP Products North
America Inc. Project), Series 2009 (BP p.l.c.),
0.230%, 2-1-10
Louisiana - 3.15%
Bonds (Air Products and Chemicals Project),
Series 2009A (The Bank of New York Mellon
Trust Company, N.A.),
0.290%, 1-4-10 (B)
Variable Rate Revenue Refunding Bonds,
Series 2009B-1 (The Bank of New York
Mellon Trust Company, N.A.),
0.170%, 1-6-10 (B)
Exempt Facility Revenue Bonds (Mobil Oil
Corporation Project), Series 1996 (Exxon
Mobil Corporation),
0.200%, 1-4-10 (B)
Maryland - 0.65%
Facilities Authority, Revenue Bonds,
Anne Arundel Health Systems Issue,
Series 2009A (Wachovia Bank, N.A.),
0.240%, 1-1-10 (B)
Mississippi - 2.61%
Mode Industrial Development Revenue Bonds
(Belk, Inc. Project), Series 2005 (Wachovia Bank, N.A.),
0.240%, 1-4-10 (B)
Missouri - 0.93%
Demand Taxable Special Obligation
Refunding Bonds (President Hotel Redevelopment
Project), Series 2009B (JPMorgan Chase Bank, N.A.),
0.280%, 1-1-10 (B)
New York - 1.42%
Archstone Westbury Housing Revenue
Bonds, Series A (Bank of America, N.A.),
0.270%, 1-4-10 (B)
Related-Caroline Apartments Housing
Revenue Bonds, 2008 Series A (Federal
Home Loan Mortgage Corporation),
0.300%, 1-1-10 (B)
North Carolina - 1.26%
Agency, Exempt Facilities Revenue Bonds
(Republic Services, Inc. Project),
Series 2004 (Bank of America, N.A.),
0.210%, 1-4-10 (B)
Ohio - 1.19%
Notes, Series 2009, General Obligation Bond,
Anticipation Notes,
1.750%, 7-22-10
Tennessee - 0.66%
of Montgomery, Tennessee, Adjustable
Rate Pooled Financing, Revenue Bonds,
Series 2008 (Tennessee County Loan Pool)
(Bank of America, N.A.),
0.260%, 1-1-10 (B)
Texas - 0.66%
Development Corporation, Exempt Facilities
Revenue Bonds (Air Products Project), Series 2005
(Air Products and Chemicals, Inc.),
0.250%, 1-4-10 (B)
Virginia - 0.33%
Terminal Revenue Refunding Bonds
(Dominion Terminal Associates Project),
Series 1987-A (U.S. Bank, N.A.),
0.220%, 1-6-10
Washington - 0.99%
Port of Bellingham (Washington),
Environmental Facilities Industrial Revenue Bonds
(BP West Coast Products LLC Project),
Series 2003 (BP p.l.c.),
0.230%, 1-4-10 (B)
Wisconsin - 1.79%
Variable Rate, Demand Revenue Bonds, Series 1998B
(Wausau Hospital, Inc.) (JPMorgan Chase Bank, N.A.),
0.250%, 1-4-10 (B)
Revenue Bonds, Series 2008-A
(U.S. Bank N.A.),
0.600%, 12-2-10
TOTAL MUNICIPAL OBLIGATIONS - 27.54%
Notes to Schedule of Investments
GOVERNMENT AGENCY OBLIGATIONS
United States Government Agency Obligations
0.160%, 2-15-10 (B)
0.160%, 3-15-10 (B)
(United States Government Guaranteed
Ship Financing Obligations),
0.504%, 4-15-10 (B)
TOTAL UNITED STATES GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - 2.82%
TOTAL INVESTMENT SECURITIES - 98.79%
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.21%
NET ASSETS - 100.00%
(A)Rate shown is the yield to maturity at December 31, 2009.
(B)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
(C)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009.
(D)Security is fully guaranteed by the Federal Deposit Insurance Corporation for both interest and principal under the Debt Guarantee Program of the Temporary Liquidity Guarantee Program. The guarantee expires at the earlier of the security's maturity date or December 31, 2012.
See Accompanying Notes to Financial Statements.
Christopher R. Sebald
Fiscal year performance
Please note that the Portfolio returns include applicable investment fees and expenses, whereas the index returns do not include any such fees. Also, the Portfolio's performance data does not take into account any product expenses or charges associated with owning a variable life or annuity policy, which is invested in Ivy Funds Variable Insurance Portfolios.
Benchmark(s)/Lipper Category
the mortgage-backed securities market)
Universe Average
with similar investment objectives)
Asset Allocation
United States Government and
Government Agency Obligations
Corporate Debt Securities
Bond Portfolio Characteristics
Quality Weightings
Ratings reflected in the wheel are taken from the following sources in order of preference: Standard & Poor's, Moody's or management's internal ratings, where no other ratings are available.
AAA
AA
A
BBB
BB
B
Below B
MORTGAGE-BACKED
SECURITIES INDEX
U.S. MORTGAGE FUNDS
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
(2)Because the Portfolio commenced operations on a date other than at the end of a month, and partial month calculations of the performances of the indexes (including income) are not available, investment in the indexes was effected as of May 31, 2004.
Average Annual Total Return(3)
(3)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
(4)5-27-04 (the date on which shares were first acquired by shareholders).
CORPORATE DEBT SECURITIES
Asset-Backed Security - 0.08%
7.050%, 12-15-13 (A)
Consumer Finance - 2.30%
7.650%, 4-15-19
9.000%, 6-15-25
7.950%, 8-15-25
5.700%, 1-15-35
4.750%, 8-15-21
5.605%, 5-15-22
5.910%, 1-15-37
Housing Contract Senior/Subordinate Pass-Through
Certificates, Series 1999A, Class I A-5,
6.555%, 3-7-23
Other Mortgage-Backed Securities - 8.46%
7.490%, 12-25-31 (B)
5.329%, 3-25-18 (B)
5.662%, 11-25-35 (B)
5.801%, 1-25-36 (B)
6.000%, 7-25-35
5.562%, 9-25-35 (B)
5.562%, 9-25-35 (B)
6.210%, 5-25-46 (B)
6.210%, 5-25-46 (B)
6.500%, 7-20-32
4.875%, 4-25-19
2002-X1 F,
6.274%, 10-11-33 (A)
7.015%, 1-10-28
Series 2000-WF1 Trust Fund,
6.500%, 2-15-32
5.109%, 5-25-35 (B)
5.860%, 12-25-36
5.970%, 10-25-36 (B)(C)
5.048%, 6-25-35 (B)
Pass-Through Certificates, Series 2004-2,
6.500%, 8-25-18 (C)
6.234%, 7-25-37 (B)(F)
Trust 2005-1,
4.800%, 12-15-35 (A)(B)
6.518%, 1-25-29 (B)
5.997%, 1-25-35 (B)(C)
Mortgage Securitization 2005-A LLC:
5.250%, 4-25-32
5.409%, 4-25-32 (B)
Securitization, LLC,
5.250%, 11-25-32 (A)
Commercial Mortgage Pass-Through Notes 2006-1,
5.506%, 11-11-38 (A)
3.445%, 11-25-33 (B)
6.187%, 8-25-36
4.475%, 7-25-35 (B)
4.846%, 2-15-37 (B)(C)
Pass-Through Certificates, Series 2001-WM,
6.647%, 7-14-16 (C)
Trust 2001-B,
3.010%, 3-15-10
6.005%, 8-15-37
4.690%, 6-13-41
Mortgage Pass-Through Certificates, Series 1998-D6,
6.000%, 3-15-30 (C)
Class II-B-2,
6.000%, 2-25-37
5.750%, 6-25-33
5.145%, 1-25-35 (B)
6.410%, 12-25-33
RESI Finance DE Corporation 2003-C,
1.631%, 9-10-35 (A)(B)
4.500%, 5-25-19
6.290%, 11-25-32 (B)
5.250%, 8-25-33
6.000%, 6-25-34 (B)
Other Non-Agency REMIC/CMO - 0.07%
Series 2005-21,
5.400%, 11-25-35 (B)
TOTAL CORPORATE DEBT SECURITIES - 10.91%
UNITED STATES GOVERNMENT
AGENCY OBLIGATIONS
Agency Obligations - 0.58%
3.875%, 7-12-13
Mortgage-Backed Obligations - 80.35%
Participation Certificates:
5.000%, 5-1-18
5.500%, 6-1-19
6.000%, 9-1-22
5.000%, 4-1-23
5.300%, 1-15-33
6.000%, 10-1-33
5.500%, 1-1-35 TBA
5.500%, 2-1-35
5.500%, 2-1-35
5.000%, 8-1-35
5.000%, 11-1-35
5.000%, 12-1-35 TBA
6.000%, 1-1-36 TBA
6.500%, 7-1-36
5.500%, 6-1-37
6.500%, 9-1-37
7.000%, 12-1-37
4.500%, 1-1-38 TBA
5.500%, 2-1-35
5.000%, 4-1-35
Pass-Through Certificates:
5.500%, 3-1-18
5.000%, 10-1-18
5.500%, 9-1-19
4.500%, 1-1-20 TBA
7.000%, 11-1-32
6.000%, 6-1-33
6.000%, 12-1-33
5.500%, 1-1-34
5.500%, 1-1-34
5.000%, 2-1-34
5.500%, 2-1-34
5.500%, 2-1-34
5.000%, 3-1-34
6.000%, 4-1-34
5.500%, 9-1-34
6.500%, 9-1-34
5.500%, 11-1-34
6.000%, 11-1-34
6.500%, 11-1-34
6.500%, 11-1-34
6.000%, 12-1-34
4.500%, 1-1-35 TBA
5.500%, 2-1-35
6.500%, 3-1-35
6.000%, 4-1-35
6.000%, 6-1-35
5.000%, 7-1-35
5.000%, 7-1-35
5.000%, 7-1-35
5.500%, 7-1-35
5.500%, 8-1-35
5.500%, 10-1-35
5.500%, 10-1-35
6.000%, 10-1-35
5.500%, 11-1-35
6.000%, 1-1-36
5.000%, 2-1-36
6.500%, 2-1-36
6.500%, 6-1-36
5.500%, 9-1-36
5.500%, 11-1-36
6.000%, 11-1-36
6.500%, 11-1-36
5.000%, 1-1-37 TBA
6.000%, 2-1-37
6.500%, 8-1-37
6.000%, 9-1-37
6.500%, 9-1-37
6.000%, 12-1-37
5.500%, 5-1-38
6.000%, 7-1-38
REMIC/CMO (Interest Only), (D)
0.862%, 6-17-45 (B)
Pass-Through Certificates:
6.250%, 7-15-24
5.500%, 12-15-34
5.000%, 1-1-35 TBA
5.500%, 1-1-35 TBA
5.500%, 7-15-38
5.500%, 10-15-38
5.000%, 7-20-39
Non-Agency REMIC/CMO - 1.42%
Non-Agency REMIC/CMO,
5.008%, 12-16-25 (B)
TOTAL UNITED STATES GOVERNMENT
AGENCY OBLIGATIONS - 82.35%
Notes to Schedule of Investments
SHORT-TERM SECURITIES
Commercial Paper (E) - 27.36%
0.230%, 1-13-10
0.290%, 1-21-10
0.090%, 1-4-10
0.140%, 1-6-10
0.120%, 1-5-10
0.110%, 1-4-10
Master Note - 1.96%
0.117%, 1-1-10 (G)
TOTAL SHORT-TERM SECURITIES - 29.32%
TOTAL INVESTMENT SECURITIES - 122.58%
LIABILITIES, NET OF CASH AND OTHER ASSETS - (22.58%)
)
NET ASSETS - 100.00%
(A)Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities have been determined to be illiquid under guidelines established by the Board of Trustees. At December 31, 2009, the total value of these securities amounted to $705 or 1.91% of net assets.
(B)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009.
(C)Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities have been determined to be liquid under guidelines established by the Board of Trustees. At December 31, 2009, the total value of these securities amounted to $653 or 1.77% of net assets.
(D)Amount shown in principal column represents notional amount for computation of interest.
(E)Rate shown is the yield to maturity at December 31, 2009.
(F)Non-income producing as the issuer has either missed its most recent interest payment or declared bankruptcy.
(G)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
The following acronyms are used throughout this schedule:
CMO = Collateralized Mortgage Obligation
REMIC = Real Estate Mortgage Investment Conduit
TBA = To Be Announced
For Federal income tax purposes, cost of investments owned at December 31, 2009
and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized depreciation
)
Industry classifications are unaudited.
See Accompanying Notes to Financial Statements.
Fiscal year performance
with similar investment objectives)
Asset Allocation
Financials
Consumer Discretionary
Health Care
Telecommunication Services
Top 10 Equity Holdings
Real Estate Securities(1)
Wilshire Real Estate Securities Index(2)
Lipper Variable Annuity Real Estate Funds Universe Average(2)
SECURITIES
REAL ESTATE
SECURITIES INDEX
VA REAL ESTATE
FUNDS
(2)Because the Portfolio commenced operations on a date other than at the end of a month, and partial month calculations of the performances of the indexes (including income) are not available, investment in the indexes was effected as of May 31, 2004.
Average Annual Total Return(3)
(3)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
(4)5-27-04 (the date on which shares were first acquired by shareholders).
COMMON STOCKS
Diversified REITs - 8.68%
Health Care Facilities - 1.02%
Hotels, Resorts & Cruise Lines - 1.41%
Industrial REITs - 4.74%
Mortgage REITs - 1.03%
Office REITs - 20.31%
Real Estate Management & Development - 1.80%
Real Estate Operating Companies - 0.37%
Residential REITs - 12.32%
Retail REITs - 21.80%
Specialized REITs - 20.08%
Wireless Telecommunication Service - 0.65%
TOTAL COMMON STOCKS - 94.21%
Notes to Schedule of Investments
SHORT-TERM SECURITIES - 3.86%
Master Note
0.117%, 1-1-10 (B)
TOTAL INVESTMENT SECURITIES - 98.07%
CASH AND OTHER ASSETS, NET OF LIABILITIES - 1.93%
NET ASSETS - 100.00%
(A) No dividends were paid during the preceding 12 months.
(B) Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
REIT = Real Estate Investment Trust
For Federal income tax purposes, cost of investments owned at December 31, 2009 and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized depreciation
)
See Accompanying Notes to Financial Statements.
Fiscal year performance
Please note that the Portfolio returns include applicable investment fees and expenses, whereas the index returns do not include any such fees. Also, the Portfolio's performance data does not take into account any product expenses or charges associated with owning a variable life or annuity policy, which is invested in Ivy Funds Variable Insurance Portfolios.
Universe Average
investment objectives)
Conservative posture, a low-quality rally
Asset Allocation
Information Technology
Health Care
Consumer Staples
Industrials
Materials
Telecommunication Services
Financials
Energy
Consumer Discretionary
United States
Canada
Spain
Other Europe
Bermuda
See your advisor for more information on the Portfolio's most recently published Top 10 Equity Holdings.
TECHNOLOGY
NORTH AMERICAN
TECHNOLOGY
SECTOR INDEX
VA SCIENCE &
TECHNOLOGY
FUNDS
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
Average Annual Total Return(2)
(2)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
COMMON STOCKS
Agricultural Products - 6.91%
Application Software - 9.69%
Biotechnology - 9.13%
Communications Equipment - 4.87%
Computer Hardware - 2.57%
Consumer Electronics - 0.50%
Data Processing & Outsourced Services - 11.36%
Diversified Chemicals - 2.94%
Diversified Support Services - 0.98%
Electrical Components & Equipment - 1.18%
Electronic Equipment & Instruments - 2.78%
Fertilizers & Agricultural Chemicals - 0.48%
Health Care Distributors - 1.01%
Health Care Equipment - 1.37%
Health Care Facilities - 2.08%
Health Care Services - 0.59%
Home Entertainment Software - 2.86%
Industrial Machinery - 3.67%
Integrated Telecommunication Services - 1.22%
Internet Software & Services - 1.27%
IT Consulting & Other Services - 4.64%
Life & Health Insurance - 1.08%
Oil & Gas Equipment & Services - 0.53%
Research & Consulting Services - 0.28%
Semiconductor Equipment - 0.50%
Semiconductors - 16.93%
Systems Software - 5.15%
Wireless Telecommunication Service - 1.36%
TOTAL COMMON STOCKS - 97.93%
Notes to Schedule of Investments
SHORT-TERM SECURITIES
Commercial Paper (D) - 2.67%
0.090%, 1-4-10
0.100%, 1-8-10
Master Note - 0.59%
0.117%, 1-1-10 (E)
TOTAL SHORT-TERM SECURITIES - 3.26%
TOTAL INVESTMENT SECURITIES - 101.19%
LIABILITIES, NET OF CASH AND OTHER ASSETS - (1.19%)
)
NET ASSETS - 100.00%
(A)No dividends were paid during the preceding 12 months.
(B)Listed on an exchange outside the United States.
(C)Securities were purchased pursuant to Rule 144A under the Securities Act of 1933 and may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities have been determined to be liquid under guidelines established by the Board of Trustees. At December 31, 2009, the total value of these securities amounted to $4,103 or 1.30% of net assets.
(D)Rate shown is the yield to maturity at December 31, 2009.
(E)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
The following acronym is used throughout this schedule:
ADR = American Depositary Receipts
+Includes cash and cash equivalents and other assets and liabilities
For Federal income tax purposes, cost of investments owned at December 31, 2009
and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized appreciation
See Accompanying Notes to Financial Statements.
with similar investment objectives)
Information Technology
Consumer Discretionary
Health Care
Industrials
Energy
Consumer Staples
Financials
Small Cap Growth(1)
Russell 2000 Growth Index
Lipper Variable Annuity Small-Cap Growth Funds Universe Average
GROWTH
2000
GROWTH
VA SMALL-CAP
GROWTH FUNDS
Average Annual Total Return(2)
(2)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
COMMON STOCKS
Apparel, Accessories & Luxury Goods - 1.40%
Application Software - 6.47%
Auto Parts & Equipment - 3.47%
Broadcasting - 3.19%
Casinos & Gaming - 3.65%
Communications Equipment - 4.60%
Construction & Engineering - 3.22%
NY Shares
Construction & Farm Machinery &
Heavy Trucks - 2.15%
Technologies Corporation
Consumer Finance - 1.50%
Education Services - 6.48%
Electronic Components - 3.11%
Health Care Equipment - 7.37%
Health Care Services - 5.16%
Health Care Technology - 4.77%
Home Entertainment Software - 0.75%
Hotels, Resorts & Cruise Lines - 1.81%
Industrial Machinery - 1.00%
Internet Software & Services - 6.49%
Investment Banking & Brokerage - 1.57%
Life Sciences Tools & Services - 0.56%
Oil & Gas Equipment & Services - 0.99%
Oil & Gas Exploration & Production - 4.09%
Packaged Foods & Meats - 2.20%
Personal Products - 2.53%
Railroads - 3.76%
Systems Software - 8.51%
Trucking - 1.38%
TOTAL COMMON STOCKS - 92.18%
SHORT-TERM SECURITIES
Commercial Paper (B) - 7.26%
0.230%, 1-13-10
0.090%, 1-4-10
0.170%, 1-19-10
0.130%, 1-22-10
0.100%, 1-8-10
Master Note - 0.59%
0.117%, 1-1-10 (C)
TOTAL SHORT-TERM SECURITIES - 7.85%
TOTAL INVESTMENT SECURITIES - 100.03%
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.03%)
)
NET ASSETS - 100.00%
(B)Rate shown is the yield to maturity at December 31, 2009.
(C)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
For Federal income tax purposes, cost of investments owned at December 31, 2009 and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized appreciation
See Accompanying Notes to Financial Statements.
Fiscal year performance
Please note that the Portfolio returns include applicable investment fees and expenses, whereas the index returns do not include any such fees. Also, the Portfolio's performance data does not take into account any product expenses or charges associated with owning a variable life or annuity policy, which is invested in Ivy Funds Variable Insurance Portfolios.
investment objectives)
Low-quality leads as market direction changes course
Asset Allocation
Financials
Information Technology
Consumer Discretionary
Industrials
Materials
Utilities
Health Care
Consumer Staples
Energy
See your advisor for more information on the Portfolio's most recently published Top 10 Equity Holdings.
VALUE
VALUE
SMALL-CAP
VALUE FUNDS
(1)The value of the investment in the Portfolio is impacted by the ongoing expenses of the Portfolio and assumes reinvestment of dividends and distributions.
Average Annual Total Return(2)
(2)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
COMMON STOCKS
Advertising - 0.97%
Aerospace & Defense - 4.05%
Apparel, Accessories & Luxury Goods - 2.46%
Application Software - 2.32%
Asset Management & Custody Banks - 2.76%
Auto Parts & Equipment - 3.64%
Broadcasting - 2.13%
Casinos & Gaming - 2.37%
Communications Equipment - 0.76%
Computer Hardware - 0.77%
Consumer Finance - 1.18%
Data Processing & Outsourced Services - 1.86%
Diversified Chemicals - 2.15%
Diversified Metals & Mining - 0.89%
Electric Utilities - 1.53%
Electronic Manufacturing Services - 2.59%
Food Distributors - 0.70%
Gas Utilities - 1.89%
Gold - 1.17%
Health Care Facilities - 1.21%
Homebuilding - 1.50%
Human Resource & Employment Services - 1.61%
Hypermarkets & Super Centers - 1.38%
Industrial Machinery - 2.24%
Investment Banking & Brokerage - 3.86%
Managed Health Care - 1.20%
Metal & Glass Containers - 1.57%
Movies & Entertainment - 1.57%
Office REITs - 2.39%
Oil & Gas Exploration & Production - 0.53%
Regional Banks - 12.85%
Reinsurance - 4.10%
Residential REITs - 1.59%
Retail REITs - 0.98%
Security & Alarm Services - 1.41%
Semiconductor Equipment - 2.05%
Semiconductors - 3.22%
Specialty Chemicals - 1.44%
Systems Software - 1.76%
Technology Distributors - 4.25%
Thrifts & Mortgage Finance - 1.48%
Trucking - 2.34%
TOTAL COMMON STOCKS - 92.72%
Notes to Schedule of Investments
SHORT-TERM SECURITIES
Commercial Paper (C) - 6.02%
0.010%, 1-4-10
0.110%, 1-4-10
0.080%, 1-6-10
Master Note - 1.32%
0.117%, 1-1-10 (D)
TOTAL SHORT-TERM SECURITIES - 7.34%
TOTAL INVESTMENT SECURITIES - 100.06%
LIABILITIES, NET OF CASH AND OTHER ASSETS - (0.06%)
)
NET ASSETS - 100.00%
(A)No dividends were paid during the preceding 12 months.
(B)Listed on an exchange outside the United States.
(C)Rate shown is the yield to maturity at December 31, 2009.
(D)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
The following acronym is used throughout this schedule:
REIT = Real Estate Investment Trust
For Federal income tax purposes, cost of investments owned at December 31, 2009
and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized appreciation
Industry classifications are unaudited.
See Accompanying Notes to Financial Statements.
with similar investment objectives)
Financials
Energy
Consumer Discretionary
Information Technology
Health Care
Consumer Staples
Industrials
Materials
Telecommunication Services
See your advisor for more information on the Portfolio's most recently published Top 10 Equity Holdings.
Value(1)
Russell 1000 Value Index(2)
Lipper Variable Annuity Large-Cap Value Funds Universe Average(2)
VALUE
VA LARGE-CAP
VALUE FUNDS
(2)Because the Portfolio commenced operations on a date other than at the end of a month, and partial month calculations of the performances of the indexes (including income) are not available, investment in the indexes was effected as of April 30, 2001.
Average Annual Total Return(3)
(3)Data quoted is past performance and current performance may be lower or higher. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Please call 1.888.WADDELL for the Portfolio's most recent month-end performance. Performance data quoted does not reflect any expenses or charges associated with owning a variable life insurance policy or variable annuity contract that invests in the Portfolio's shares. When such charges are deducted, actual investment performance in a variable policy or contract will be lower.
(4)5-1-01 (the date on which shares were first acquired by shareholders).
COMMON STOCKS
Advertising - 2.10%
Aerospace & Defense - 1.84%
Apparel, Accessories & Luxury Goods - 1.75%
Brewers - 2.63%
Computer Hardware - 6.74%
Consumer Finance - 2.24%
Department Stores - 2.11%
Diversified Chemicals - 4.22%
Health Care Distributors - 6.29%
Home Improvement Retail - 3.40%
Hotels, Resorts & Cruise Lines - 2.97%
Industrial Machinery - 0.97%
Integrated Oil & Gas - 14.39%
Integrated Telecommunication Services - 2.88%
Investment Banking & Brokerage - 2.65%
IT Consulting & Other Services - 0.82%
Managed Health Care - 1.73%
Mortgage REITs - 1.65%
Office Electronics - 2.47%
Oil & Gas Storage & Transportation - 7.16%
Other Diversified Financial Services - 5.21%
Pharmaceuticals - 0.51%
Property & Casualty Insurance - 7.49%
Railroads - 3.24%
Regional Banks - 3.33%
Reinsurance - 1.63%
Specialty Stores - 1.02%
Systems Software - 1.00%
Tobacco - 4.19%
TOTAL COMMON STOCKS - 98.63%
SHORT-TERM SECURITIES
Commercial Paper (C) - 0.41%
0.070%, 1-4-10
Master Note - 0.91%
0.117%, 1-1-10 (D)
TOTAL SHORT-TERM SECURITIES - 1.32%
TOTAL INVESTMENT SECURITIES - 99.95%
CASH AND OTHER ASSETS, NET OF LIABILITIES - 0.05%
NET ASSETS - 100.00%
Subject
to Call
Month
Price
Received
Value
UnitedHealth Group
IncorporatedMorgan Stanley Smith
Barney LLC
Xerox Corporation
UBS Securities LLC
*Not shown due to rounding.
Subject
to Put
Month
Price
Received
Value
Energy Transfer
Equity, L.P. Morgan Stanley Smith
Barney LLC
Morgan Stanley Smith
Barney LLC
Everest Re Group, Ltd.
Morgan Stanley Smith
Barney LLC
MarkWest Energy
Partners, L.P. Morgan Stanley Smith
Barney LLC
Morgan Stanley
UBS Securities LLC
Regency Energy
Partners LP Morgan Stanley Smith
Barney LLC
(B)No dividends were paid during the preceding 12 months.
(C)Rate shown is the yield to maturity at December 31, 2009.
(D)Variable rate security. Interest rate disclosed is that which is in effect at December 31, 2009. Date shown represents reset date.
REIT = Real Estate Investment Trust
For Federal income tax purposes, cost of investments owned at December 31, 2009
and the related unrealized appreciation (depreciation) were as follows:
Cost
Gross unrealized appreciation
Gross unrealized depreciation
)
Net unrealized appreciation
See Accompanying Notes to Financial Statements.
(In thousands, except
per share amounts)
Strategy
ASSETS
Investments in unaffiliated
securities at market
value+
Investments in affiliated
securities at market
value+
Bullion at market value+
Investments at
Market Value
Cash
Cash denominated in
foreign currencies
at market value+
Restricted cash
Unrealized appreciation
on forward foreign
currency contracts
Investment securities
sold receivable
Dividends and interest
receivable
Capital shares sold receivable
Prepaid and other assets
Total Assets
LIABILITIES
Investment securities
purchased payable
Unrealized depreciation on
forward foreign
currency contracts
Capital shares redeemed
payable
Trustees' fees payable
Service fee payable
Shareholder servicing
payable
Investment management
fee payable
Accounting services fee
payable
Other liabilities
Total Liabilities
Total Net Assets
NET ASSETS
Capital paid in (shares
authorized - unlimited)
Undistributed net
investment income
Accumulated net realized
gain (loss)
Net unrealized appreciation
(depreciation)
Total Net Assets
CAPITAL SHARES
OUTSTANDING
NET ASSET VALUE
PER SHARE
+COST
Investments in unaffiliated
securities at cost
Investments in affiliated
securities at cost
Bullion at cost
Cash denominated in
foreign currencies
at cost
*Not shown due to rounding.
See Accompanying Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES
(In thousands, except
per share amounts)
Equity
Natural
Resources
Income
ASSETS
Investments in unaffiliated
securities at market value+
Investments at Market
Value
Cash
Cash denominated in foreign
currencies at market value+
Unrealized appreciation on
forward foreign
currency contracts
Investment securities sold
receivable
Dividends and interest
receivable
Capital shares sold receivable
Prepaid and other assets
Total Assets
LIABILITIES
Investment securities
purchased payable
Unrealized depreciation on
forward foreign
currency contracts
Capital shares redeemed
payable
Trustees' fees payable
Overdraft due to custodian
Service fee payable
Shareholder servicing payable
Investment management
fee payable
Accounting services fee
payable
Other liabilities
Total Liabilities
Total Net Assets
NET ASSETS
Capital paid in (shares
authorized - unlimited)
Undistributed (distributions
in excess of) net
investment income
Accumulated net realized loss
Net unrealized appreciation
(depreciation)
Total Net Assets
CAPITAL SHARES
OUTSTANDING
NET ASSET VALUE PER
SHARE
+COST
Investments in unaffiliated
securities at cost
Cash denominated in foreign
currencies at cost
*Not shown due to rounding.
See Accompanying Notes to Financial Statements.
Ivy Funds VIP
(In thousands, except
per share amounts)
Cap
Growth
Cap
Growth
Market
Estate
Securities
ASSETS
Investments in unaffiliated
securities at market value+
Investments at Market
Value
Cash
Unrealized appreciation on
forward foreign
currency contracts
Investment securities sold
receivable
Dividends and interest
receivable
Capital shares sold receivable
Prepaid and other assets
Total Assets
LIABILITIES
Investment securities
purchased payable
Capital shares redeemed
payable
Distributions payable
Trustees' fees payable
Overdraft due to custodian
Service fee payable
Shareholder servicing payable
Investment management fee
payable
Accounting services fee
payable
Other liabilities
Total Liabilities
Total Net Assets
NET ASSETS
Capital paid in (shares
authorized - unlimited)
Undistributed (distributions
in excess of) net
investment income
Accumulated net realized
gain (loss)
Net unrealized appreciation
(depreciation)
Total Net Assets
CAPITAL SHARES
OUTSTANDING
NET ASSET VALUE
PER SHARE
+COST
Investments in unaffiliated
securities at cost
*Not shown due to rounding.
See Accompanying Notes to Financial Statements.
Ivy Funds VIP
(In thousands, except
per share amounts)
Technology
Cap
Growth
Cap
Value
ASSETS
Investments in unaffiliated
securities at market value+
Investments at Market
Value
Cash
Cash denominated in foreign
currencies at market value+
Investment securities sold
receivable
Dividends and interest
receivable
Capital shares sold receivable
Prepaid and other assets
Total Assets
LIABILITIES
Investment securities
purchased payable
Capital shares redeemed
payable
Trustees' fees payable
Service fee payable
Shareholder servicing payable
Investment management fee
payable
Accounting services fee
payable
Written options at market
value+
Other liabilities
Total Liabilities
Total Net Assets
NET ASSETS
Capital paid in (shares
authorized - unlimited)
Undistributed (distributions
in excess of) net investment
income
Accumulated net realized
gain (loss)
Net unrealized appreciation
Total Net Assets
CAPITAL SHARES
OUTSTANDING
NET ASSET VALUE
PER SHARE
+COST
Investments in unaffiliated
securities at cost
Cash denominated in foreign
currencies at cost
Written options premiums
received at cost
*Not shown due to rounding.
See Accompanying Notes to Financial Statements.
Ivy Funds VIP
(In thousands)
Aggressive
Conservative
Moderate
Moderately
Aggressive
Moderately
Conservative
Strategy
INVESTMENT INCOME
Dividends from unaffiliated
securities
Dividends from affiliated
securities
Foreign dividend withholding tax
Interest and amortization from
unaffiliated securities
Foreign interest withholding tax
Total Investment Income
EXPENSES
Investment management fee
Service fee
Shareholder servicing
Registration fees
Custodian fees
Trustees' fees
Accounting services fee
Legal fees
Audit fees
Other
Total Expenses
Less:
Expenses in excess of limit
Total Net Expenses
Net Investment Income
REALIZED AND
UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investments in unaffiliated
securities
Investments in affiliated
securities
Distributions of realized
capital gains from
affiliated investments
Futures contracts
Written options
Swap agreements
Forward foreign currency
contracts
Foreign currency exchange
transactions
Net change in unrealized
appreciation (depreciation) on:
Investments in unaffiliated
securities
Investments in affiliated
securities
Futures contracts
Forward foreign currency
contracts
Foreign currency exchange
transactions
Net Realized and
Unrealized Gain
Net Increase in Net
Assets Resulting
from Operations
*Not shown due to rounding.
See Accompanying Notes to Financial Statements.
Ivy Funds VIP
(In thousands)
Equity
Natural
Resources
Income
INVESTMENT INCOME
Dividends from unaffiliated
securities
Foreign dividend withholding
tax
Interest and amortization
from unaffiliated securities
Foreign interest withholding
tax
Total Investment Income
EXPENSES
Investment management fee
Service fee
Shareholder servicing
Custodian fees
Trustees' fees
Accounting services fee
Legal fees
Audit fees
Other
Total Expenses
Less:
Expenses in excess of limit
Total Net Expenses
Net Investment
Income (Loss)
REALIZED AND
UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investments in unaffiliated
securities
Futures contracts
Forward foreign currency
contracts
Foreign currency exchange
transactions
Net change in unrealized
appreciation (depreciation) on:
Investments in unaffiliated
securities
Forward foreign currency
contracts
Foreign currency exchange
transactions
Net Realized and
Unrealized Gain
Net Increase in Net
Assets Resulting
from Operations
*Not shown due to rounding.
See Accompanying Notes to Financial Statements.
Ivy Funds VIP
(In thousands)
Growth
Value
Cap
Growth
Cap
Growth
Market
Estate
Securities
INVESTMENT INCOME
Dividends from unaffiliated
securities
Foreign dividend withholding
tax
Interest and amortization from
unaffiliated securities
Total Investment Income
EXPENSES
Investment management fee
Service fee
Shareholder servicing
Custodian fees
Trustees' fees
Accounting services fee
Legal fees
Audit fees
Other
Total Expenses
Less:
Expenses in excess of limit
Total Net Expenses
Net Investment
Income (Loss)
REALIZED AND
UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investments in unaffiliated
securities
Futures contracts
Written options
Forward foreign currency
contracts
Foreign currency exchange
transactions
Net change in unrealized
appreciation (depreciation) on:
Investments in unaffiliated
securities
Futures contracts
Forward foreign currency
contracts
Foreign currency exchange
transactions
Net Realized and
Unrealized Gain
Net Increase in Net
Assets Resulting
from Operations
See Accompanying Notes to Financial Statements.
Ivy Funds VIP
(In thousands)
Technology
Cap
Growth
Cap
Value
INVESTMENT INCOME
Dividends from unaffiliated
securities
Foreign dividend withholding
tax
Interest and amortization from
unaffiliated securities
Total Investment Income
EXPENSES
Investment management fee
Service fee
Shareholder servicing
Custodian fees
Trustees' fees
Accounting services fee
Legal fees
Audit fees
Other
Total Expenses
Less:
Expenses in excess of limit
Total Net Expenses
Net Investment
Income (Loss)
REALIZED AND
UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investments in unaffiliated
securities
Investments in affiliated
securities
Written options
Foreign currency exchange
transactions
Net change in unrealized
appreciation (depreciation) on:
Investments in unaffiliated
securities
Investments in affiliated
securities
Written options
Foreign currency exchange
transactions
Net Realized and
Unrealized Gain
Net Increase in Net
Assets Resulting
from Operations
See Accompanying Notes to Financial Statements.
Ivy Funds VIP
(In thousands)
ended
12-31-09
ended
12-31-08(1)
ended
12-31-09
ended
12-31-08(2)
ended
12-31-09
ended
12-31-08(1)
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income
Net realized gain on
investments
Net change in unrealized
appreciation
(depreciation)
Net Increase (Decrease)
in Net Assets
Resulting from
Operations
11,182
(11,450
4,828
(562
31,104
(9,181 )
Distributions to
Shareholders From:
Net investment income
Net realized gains
Total Distributions to
Shareholders
Net Increase in Net Assets
Net Assets, Beginning
of Period
Net Assets, End of
Period
Undistributed net
investment income
Aggressive
Conservative
(In thousands)
ended
12-31-09
ended
12-31-08(1)
ended
12-31-09
ended
12-31-08(3)
ended
12-31-09
ended
12-31-08
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income
Net realized gain (loss)
on investments
Net change in unrealized
appreciation
(depreciation)
Net Increase (Decrease)
in Net Assets
Resulting from
Operations
44,256
(18,389
10,811
(2,322
191,925
(246,840 )
Distributions to
Shareholders From:
Net investment income
Net realized gains
Total Distributions to
Shareholders
)
Net Increase (Decrease)
in Net Assets
)
Net Assets, Beginning
of Period
Net Assets, End of
Period
Undistributed net
investment income
(1) For the period from March 4, 2008 (commencement of operations) through December 31, 2008.
(2) For the period from March 13, 2008 (commencement of operations) through December 31, 2008.
(3) For the period from March 12, 2008 (commencement of operations) through December 31, 2008.
See Accompanying Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
(In thousands)
ended
12-31-09
ended
12-31-08
ended
12-31-09
ended
12-31-08
ended
12-31-09
ended
12-31-08
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income
Net realized gain (loss)
on investments
Net change in unrealized
appreciation
(depreciation)
Net Increase (Decrease)
in Net Assets
Resulting from
Operations
43,225
(108,994
26,972
1,238
82,747
(233,976 )
Distributions to
Shareholders From:
Net investment income
Net realized gains
Total Distributions to
Shareholders
)
)
Net Increase (Decrease)
in Net Assets
)
)
)
Net Assets, Beginning
of Period
Net Assets, End of
Period
Undistributed net
investment income
(In thousands)
ended
12-31-09
ended
12-31-08
ended
12-31-09
ended
12-31-08
ended
12-31-09
ended
12-31-08
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss)
Net realized gain (loss) on
investments
Net change in unrealized
appreciation
(depreciation)
Net Increase (Decrease)
in Net Assets
Resulting from
Operations
30,296
(56,335)
8,561
(17,594)
64,363
(105,092 )
Distributions to
Shareholders From:
Net investment income
Net realized gains
Total Distributions to
Shareholders
)
)
)
)
Net Increase (Decrease)
in Net Assets
)
)
Net Assets, Beginning
of Period
Net Assets, End of
Period
Undistributed (distributions
in excess of) net
investment income
See Accompanying Notes to Financial Statements.
Ivy Funds VIP
(In thousands)
ended
12-31-09
ended
12-31-08
ended
12-31-09
ended
12-31-08
ended
12-31-09
ended
12-31-08
INCREASE (DECREASE)
IN NET ASSETS
Operations:
Net investment income
Net realized gain (loss)
on investments
Net change in unrealized
appreciation
(depreciation)
Net Increase (Decrease)
in Net Assets
Resulting from
Operations
192,337
(448,105
69,748
(43,766
48,107
(117,467 )
Distributions to
Shareholders From:
Net investment income
Net realized gains
Total Distributions to
Shareholders
)
)
Net Increase (Decrease)
in Net Assets
)
)
Net Assets, Beginning
of Period
Net Assets, End of
Period
Undistributed net
investment income
(In thousands)
ended
12-31-09
ended
12-31-08
ended
12-31-09
ended
12-31-08
ended
12-31-09
ended
12-31-08
INCREASE (DECREASE)
IN NET ASSETS
Operations:
Net investment income (loss)
Net realized gain (loss)
on investments
Net change in unrealized
appreciation
(depreciation)
Net Increase (Decrease)
in Net Assets
Resulting from
Operations
140,251
(270,391)
11,020
(27,133)
26,734
(24,210 )
Distributions to
Shareholders From:
Net investment income
Net realized gains
Total Distributions to
Shareholders
)
)
)
Net Increase (Decrease)
in Net Assets
)
)
)
Net Assets, Beginning
of Period
Net Assets, End of
Period
Undistributed (distributions
in excess of) net
investment income
See Accompanying Notes to Financial Statements.
Ivy Funds VIP
(In thousands)
ended
12-31-09
ended
12-31-08
ended
12-31-09
ended
12-31-08
ended
12-31-09
ended
12-31-08
INCREASE (DECREASE)
IN NET ASSETS
Operations:
Net investment income
Net realized gain (loss)
on investments
Net change in unrealized
appreciation
(depreciation)
Net Increase (Decrease)
in Net Assets
Resulting from
Operations
1,988
2,839
2,418
(3,702)
6,371
(17,675 )
Distributions to
Shareholders From:
Net investment income
Net realized gains
Total Distributions to
Shareholders
)
)
)
)
)
)
)
Net Increase (Decrease)
in Net Assets
)
)
)
Net Assets, Beginning
of Period
Net Assets, End of
Period
Undistributed net
investment income
(In thousands)
ended
12-31-09
ended
12-31-08
INCREASE (DECREASE)
IN NET ASSETS
Operations:
Net investment income (loss)
Net realized gain on
investments
Net change in unrealized
appreciation
(depreciation)
Net Increase (Decrease)
in Net Assets
Resulting from
Operations
95,446
(124,551 )
Distributions to
Shareholders From:
Net investment income
Net realized gains
Total Distributions to
Shareholders
)
)
)
Net Increase (Decrease)
in Net Assets
)
Net Assets, Beginning
of Period
Net Assets, End of
Period
Distributions in excess of
net investment income
See Accompanying Notes to Financial Statements.
Ivy Funds VIP
(In thousands)
ended
12-31-09
ended
12-31-08
ended
12-31-09
ended
12-31-08
ended
12-31-09
ended
12-31-08
INCREASE (DECREASE)
IN NET ASSETS
Operations:
Net investment income (loss)
Net realized gain (loss)
on investments
Net change in unrealized
appreciation
(depreciation)
Net Increase (Decrease)
in Net Assets
Resulting from
Operations
93,531
(200,847)
44,219
(52,923)
59,370
(119,993 )
Distributions to
Shareholders From:
Net investment income
Net realized gains
Total Distributions to
Shareholders
)
)
)
)
)
)
Net Increase (Decrease)
in Net Assets
)
)
)
Net Assets, Beginning
of Period
Net Assets, End of
Period
Undistributed (distributions
in excess of) net
investment income
See Accompanying Notes to Financial Statements.
THROUGHOUT EACH PERIOD
Value,
Beginning
of Period
Investment
Income
Net Realized
and
Unrealized
Gain (Loss)
on
Investments
Investment Operations
From Net
Investment
Income
From Net
Realized
Gains
Distributions
Pathfinder Aggressive
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008(2)
Pathfinder Conservative
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008(4)
Pathfinder Moderate
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008(2)
Pathfinder Moderately Aggressive
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008(2)
Pathfinder Moderately Conservative
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008(5)
Asset Strategy
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Balanced
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
(1)Ratios excluding expense waivers are included only for periods in which the Portfolio had waived or reimbursed expenses.
(2)For the period from March 4, 2008 (commencement of operations of the class) through December 31, 2008.
(3)Annualized.
(4)For the period from March 13, 2008 (commencement of operations of the class) through December 31, 2008
(5)For the period from March 12, 2008 (commencement of operations of the class) through December 31, 2008.
Asset
Value,
End of
Period
Return
Assets,
End of
Period
(in
millions)
Expenses
to Average
Net Assets
Including
Expense
Waiver
Net
Investment
Income to
Average
Net Assets
Including
Expense
Waiver
Expenses
to Average
Net Assets
Excluding
Expense
Waiver(1)
Net
Investment
Income to
Average
Net Assets
Excluding
Expense
Waiver(1)
Turnover
Rate
Pathfinder Aggressive
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008(2)
Pathfinder Conservative
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008(4)
Pathfinder Moderate
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008(2)
Pathfinder Moderately Aggressive
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008(2)
Pathfinder Moderately Conservative
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008(5)
Asset Strategy
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Balanced
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
See Accompanying Notes to Financial Statements.
Ivy Funds VIP
THROUGHOUT EACH PERIOD
Value,
Beginning
of Period
Investment
Income
(Loss)
Net Realized
and
Unrealized
Gain (Loss)
on
Investments
Investment Operations
From Net
Investment
Income
Realized
Gains
Distributions
Bond
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Core Equity
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Dividend Opportunities
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Energy
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006(2)
Global Natural Resources
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005(4)
Growth
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
(1)Ratios excluding expense waivers are included only for periods in which the Portfolio had waived or reimbursed expenses.
(2)For the period from May 1, 2006 (commencement of operations of the class) through December 31, 2006.
(3)Annualized.
(4)For the period from April 28, 2005 (commencement of operations of the class) through December 31, 2005.
Asset
Value,
End of
Period
Return
Assets,
End of
Period
(in
millions)
Expenses
to Average
Net Assets
Including
Expense
Waiver
Investment
Income
(Loss) to
Average
Net Assets
Including
Expense
Waiver
Expenses
to Average
Net Assets
Excluding
Expense
Waiver(1)
Investment
Income
(Loss) to
Average
Net Assets
Excluding
Expense
Waiver(1)
Turnover
Rate
Bond
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Core Equity
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Dividend Opportunities
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Energy
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006(2)
Global Natural Resources
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005(4)
Growth
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
See Accompanying Notes to Financial Statements.
Ivy Funds VIP
THROUGHOUT EACH PERIOD
Value,
Beginning
of Period
Investment
Income
(Loss)
Net
Realized
and
Unrealized
Gain (Loss)
on
Investments
Investment Operations
From Net
Investment
Income
Realized
Gains
Distributions
High Income
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
International Growth
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
International Value
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Micro Cap Growth
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Mid Cap Growth
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005(2)
Money Market
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
(1)Ratios excluding expense waivers are included only for periods in which the Portfolio had waived or reimbursed expenses.
(2)For the period from April 28, 2005 (commencement of operations of the class) through December 31, 2005.
(3)Annualized.
Asset
Value,
End of
Period
Return
Assets,
End of
Period
(in
millions)
Expenses
to Average
Net Assets
Including
Expense
Waiver
Investment
Income
(Loss) to
Average
Net Assets
Including
Expense
Waiver
Expenses
to Average
Net Assets
Excluding
Expense
Waiver(1)
Investment
Income
(Loss) to
Average
Net Assets
Excluding
Expense
Waiver(1)
Turnover
Rate
High Income
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
International Growth
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
International Value
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Micro Cap Growth
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Mid Cap Growth
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005(2)
Money Market
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
See Accompanying Notes to Financial Statements.
Ivy Funds VIP
THROUGHOUT EACH PERIOD
Value,
Beginning
of Period
Investment
Income
(Loss)
Net Realized
and
Unrealized
Gain (Loss)
on
Investments
Investment Operations
From Net
Investment
Income
From Net
Realized
Gains
Distributions
Mortgage Securities
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Real Estate Securities
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Science and Technology
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Small Cap Growth
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Small Cap Value
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Value
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
(1)Ratios excluding expense waivers are included only for periods in which the Portfolio had waived or reimbursed expenses.
Asset
Value,
End of
Period
Return
Assets,
End of
Period
(in
millions)
Expenses
to Average
Net Assets
Including
Expense
Waiver
Investment
Income
(Loss) to
Average
Net Assets
Including
Expense
Waiver
Expenses
to Average
Net Assets
Excluding
Expense
Waiver(1)
Investment
Income
(Loss) to
Average
Net Assets
Excluding
Expense
Waiver(1)
Turnover
Rate
Mortgage Securities
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Real Estate Securities
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Science and Technology
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Small Cap Growth
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Small Cap Value
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
Value
Fiscal year ended 12-31-2009
Fiscal year ended 12-31-2008
Fiscal year ended 12-31-2007
Fiscal year ended 12-31-2006
Fiscal year ended 12-31-2005
See Accompanying Notes to Financial Statements.
Fair Valued
Securities
Net Assets
Asset Strategy
Balanced
Global Natural Resources
International Growth
International Value
Science and Technology
Rate
Asset Strategy
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Balanced
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Bond
Up to $500 Million
Over $500 Million up to $1 Billion
Over $1 Billion up to $1.5 Billion
Core Equity
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Dividend Opportunities
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Energy
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Global Natural Resources
Up to $500 Million
Over $500 Million up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Growth
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
High Income
Up to $500 Million
Over $500 Million up to $1 Billion
Over $1 Billion up to $1.5 Billion
International Growth
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
International Value
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Micro Cap Growth
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Mid Cap Growth
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Mortgage Securities
Up to $500 Million
Over $500 Million up to $1 Billion
Over $1 Billion up to $1.5 Billion
Real Estate Securities
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Science and Technology
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Small Cap Growth
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Small Cap Value
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Value
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Over $3 Billion
Rate
Asset Strategy
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Bond
Up to $500 Million
Over $500 Million up to $1 Billion
Over $1 Billion up to $1.5 Billion
Core Equity
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Growth
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
High Income
Up to $500 Million
Over $500 Million up to $1 Billion
Over $1 Billion up to $1.5 Billion
International Growth
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Mid Cap Growth
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Science and Technology
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Small Cap Growth
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Value
Up to $1 Billion
Over $1 Billion up to $2 Billion
Over $2 Billion up to $3 Billion
Over $3 Billion
Bond
Up to $1 Billion
Over $1 Billion up to $1.5 Billion
(in millions)
for Each Level
(in millions)
for Each Level
Asset Strategy
Core Equity
Growth
High Income
International Growth
Mid Cap Growth
Science and Technology
Small Cap Growth
Value
Energy
Pathfinder Aggressive
Assets
Investments in Securities
Affiliated Mutual Funds
Short-Term Securities
Total Investments in Securities
Pathfinder Conservative
Assets
Investments in Securities
Affiliated Mutual Funds
Short-Term Securities
Total Investments in Securities
Pathfinder Moderate
Assets
Investments in Securities
Affiliated Mutual Funds
Short-Term Securities
Total Investments in Securities
Pathfinder Moderately Aggressive
Assets
Investments in Securities
Affiliated Mutual Funds
Short-Term Securities
Total Investments in Securities
Pathfinder Moderately Conservative
Assets
Investments in Securities
Affiliated Mutual Funds
Short-Term Securities
Total Investments in Securities
Asset Strategy
Assets
Investments in Securities
Common Stocks
Investment Funds
Corporate Debt Securities
United States Government Agency Obligations
Bullion
Short-Term Securities
Total Investments in Securities
Forward Foreign Currency Contracts
Liabilities
Forward Foreign Currency Contracts
Balanced
Assets
Investments in Securities
Common Stocks
Corporate Debt Securities
Other Government Securities
United States Government Agency Obligations
United States Government Obligations
Short-Term Securities
Total Investments in Securities
Bond
Assets
Investments in Securities
Corporate Debt Securities
Municipal Bonds
Other Government Securities
United States Government Agency Obligations
United States Government Obligations
Short-Term Securities
Total Investments in Securities
Core Equity
Assets
Investments in Securities
Common Stocks
Short-Term Securities
Total Investments in Securities
Dividend Opportunities
Assets
Investments in Securities
Common Stocks
Short-Term Securities
Total Investments in Securities
Energy
Assets
Investments in Securities
Common Stocks
Short-Term Securities
Total Investments in Securities
Global Natural Resources
Assets
Investments in Securities
Common Stocks
Preferred Stocks
Call Options
Corporate Debt Securities
Short-Term Securities
Total Investments in Securities
Forward Foreign Currency Contracts
Liabilities
Forward Foreign Currency Contracts
Growth
Assets
Investments in Securities
Common Stocks
Short-Term Securities
Total Investments in Securities
High Income
Assets
Investments in Securities
Common Stocks
Corporate Debt Securities
Senior Loans
Short-Term Securities
Total Investments in Securities
Forward Foreign Currency Contracts
International Growth
Assets
Investments in Securities
Common Stocks
Preferred Stocks
Short-Term Securities
Total Investments in Securities
Forward Foreign Currency Contracts
International Value
Assets
Investments in Securities
Common Stocks
Short-Term Securities
Total Investments in Securities
Micro Cap Growth
Assets
Investments in Securities
Common Stocks
Short-Term Securities
Total Investments in Securities
Mid Cap Growth
Assets
Investments in Securities
Common Stocks
Corporate Debt Securities
Short-Term Securities
Total Investments in Securities
Money Market
Assets
Investments in Securities
Corporate Obligations
Municipal Obligations
United States Government Agency Obligations
Total Investments in Securities
Mortgage Securities
Assets
Investments in Securities
Corporate Debt Securities
United States Government Agency Obligations
Short-Term Securities
Total Investments in Securities
Real Estate Securities
Assets
Investments in Securities
Common Stocks
Short-Term Securities
Total Investments in Securities
Science and Technology
Assets
Investments in Securities
Common Stocks
Short-Term Securities
Total Investments in Securities
Small Cap Growth
Assets
Investments in Securities
Common Stocks
Short-Term Securities
Total Investments in Securities
Small Cap Value
Assets
Investments in Securities
Common Stocks
Short-Term Securities
Total Investments in Securities
Value
Assets
Investments in Securities
Common Stocks
Short-Term Securities
Total Investments in Securities
Liabilities
Written Options
Stocks
Stocks
Funds
Options
Options
Asset Strategy
Beginning Balance 1-1-09
Net realized gain (loss)
Net unrealized appreciation (depreciation)
Net purchases (sales)
Transfers in and/or (out) of Level 3
during the period
Ending Balance 12-31-09
Net change in unrealized appreciation
(depreciation) for all Level 3
investments still held as of 12-31-09
Balanced
Beginning Balance 1-1-09
Net realized gain (loss)
Net unrealized appreciation (depreciation)
Net purchases (sales)
Transfers in and/or (out) of Level 3
during the period
Ending Balance 12-31-09
Net change in unrealized appreciation
(depreciation) for all Level 3
investments still held as of 12-31-09
Bond
Beginning Balance 1-1-09
Net realized gain (loss)
Net unrealized appreciation (depreciation)
Net purchases (sales)
Transfers in and/or (out) of Level 3
during the period
Ending Balance 12-31-09
Net change in unrealized appreciation
(depreciation) for all Level 3
investments still held as of 12-31-09
Global Natural Resources
Beginning Balance 1-1-09
Net realized gain (loss)
Net unrealized appreciation (depreciation)
Net purchases (sales)
Transfers in and/or (out) of Level 3
during the period
Ending Balance 12-31-09
Net change in unrealized appreciation
(depreciation) for all Level 3
investments still held as of 12-31-09
High Income
Beginning Balance 1-1-09
Net realized gain (loss)
Net unrealized appreciation (depreciation)
Net purchases (sales)
Transfers in and/or (out) of Level 3
during the period
Ending Balance 12-31-09
Net change in unrealized appreciation
(depreciation) for all Level 3
investments still held as of 12-31-09
International Growth
Beginning Balance 1-1-09
Net realized gain (loss)
Net unrealized appreciation (depreciation)
Net purchases (sales)
Transfers in and/or (out) of Level 3
during the period
Ending Balance 12-31-09
Net change in unrealized appreciation
(depreciation) for all Level 3
investments still held as of 12-31-09
Mortgage Securities
Beginning Balance 1-1-09
Net realized gain (loss)
Net unrealized appreciation (depreciation)
Net purchases (sales)
Transfers in and/or (out) of Level 3
during the period
Ending Balance 12-31-09
Net change in unrealized appreciation
(depreciation) for all Level 3
investments still held as of 12-31-09
Science and Technology
Beginning Balance 1-1-09
Net realized gain (loss)
Net unrealized appreciation (depreciation)
Net purchases (sales)
Transfers in and/or (out) of Level 3
during the period
Ending Balance 12-31-09
Net change in unrealized appreciation
(depreciation) for all Level 3
investments still held as of 12-31-09
Value
Beginning Balance 1-1-09
Net realized gain (loss)
Net unrealized appreciation (depreciation)
Net purchases (sales)
Transfers in and/or (out) of Level 3
during the period
Ending Balance 12-31-09
Net change in unrealized appreciation
(depreciation) for all Level 3
investments still held as of 12-31-09
Pathfinder Aggressive
Pathfinder Conservative
Pathfinder Moderate
Pathfinder Moderately Aggressive
Pathfinder Moderately Conservative
Asset Strategy
Balanced
Bond
Core Equity
Dividend Opportunities
Energy
Global Natural Resources
Growth
High Income
International Growth
International Value
Micro Cap Growth
Mid Cap Growth
Money Market
Mortgage Securities
Real Estate Securities
Science and Technology
Small Cap Growth
Small Cap Value
Value
Asset Strategy
Balanced
Bond
Mortgage Securities
Aggressive
Conservative
Moderate
Moderately
Aggressive
Moderately
Conservative
Strategy
Net ordinary income
Distributed ordinary income
Undistributed ordinary income
Realized long term capital gains
Distributed long term capital gains
Undistributed long term capital gains
Post-October losses deferred
Equity
Opportunities
Natural
Resources
Net ordinary income
Distributed ordinary income
Undistributed ordinary income
Realized long term capital gains
Distributed long term capital gains
Undistributed long term capital gains
Post-October losses deferred
Income
Growth
Value
Growth
Growth
Net ordinary income
Distributed ordinary income
Undistributed ordinary income
Realized long term capital gains
Distributed long term capital gains
Undistributed long term capital gains
Post-October losses deferred
Market
Securities
Securities
Technology
Growth
Value
Net ordinary income
Distributed ordinary income
Undistributed ordinary income
Realized long term capital gains
Distributed long term capital gains
Undistributed long term capital gains
Post-October losses deferred
Net ordinary income
Distributed ordinary income
Undistributed ordinary income
Realized long term capital gains
Distributed long term capital gains
Undistributed long term capital gains
Post-October losses deferred
Strategy
Equity
Opportunities
Natural
Resources
December 31, 2010
December 31, 2014
December 31, 2015
December 31, 2016
December 31, 2017
Total carryover
Income
Growth
Value
Growth
Growth
Securities
Securities
December 31, 2010
December 31, 2013
December 31, 2014
December 31, 2016
December 31, 2017
Total carryover
Growth
Value
December 31, 2010
December 31, 2016
December 31, 2017
Total carryover
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
Net increase
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net decrease
)
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net decrease
)
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net decrease
)
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase (decrease)
)
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase (decrease)
)
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net decrease
)
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase (decrease)
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase (decrease)
)
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net decrease
)
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase (decrease)
)
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net decrease
)
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
)
Net increase
Shares issued from sale of shares
Shares issued in reinvestment of distributions
to shareholders
Shares redeemed
Net decrease
Unrealized appreciation on
forward foreign
currency contracts
Unrealized depreciation on forward foreign currency contracts
Derivatives Recognized
in Income
on Derivatives
Recognized in Income
Unrealized
Appreciation
(Depreciation)
on Derivatives
Recognized in Income
Net realized gain (loss) on
investments in unaffiliated
securities and written options
and futures contracts/Net
change in unrealized
appreciation (depreciation)
on investments in
futures contracts
Net realized gain (loss) on
forward foreign currency
contracts/Net change in
unrealized appreciation
(depreciation) on forward
foreign currency contracts
Commodities
Net realized gain (loss) on
futures contracts
Total
)
)
Derivatives Recognized
in Income
on Derivatives
Recognized in Income
Appreciation
(Depreciation)
on Derivatives
Recognized in Income
Equity
Net realized gain (loss) on
futures contracts
Value
Value
Investments in
unaffiliated securities
Foreign currency
Unrealized appreciation
on forward foreign
currency contracts
Unrealized depreciation
on forward foreign
currency contracts
Total
on Derivatives Recognized
in Income
on Derivatives
Recognized in Income
Appreciation (Depreciation)
on Derivatives
Recognized in Income
Net realized gain (loss) on
investments in unaffiliated
securities and futures
contracts/Net change in
unrealized appreciation
(depreciation) on investments
in unaffiliated securities
Foreign currency
Net realized gain (loss) on forward
foreign currency contracts/
Net change in unrealized
appreciation (depreciation)
on forward foreign
currency contracts
)
Total
)
)
Unrealized appreciation on
forward foreign
currency contracts
on Derivatives Recognized
in Income
on Derivatives
Recognized in Income
Appreciation
(Depreciation)
on Derivatives
Recognized in Income
Net change in unrealized
appreciation (depreciation)
on forward foreign
currency contracts
Value
Value
Unrealized appreciation on
forward foreign
currency contracts
on Derivatives
Recognized in Income
on Derivatives
Recognized in Income
Unrealized
Appreciation
(Depreciation) on
Derivatives
Recognized in Income
Net realized gain (loss) on
forward foreign currency
contracts/Net change in
unrealized appreciation
(depreciation) on forward
foreign currency contracts
on Derivatives
Recognized in Income
on Derivatives
Recognized in Income
Appreciation
(Depreciation)
on Derivatives
Recognized in Income
Net realized gain (loss) on
investments in unaffiliated
securities and written
options
on Derivatives
Recognized in Income
on Derivatives
Recognized in Income
in Income
Net realized gain (loss) on
futures contracts/
Net change in unrealized
appreciation (depreciation)
on futures contracts
Derivatives Recognized
in Income
on Derivatives
Recognized in Income
Appreciation
(Depreciation)
on Derivatives
Recognized in Income
Net realized gain (loss) on
investments in unaffiliated
securities and written options/
Net change in unrealized
appreciation (depreciation)
on investments in
unaffiliated securities
and written options
on Derivatives
Recognized in Income
on Derivatives
Recognized in Income
(Depreciation)
on Derivatives
Recognized in Income
Net realized gain (loss) on
investments in unaffiliated
securities and written
options/Net change in
unrealized appreciation
(depreciation) on
investments in unaffiliated
securities and written
options
Value
Value
Equity
N/A
on Derivatives
Recognized in Income
on Derivatives
Recognized in Income
(Depreciation)
on Derivatives
Recognized in Income
Net realized gain (loss) on
investments in unaffiliated
securities and written
options/Net change in
unrealized appreciation
(depreciation) on
investments in written
options
Share
Balance
at Cost
at Cost
Gain
(Loss)(3)
tions
Received
Share
Balance
Market
Value
Pathfinder Moderately Conservative
Ivy Funds VIP Bond
Ivy Funds
VIP Dividend Opportunities
Ivy Funds VIP Growth
Ivy Funds VIP International Growth
Ivy Funds VIP International Value
Ivy Funds VIP Mid Cap Growth(1)
Ivy Funds VIP Money Market
Ivy Funds VIP Small Cap Growth
Ivy Funds VIP Small Cap Value(1)
Ivy Funds VIP Value
12-31-08
Share Balance |
Purchases
at Cost |
Sales
at Cost |
Realized
Gain (Loss)(3) |
Distribu-
tions Received |
12-31-09
Share Balance |
12-31-09
Market Value |
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
||||||||||||||||||||||||
Pathfinder Aggressive | ||||||||||||||||||||||||
Ivy Funds VIP Bond |
1,028
|
|
$4,318
|
|
$
|
359
|
|
$
|
19
|
|
|
$
|
230
|
|
|
1,763
|
|
|
$
|
9,697
|
|
|
||
Ivy Funds VIP Dividend Opportunities |
1,159
|
|
|
1,463
|
|
|
983
|
|
|
139
|
|
|
|
66
|
|
|
1,237
|
|
|
|
7,374
|
|
|
|
Ivy Funds VIP Growth |
891
|
|
|
1,875
|
|
|
898
|
|
|
372
|
|
|
|
30
|
|
|
1,004
|
|
|
|
9,312
|
|
|
|
Ivy Funds VIP International Growth |
692
|
|
|
4,489
|
|
|
372
|
|
|
98
|
|
|
|
78
|
|
|
1,300
|
|
|
|
9,740
|
|
|
|
Ivy Funds VIP International Value |
428
|
|
|
2,034
|
|
|
433
|
|
|
502
|
|
|
|
234
|
|
|
551
|
|
|
|
8,469
|
|
|
|
Ivy Funds VIP Mid Cap Growth(1) |
444
|
|
|
462
|
|
|
288
|
|
|
106
|
|
|
|
|
|
|
467
|
|
|
|
3,084
|
|
|
|
Ivy Funds VIP Money Market |
5,465
|
|
|
580
|
|
|
6,045
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
Ivy Funds VIP Mortgage Securities |
|
|
|
1,708
|
|
|
40
|
|
|
1
|
|
|
|
|
|
|
385
|
|
|
|
1,730
|
|
|
|
Ivy Funds VIP Small Cap Growth |
200
|
|
|
283
|
|
|
86
|
|
|
27
|
|
|
|
6
|
|
|
227
|
|
|
|
1,855
|
|
|
|
Ivy Funds VIP Small Cap Value(1) |
344
|
|
|
775
|
|
|
376
|
|
|
99
|
|
|
|
|
|
|
375
|
|
|
|
4,988
|
|||
Ivy Funds VIP Value |
697
|
|
|
729
|
|
|
157
|
|
|
45
|
|
|
|
69
|
824
|
|
|
4,240
|
||||||
|
|
|||||||||||||||||||||||
$
|
757
|
|
$
|
60,489
|
||||||||||||||||||||
|
|
12-31-08
Share Balance |
Purchases
at Cost |
Sales
at Cost |
Realized
Gain (Loss)(3) |
Distribu-
tions Received |
12-31-09
Share Balance |
|
12-31-09
Market Value |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|||||||||||||||||||||||
Pathfinder Conservative | |||||||||||||||||||||||
Ivy Funds VIP Bond |
702
|
|
$
|
13,712
|
|
$
|
868
|
|
$
|
42
|
|
|
$
|
343
|
|
|
3,089
|
|
|
$
|
16,990
|
||
Ivy Funds VIP Dividend Opportunities |
412
|
|
|
5,876
|
|
|
1,326
|
|
|
333
|
|
|
|
59
|
|
|
1,304
|
|
|
|
7,779
|
||
Ivy Funds VIP Growth |
125
|
|
|
2,655
|
|
|
883
|
|
|
265
|
|
|
|
10
|
|
|
349
|
|
|
|
3,237
|
||
Ivy Funds VIP International Growth |
|
|
|
2,134
|
|
|
80
|
|
|
4
|
|
|
|
|
|
|
302
|
|
|
|
2,266
|
||
Ivy Funds VIP International Value |
43
|
|
|
1,628
|
|
|
335
|
|
|
215
|
|
|
|
58
|
|
|
146
|
|
|
|
2,252
|
||
Ivy Funds VIP Mid Cap Growth(1) |
47
|
|
|
590
|
|
|
127
|
|
|
64
|
|
|
|
|
|
|
139
|
|
|
|
919
|
||
Ivy Funds VIP Money Market |
3,685
|
|
|
8,513
|
|
|
3,681
|
|
|
|
|
|
|
77
|
|
|
8,516
|
|
|
|
8,516
|
||
Ivy Funds VIP Small Cap Growth |
18
|
|
|
296
|
|
|
49
|
|
|
21
|
|
|
|
1
|
|
|
56
|
|
|
|
461
|
||
Ivy Funds VIP Small Cap Value(1) |
11
|
|
|
296
|
|
|
44
|
|
|
18
|
|
|
|
|
|
|
35
|
|
|
|
464
|
||
Ivy Funds VIP Value |
53
|
|
|
603
|
|
|
99
|
|
|
41
|
|
|
|
13
|
|
|
175
|
|
|
|
902
|
||
|
|
||||||||||||||||||||||
$
|
561
|
|
|
|
|
|
$
|
43,786
|
|||||||||||||||
|
|
12-31-08
Share Balance |
Purchases
at Cost |
Sales
at Cost |
Realized
Gain (Loss)(3) |
Distribu-
tions Received |
12-31-09
Share Balance |
12-31-09
Market Value |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
||||||||||||||||||||||
Pathfinder Moderate | ||||||||||||||||||||||
Ivy Funds VIP Bond |
3,327
|
|
$
|
56,049
|
|
$
|
493
|
|
$
|
34
|
|
|
$
|
1,063
|
|
|
13,622
|
|
$
|
74,915
|
||
Ivy Funds VIP Dividend Opportunities |
2,483
|
|
|
27,414
|
|
|
3,439
|
|
|
768
|
|
|
|
221
|
|
|
6,941
|
|
|
41,390
|
||
Ivy Funds VIP Growth |
1,120
|
|
|
18,545
|
|
|
2,921
|
|
|
1,021
|
|
|
|
58
|
|
|
3,005
|
|
|
27,882
|
||
Ivy Funds VIP International Growth |
822
|
|
|
24,037
|
|
|
314
|
|
|
127
|
|
|
|
144
|
|
|
4,386
|
|
|
32,856
|
||
Ivy Funds VIP International Value |
452
|
|
|
13,838
|
|
|
1,019
|
|
|
1,000
|
|
|
|
386
|
|
|
1,416
|
|
|
21,774
|
||
Ivy Funds VIP Mid Cap Growth(1) |
634
|
|
|
6,416
|
|
|
615
|
|
|
297
|
|
|
|
|
|
|
1,680
|
|
|
11,099
|
||
Ivy Funds VIP Money Market |
17,554
|
|
|
25,554
|
|
|
17,199
|
|
|
|
|
|
|
248
|
|
|
25,909
|
|
|
25,909
|
||
Ivy Funds VIP Mortgage Securities |
|
|
|
2,547
|
|
|
14
|
|
|
|
*
|
|
|
|
|
|
580
|
|
|
2,609
|
||
Ivy Funds VIP Small Cap Growth |
240
|
|
|
3,219
|
|
|
147
|
|
|
64
|
|
|
|
11
|
|
|
681
|
|
|
5,568
|
||
Ivy Funds VIP Small Cap Value(1) |
297
|
|
|
6,455
|
|
|
285
|
|
|
115
|
|
|
|
|
|
|
844
|
|
|
11,210
|
||
Ivy Funds VIP Value |
888
|
|
|
8,159
|
|
|
380
|
|
|
161
|
|
|
|
135
|
|
|
2,648
|
|
|
13,623
|
||
|
|
|||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,266
|
|
|
|
|
$
|
268,835
|
|||
|
|
12-31-08
Share Balance |
Purchases
at Cost |
Sales
at Cost |
Realized
Gain (Loss)(3) |
Distribu-
tions Received |
12-31-09
Share Balance |
12-31-09
Market Value |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
||||||||||||||||||||||
Pathfinder Moderately Aggressive | ||||||||||||||||||||||
Ivy Funds VIP Bond |
3,810
|
|
$
|
44,230
|
|
$
|
271
|
|
$
|
20
|
|
|
$
|
1,113
|
|
|
11,984
|
|
$
|
65,908
|
|
|
Ivy Funds VIP Dividend Opportunities |
3,712
|
|
|
24,985
|
|
|
3,619
|
|
|
758
|
|
|
|
298
|
|
|
7,744
|
|
|
46,183
|
|
|
Ivy Funds VIP Growth |
1,676
|
|
|
17,028
|
|
|
3,303
|
|
|
1,204
|
|
|
|
79
|
|
|
3,354
|
|
|
31,122
|
|
|
Ivy Funds VIP International Growth |
1,558
|
|
|
30,320
|
|
|
386
|
|
|
156
|
|
|
|
246
|
|
|
6,109
|
|
|
45,763
|
|
|
Ivy Funds VIP International Value |
919
|
|
|
16,965
|
|
|
3,068
|
|
|
2,002
|
|
|
|
706
|
|
|
1,971
|
|
|
30,317
|
|
|
Ivy Funds VIP Mid Cap Growth(1) |
1,185
|
|
|
7,111
|
|
|
853
|
|
|
393
|
|
|
|
|
|
|
2,340
|
|
|
15,463
|
|
|
Ivy Funds VIP Money Market |
20,157
|
|
|
16,611
|
|
|
22,406
|
|
|
|
|
|
|
234
|
|
|
14,362
|
|
|
14,362
|
|
|
Ivy Funds VIP Mortgage Securities |
|
|
|
5,618
|
|
|
17
|
|
|
1
|
|
|
|
|
|
|
1,289
|
|
|
5,793
|
|
|
Ivy Funds VIP Small Cap Growth |
536
|
|
|
4,290
|
|
|
195
|
|
|
84
|
|
|
|
23
|
|
|
1,139
|
|
|
9,305
|
|
|
Ivy Funds VIP Small Cap Value(1) |
784
|
|
|
10,069
|
|
|
515
|
|
|
201
|
|
|
|
|
|
|
1,647
|
|
|
21,878
|
|
|
Ivy Funds VIP Value |
1,325
|
|
|
7,319
|
|
|
296
|
|
|
122
|
|
|
|
181
|
|
|
2,951
|
|
|
15,183
|
|
|
|
|
|||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,880
|
|
|
|
|
$
|
301,277
|
|
||
|
|
12-31-08
Share Balance |
Purchases
at Cost |
Sales
at Cost |
Realized
Gain (Loss)(3) |
Distribu-
tions Received |
12-31-09
Share Balance |
12-31-09
Market Value |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
||||||||||||||||||||||
Pathfinder Moderately Conservative | ||||||||||||||||||||||
Ivy Funds VIP Bond |
1,631
|
|
$
|
23,489
|
|
$1,921
|
|
$
|
83
|
|
|
$
|
582
|
|
|
5,633
|
|
$
|
30,981
|
|
||
Ivy Funds VIP Dividend Opportunities |
1,022
|
|
|
9,828
|
|
|
2,603
|
|
|
397
|
|
|
|
101
|
|
|
2,395
|
|
|
14,283
|
|
|
Ivy Funds VIP Growth |
422
|
|
|
6,095
|
|
|
1,941
|
|
|
462
|
|
|
|
24
|
|
|
933
|
|
|
8,660
|
|
|
Ivy Funds VIP International Growth |
244
|
|
|
7,134
|
|
|
438
|
|
|
99
|
|
|
|
47
|
|
|
1,259
|
|
|
9,433
|
|
|
Ivy Funds VIP International Value |
117
|
|
|
3,068
|
|
|
643
|
|
|
321
|
|
|
|
111
|
|
|
305
|
|
|
4,688
|
|
|
Ivy Funds VIP Mid Cap Growth(1) |
261
|
|
|
2,224
|
|
|
525
|
|
|
174
|
|
|
|
|
|
|
579
|
|
|
3,825
|
|
|
Ivy Funds VIP Money Market |
8,603
|
|
|
12,759
|
|
|
8,050
|
|
|
|
|
|
|
132
|
|
|
13,312
|
|
|
13,312
|
|
|
Ivy Funds VIP Small Cap Growth |
49
|
|
|
558
|
|
|
98
|
|
|
26
|
|
|
|
3
|
|
|
117
|
|
|
959
|
|
|
Ivy Funds VIP Small Cap Value(1) |
30
|
|
|
559
|
|
|
92
|
|
|
20
|
|
|
|
|
|
|
73
|
|
|
966
|
|
|
Ivy Funds VIP Value |
364
|
|
|
2,841
|
|
|
488
|
|
|
110
|
|
|
|
61
|
|
|
913
|
|
|
4,695
|
||
|
|
|||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,061
|
|
|
|
$
|
91,802
|
||||
|
|
12-31-08 Share Balance
|
Purchases
at Cost |
Sales
at Cost |
Realized Gain/
Loss) |
Distributions Received
|
12-31-09 Share Balance
|
12-31-09 Market
Value |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
||||||||||||||||||||||
Asset Strategy | ||||||||||||||||||||||
Vietnam Azalea Fund Limited(1) |
300
|
|
$242
|
|
$
|
|
$
|
|
|
$
|
|
|
300
|
|
$1,392
|
|||||||
12-31-08 Share Balance
|
Purchases
at Cost |
Sales
at Cost |
Realized Gain/
(Loss) |
Distributions Received
|
12-31-09 Share Balance
|
12-31-09 Market
Value |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
||||||||||||||||||||||
Small Cap Growth | ||||||||||||||||||||||
Argyle Security, Inc.(1)(2) |
300
|
|
$
|
|
$2,412
|
|
$
|
(2,341
|
)
|
|
$
|
|
|
|
|
|
N/A
|
|
||||
*Not shown due to rounding.
(1)No dividends were paid during the preceding 12 months.
(2)Company was no longer an affiliate at December 31, 2009.
(3)Distributions from capital gains from the underlying portfolios, if applicable, are included here.
10. SENIOR LOANS
A Portfolio invests in senior secured corporate loans (senior loans) either as an original lender or as a purchaser of a loan assignment or a participation interest in a loan. Senior loans are generally made to U.S. and foreign borrowers that are corporations, partnerships, or other business entities. Senior loans are generally readily marketable, but some loans may be illiquid or be subject to some restrictions on resale.
Certain senior loans contain provisions that obligate a Portfolio to fund future commitments at the borrower's discretion. At December 31, 2009, there were no such unfunded commitments.
11. WRITTEN OPTION ACTIVITYFor Asset Strategy, transactions in written call options were as follows:
Number of
Contracts |
|
Premium
Received |
||||||
---|---|---|---|---|---|---|---|---|
|
||||||||
Outstanding at December 31, 2008 |
––
|
|
|
|
$
|
––
|
|
|
Options written |
1
|
|
|
|
|
2,204
|
|
|
Options terminated in closing purchase transactions |
(1
|
)
|
|
|
|
(2,007
|
)
|
|
Options exercised |
––
|
|
|
|
|
––
|
|
|
Options expired |
––
|
*
|
|
|
|
(197
|
)
|
|
|
||||||||
Outstanding at December 31, 2009 |
|
|
|
|
$
|
|
||
|
For Asset Strategy, transactions in written put options were as follows:
Number of
Contracts |
|
Premium
Received |
||||||
---|---|---|---|---|---|---|---|---|
|
||||||||
Outstanding at December 31, 2008 |
––
|
|
|
|
$
|
––
|
|
|
Options written |
3
|
|
|
|
|
3,686
|
|
|
Options terminated in closing purchase transactions |
(2
|
)
|
|
|
|
(2,005
|
)
|
|
Options exercised |
––
|
|
|
|
|
––
|
|
|
Options expired |
(1
|
)
|
|
|
|
(1,681
|
)
|
|
|
|
|||||||
Outstanding at December 31, 2009 |
|
|
|
|
$
|
|
|
|
|
For Mid Cap Growth, transactions in written call options were as follows:
Number of
Contracts |
|
Premium
Received |
||||||
---|---|---|---|---|---|---|---|---|
|
||||||||
Outstanding at December 31, 2008 |
––
|
|
|
|
$
|
––
|
|
|
Options written |
1
|
|
|
|
|
48
|
|
|
Options terminated in closing purchase transactions |
––
|
*
|
|
|
|
(31
|
)
|
|
Options exercised |
––
|
*
|
|
|
|
(3
|
)
|
|
Options expired |
––
|
*
|
|
|
|
(14
|
)
|
|
|
||||||||
Outstanding at December 31, 2009 |
|
|
|
|
$
|
|
||
|
For Mid Cap Growth, transactions in written put options were as follows:
Number of
Contracts |
|
Premium
Received |
||||||
---|---|---|---|---|---|---|---|---|
|
||||||||
Outstanding at December 31, 2008 |
––
|
|
|
|
$
|
––
|
|
|
Options written |
4
|
|
|
|
|
517
|
|
|
Options terminated in closing purchase transactions |
(3
|
)
|
|
|
|
(481
|
)
|
|
Options exercised |
––
|
*
|
|
|
|
(10
|
)
|
|
Options expired |
––
|
*
|
|
|
|
(26
|
)
|
|
|
||||||||
Outstanding at December 31, 2009 |
|
|
|
|
$
|
|
||
|
For Science and Technology, transactions in written call options were as follows:
Number of
Contracts |
|
Premium
Received |
||||||
---|---|---|---|---|---|---|---|---|
|
||||||||
Outstanding at December 31, 2008 |
7
|
|
|
|
$
|
2,374
|
|
|
Options written |
4
|
|
|
|
|
1,907
|
|
|
Options terminated in closing purchase transactions |
(5
|
)
|
|
|
|
(2,561
|
)
|
|
Options exercised |
(4
|
)
|
|
|
|
(884
|
)
|
|
Options expired |
(2
|
)
|
|
|
|
(836
|
)
|
|
|
||||||||
Outstanding at December 31, 2009 |
|
|
|
|
$
|
|
||
|
For Small Cap Value, transactions in written call options were as follows:
Number of
Contracts |
|
Premium
Received |
||||||
---|---|---|---|---|---|---|---|---|
|
||||||||
Outstanding at December 31, 2008 |
––
|
|
|
|
$
|
––
|
|
|
Options written |
2
|
|
|
|
|
209
|
|
|
Options terminated in closing purchase transactions |
(2
|
)
|
|
|
|
(209
|
)
|
|
Options exercised |
––
|
|
|
|
|
––
|
|
|
Options expired |
––
|
|
|
|
|
––
|
|
|
|
||||||||
Outstanding at December 31, 2009 |
|
|
|
|
$
|
|
||
|
For Small Cap Value, transactions in written put options were as follows:
Number of
Contracts |
|
Premium
Received |
||||||
---|---|---|---|---|---|---|---|---|
|
||||||||
Outstanding at December 31, 2008 |
––
|
*
|
|
|
$
|
884
|
|
|
Options written |
––
|
|
|
|
|
––
|
|
|
Options terminated in closing purchase transactions |
––
|
*
|
|
|
|
(884
|
)
|
|
Options exercised |
––
|
|
|
|
|
––
|
|
|
Options expired |
––
|
|
|
|
|
––
|
|
|
|
||||||||
Outstanding at December 31, 2009 |
|
|
|
|
$
|
|
||
|
For Value, transactions in written call options were as follows:
Number of
Contracts |
|
Premium
Received |
||||||
---|---|---|---|---|---|---|---|---|
|
||||||||
Outstanding at December 31, 2008 |
5
|
|
|
|
$
|
646
|
|
|
Options written |
50
|
|
|
|
|
2,417
|
|
|
Options terminated in closing purchase transactions |
(20
|
)
|
|
|
|
(1,453
|
)
|
|
Options exercised |
(4
|
)
|
|
|
|
(406
|
)
|
|
Options expired |
(25
|
)
|
|
|
|
(1,089
|
)
|
|
|
||||||||
Outstanding at December 31, 2009 | 6
|
|
|
|
$
|
115
|
||
|
For Value, transactions in written put options were as follows:
Number of
Contracts |
|
Premium
Received |
||||||
---|---|---|---|---|---|---|---|---|
|
||||||||
Outstanding at December 31, 2008 |
––
|
*
|
|
|
$
|
39
|
|
|
Options written |
17
|
|
|
|
|
1,059
|
|
|
Options terminated in closing purchase transactions |
(2
|
)
|
|
|
|
(136
|
)
|
|
Options exercised |
––
|
*
|
|
|
|
(39
|
)
|
|
Options expired |
(9
|
)
|
|
|
|
(530
|
)
|
|
|
||||||||
Outstanding at December 31, 2009 | 6
|
|
|
|
$
|
393
|
||
|
*Not shown due to rounding.
On April 30, 2009, the 25 series of Ivy Funds Variable Insurance Portfolios, Inc., a Maryland corporation, were reorganized as a corresponding series of Ivy Funds Variable Insurance Portfolios, a Delaware statutory trust, pursuant to a Plan of Reorganization and Termination that was approved by shareholders. The reorganization was accomplished through a tax-free exchange of shares, which had no impact on net assets, operations and number of shares outstanding.
13. SUBSEQUENT EVENTSAt a meeting held on November 11, 2009, the Board of Trustees of Ivy Funds Variable Insurance Portfolios unanimously approved and recommended that shareholders of Ivy Funds VIP Mortgage Securities approve the merger of Ivy Funds VIP Mortgage Securities into Ivy Funds VIP Bond. Ivy Funds VIP Mortgage Securities shareholders of record on December 1, 2009 will be asked to vote on the proposed merger at a special meeting called for this purpose, tentatively scheduled for March 1, 2010.
14. REGULATORY AND LITIGATION MATTERSOn July 24, 2006, WRIMCO, W&R and WRSCO (collectively, Waddell & Reed) reached a settlement with each of the SEC, the New York Attorney General (NYAG) and the Securities Commissioner of the State of Kansas to resolve proceedings brought by each regulator in connection with its investigation of frequent trading and market timing in certain Waddell & Reed Advisors Funds.
Under the terms of the SEC's cease-and desist order (SEC Order), pursuant to which Waddell & Reed neither admitted nor denied any of the findings contained therein, among other provisions Waddell & Reed has agreed to: pay $40 million in disgorgement and $10 million in civil money penalties; cease and desist from violations of the antifraud provisions and certain other provisions of the federal securities laws; maintain certain compliance and ethics oversight structures; retain an independent consultant to periodically review Waddell & Reed's supervisory, compliance, control and other policies and procedures; and retain an independent distribution consultant (described below). According to the SEC Order, the SEC found that some market timers made profits in some of the Waddell & Reed Advisors Funds, and that this may have caused some dilution in those Funds. Also, the SEC found that Waddell & Reed failed to make certain disclosures to the Waddell & Reed Advisors Funds' Boards of Direct ors (now Trustees) and shareholders regarding the market timing activity and Waddell & Reed's acceptance of service fees from some market timers.
The Assurance of Discontinuance with the NYAG (NYAG Settlement), pursuant to which Waddell & Reed neither admitted nor denied any of the findings contained therein, among its conditions requires that Waddell & Reed: reduce the aggregate investment management fees paid by certain of the Waddell & Reed Advisors Funds and certain of the Ivy Funds Variable Insurance Portfolios (the Funds) by $5 million per year for five years, for a projected total of $25 million in investment management fee reductions; bear the costs of an independent fee consultant to be retained by the Funds to review and consult regarding the Funds' investment management fee arrangements; and make additional investment management fee-related disclosures to Fund shareholders. The NYAG Settlement also effectively requires that the Funds implement certain governance measures designed to maintain the independence of the Funds' Boards of Directors (now Trustees) and appoint an independent compliance consultant responsible for monitori ng the Funds' and WRIMCO's compliance with applicable laws.
The consent order issued by the Securities Commissioner of the State of Kansas (Kansas Order), pursuant to which Waddell & Reed neither admitted nor denied any of the findings contained therein, requires Waddell & Reed to pay a fine of $2 million to the Office of the Commissioner.
The SEC Order further requires that the $50 million in settlement amounts described above will be distributed in accordance with a distribution plan developed by an independent distribution consultant, in consultation with Waddell & Reed, and that is agreed to by the SEC staff and the Funds' Disinterested Directors. The SEC Order requires that the independent distribution consultant develop a methodology and distribution plan pursuant to which Fund shareholders shall receive their proportionate share of losses, if any, suffered by the Funds due to market timing. Therefore, it is not currently possible to specify which particular Fund shareholders or groups of Fund shareholders will receive distributions of those settlement monies or in what proportion and amounts. However, as noted above, the SEC Order makes certain findings with respect to market timing activities in some of the Waddell & Reed Advisors Funds only. Accordingly, it is not expected that shareholders of Ivy Funds Variable Insurance Port folios will receive distributions of settlement monies.
The foregoing is only a summary of the SEC Order, NYAG Settlement and Kansas Order. A copy of the SEC Order is available on the SEC's website at www.sec.gov. A copy of the SEC Order, NYAG Settlement and Kansas Order is available as part of the Waddell & Reed Financial, Inc. Form 8-K as filed on July 24, 2006.
In addition, pursuant to the terms of agreement in the dismissal of separate litigation, Waddell & Reed has also agreed to extend the reduction in the aggregate investment management fees paid by the Funds, as described above, for an additional five years.
To the Shareholders and Board of Trustees of
Ivy Funds Variable Insurance Portfolios:
We have audited the accompanying statements of assets and liabilities, including the schedules of investments of Ivy Funds VIP Asset Strategy, Ivy Funds VIP Balanced, Ivy Funds VIP Bond, Ivy Funds VIP Core Equity, Ivy Funds VIP Dividend Opportunities, Ivy Funds VIP Energy, Ivy Funds VIP Global Natural Resources, Ivy Funds VIP Growth, Ivy Funds VIP High Income, Ivy Funds VIP International Growth, Ivy Funds VIP International Value, Ivy Funds VIP Micro Cap Growth, Ivy Funds VIP Mid Cap Growth, Ivy Funds VIP Money Market, Ivy Funds VIP Mortgage Securities, Ivy Funds VIP Real Estate Securities, Ivy Funds VIP Science and Technology, Ivy Funds VIP Small Cap Growth, Ivy Funds VIP Small Cap Value, and Ivy Funds VIP Value, twenty of the portfolios constituting Ivy Funds Variable Insurance Portfolios (the "Trust") (formerly Ivy Funds Variable Insurance Portfolios, Inc.) as of December 31, 2009, and the related statements of operations for the fiscal year then ended, the statements of changes in net assets for each of the two fiscal years in the period then ended, and the financial highlights for each of the fiscal periods presented. We have also audited the statements of assets and liabilities, including the schedules of investments, of Ivy Funds VIP Pathfinder Aggressive, Ivy Funds VIP Pathfinder Conservative, Ivy Funds VIP Pathfinder Moderate, Ivy Funds VIP Pathfinder Moderately Aggressive, and Ivy Funds VIP Pathfinder Moderately Conservative, five of the portfolios constituting the Trust as of December 31, 2009, and the related statements of operations for the fiscal year then ended, and the statements of changes in net assets and the financial highlights for the fiscal year then ended and for the fiscal period from March 4, 2008 (March 13, 2008 and March 12, 2008 for Ivy Funds VIP Pathfinder Conservative and Ivy Funds VIP Pathfinder Moderately Conservative, respectively) (the commencements of their operations) through December 31, 2008. These financial statements and financial highlights are the responsibil ity of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Trust is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall fin ancial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2009, by correspondence with the custodian, brokers, and transfer agent; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the portfolios constituting Ivy Funds Variable Insurance Portfolios as of December 31, 2009, the results of their operations for the fiscal year then ended, the changes in their net assets for each of the two fiscal periods in the period then ended, and the financial highlights for each of the fiscal periods presented, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Kansas City, Missouri
February 15, 2010
The Portfolios hereby designate the following amounts of dividends paid from net ordinary income as dividends qualifying for the 70% dividends received deduction for corporations for the tax period ended December 31, 2009:
Dividends Received Deduction for Corporations
|
||||
---|---|---|---|---|
|
||||
Pathfinder Aggressive |
$
|
45,522
|
|
|
Pathfinder Conservative | |
4,490
|
|
|
Pathfinder Moderate | |
54,460
|
|
|
Pathfinder Moderately Aggressive | |
107,722
|
|
|
Pathfinder Moderately Conservative | |
15,533
|
|
|
Asset Strategy | |
2,240,219
|
|
|
Balanced | |
6,322,297
|
|
|
Bond | |
––
|
|
|
Core Equity | |
3,943,380
|
|
|
Dividend Opportunities | |
1,506,260
|
|
|
Energy | |
––
|
|
|
Global Natural Resources | |
––
|
|
|
Growth | |
3,004,451
|
|
|
High Income | |
––
|
|
|
International Growth | |
––
|
|
|
International Value | |
––
|
|
|
Micro Cap Growth | |
––
|
|
|
Mid Cap Growth | |
––
|
|
|
Money Market | |
––
|
|
|
Mortgage Securities | |
––
|
|
|
Real Estate Securities | |
––
|
|
|
Science and Technology | |
943,590
|
|
|
Small Cap Growth | |
1,285,463
|
|
|
Small Cap Value | |
––
|
|
|
Value | |
4,928,139
|
|
The Portfolios hereby designate the following amounts as distributions of long-term capital gains:
Pathfinder Aggressive |
$
|
446,043
|
|
|
Pathfinder Conservative | |
37,644
|
|
|
Pathfinder Moderate | |
530,688
|
|
|
Pathfinder Moderately Aggressive | |
969,368
|
|
|
Pathfinder Moderately Conservative | |
164,508
|
|
|
Asset Strategy | |
78,973,168
|
|
|
Balanced | |
2,098,449
|
|
|
Bond | |
––
|
|
|
Core Equity | |
––
|
|
|
Dividend Opportunities | |
––
|
|
|
Energy | |
––
|
|
|
Global Natural Resources | |
––
|
|
|
Growth | |
22,097,924
|
|
|
High Income | |
––
|
|
|
International Growth | |
––
|
|
|
International Value | |
24,546,103
|
|
|
Micro Cap Growth | |
––
|
|
|
Mid Cap Growth | |
––
|
|
|
Money Market | |
––
|
|
|
Mortgage Securities | |
––
|
|
|
Real Estate Securities | |
––
|
|
|
Science and Technology | |
15,603,910
|
|
|
Small Cap Growth | |
––
|
|
|
Small Cap Value | |
––
|
|
|
Value | |
––
|
|
Internal Revenue code regulations permit each qualifying Portfolio to elect to pass through a foreign tax credit to shareholders with respect to foreign taxes paid by the Portfolio. Each Portfolio elected to pass the following amounts of creditable foreign taxes through to their shareholders:
Foreign
Tax Credit |
Foreign
Derived Income |
||||||
---|---|---|---|---|---|---|---|
|
|||||||
Asset Strategy |
$
|
876,681
|
$
|
8,608,449
|
|
||
International Growth |
|
454,443
|
|
5,248,353
|
|
||
International Value |
|
922,933
|
|
12,887,759
|
|
Each of the individuals listed below serves as a trustee for the Trust (25 portfolios), and for the portfolios within the Waddell & Reed Advisors Funds (20 portfolios) and Waddell & Reed InvestEd Portfolios (3 portfolios) (collectively, the Advisors Fund Complex). The Advisors Fund Complex, together with the Ivy Family of Funds, comprises the Waddell & Reed/Ivy Fund Complex (Fund Complex). The Ivy Family of Funds consists of the portfolios in the Ivy Funds (18 portfolios) and Ivy Funds, Inc. (14 portfolios).
Board members who are not "interested persons" of the Portfolios as defined in Section 2(a)(19) of the 1940 Act (Disinterested Trustees) constitute at least 75% of the Board.
David P. Gardner serves as the Independent Chairman of the Trust's Board and of the board of trustees of the other funds in the Advisors Fund Complex. Subject to the Trustee Emeritus and Retirement Policy, a Trustee serves until his or her successor is elected and qualified or until his or her earlier death, resignation or removal.
Additional Information about TrusteesThe Statement of Additional Information (SAI) for the Trust includes additional information about the Trust's trustees. The SAI is available without charge, upon request, by calling 1.888.WADDELL. It is also available on the Waddell & Reed website, www.waddell.com.
Disinterested Trustees
NAME, ADDRESS
AND YEAR OF BIRTH |
|
POSITION HELD
WITH THE TRUST AND FUND COMPLEX |
|
TRUSTEE SINCE*
|
|
PRINCIPAL OCCUPATION(S)
DURING PAST 5 YEARS |
|
OTHER
DIRECTORSHIPS HELD |
---|---|---|---|---|---|---|---|---|
|
||||||||
Jarold W. Boettcher 6300 Lamar Avenue Overland Park, KS 66202 1940 |
Trustee | Trust: 2009 Fund Complex: 2003 |
President of Boettcher Enterprises, Inc. (agriculture products and services) (1979 to present); Boettcher Supply, Inc. (electrical and plumbing supplies distributor) (1979 to present); Boettcher Aerial, Inc. (Aerial Ag Applicator) (1979 to present) | Director of Guaranty State Bank & Trust Co. (financial services); Director of Guaranty, Inc. (financial services); Director, Ivy Funds, Inc.; Trustee, Ivy Funds (32 portfolios overseen); Member of Kansas Board of Regents (2007 to present) | ||||
|
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James M. Concannon 6300 Lamar Avenue Overland Park, KS 66202 1947 |
Trustee | Trust: 2009 Fund Complex: 1997 |
Professor of Law, Washburn School of Law (1973 to present) | Director, Kansas Legal Services for Prisoners, Inc.; Director, U.S. Alliance Corporation (insurance) | ||||
|
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John A. Dillingham 6300 Lamar Avenue Overland Park, KS 66202 1939 |
Trustee | Trust: 2009 Fund Complex: 1997 |
President and Director, JoDill Corp. (1997 to present) and Dillingham Enterprises, Inc. (1997 to present), both farming enterprises | Advisory Director, UMB Northland Board (financial services); Chairman, Clay Co. Millenium Historical Commission; Director, Clay Co. Industrial Development Authority | ||||
|
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David P. Gardner 6300 Lamar Avenue Overland Park, KS 66202 1933 |
Trustee Independent Chairman |
Trust: 2009 Fund Complex: 1998 Trust: 2009 Fund Complex: 2006 |
President Emeritus, University of Utah; President Emeritus, University of California; Chairman, Board of Trustees, J. Paul Getty Trust (until 2004); Professor, University of Utah (until 2005) | Director, Fluor Corporation (construction and engineering) (until 2005); Director, Salzberg Seminar (non-profit education) (2003-2005); Trustee, Tanner Lectures on Human Values (1978-2005); Consultant, Huntsman Cancer Foundation (2000-2006) | ||||
|
||||||||
Joseph Harroz, Jr. 6300 Lamar Avenue Overland Park, KS 66202 1967 |
Trustee | Trust: 2009 Fund Complex: 1998 |
President and Chief Operating Officer, Graymark HealthCare (a NASDAQ listed company) (2008 to present); Vice President and General Counsel of the Board of Regents, University of Oklahoma (1996 to 2008); Adjunct Professor, University of Oklahoma Law School (1997 to present); Managing Member, Harroz Investments, LLC, (commercial enterprise investments) (1998 to present); LSQ Manager, Inc. (2007 to present) | Director and Shareholder, Valliance Bank; Independent Chairman and Director, Ivy Funds, Inc.; Independent Chairman and Trustee, Ivy Funds (32 portfolios overseen) | ||||
|
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Robert L. Hechler 6300 Lamar Avenue Overland Park, KS 66202 1936 |
Trustee | Trust: 2009 Fund Complex: 1998 |
Formerly, consultant of WDR and Waddell & Reed (2001 to 2008) | None | ||||
|
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Albert W. Herman, FHFMA, CPA 6300 Lamar Avenue Overland Park, KS 66202 1938 |
Trustee | Trust: 2009 Fund Complex: 2008 |
Business Consultant (1998 to present); Treasurer and Director, Wellness Council of America (health care initiatives) (1996 to present) | Finance Committee Member, Ascension Health (non-profit health system) (2007 to present); Director, Baylor Health Care System Foundation (health care) (1998-2009) | ||||
|
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Glendon E. Johnson, Sr. 6300 Lamar Avenue Overland Park, KS 66202 1924 |
Trustee | Trust: 2009 Fund Complex: 1971 |
Chairman and Chief Executive Officer (CEO), Castle Valley Ranches, LLC (ranching and farming) (1995 to present) | Chairman Emeritus, Wellness Council of America (health care initiatives); Executive Board and Committee Member, Boy Scouts of America | ||||
|
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Frank J. Ross, Jr. Polsinelli Shughart PC 700 West 47th Street Suite 1000 Kansas City, MO 64112 1953 |
Trustee | Trust: 2009 Fund Complex: 1996 |
Shareholder/Director, Polsinelli Shughart PC, a law firm (1980 to present) | Director, Rockhurst University (education) | ||||
|
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Eleanor B. Schwartz 6300 Lamar Avenue Overland Park, KS 66202 1937 |
Trustee | Trust: 2009 Fund Complex: 1995 |
Professor Emeritus, University of Missouri at Kansas City (2003 to present); formerly, Dean, Block School of Business (1980-1986), Vice Chancellor (1988-1991), Chancellor (1992-1999) and Professor of Business Administration, University of Missouri at Kansas City (until 2003) | Director, Ivy Funds, Inc.; Trustee, Ivy Funds (32 portfolios overseen) | ||||
|
*Each Trustee became a Trustee in 2009, as reflected by the first date shown. The second date shows when the Trustee first became a director of one or more of the funds that are the predecessors to current funds within the Advisors Fund Complex.
Interested TrusteesMessrs. Avery and Herrmann are "interested" by virtue of their current or former engagement as officers of Waddell & Reed Financial, Inc. (WDR) or its wholly owned subsidiaries, including each Fund's investment manager, WRIMCO, each Fund's principal underwriter, Waddell & Reed, Inc. (Waddell & Reed), and each Fund's shareholder servicing and accounting services agent, Waddell & Reed Services Company, doing business as WI Services Company (WI Services Company), as well as by virtue of their personal ownership of shares of WDR. The address for each Interested Trustee and each of the officers in the following tables is 6300 Lamar Avenue, Overland Park, KS 66202.
NAME, ADDRESS
AND YEAR OF BIRTH |
|
POSITION(S)
HELD WITH THE TRUST AND FUND COMPLEX |
|
TRUSTEE/
OFFICER SINCE* |
|
PRINCIPAL
OCCUPATION(S) DURING PAST 5 YEARS |
|
OTHER
DIRECTORSHIPS HELD |
---|---|---|---|---|---|---|---|---|
|
||||||||
Michael L. Avery 1953 |
Trustee | Trust: 2009 Fund Complex: 2007 |
Chief Investment Officer (CIO) of WDR, WRIMCO and IICO (2005 to present); Senior Vice President of WDR (2005 to present); Executive Vice President of WRIMCO and IICO (2005 to present); portfolio manager for investment companies managed by WRIMCO and IICO (1994 to present); Director of Research for WRIMCO and IICO (1987 to 2005) | Director of WRIMCO and IICO | ||||
|
||||||||
Henry J. Herrmann 1942 |
President Trustee |
Trust: 2009 Fund Complex: 2001 Trust: 2009 Fund Complex: 1998 |
CEO of WDR (2005 to present); President, CEO and Chairman of WRIMCO (1993 to present); President, CEO and Chairman of IICO (2002 to present); formerly, President and CIO of WDR, WRIMCO and IICO (until 2005); President and Director/Trustee of each of the funds in the Fund Complex | Director of WDR, WI Services Company and Waddell & Reed; Director, Ivy Funds, Inc.; Trustee, Ivy Funds (32 portfolios overseen) | ||||
|
*Each Trustee became a Trustee (and, as applicable, an officer) in 2009 as reflected by the first date shown. The second date shows when the Trustee first became a director (and, as applicable, an officer) of one or more of the funds that are the predecessors to current funds within the Advisors Fund Complex.
OfficersThe Board has appointed officers who are responsible for the day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the Board. In addition to Mr. Herrmann, who is President, the Trust's principal officers are:
NAME, ADDRESS
AND YEAR OF BIRTH |
|
POSITION(S) HELD
WITH THE TRUST AND FUND COMPLEX |
|
OFFICER OF
TRUST SINCE |
|
OFFICER OF
FUND COMPLEX SINCE* |
|
PRINCIPAL
OCCUPATION(S) DURING PAST 5 YEARS |
---|---|---|---|---|---|---|---|---|
|
||||||||
Mara D. Herrington 1964 |
Vice President Secretary |
2009 2009 |
2006 2006 |
Vice President and Secretary of each of the funds in the Fund Complex (2006 to present); Vice President of WRIMCO and IICO (2006 to present) | ||||
|
||||||||
Joseph W. Kauten 1969 |
Vice President Treasurer Principal Financial Officer Principal Accounting Officer |
2009 2009 2009 2009 |
2006 2006 2007 2006 |
Principal Financial Officer of each of the funds in the Fund Complex (2007 to present); Vice President, Treasurer and Principal Accounting Officer of each of the funds in the Fund Complex (2006 to present); Assistant Treasurer of each of the funds in the Fund Complex (2003 to 2006) | ||||
|
||||||||
Kristen A. Richards 1967 |
Vice President Assistant Secretary Associate General Counsel |
2009 2009 2009 |
2000 2006 2000 |
Senior Vice President of WRIMCO and IICO (2007 to present); Associate General Counsel and Chief Compliance Officer of WRIMCO (2000 to present) and IICO (2002 to present); Vice President and Associate General Counsel of each of the funds in the Fund Complex (2000 to present); Assistant Secretary of each of the funds in the Fund Complex (2006 to present); formerly, Vice President of WRIMCO (2000 to 2007) and IICO (2002 to 2007); formerly, Secretary of each of the funds in the Fund Complex (2000 to 2006) | ||||
|
||||||||
Scott J. Schneider 1968 |
Vice President Chief Compliance Officer |
2009 2009 |
2006 2004 |
Chief Compliance Officer (2004 to present) and Vice President (2006 to present) of each of the funds in the Fund Complex | ||||
|
||||||||
Daniel C. Schulte 1965 |
Vice President General Counsel Assistant Secretary |
2009 2009 2009 |
2000 2000 2000 |
Senior Vice President and General Counsel of WDR, Waddell & Reed, WRIMCO and WI Services Company (2000 to present); Senior Vice President and General Counsel of IICO (2002 to present); Vice President, General Counsel and Assistant Secretary for each of the funds in the Fund Complex (2000 to present) | ||||
|
*This is the date when the officer first became an officer of one or more of the funds that are the predecessors to current funds within the Advisors Fund Complex.
At its meeting on August 10, 11 and 12, 2009, the Trust's Board of Trustees, including all of the Disinterested Trustees, considered and approved the continuance of the existing Investment Management Agreement ("Management Agreement") between WRIMCO and the Trust as to each of its Portfolios and, for certain Portfolios, of the Investment Subadvisory Agreement (each, a "Subadvisory Agreement") between WRIMCO and the Portfolio subadvisor pursuant to which the subadvisor provides day-to-day investment advisory services. The Disinterested Trustees were assisted in their review by independent legal counsel and met with such counsel separately from representatives of WRIMCO. The Disinterested Trustees also received and considered a memorandum from their independent legal counsel regarding the Disinterested Trustees' responsibilities in evaluating the Management Agreement and, if applicable, the Subadvisory Agreement, for each Portfolio. This memorandum explained the regulatory requirements pert aining to the Disinterested Trustees' evaluation of the Management Agreement and the Subadvisory Agreements. In addition, the Disinterested Trustees engaged an independent fee consultant whose responsibilities included managing the process by which the proposed management fees under the Management Agreement were negotiated with WRIMCO.
Prior to the Board meeting, independent legal counsel sent to WRIMCO and, as applicable, to each subadvisor a request for information to be provided to the Trustees in connection with their consideration of the continuance of the Management Agreement with respect to each Portfolio and of the Subadvisory Agreements, as applicable. WRIMCO and each subadvisor provided materials to the Trustees that included responses to the request letter and other information WRIMCO and the subadvisor, as applicable, believed was useful in evaluating the continuation of the Management Agreement and the Subadvisory Agreements (the "Initial Response"). Thereafter, independent legal counsel sent to WRIMCO a supplemental request for certain additional information, and WRIMCO provided additional information in response to this request (the "Supplemental Response"). The Trustees also received reports prepared by an independent third party, Lipper Inc. ("Lipper"), relating to each Portfolio's performance and expenses compared to the performance of the universe of comparable mutual funds selected by Lipper (the "Performance Universe") and to the expenses of a peer group of comparable funds selected by Lipper (the "Peer Group"), respectively. Further, the Trustees received a written evaluation from the independent fee consultant, a summary of which is included in this Annual Report. At their meeting, the Trustees received a presentation from representatives of WRIMCO regarding services provided by it and its affiliates (collectively, "W&R") to each Portfolio. In addition, during the course of the year, WRIMCO and, as applicable, the subadvisors had provided information relevant to the Trustees' consideration of the continuance of the Management Agreement with respect to each Portfolio and the Subadvisory Agreements.
Nature, Extent and Quality of Services Provided to the PortfoliosThe Trustees considered the nature, extent and quality of the services provided to each Portfolio pursuant to the Management Agreement and by each subadvisor pursuant to its Subadvisory Agreement and also the overall fairness of the Management Agreement as to each Portfolio and, as applicable, the Subadvisory Agreement.
The Trustees considered WRIMCO's and, as applicable, each subadvisor's research and portfolio management capabilities and that W&R also provides oversight of day-to-day portfolio operations, including but not limited to portfolio accounting and administration and assistance in meeting legal and regulatory requirements. The Trustees also considered WRIMCO's and, as applicable, each subadvisor's practices regarding the selection and compensation of brokers and dealers that execute portfolio transactions for each Portfolio and, as applicable, those brokers' and dealers' provision of brokerage and research services to WRIMCO, and the benefits derived by the other funds in the Advisors Fund Complex and by other clients of WRIMCO from such services. The Trustees considered the information provided by WRIMCO and, as applicable, each subadvisor regarding its compliance program and compliance matters, if any, over the past year. The Trustees also considered the favorable history, reputation, qualification and bac kground of WRIMCO and W&R's extensive administrative, accounting and compliance infrastructure, as well as WRIMCO's supervisory activities over each subadvisor.
The Trustees considered each Portfolio's performance, both on an absolute basis and in relation to the performance of its Performance Universe. Each Portfolio's performance was also compared to relevant market indices and to a Lipper index, as applicable. The Trustees noted the independent fee consultant's finding that the Portfolios had generally strong and improving performance for the periods reviewed.
The Trustees considered the management fees and total expenses of each Portfolio and also considered each Portfolio's management fees and total expenses in relation to the management fees and total expenses, respectively, of its Peer Group. The Trustees' review also included consideration of each Portfolio's management fees at various asset levels in relation to the management fees at those asset levels of funds within a peer group of comparable mutual funds selected by and as shown in the reports from Lipper ("Lipper Group"). They also considered each Portfolio's non-management fees in relation to the non-management fees of its Peer Group, the amount of assets in each Portfolio, and factors affecting the Portfolios' expense ratios. In addition, the Trustees considered, for each Portfolio, the investment management fees, if any, paid to WRIMCO (or its affiliate) by other mutual funds managed by WRIMCO (or its affiliate) with a similar investment objective (or objectives) and similar investment poli cies and strategies as the Portfolio ("Similar Funds"). The Trustees also considered, for each Portfolio, the subadvisory fees, if any, paid to WRIMCO or the subadvisor, as applicable, (or their respective affiliates) by other mutual funds advised by WRIMCO or the subadvisor (or their respective affiliates), as well as the management fees, if any, paid by other client accounts managed by WRIMCO or the subadvisor (or their respective affiliates), with a similar investment objective (or objectives) and similar investment policies and strategies as the Portfolio ("Other Accounts").
Additional Considerations with Respect to Each PortfolioAsset Strategy
The Trustees considered that Asset Strategy's total return performance was higher than the Performance Universe median and the Lipper index for the one-, three-, five-, seven-, and ten-year periods.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee and overall expense ratio were higher than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at certain asset levels were lower than the median for its Lipper Group.
The Trustees also considered that the Similar Funds had advisory fee schedules that were the same as the Portfolio's advisory fee schedule, except that one Similar Fund's advisory fee was higher for an asset level, and that there were no Other Accounts managed by WRIMCO or its affiliates with a similar investment objective and similar investment policies and strategies as the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Funds to evaluate the appropriateness and reasonableness of the Portfolio's management fee.
Balanced
The Trustees considered that Balanced's total return performance was higher than the Performance Universe median and the Lipper index for the one-, three-, five-, seven-, and ten-year periods.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee was lower than the Peer Group median but that the overall expense ratio was higher than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at certain asset levels were higher than, and at other asset levels were lower than, the median for its Lipper Group.
The Trustees also considered that the Similar Funds had advisory fee schedules that were the same as the Portfolio's advisory fee schedule and that the Other Accounts had average advisory fees that were lower than the management fee of the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Funds and Other Accounts to evaluate the appropriateness and reasonableness of the Portfolio's management fee. The Trustees recognized that differences in fees paid by the Other Accounts were consistent with the additional management and other services provided by WRIMCO to the Portfolio.
Bond
The Trustees considered that Bond's total return performance was higher than the Performance Universe median and the Lipper index for the one-, three-, five-, seven-, and ten-year periods.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee and overall expense ratio were lower than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at certain asset levels were higher than, and at other asset levels were lower than or equal to, the median for its Lipper Group.
The Trustees also considered that the Similar Funds had advisory fee schedules that were the same as the Portfolio's advisory fee schedule, except that one Similar Fund's advisory fee was higher for certain asset levels, and that the Other Accounts had average advisory fees that were lower than the management fee of the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Funds and Other Accounts to evaluate the appropriateness and reasonableness of the Portfolio's management fee. The Trustees recognized that differences in fees paid by the Other Accounts were consistent with the additional management and other services provided by WRIMCO to the Portfolio.
Core Equity
The Trustees considered that Core Equity's total return performance was higher than the Performance Universe median and the Lipper index for the one-, three-, five-, seven-, and ten-year periods.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee and overall expense ratio were lower than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at certain asset levels were lower than the median for its Lipper Group.
The Trustees also considered that the Similar Funds had advisory fee schedules that were the same as the Portfolio's advisory fee schedule, except that one Similar Fund's advisory fee was higher for an asset level and the Similar Funds' advisory fees were lower for other asset levels, and that the Other Accounts had average advisory fees that were lower than the management fee of the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Funds and Other Accounts to evaluate the appropriateness and reasonableness of the Portfolio's management fee. The Trustees recognized that differences in fees paid by the Other Accounts were consistent with the additional management and other services provided by WRIMCO to the Portfolio.
Dividend Opportunities
The Trustees considered that Dividend Opportunities' total return performance was higher than the Performance Universe median and the Lipper index for the one-, three-, and five-year periods for which information was provided, since the Portfolio did not have a seven-year performance record as of March 31, 2009.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee was lower than the Peer Group median but that the overall expense ratio was higher than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at various asset levels were lower than the median for its Lipper Group.
The Trustees also considered that the Similar Funds had advisory fee schedules that were the same as the Portfolio's advisory fee schedule and that the Other Accounts had average advisory fees that were lower than the management fee of the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Funds and Other Accounts to evaluate the appropriateness and reasonableness of the Portfolio's management fee.
Energy
The Trustees considered that Energy's total return performance was equal to the Performance Universe median for the one-year period and was higher than the Lipper index for the one-year period for which information was provided, since the Portfolio did not have a three-year performance record as of March 31, 2009.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee was equal to the Peer Group median but that the overall expense ratio was higher than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at certain asset levels were equal to the median for its Lipper Group. The Trustees considered that WRIMCO had voluntarily agreed to waive the management fee if Portfolio assets totaled less than $25 million, which resulted in a fee waiver for the fiscal year ended December 31, 2008.
The Trustees also considered that the Similar Funds had advisory fee schedules that were the same as the Portfolio's advisory fee schedule and that there were no Other Accounts managed by WRIMCO or its affiliates with a similar investment objective and similar investment policies and strategies as the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Funds to evaluate the appropriateness and reasonableness of the Portfolio's management fee.
Global Natural Resources
The Trustees considered that Global Natural Resources' total return performance was lower than the Performance Universe median and the Lipper index for the one- and three-year periods for which information was provided, since the Portfolio did not have a five-year performance record as of March 31, 2009. They also considered the information provided by WRIMCO in its Initial Response and Supplemental Response explaining that, among other factors, certain Portfolio investments in international materials stocks had contributed to the Portfolio's poor performance over the last year. They further considered the improved year-to-date performance information through June 10, 2009, provided by WRIMCO in its Initial Response. The Trustees also noted that WRIMCO recommended the continuance of the Subadvisory Agreement with the Portfolio's subadviser, Mackenzie Financial Corporation.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee and overall expense ratio were higher than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at various asset levels were higher than the median for its Lipper Group.
The Trustees also considered that there was a Similar Fund that had an advisory fee schedule that was the same as the Portfolio's advisory fee schedule (including a subadvisory fee to the sub-adviser that was the same as the Portfolio's) and that there were no Other Accounts managed by WRIMCO or its affiliates with a similar investment objective and similar investment policies and strategies as the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Fund to evaluate the appropriateness and reasonableness of the Portfolio's management fee.
Growth
The Trustees considered that Growth's total return performance was higher than the Performance Universe median and the Lipper index for the one-, three-, five-, seven-, and ten-year periods.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee was lower than the Peer Group median but that the overall expense ratio was higher than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at various asset levels were lower than the median for its Lipper Group.
The Trustees also considered that the Similar Funds had advisory fee schedules that were the same as the Portfolio's advisory fee schedule, except that one Similar Fund's advisory fee was higher for an asset level, and that the Other Accounts had average advisory fees that were lower than the management fee of the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Funds and Other Accounts to evaluate the appropriateness and reasonableness of the Portfolio's management fee. The Trustees recognized that differences in fees paid by the Other Accounts were consistent with the additional management and other services provided by WRIMCO to the Portfolio.
High Income
The Trustees considered that High Income's total return performance was higher than the Performance Universe median and the Lipper index for the one-, three-, five-, seven-, and ten-year periods.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee and overall expense ratio were lower than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at various asset levels were lower than the median for its Lipper Group.
The Trustees also considered that the Similar Funds had advisory fee schedules that were the same as the Portfolio's advisory fee schedule, except that one Similar Fund's advisory fee was higher for an asset level, and that the Other Accounts had average advisory fees that were lower than the management fee of the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Funds and Other Accounts to evaluate the appropriateness and reasonableness of the Portfolio's management fee. The Trustees recognized that differences in fees paid by the Other Accounts were consistent with the additional management and other services provided by WRIMCO to the Portfolio.
International Growth
The Trustees considered that International Growth's total return performance was higher than the Performance Universe median for the one-, three-, and five-year periods and was higher than the Lipper index for the one-, three-, five-, seven-, and ten-year periods.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee and overall expense ratio were lower than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at various asset levels were lower than the median for its Lipper Group.
The Trustees also considered that the Similar Funds had advisory fee schedules that were the same as the Portfolio's advisory fee schedule, except that one Similar Fund's advisory fee was higher for an asset level, and that the Other Accounts had average advisory fees that were lower than the management fee of the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Funds and Other Accounts to evaluate the appropriateness and reasonableness of the Portfolio's management fee. The Trustees recognized that differences in fees paid by the Other Accounts were consistent with the additional management and other services provided by WRIMCO to the Portfolio.
International Value
The Trustees considered that International Value's total return performance was higher than the Performance Universe median and the Lipper index for the one-, three-, five-, seven-, and ten-year periods.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee and overall expense ratio were lower than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at certain asset levels were higher than, and at other asset levels were equal to, the median for its Lipper Group.
The Trustees also considered that there were no Similar Funds and no Other Accounts managed by WRIMCO or its affiliates with a similar investment objective and similar investment policies and strategies as the Portfolio.
Micro Cap Growth
The Trustees considered that Micro Cap Growth's total return performance was lower than the Performance Universe median for the one-, three-, five-, seven-, and ten-year periods and was lower than the Lipper index for the one-, three-, five-, and seven-year periods. They also considered the information provided by WRIMCO in its Initial Response and Supplemental Response explaining that the Portfolio tends to outperform in stronger markets and underperform in weaker markets and that the Portfolio's overweighting in technology and stock selection in this sector had contributed to its poor performance. They further considered the improved year-to-date performance information through June 10, 2009, provided by WRIMCO in its Initial Response. The Trustees also noted that WRIMCO recommended the continuance of the Subadvisory Agreement with the Portfolio's subadviser, Wall Street Associates.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee and overall expense ratio were higher than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at various asset levels were higher than the median for its Lipper Group.
The Trustees also considered that there was a Similar Fund that had an advisory fee schedule that was the same as the Portfolio's advisory fee schedule (including a subadvisory fee to the sub-adviser that was the same as the Portfolio's) and that there were no Other Accounts managed by WRIMCO or its affiliates with a similar investment objective and similar investment policies and strategies as the Portfolio. The Trustees also considered that the Other Accounts of a similar size managed by the subadviser had advisory fees that were higher than the subadvisory fees for the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Fund and Other Accounts to evaluate the appropriateness and reasonableness of the Portfolio's management fee.
Mid Cap Growth
The Trustees considered that Mid Cap Growth's total return performance was higher than the Performance Universe median and the Lipper index for the one- and three-year periods for which information was provided, since the Portfolio did not have a five-year performance record as of March 31, 2009.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee and overall expense ratio were higher than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at various asset levels were higher than the median for its Lipper Group.
The Trustees also considered that the Similar Funds had advisory fee schedules that were the same as the Portfolio's advisory fee schedule, except that one Similar Fund's advisory fee was higher for an asset level, and that there were no Other Accounts managed by WRIMCO or its affiliates with a similar investment objective and similar investment policies and strategies as the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Funds to evaluate the appropriateness and reasonableness of the Portfolio's management fee.
Money Market
The Trustees considered that Money Market's total return performance was lower than the Performance Universe median and the Lipper index for the three-, five-, seven-, and ten-year periods.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee and overall expense ratio were lower than the Peer Group median. They also considered that the Portfolio's effective management fees at certain asset levels were higher than, and at other asset levels were lower than or equal to, the median for its Lipper Group.
The Trustees also considered that the Similar Funds had advisory fee schedules that were the same as the Portfolio's advisory fee schedule and that there were no Other Accounts managed by WRIMCO or its affiliates with a similar investment objective and similar investment policies and strategies as the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Funds to evaluate the appropriateness and reasonableness of the Portfolio's management fee.
Mortgage Securities
The Trustees considered that Mortgage Securities' total return performance was lower than the Performance Universe median for the one- and three-year periods for which such information was provided, since the Portfolio did not have a five-year performance record as of March 31, 2009. They also considered the information provided by WRIMCO in its Initial Response and Supplemental Response explaining that the Portfolio's holdings of non-agency asset-backed securities had contributed to the Portfolio's poor performance and also noting that the Portfolio's subadviser, Advantus Capital Management, Inc. ("Advantus Capital"), has continued to take steps to enhance the Portfolio's credit and liquidity profile. They further considered the improved year-to-date performance information through June 10, 2009, provided by WRIMCO in its Initial Response. The Trustees noted that WRIMCO recommended the continuance of the Subadvisory Agreement with Advantus Capital.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee was lower than the Peer Group median but that the overall expense ratio was higher than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at various asset levels were lower than the median for its Lipper Group.
The Trustees also considered that there was a Similar Fund that had an advisory fee schedule that was the same as the Portfolio's advisory fee schedule (including a subadvisory fee to the sub-adviser that was the same as the Portfolio's) and that there were no Other Accounts managed by WRIMCO or its affiliates with a similar investment objective and similar investment policies and strategies as the Portfolio. The Trustees also concluded that the Other Accounts of a similar size managed by the subadviser had advisory fees that were close to or higher than the subadvisory fees for the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Fund and Other Accounts to evaluate the appropriateness and reasonableness of the Portfolio's management fee.
Pathfinder Aggressive
The Trustees considered that Pathfinder Aggressive's total return performance was higher than the Performance Universe median and the Lipper index for the one-year period for which information was provided, since the Portfolio did not have a three-year performance record as of March 31, 2009.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio did not have a management fee but that the Portfolio's overall expense ratio was higher than the Peer Group median.
Pathfinder Conservative
The Trustees considered that Pathfinder Conservative's total return performance was higher than the Performance Universe median and the Lipper index for the one-year period for which information was provided, since the Portfolio did not have a three-year performance record as of March 31, 2009.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio did not have a management fee but that the Portfolio's overall expense ratio was higher than the Peer Group median.
Pathfinder Moderate
The Trustees considered that Pathfinder Moderate's total return performance was higher than the Performance Universe median and the Lipper index for the one-year period for which information was provided, since the Portfolio did not have a three-year performance record as of March 31, 2009.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio did not have a management fee but that the Portfolio's overall expense ratio was higher than the Peer Group median.
Pathfinder Moderately Aggressive
The Trustees considered that Pathfinder Moderately Aggressive's total return performance was higher than the Performance Universe median and the Lipper index for the one-year period for which information was provided, since the Portfolio did not have a three-year performance record as of March 31, 2009.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio did not have a management fee but that the Portfolio's overall expense ratio was higher than the Peer Group median.
Pathfinder Moderately Conservative
The Trustees considered that Pathfinder Moderately Conservative's total return performance was higher than the Performance Universe median and the Lipper index for the one-year period for which information was provided, since the Portfolio did not have a three-year performance record as of March 31, 2009.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio did not have a management fee but that the Portfolio's overall expense ratio was higher than the Peer Group median.
Real Estate Securities
The Trustees considered that Real Estate Securities' total return performance was higher than the Performance Universe median for the one- and three-year periods and was higher than the Lipper index for the one-year period for which information was provided, since the Portfolio did not have a five-year performance record as of March 31, 2009. The Trustees noted that WRIMCO recommended the continuance of the Subadvisory Agreement with Advantus Capital.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee and overall expense ratio were higher than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at various asset levels were higher than the median for its Lipper Group.
The Trustees also considered that there was a Similar Fund that had an advisory fee schedule that was the same as the Portfolio's advisory fee schedule (including a subadvisory fee to the sub-adviser that was the same as the Portfolio's) and that there were no Other Accounts managed by WRIMCO or its affiliates with a similar investment objective and similar investment policies and strategies as the Portfolio. The Trustees also concluded that the Other Accounts of a similar size managed by the subadviser had advisory fees that were close to or higher than the subadvisory fees for the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Fund and Other Accounts to evaluate the appropriateness and reasonableness of the Portfolio's management fee.
Science and Technology
The Trustees considered that Science and Technology's total return performance was higher than the Performance Universe median for the one-, three-, five-, seven-, and ten-year periods and the Lipper index for the one-, three-, five-, and seven-year periods.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee was higher than the Peer Group median but that the overall expense ratio was equal to the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at various asset levels were lower than the median for its Lipper Group.
The Trustees also considered that the Similar Funds had advisory fee schedules that were the same as the Portfolio's advisory fee schedule, except that one Similar Fund's advisory fee was higher for an asset level, and that the Other Accounts had average advisory fees that were lower than the management fee of the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Funds and Other Accounts to evaluate the appropriateness and reasonableness of the Portfolio's management fee. The Trustees recognized that differences in fees paid by the Other Accounts were consistent with the additional management and other services provided by WRIMCO to the Portfolio.
Small Cap Growth
The Trustees considered that Small Cap Growth's total return performance was higher than the Performance Universe median and the Lipper index for the one-, three-, five-, seven-, and ten-year periods.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee was lower than the Peer Group median but that the overall expense ratio was higher than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at various asset levels were lower than the median for its Lipper Group.
The Trustees also considered that the Similar Funds had advisory fee schedules that were the same as the Portfolio's advisory fee schedule, except that one Similar Fund's advisory fee was higher for an asset level, and that the Other Accounts had average advisory fees that were lower than the management fee of the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Funds and Other Accounts to evaluate the appropriateness and reasonableness of the Portfolio's management fee. The Trustees recognized that differences in fees paid by the Other Accounts were consistent with the additional management and other services provided by WRIMCO to the Portfolio.
Small Cap Value
The Trustees considered that Small Cap Value's total return performance was higher than the Performance Universe median for the one-, three-, five-, seven-, and ten-year periods and the Lipper index for the one-, three-, five-, and seven-year periods.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee and overall expense ratio were higher than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at various asset levels were higher than the median for its Lipper Group.
The Trustees also considered that there was a Similar Fund that had an advisory fee schedule that was the same as the Portfolio's advisory fee schedule and that there were no Other Accounts managed by WRIMCO or its affiliates with a similar investment objective and similar investment policies and strategies as the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Fund to evaluate the appropriateness and reasonableness of the Portfolio's management fee.
Value
The Trustees considered that Value's total return performance was higher than the Performance Universe median and the Lipper index for the one-, three-, five-, and seven-year periods for which information was provided, since the Portfolio did not have a ten-year performance record as of March 31, 2009.
The Trustees considered the range and average of the management fees and expense ratios of the Peer Group. They considered that the Portfolio's management fee and overall expense ratio were lower than the Peer Group median. They also considered that, with the breakpoints in the fee schedule, the Portfolio's effective management fees at various asset levels were lower than the median for its Lipper Group.
The Trustees also considered that the Similar Funds had advisory fee schedules that were the same as the Portfolio's advisory fee schedule, except that one Similar Fund's advisory fee was higher for an asset level, and that the Other Accounts had average advisory fees that were lower than the management fee of the Portfolio. The Trustees considered the relevance of the fee information provided for the Similar Funds and Other Accounts to evaluate the appropriateness and reasonableness of the Portfolio's management fee. The Trustees recognized that differences in fees paid by the Other Accounts were consistent with the additional management and other services provided by WRIMCO to the Portfolio.
Profitability and Economies of ScaleThe Trustees also considered that the management fee structure of each Portfolio (except Money Market, which has a single management fee rate, and Pathfinder Aggressive, Pathfinder Conservative, Pathfinder Moderate, Pathfinder Moderately Aggressive and Pathfinder Moderately Conservative (each, a "Pathfinder Portfolio"), which has no management fee) includes breakpoints that provide for a reduction of payments to reflect anticipated economies of scale. The Trustees also considered the management fee rate reductions that became effective October 1, 2006, for Asset Strategy, Bond, Core Equity, Growth, High Income, International Growth, Mid Cap Growth, Science and Technology, Small Cap Growth, Value and certain other funds in the Advisors Fund Complex, and the anticipated impact of the fee rate reduction for each of these Portfolios on its investment management fees and overall expense ratio. In concluding that the benefits accruing to WRIMCO and its affiliates by virtue of their relationship to each P ortfolio were reasonable in comparison with the costs of providing the investment management services and the benefits accruing to the Portfolio, the Trustees considered specific data as to WRIMCO's profit or loss with respect to the Portfolio for a recent period. The Trustees also considered WRIMCO's methodology for determining this data. In addition, the Trustees considered the soft dollar arrangements with respect to Portfolio portfolio transactions, as applicable.
In determining whether to approve the proposed continuance of the Management Agreement as to a Portfolio and, as applicable, a Portfolio's Subadvisory Agreement, the Trustees considered the best interests of the Portfolio and the overall fairness of the proposed Management Agreement, and, as applicable, the Subadvisory Agreement. The Trustees considered the following factors to be of primary importance to their approval of the continuance of the Management Agreement as to a Portfolio and, as applicable, its Subadvisory Agreement, without any one factor being dispositive:
Based on the discussions, considerations and information described generally above, including the evaluation provided by the independent fee consultant, the Board determined that each Portfolio's Management Agreement and, as applicable, its Subadvisory Agreement are fair and reasonable and that continuance of the Management Agreement and, as applicable, the Subadvisory Agreement, is in the best interests of the Portfolio. In reaching these determinations as to each Portfolio, the Board concluded that: the nature, extent and quality of the services provided by WRIMCO for the Portfolio are adequate and appropriate; it retained confidence in WRIMCO's overall ability to manage the Portfolio; and the management fee paid to WRIMCO is reasonable in light of comparative management fee information, the breakpoints in the proposed management fee for the Portfolio (other than Money Market and the Pathfinder Portfolios), the services provided by WRIMCO, the costs of the services provided, and the profits realized and ot her benefits likely to be derived by WRIMCO from its relationship with the Portfolio.
Pursuant to the Assurance of Discontinuance between Waddell & Reed, Inc., Waddell & Reed Investment Management Company ("WRIMCO") and Waddell & Reed Services Company ("WISC") (collectively, "Waddell") and the Office of the New York Attorney General dated July 10, 2006 ("AOD"), the Disinterested Trustees of each Fund's Board appointed an Independent Fee Consultant ("IFC") to manage the process by which proposed management fees paid by the Fund to WRIMCO are negotiated. The IFC does not replace the Trustees in negotiating management fees and does not substitute his or her judgment for that of the Trustees about the reasonableness of the proposed fees.
In the IFC's 2009 written evaluation of the proposed management fees of the Funds ("Report"), the IFC addressed the following six factors:
1. The nature and quality of Waddell's services, including Fund performance
2. Management fees (including any components thereof) charged by other mutual fund companies for like services
3. Possible economies of scale as the Funds grow larger
4. Management fees (including any components thereof) charged to institutional and other clients of Waddell for like services
5. Costs to Waddell and its affiliates of supplying services pursuant to the management fee agreements, excluding any intra corporate profit
6. Profit margins of Waddell and its affiliates from supplying such services
The following is a summary of the Report's discussion of the process followed by the Disinterested Trustees and Waddell in connection with the renewal of each Fund's investment management agreement with WRIMCO, related materials, and the IFC's findings.
ANALYSIS OF THE PROCESSThe Report noted that each Board previously created a Special Compliance & Governance Committee ("Compliance Committee"), which is composed solely of Disinterested Trustees and charged with the responsibility for certain work associated with the contract renewal process.
The Report stated that the contract renewal process includes a number of sequential steps by which the Disinterested Trustees go about determining the reasonableness of the proposed management fees for the Funds in the context of their annual consideration of the proposed continuance of the Funds' respective investment management agreements with WRIMCO and the subadvisory agreements with certain subadvisors. The Report stated that the IFC participated throughout the contract renewal process.
The Disinterested Trustees instructed independent legal counsel to the Disinterested Trustees, K&L Gates LLP ("K&L Gates"), to prepare a letter requesting information from WRIMCO needed for the contract renewal process, which was provided. The Lipper Company ("Lipper") was asked to provide independently compiled comparative information about the Funds.
The Report noted that the Compliance Committee met with the IFC and K&L Gates to discuss the information provided by WRIMCO and Lipper and to determine whether to request any additional information from WRIMCO prior to the August Disinterested Trustees and Board meetings. At the Compliance Committee's direction, K&L Gates sent a supplemental request to WRIMCO for certain additional information, which was provided prior to the Disinterested Trustees' August 2009 meetings.
ANALYSIS OF MATERIALSThe Disinterested Trustees received and considered informational materials that were prepared by Waddell and Lipper in response to the data requested by the Disinterested Trustees through the Compliance Committee and K&L Gates. The IFC reviewed the information produced and found it to be responsive to the requests by the Disinterested Trustees. He also reviewed certain other materials that he considered relevant.
The IFC used these materials to analyze trends and comparative information about the six factors listed above. The Report noted that, apart from these materials, the Disinterested Trustees also received and considered information throughout the year, some of which the IFC reviewed, that was also relevant to the contract renewal process.
(1) Nature and Quality of Services
The Report stated that, overall, the Funds reflect strong performance. The performance information was provided by Lipper and was based on March 31, 2009 data. For the three-year period ended March 31, 2009, the IFC noted that 86% of the Funds in the Advisors Fund Complex (Advisors Funds, Ivy Funds VIP Portfolios and InvestEd Portfolios together) were in the top two quintiles.
Although the IFC found that the Funds have strong performance, it also noted that certain Funds have experienced either continuing or recent challenges. The IFC suggested that the Disinterested Trustees request additional information from WRIMCO regarding these Funds which the Disinterested Trustees reviewed. The Report noted that the on-going performance of these Funds will be subject to evaluation by both WRIMCO and the Board.
The Report noted that the IFC considered, with respect to service provided by WRIMCO affiliates, the internal statistics maintained by WISC to track shareholder service quality which showed continued improvement in 2009 and that WISC also retained Dalbar, Inc. to provide an independent quality assessment.
The Report stated that information for this metric is drawn from the Lipper analysis and that the IFC compared the management fee for each Fund to its peer group. The Report noted that the IFC reviewed how actual management fees for each of the Funds have changed in ranking from 2008 to 2009. With respect to the Advisors Funds, the Report stated that, in aggregate, 45% of the Advisors Funds have management fees above their peer group median and that the IFC reviewed information that showed that 65% of the Advisors Funds have the same or have improved their ranking from 2008 to 2009 and that 35% of the Advisors Funds have a lower ranking. With respect to the Ivy Funds VIP Portfolios, the Report stated that, in aggregate, the majority of the Funds (excluding the Pathfinder Portfolios) have management fees above their peer group median and noted that this was a slight improvement from last year when 65% of the Ivy Funds VIP Portfolios had management fees above their peer group median. With respect to the Invest Ed Portfolios, the Report noted the first percentile ranking.
(2) Management Fees
The Report also noted that certain Funds have higher total expenses than the peer group and that this is often caused by non-management fees. The Report commented that Waddell's business model tends to result in higher non-management expenses. This business model targets the small- to mid-level investor population, an approach that has resulted in many smaller accounts relative to the general mutual fund industry. The Disinterested Trustees requested additional information from WRIMCO regarding future control of non-management expenses, which Waddell provided.
(3) Possible Economies of Scale
The Report noted that economies of scale occur when assets grow and a fund's fixed costs are spread over a larger asset base. The Report also pointed out that fund managers usually share economies of scale by implementing breakpoints, or scale-downs, in the structure of the management fee. As a general rule, fund trustees establish breakpoints prospectively at an asset level beyond the current asset level so that shareholders benefit from future asset growth. Lipper compared the Funds' and peer groups' effective fees at uniform asset levels.
The IFC Report noted that all Funds except money market Funds already have breakpoints in place that appear adequate in providing economies of scale.
(4) Management Fees for Other Clients
The Report noted that the Advisors Funds and Ivy Funds VIP have Funds with similar investment strategies and therefore anticipated comparable contractual management fees. The Report stated that actual management fee variances can be explained with the larger average asset size of the Advisors Funds, causing some of the Funds to reach breakpoints and reductions in management fees, or Funds that have remaining waivers. The Report further noted that the Funds within Advisors Funds and Ivy Funds VIP that correspond to funds within the Ivy Fund Family having similar investment strategies also have comparable contractual management fees.
The Report noted that WRIMCO manages money for different types of clients in addition to mutual funds. These clients may include corporate and municipal pension funds and investment pools for wealthy individuals (collectively, "separate accounts"). Several of these separate accounts are managed with the same investment objective and in the same style as some of the Advisors Funds and Ivy Funds VIP Portfolios. In most cases, the data provided by WRIMCO showed that net management fees for the Funds are higher than that of the equivalent separate accounts. WRIMCO has explained these differences by reference to the different type of responsibilities borne by WRIMCO as a mutual fund manager compared to a separate account manager. The IFC found these differences reasonable.
(5) and (6) WRIMCO Cost and Profitability
The Report noted that the disinterested trustees of mutual funds generally are required to consider the cost and profitability of the advisory contracts to advisors. In connection with the Fund-by-Fund profitability review, WRIMCO provided an analysis of the profitability of each Fund. The IFC did not find the profit margins excessive.
The Report also noted that disinterested trustees often review the overall profitability of their funds and investment advisors. Lipper provided benchmarks against which to evaluate the overall profitability of Waddell's parent company and other public companies in the investment business. The Report found that this analysis places Waddell's parent company near the median of Lipper peers.
***
The Report stated that the IFC monitored the process, reviewed the materials, and reached the following conclusions:
Waddell & Reed, Inc., the Waddell & Reed Advisors Funds, the Ivy Funds Variable Insurance Portfolios and the Waddell & Reed InvestEd Portfolios ("Waddell & Reed") are committed to ensuring their clients have access to a broad range of products and services to help them achieve their personal financial goals. Accurate information lies at the heart of our pledge to provide these products and services, and we strive to protect your personal nonpublic information. In the course of doing business with Waddell & Reed, clients are requested to share financial information and they may be asked to provide other personal details. Clients can be assured that Waddell & Reed is diligent in its efforts to keep such information confidential.
Recognition of a Client's Expectation of PrivacyAt Waddell & Reed, we believe the confidentiality and protection of client information is one of our fundamental responsibilities. And while information is critical to providing quality service, we recognize that one of our most important assets is our clients' trust. Thus, the safekeeping of client information is a priority for Waddell & Reed.
Information CollectedIn order to tailor available financial products to your specific needs, Waddell & Reed may request that you complete a variety of forms that require nonpublic personal information about your financial history and other personal details, including but not limited to, your name, address, social security number, assets, income and investments. Waddell & Reed may also gather information about your transactions with us, our affiliates and others.
Categories of Information that may be DisclosedWhile Waddell & Reed may disclose information it collects from applications and other forms, as described above, we at Waddell & Reed also want to assure all of our clients that whenever information is used, it is done with discretion. The safeguarding of client information is an issue we take seriously.
Categories of Parties to whom we disclose nonpublic personal informationWaddell & Reed may disclose nonpublic personal information about you to selectively chosen financial service providers, whom we believe have valuable products or services that could benefit you. Whenever we do this, we carefully review the company and the product or service to make sure that it provides value to our clients. We share the minimum amount of information necessary for that company to offer its product or service. We may also share information with unaffiliated companies that assist us in providing our products and services to our clients; in the normal course of our business (for example, with consumer reporting agencies and government agencies); when legally required or permitted in connection with fraud investigations and litigation; and at the request or with the permission of a client.
In addition, Waddell & Reed, Inc. has entered into a Protocol with a number of other brokerage firms intended to further our clients' freedom of choice in connection with the movement of their financial advisors to new firms. In the event your account is maintained through Waddell & Reed, Inc. and your financial advisor leaves Waddell & Reed to join a firm that has likewise entered the Protocol, Waddell & Reed may disclose your name, address and telephone number to the departed advisor's new firm.
Opt Out RightIf you prefer that we not disclose nonpublic personal information about you to nonaffiliated third parties, you may opt out of those disclosures; that is, you may direct us not to make those disclosures (other than disclosures permitted by law). If you wish to opt out of disclosures to nonaffiliated third parties, you may make this request in writing to: Waddell & Reed, Attn: Opt Out Notices, P.O. Box 29220, Shawnee Mission, KS 66201, or you may call 1.888.WADDELL and a Client Services Representative will assist you.
Confidentiality and SecurityWe restrict access to nonpublic personal information about you to those employees who need to know that information to provide products and services to you. We maintain physical, electronic, and procedural safeguards that comply with federal standards to guard your nonpublic personal information. If you decide to close your account(s) or become an inactive client, we will adhere to the privacy policies and practices as described in this notice.
A description of the policies and procedures Ivy Funds Variable Insurance Portfolios uses to determine how to vote proxies relating to portfolio securities is available (i) without charge, upon request, by calling 1.888.WADDELL and (ii) on the Securities and Exchange Commission's (SEC) web site at www.sec.gov.
Proxy Voting RecordsInformation regarding how the Portfolio voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on Form N-PX through Waddell & Reed's website at www.waddell.com and on the SEC's website at www.sec.gov.
A complete schedule of portfolio holdings for the first and third quarters of each fiscal year is filed with the Securities and Exchange Commission (SEC) on the Trust's Form N-Q. This form may be obtained in the following ways:
International Growth
International Value
Domestic Equity Portfolios
Core Equity
Dividend Opportunities
Growth
Micro Cap Growth
Mid Cap Growth
Small Cap Growth
Small Cap Value
Value
Fixed Income Portfolios
Bond
High Income
Mortgage Securities
Money Market Portfolios
Money Market
Specialty Portfolios
Asset Strategy
Balanced
Energy
Global Natural Resources
Pathfinder Aggressive
Pathfinder Conservative
Pathfinder Moderate
Pathfinder Moderately Aggressive
Pathfinder Moderately Conservative
Real Estate Securities
Science and Technology
The underlying portfolios discussed in this report are only available as investment options in variable annuity and variable life insurance contracts issued by life insurance companies. They are not offered or made available directly to the general public.
This report is submitted for the general information of the shareholders of Ivy Funds Variable Insurance Portfolios. It is not authorized for distribution to prospective investors in a Portfolio unless accompanied with or preceded by the current Portfolio prospectus, or summary prospectus, if available, as well as the variable product prospectus.
ITEM 2. CODE OF ETHICS |
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(a) |
As of December 31, 2009, the Registrant has adopted a code of ethics (the Code), as defined in Item 2 of Form N-CSR, that applies to the Principal Executive Officer and Principal Financial Officer or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. A copy of this code of ethics is filed as an exhibit to this Form N-CSR. |
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(b) |
There have been no amendments, during the period covered by this report, to a provision of the Code that applies to the registrant's Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer or Controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, and that relates to any element of the Code. |
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(c) |
During the period covered by this report, the registrant did not grant any waivers, including an implicit waiver, from a provision of the Code that applies to the registrant's Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer or Controller, or persons performing similar functions, regardless of whether those individuals were employed by the registrant or a third party, that related to one or more of the items set forth in paragraph (b) of this item's instructions. |
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ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT |
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The Board of Directors of the Registrant has determined that Glendon E. Johnson, Sr. is an audit committee financial expert, as defined in Item 3 of Form N-CSR, serving on its audit committee. Mr. Johnson is independent for purposes of Item 3 of Form N-CSR. |
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ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
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(a) |
Audit Fees |
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The aggregate fees billed for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for each of the last two fiscal years are as follows: |
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2008 |
$326,000 |
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2009 |
251,400 |
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(b) |
Audit-Related Fees |
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The aggregate fees billed for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's annual financial statements and are not reported under paragraph (a) of this Item are as follows: |
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2008 |
$6,400 |
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2009 |
8,000 |
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These fees are related to the review of Form N-1A. |
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(c) |
Tax Fees |
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The aggregate fees billed for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning are as follows: |
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2008 |
$55,000 |
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2009 |
98,000 |
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These fees are related to the review of the registrant's tax returns. |
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(d) |
All Other Fees |
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The aggregate fees billed for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this item are as follows: |
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2008 |
$6,050 |
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2009 |
6,800 |
These fees are related to the review of internal control. |
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(e) |
(1) |
Registrant's audit committee considers with the principal accountants all audit services to be provided by the principal accountants and pre-approves all such audit services. |
The audit committee shall pre-approve all non-audit services to be provided by the principal accountants to the registrant; provided that the pre-approval requirement does not apply to non-audit services that (i) were not identified as such at the time of the pre-approval and (ii) do not aggregate more than 5% of total fees paid to the principal accountants by the registrant during the fiscal year in which the services are provided, if the audit committee approves the provision of such non-audit services prior to the completion of the audit. |
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The audit committee shall pre-approve all non-audit services to be provided by the principal accountants to the investment adviser (not including any subadvisor whose role is primarily portfolio management and is subcontracted and overseen by the investment advisor) or any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant if the engagement relates directly to the operations or financial reporting of the registrant; provided that the pre-approval requirement does not apply to non-audit services that (i) were not identified as such at the time of the pre-approval and (ii) do not aggregate more than 5% of total fees paid to the principal accountants by the registrant for all services and by the registrant's investment adviser for non-audit services if the engagement relates directly to the operations or financial reporting of the registrant during the fiscal year in which those services are provided, if the audit committee approves the provision of such non-audit services prior to the completion of the audit. |
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(e) |
(2) |
None of the services described in each of paragraphs (b) through (d) of this Item were approved by the audit committee pursuant to the waiver provisions of paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. |
(f) |
Not applicable |
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(g) |
$67,450 and $112,800 are the aggregate non-audit fees billed in each of the last two fiscal years for services rendered by the principal accountant to the registrant. $140,462 and $224,036 are the aggregate non-audit fees billed in each of the last two fiscal years for services rendered by the principal accountant to the investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser) and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant. |
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(h) |
Not Applicable. |
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ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS |
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Not applicable. |
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ITEM 6. SCHEDULE OF INVESTMENTS. |
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(a) |
See Item 1 Shareholder Report. |
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(b) |
Not Applicable. |
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ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END |
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MANAGEMENT INVESTMENT COMPANIES |
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Not applicable. |
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ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
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Not applicable. |
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ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANIES AND AFFILIATED PURCHASERS |
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Not applicable. |
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ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
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There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrant's board of directors. |
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ITEM 11. CONTROLS AND PROCEDURES. |
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(a) |
The Registrant's Principal Executive Officer and Principal Financial Officer, or persons performing similar functions, based on their evaluation of the Registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this report, have concluded that such controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended) are effective and adequately designed to ensure that information required to be disclosed by the Registrant in its reports that it files or submits is accumulated and communicated to the Registrant's management, including the Principal Executive Officer and Principal Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. |
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(b) |
There were no significant changes in the registrant's internal controls over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940, as amended) that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. |
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ITEM 12. EXHIBITS. |
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(a)(1) The Code described in Item 2 of this Form N-CSR. |
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Attached hereto as Exhibit 99.CODE. |
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(a)(2) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)). |
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Attached hereto as Exhibit 99.CERT. |
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(b) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(b) under the Investment Company Act of 1940 (17 CFR 270.30a-2(b)). |
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Attached hereto as Exhibit 99.906CERT. |
SIGNATURES |
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. |
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IVY FUNDS VARIABLE INSURANCE PORTFOLIOS |
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(Registrant) |
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By |
/s/Mara D. Herrington |
Mara D. Herrington, Vice President and Secretary |
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Date: March 5, 2010 |
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. |
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By |
/s/Henry J. Herrmann |
Henry J. Herrmann, Principal Executive Officer |
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Date: March 5, 2010 |
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By |
/s/Joseph W. Kauten |
Joseph W. Kauten, Principal Financial Officer |
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Date: March 5, 2010 |
EXHIBIT 99.CODE
WADDELL & REED ADVISORS FUNDS
IVY FUNDS VARIABLE INSURANCE PORTFOLIOS
WADDELL & REED INVESTED PORTFOLIOS
(each a "Fund" and, together, the "Funds")
CODE OF ETHICS
pursuant to
Section 406 of the Sarbanes-Oxley Act of 2002
The Boards of Trustees of the Funds, each of which is an open-end management investment company registered as such under the provisions of the Investment Company Act of 1940, as amended (the "1940 Act"), have adopted this Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and forms of the Securities and Exchange Commission ("Commission") thereunder.
1. Persons to Whom this Code of Ethics Applies
This Code of Ethics is applicable to each person who occupies the position of principal executive officer, principal financial officer, controller or principal accounting officer of a Fund ("Covered Officers").
2. Relationship to Codes of Ethics Under Rule 17j-1
Each of the Funds is subject to, and has adopted a code of ethics pursuant to, Rule 17j-1 under the 1940 Act (the "17j-1 codes"), applicable to trustees and/or directors, officers and employees of a Fund, the Fund's investment adviser and, in the case of Series Trust and Investors Series Trust, those Funds' principal underwriter.
The 17j-1 codes impose reporting and disclosure requirements on covered persons relating to their personal investment transactions in securities, as well as substantively regulate such transactions, as the Boards of Trustees have determined to be reasonably necessary in order to prevent fraud, deceit or manipulative practices by such persons in connection with the purchase or sale, directly or indirectly, by the person of a security held or to be acquired by a Fund.
The requirements of this Code of Ethics are in addition to, not in substitution for, the provisions of the 17j-1 codes that are applicable to Covered Officers to whom this Code of Ethics applies.
3. Substantive Requirements
a. Honest and ethical conduct, including ethical handling of actual or apparent conflicts of interest between personal and professional relationships.
It shall be the responsibility of each Covered Officer to comply with the reporting, disclosure and pre-approval requirements of the 17j-1 codes of the Funds as are applicable to personal securities investments of such Covered Officer. No personal securities investment transaction by a Covered Officer that complies with the procedural, reporting, disclosure and other provisions of such 17j-1 codes as may be applicable to such transaction, shall be deemed to be a violation or constitute a waiver of any requirement of this Code of Ethics.
No Covered Officer shall derive any personal1 financial or other benefit of a substantial nature as a result of his or her position as the principal executive officer, principal financial officer, controller or principal accounting officer, as the case may be, through or from a Fund, or through or from any person or entity doing business or seeking to do business with a Fund, including, without limitation, gifts or gratuities (other than customary business gifts, meals or business entertainment that are not extravagant), preferred investment opportunities, or cash payments of any amount.
1 | For the purpose of this Code of Ethics, a "personal" benefit includes a benefit offered to or received by: a Covered Officer; a partnership in which the Covered Officer is a partner; a trust of which the Covered Officer is the grantor or beneficiary; a member of such Covered Officer's "immediate family," which includes the Covered Officer's spouse, a child residing in the Covered Officer's household (including a step or adoptive child), and any dependent of the Covered Officer as defined in section 152 of the Internal Revenue Code; a partnership in which any member of the Covered Officer's immediate family is a partner; or a trust for the benefit of any member of the Covered Officer's immediate family. |
The employment of a member of the immediate family of a Covered Officer by an entity doing business, or seeking to do business, with a Fund shall not be deemed a violation of this Code of Ethics if the Covered Officer shall have disclosed such employment to the Board of Trustees of such Fund.
Any Covered Officer who shall, in his or her capacity as principal executive officer, principal financial officer, controller or principal accounting officer, receive or be offered any personal financial or other benefit that is or may be proscribed by this Code of Ethics promptly shall report same to the Funds' Chief Legal Officer.2 The Chief Legal Officer shall be, and hereby is, authorized to determine whether the receipt of such financial or other benefit is or would be proscribed by this Code of Ethics. If the Chief Legal Officer shall determine the receipt of any such personal financial or other benefit is or would be proscribed by this Code of Ethics, then the Chief Legal Officer may direct that such benefit be refused or, if already received, that such benefit anonymously be donated to a charitable organization. Upon such donation, no violation of this Code of Ethics shall be deemed to have occurred by reason of the Covered Officer having received such personal financial or other benefit. The Chief Legal Officer's determination that the offer to or receipt by a Covered Officer of a benefit is not a violation of this Code of Ethics shall not be deemed a waiver of any provision of this Code of Ethics.
2 | References herein to the Chief Legal Officer of the Funds shall include a designee of the Chief Legal Officer. |
The Chief Legal Officer shall maintain a record of reports, if any, by Covered Officers of the receipt or offer of personal financial or other benefits, and the Chief Legal Officer's determinations and directions with respect to such reports.
b. Full, fair, accurate, timely and understandable disclosure in reports and documents the Funds file with, or submit to, the Commission and in other public communications made by the Funds. |
Each Covered Officer is responsible for the full, fair, accurate, timely and understandable disclosure in reports and documents the Funds file with, or submit to, the Commission and in other public communications made by a Fund, insofar as such disclosure or communication relates to matters within the scope of such Covered Officer's responsibilities of office. Without limiting the generality of the foregoing, no Covered Officer willfully shall cause or permit any such disclosure or communication regarding a matter within the scope of his or her responsibility to: misstate a material fact; or omit to state a material fact necessary to make any statement made in any such disclosure or communication, in light of the circumstances in which such statement is made, not misleading.
c. Compliance with applicable governmental laws, rules and regulations. |
A Covered Officer promptly shall report to the Chief Legal Officer of the Funds any non-compliance or apparent non-compliance by a Fund with applicable governmental laws, rules and regulations including, without limitation, federal securities laws, regarding any matter that is within the scope of office of such Covered Officer, and shall take such action, if any, as may be directed by the Chief Legal Officer with respect to the investigation or cure of such non-compliance or apparent non-compliance.
The responsibility of a Covered Officer pursuant to this Code of Ethics with respect to non-compliance or apparent non-compliance by a Fund with applicable governmental laws, rules or regulations shall be fully discharged upon such report to the Chief Legal Officer, unless such Covered Officer shall refuse or willfully fail to act as shall have been directed by the Chief Legal Officer in response to such report. The fact that a violation of applicable governmental laws, rules or regulations has, or may have, occurred shall not itself be deemed violation of this Code of Ethics. A determination by the Chief Legal Officer that a violation of applicable governmental laws, rules or regulations has, or has not, occurred shall not be deemed a waiver of any provision of this Code of Ethics.
d. Prompt internal reporting of violations of this Code of Ethics. |
It is the responsibility of each Covered Person promptly to report to the Chief Legal Officer of the Funds any violation or apparent violation of this Code of Ethics by any Covered Person. The Chief Legal Officer shall maintain a record of the reports, if any, of violations or apparent violations of this Code of Ethics by any Covered Person.
The Chief Legal Officer shall determine, in response to any such report, whether or not a violation of this Code of Ethics has occurred and, in the event the Chief Legal Officer shall determine that a violation has occurred, shall report such violation to the Board of Trustees of the Fund(s) to which such violation relates.
e. Accountability for adherence to this Code of Ethics. |
Compliance with the requirements of this Code of Ethics is a condition of office of each Covered Officer. In the event of violation of the requirements of this Code of Ethics by a Covered Officer, the Board of Trustees of a Fund affected by such violation may take such action as it deems appropriate, including but not limited to removal from office with such Fund of the Covered Officer.
Each Covered Officer shall acknowledge in writing his or her receipt of a copy of this Code of Ethics, and his or her agreement that adherence to this Code of Ethics is a condition of office.
Adopted: August 20, 2003.
EXHIBIT 99.CERT
CERTIFICATION
I, Henry J. Herrmann, certify that:
1. I have reviewed this report on Form N-CSR of Ivy Funds Variable Insurance Portfolios;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that the material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of trustees (or persons performing equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 5, 2010 |
/s/Henry J. Herrmann |
Henry J. Herrmann, Principal Executive Officer |
CERTIFICATION
I, Joseph W. Kauten, certify that:
1. I have reviewed this report on Form N-CSR of Ivy Funds Variable Insurance Portfolios;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that the material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of trustees (or persons performing equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 5, 2010 |
/s/Joseph W. Kauten |
Joseph W. Kauten, Principal Financial Officer |
EXHIBIT 99.906 CERT
CERTIFICATION UNDER SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Henry J. Herrmann, Principal Executive Officer, and Joseph W. Kauten, Principal Financial Officer of Ivy Funds Variable Insurance Portfolios (the "Registrant"), each certify to the best of his knowledge that:
1. The Registrant's periodic report on Form N-CSR for the period covered by the report (the "Form N-CSR") fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended; and
2. The information contained in the Form N-CSR fairly represents, in all material respects, the financial condition and results of operation of the Registrant.
This certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. A signed original of this written statement required by 18 U.S.C. Section 1350 has been provided to the Registrant and will be retained and furnished to the U.S. Securities and Exchange Commission or its staff upon request.
By |
/s/Henry J. Herrmann |
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Henry J. Herrmann, Principal Executive Officer |
Date: March 5, 2010 |
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By |
/s/Joseph W. Kauten |
Joseph W. Kauten, Principal Financial Officer |
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Date: March 5, 2010 |
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