Market Sector Update

• Second quarter equity performance was strong across all styles and capitalization ranges. Growth styles continued to outperform value styles while small-cap styles outperformed all capitalization styles according to broad market indices.
• Most of the market gains in the quarter came in May as the technology sector pushed higher. However, during the quarter, especially in June, there was a clear underlying rotation to more defensive positions, specifically dividend payers and securities at lower valuation levels. This likely stems from falling bonds yields, concerns over global growth and progress toward implementation of trade tariffs.
• Although trade war rhetoric was not expected to disappear, it unfortunately intensified during the quarter as the U.S. threated additional tariffs on China but also on several U.S. allies.
• As the quarter closed out there were emerging signs that the trade war uncertainty was beginning to find its way into business and consumer confidence, supply chain lead times and Federal Reserve (Fed) outlook commentary.
• The Fed increased rates in June, marking the second this year and seventh since the first hike back in December of 2015. The front end of the yield curve moved higher during the quarter while the 10 year, despite some notable swings, moved only slightly higher resulting in a further flattening in the yield curve.
• Momentum and growth factors outperformed while value and quality underperformed. It is notable that more defensive factors, such as dividend yield, strongly outperformed momentum toward the end of the quarter.

Portfolio Strategy

• For the quarter ended June 30, 2018, the Portfolio outperformed the Russell 1000 Growth Index, its benchmark. Outperformance was driven by favorable stock selection in technology, healthcare and consumer discretionary. The main detractors were industrials, energy and financials.
• Outperformance in technology was driven by overweight positions in salesforce.com, Adobe, and MasterCard. These stocks benefited from a strong and sustained level of sales and earnings growth.
• Healthcare performance was driven by Abiomed and Intuitive Surgical. Similar to technology, the market rewarded strong and sustained growth companies during the quarter. Elsewhere in healthcare, weakness in several biotechnology names benefited performance as the Portfolio is underweight this sector.
• Relative consumer discretionary sector strength was driven by Nike, a new position during the quarter, and Ferrari. Nike is seeing the benefits of a refresh in product innovation and new digital marketing strategy.
• Industrials was a notable detractor during the quarter as slowing global growth, potential ramifications of a trade war and a stronger U.S. dollar weighed on earnings forecasts and valuation. Stanley Black and Decker and Caterpillar were relative weak performers in the Portfolio during the quarter.

Outlook

• U.S economic data remained supportive of gross domestic product growth, likely 2.5%-3.0%, with few apparent excesses. Unemployment should continue to move lower while inflationary pressures continue to build. Fed tightening will continue as policy moves from accommodative to neutral. The general set-up is a move toward late cycle with increasing risk and volatility.
• A full-blown trade war remains the biggest threat to markets. Globalization has been a boon to sales growth and profit margins for many U.S. companies. Many of these companies have also been revalued higher based on the stability and consistency in profitability given a global business model.
• This highlights that not only would a trade war unwind some of the margin benefits accrued by globalization over the past several decades, but it could also lead to a revaluation lower in those equities that benefited.
• Economist project limited first order impacts from tariffs, but clarity on trade rules is needed for corporations. Continued uncertainty about the duration of trade war rhetoric and depth of tariffs will erode the strong business confidence built following tax reform. Willingness to invest capital in long-term growth projects will diminish if the rules to global trade are not known. That pause in spending will have economic and market ramifications.
• If the trade war escalates then sectors considered more defensive – consumer staples and pharmaceuticals – would be a potential hiding spot for investors. Unfortunately, growth prospects in those sectors are currently limited and it appears too early to be interested in those areas on a fundamental basis. 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 June 30, 2018, 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 06/30/2018: Microsoft Corp. 6.7, Amazon.com, Inc. 5.5, Apple, Inc. 4.7, MasterCard, Inc. 4.5, Visa, Inc. 4.3, salesforce.com, Inc. 4.2, CME Group, Inc. 4.0, Home Depot, Inc. 3.9, PayPal, Inc. 3.6 and Adobe Systems, Inc. 3.3.

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. Portfolio holdings may have exposure to foreign markets and associated risks. 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.