Market Sector Update

• The market extended its gains for the year. Equities posted positive returns for the quarter, albeit to a lesser extent than the sizeable year-to-gains realized in the first half of 2019. The Portfolio’s benchmark, the Russell 1000 Growth Index, is up approximately 23% year-to-date.
• In terms of returns for the different styles during the quarter, large-cap growth outperformed mid-cap growth and strongly outperformed small-cap growth styles. Notably, value outperformed growth in both small-caps and mid-caps, while large-cap growth eked out a small relative gain versus large-cap value.
• One of the more notable events during the quarter was the aggressive low quality, deep value rotation that occurred in early September. This rotation appeared to be trigged by a confluence of factors, including many that have pushed the market around the past several years – global central bank policy (easing), trade rhetoric (de-escalation), global economic data points (slightly better), and yields (temporarily higher). This rotation came at the expense of momentum, as the market sold the high-performing stocks.
• Positive support for sentiment: The Federal Reserve (Fed) cut the federal funds target rate by 0.25% in July and another 0.25% in September, with further cuts anticipated by the markets. Similarly, the U.S. Administration began to signal the potential of a scaled back, short-term deal around trade with China. Housing data remains strong and jobless claims remain low
• Negative support for sentiment: Institute for Supply Management (ISM) Manufacturing ended September in contraction territory highlighting signs of weakness and the ripples spreading from the trade war.
• From a factor perspective, there was a decent amount of movement from the beginning of the period to the end, but as the dust settled, quality (return on equity and return on assets) and dividend yield outperformed. Value factors (price to sales, price to book value) ended mixed as they saw a strong move in September. Momentum (price returns and relative strength), growth (earnings per share revisions and earnings momentum) and risk (beta and variability of earnings) factors all underperformed.

Portfolio Strategy

• The Portfolio posted a positive return, outperforming its benchmark during the period. Performance benefited from strong stock selection across numerous sectors: industrials, financials, consumer discretionary and communication services. Notable detractors during the period were health care and information technology but each represented sources of positive contribution on a year-to-date basis.
• Industrials posted strong relative contribution to performance through significant overweight positions in Verisk Analytics and CoStar Group as investors remained attracted to the strong late-cycle growth prospects these companies have exposure to. The Portfolio also saw positive contribution from J.B. Hunt and Northrup Grumman.
• Financials was another notable positive contributor to performance due to strong performance from CME Group as market volatility reemerged during the period. Consumer discretionary benefited from overweight exposure to Nike and Home Depot both extending strong year-to-date returns.
• Financials was another notable positive contributor to performance due to strong performance from CME Group as market volatility reemerged during the period. Consumer discretionary benefited from overweight exposure to Nike and Home Depot both extending strong year-to-date returns.
• Communication services provided a positive contribution as the Portfolio was not exposed to Netflix, which saw negative returns as investors remained cautious ahead of competition from Disney’s new video streaming product.
• The notable detractor was health care. The Portfolio was overweight Pfizer, which underperformed as the company announced the exit of its UpJohn business leading investors to debate the outlook for the remaining company. The Portfolio also was negatively impacted by exposure to Abiomed, Illumina and Cerner. Zoetis was a relative outperformer, which continues to benefit from its slow, steady, and stable growth in the animal health sector.
• Information technology was a detractor during the period as an underweight position in Apple, which outperformed as investor excitement around services drove a higher valuation. The Portfolio also saw a negative impact from an overweight position in services where VeriSign and PayPal underperformed.

Outlook

• The rotation in September shouldn’t be ignored and should serve as a reminder of the swiftness and magnitude with which a value rotation can occur. As we approach the “answer” to the degree to which earnings and the economy slow, it is entirely possible the market will turn toward the beneficial impacts to global growth prospects from easing global monetary policy and additional global fiscal stimulus.
• Time to consider the uncomfortable? We believe downside risk in some pockets is becoming more balanced and we are prepared to consider strong business models that tilt more growth cyclical. This is not to say we are wildly confident in the prospect of accelerating growth, only to observe that many cyclicals began underperforming over 18 months ago as they anticipated the likelihood of looming negative estimate revisions. As investors step closer to those revisions, it is crucial to think beyond that event.
• Risks remain. Despite a potential short term, artificial trade resolution, we remain concerned that there will be longlasting ramifications for many industries. The localization and protection of certain innovation/know-how has potentially reduced addressable markets and capped margin improvement/returns for many industrials and technology companies. Thank you for your continued support.

The opinions expressed are those of the Portfolio’s manager and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Sept. 30, 2019, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Top 10 equity holdings as a % of net assets as of 09/30/2019: Microsoft Corp. 8.8, Apple, Inc. 5.1, Alphabet, Inc. 4.7, Visa, Inc. 4.7, Amazon.com, Inc. 4.6, Verisk Analytics, Inc. 3.2, Zoetis, Inc. 3.1, Facebook, Inc. 3.1, Booking Holdings, Inc. 2.8 and NIKE, Inc. 2.8.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It is not possible to invest directly in an index.

Risk factors: The value of the Portfolio’s shares will change, and you could lose money on your investment. Investing in companies involved primarily in a single asset class (large cap) may be more risky and volatile than an investment with greater diversification. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Portfolio’s prospectus.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.