Market Sector Update

• Equity markets continued to perform well and ascend to new highs during the second quarter with strong gains across most indices. Growth – across all caps – outperformed value, as measured by Russell broad market indices.
• The rotation that began in early 2017 from riskier deep cyclicals and value equities into higher quality and higher growth equities continued, as it became apparent that the potential for meaningful Washington policy reform was fading. Many of the growth stocks that had performed quite poorly during much of 2016 experienced sharp moves upward, as investors had to recalibrate gross domestic product (GDP) expectations for the immediate future.

Portfolio Strategy

• The Portfolio marginally underperformed the Russell 1000 Growth Index (Portfolio’s benchmark) for the quarter.
• June was particularly poor for the Portfolio as many growth stocks experienced a systematic and correlated decline late in the month and quarter for little apparent reason. These volatility shocks seem to come and go over time and are events we have experienced regularly for nearly eight years.
• We believe many of the unexplained moves are due, at least in part, to the rise and popularity of ETFs, passive investing, risk parity strategies, and quantitative and algorithmic investing. Especially peculiar is that the fastest revenue growth and the slowest revenue growth companies both performed generally well, leaving the moderate growth companies behind during the quarter.
• Technology stocks continue to perform well, and energy stocks had a particularly poor quarter as the price of oil and natural gas fell much further than many thought it would.
• We experienced strong performance in Lam Research Corp., Amazon.com, Mastercard, Inc., Alphabet Inc. (Google) and Edwards LifeSciences Corp., while our positions in O’Reilly Automotive Inc., Haliburton Co., Dexcom, Inc., EOG Resources Inc., and Goldman Sachs Group did not perform as we had hoped.

Outlook

• Investors watched the Washington policy debates with interest but seemed to take the lack of progress in stride, judging by the strong market returns. It may be that improved global growth – as illustrated by a weakening U.S. dollar – along with a stable U.S. economic backdrop was enough to maintain positive sentiment.
• Economic data during the quarter, specifically labor, manufacturing and even slight improvements in retail sales, remained supportive of growth despite fiscal policy delays. There was not a material tone change in the quarter. It felt very much like a continuation of the themes from the start of 2017, including noise from Washington on the policy front, Federal Reserve (Fed) bumping up interest rates, and economic data generally supportive of moderate economic growth environment.
• From our standpoint, it seems that GDP, profits and aggregate cash flows for most companies are improving while corporate outlooks are generally positive. We think we are on course for continued record profits in many industries, after a brief profit recession back in 2014-2015.
• Our expectation from late 2016 was that there would be a renewed sense of economic optimism that might translate into greater employee hiring, capital spending and GDP growth. Although these events are still possible, we now think it’s best to expect a continuation of the moderate, but long-lived economic cycle we have known for several years.
• As we think about the outlook for 2018, we believe the economic excesses that give birth to economic cycles still aren’t apparent, while cash flows and profits should remain abundant. International economies that have been in recession the past few years have emerged and now appear to be accelerating for the first time in many years.
• Within the Portfolio, our positions in the financials sector have remained high versus the recent past and our defensive area positions have been further reduced, as these areas seem most anomalous and correlated to low bond yields globally. Some of the Portfolio’s largest holdings are currently MasterCard, Inc., Home Depot, Inc., Amazon.com, Facebook, Visa, Inc. and Lam Research Corp.

The opinions expressed are those of the Portfolio’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 30, 2017, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

Top 10 holdings (%) as of 06/30/2017: MasterCard, Inc. 4.5, Microsoft Corp. 4.4, Home Depot, Inc. 4.2, Amazon.com 4.2, Philip Morris International, Inc. 4.1, Facebook 4.0, Visa, Inc. 3.8, Celgene Corp. 3.8, Lam Research Corp. 3.7 and Apple, Inc. 3.6.

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.