Market Sector Update

• The market posted very strong gains for the fourth quarter and exceptional returns for the year. The Portfolio’s benchmark, the Russell 1000 Growth Index, was up 10.6% during quarter and 36.4% for the year.
• Growth styles outperformed value styles across all capitalization ranges, but frankly all styles performed strongly during the period. Large-cap styles outperformed mid-cap but underperformed relative to small-cap styles.
• The trends that emerged late in the third quarter carried into the fourth quarter – one defined by less uncertainty, thus increased risk-taking. This narrative was supported by continued global central bank easing, trade war deescalation and hope of troughing economic data points.
• During the period, the Trump administration previewed that a trade truce was likely in December and a deal did materialize ahead of year-end, justifying market excitement. The Federal Reserve cut the federal funds target rate by 0.25% in August, another 0.25% in September and a final 0.25% cut in October.
• Looking at the Portfolio’s benchmark, from a factor perspective, risk (higher beta) was the clear outperformer, followed by value factors (low enterprise value to earnings before depreciation, interest, tax and amortization [EDITA], low price to sales, low price to book value). Quality characteristics also performed decently while the laggard factor was momentum (price returns and relative strength).

Portfolio Strategy

• The Portfolio posted a strong return but lagged the performance of the benchmark during the period. Performance lagged due to stock selection across numerous sectors: information technology, health care, industrials and financials.
• Stock selection was the largest contributor to the relative underperformance but it is notable that during the period there was a rotation away from long-term, high visible growers – that have been priced at a premium – into sectors/stocks with lower relative valuations (cheaper) and with more cyclical exposure (risk). This undercurrent negatively impacted performance as this rotation was away from securities that the Portfolio typically owns and into stocks that are unlikely to be owned.
• Throughout the year, the Portfolio focused on actively managing down exposure to more expensive stocks that we saw as fully valued on near-term fundamentals in order to protect performance during a market rotation to lower quality, cheaper stocks. The Portfolio, due to philosophy and process, is unable to have significant exposure to sectors and stocks that performed well during the fourth quarter.
• There were stock specific mistakes during the quarter. An underweight position to Apple, which continued its strong run, was a notable detractor. The recent addition of Motorola Solutions, based on its long-term growth sustainability and acceleration, was ill-timed given the markets desire to lean into higher-risk equities with more near-term positive revision potential. Our overweight position to CME Group was a detractor as volatility in the markets remained subdued during the period.

Outlook

• We foresee improved economic growth during 2020 and believe this will support a move to more risk taking by investors. However, we are wary about the magnitude of growth that emerges from this fourth mini-cycle of the decade. In the short-term, we worry the market has moved too aggressively and would be concerned as negative estimate revisions in cyclical stocks are still possible based on the lagging impact from the prior tightening cycle.
• As valuations for riskier stocks move higher on positive sentiment it will ultimately become imperative, and necessary for further outperformance, that positive fundamentals drive positive earnings revisions.
• We don’t see it as an “either/or.” While we own cyclical stocks that have long-term strong competitive positions (have a story outside of macro improvement alone and can outperform through cycle), we take great effort to ensure the portfolio is not making significant short-term macroeconomic bets. Focus is on selecting stocks based on 3- to 5-year prospects not biased toward the potential for near-term positive revisions based on difficult to call economic prospects.
• We repeat our longstanding view that despite the recent news of a “trade truce,” the trade war will fester over the long term. We remain concerned that there will be long-lasting ramifications for many industries. 2020 may be a year in which trade rhetoric doesn’t get worse, but we worry it's unlikely to get better. 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 Dec. 31, 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 holdings (%) as of 12/31/2019: Microsoft Corp. 9.1, Apple, Inc. 6.2, Alphabet, Inc. 4.9, Visa, Inc. 4.7, Amazon.com, Inc. 4.5, Facebook, Inc. 3.1, Cerner Corp. 3.1, Coca-Cola Co. 3.0, Booking Holdings, Inc. 2.8 and Motorola, 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.