Market Sector Update

• It was a quarter of reversals. Equities performed strongly and reversed a significant portion of the losses realized during the prior quarter. Equities across all capitalization ranges and all styles had significant gains during the first quarter 2019. Growth styles outperformed value styles while mid caps outperformed both small and large. The Russell 1000 Growth Index, the Portfolio’s benchmark, increased by approximately 16% in the quarter.
• The Federal Reserve (Fed) was a big source of optimism that developed during the quarter. Post what was perceived to be policy error during fourth quarter 2018, the Fed moved quickly to ease tightening financial conditions. Actions taken included stepping back from quantitative tightening (balance sheet reduction) and taking a more dovish position regarding future interest rate hikes.
• In response to these actions from the Fed, yields across the yield curve moved lower and the yield curve spread (10- year minus 2-year Treasuries) flattened slightly. Investors perceived the reduction in rates across the yield curve as helpful for solving the problem of tight financial conditions.
• On the trade tariffs front, there was building hope during the quarter that China and the U.S. were on a path to agreement. Companies with high foreign sales exposure, those that experienced a difficult year in 2018, benefited from this more optimistic sentiment.
• The net positive is that several of the most prominent worries during 2018 were mitigated during the first quarter 2019, sending volatility lower and market multiples higher. Despite near-term earnings risk based on weak global growth, there were building expectations for an acceleration in earnings growth later in 2019.
• In another reversal of fourth quarter 2018 performance, a period in which all sectors in the index ended the period in negative territory, first quarter ended with all sectors in positive territory with strength in information technology and real estate and relative underperformance in financials and energy.
• From a factor perspective, risk and quality outperformed during the quarter. Underperforming factors included value and pockets of momentum.

Portfolio Strategy

• The Portfolio posted strong absolute double-digit gains, slightly underperforming its benchmark during the period. Performance benefited from strong stock selection in consumer staples, consumer discretionary and industrials. The main offset was driven by stock selection in financials.
• Consumer staples provided positive attribution as the Portfolio held an overweight position to Estee Lauder. The shares responded positively to sustained strong growth out of China, a source of stress into quarterly results. The Portfolio also benefited from weakness in Coca-Cola, an index holding, as we have no exposure to this company.
• Consumer discretionary benefited from stock selection with strength in Ulta Beauty, Inc. following strong quarterly results and VF Corp., which bounced back following recent concern around growth sustainability of its Vans shoe segment. The Portfolio also benefited from zero exposure to Tesla, which underperformed in the quarter.
• The industrials sector was another notable positive contributor to performance. Strong growth momentum from CoStar Group and Verisk Analytics, both overweight positions, propelled those stocks higher and offset weakness from some cyclical names, such as JB Hunt.
• The strong positive relative drivers were offset by performance in financials. Specifically, CME Group was a significant detractor of performance as the gains realized in 2018 related to increase in volatility partly reversed as volatility in the markets ebbed.

Outlook

• We are cautious in returning to the narrative that the economy/equity markets will exit from the recent period of volatility and stress back on the same bull market trade as before. We are concerned economic conditions will remain tight and that a more cautious narrative is warranted and not currently being reflected.
• The Fed has stepped back from further tightening but the impact from past interest rate hikes will remain in the system. We believe investors must ask if the repositioning of the Fed policy is an attempt to further accelerate the economy or a response to increasing, late-cycle risks to global growth.
• We think the concerns around trade tariffs have also been swept away too quickly as investors have just moved to anticipation of a clear resolution. Several questions still linger and it is an unknown if a deal will bring full closure. We worry the uncertainty already created regarding global supply chains will be hard to unwind.
• Excesses appear to be difficult to find as consumer debt, manufacturing inventories, corporate debt coverage and excess business investment, just aren’t apparent this cycle. We think the implication could be a growth deceleration with no recession or a shallow recession looming on the horizon.
• The Portfolio will remain tilted to high quality, profitable growth as we believe the controversy regarding the growth outlook will remain, if not increase. In the current environment of sentiment swings between pro-growth and growth fears, it is important to stress risk management to avoid mistakes given the high failure rate of large-cap growth companies.

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 March 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 03/31/2019: Microsoft Corp. 8.0, Amazon.com, Inc. 4.9, Alphabet, Inc. 4.7, Apple, Inc. 4.6, Visa, Inc. 4.6, MasterCard, Inc. 3.6, Verisk Analytics, Inc. 3.4, CME Group, Inc. 3.3, Intuit, Inc. 3.1 and PayPal, Inc. 3.1.

Co-portfolio Manager Daniel P. Becker, CFA, left the firm effective April 12, 2018.

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.