Market Sector Update

• This quarter marked an unprecedented period globally not only for equity markets but for humanity. We hope the readers of this quarterly commentary are healthy, safe and receiving the support they need. The market was exceptionally weak this quarter, abruptly ending a decade long bull market and offering a humbling reminder that one never knows what event will mark the end of an economic cycle or initiate the next recession. The Russell 1000 Growth Index (the Portfolio’s benchmark) declined by 14.1% during the quarter, a sharp contrast to 2019’s annual gain of 36%.
• Growth styles significantly outperformed value styles during the market drawdown during the quarter. Also clear was the preference for larger capitalization styles as large caps outperformed mid caps and mid caps outperformed small caps.
• The quarter initially started with continued hope that easing credit conditions and financial policy loosening by global centrals bank would ultimately lead to accelerating global economic growth later in 2020. The emergence of COVID- 19, a global pandemic, abruptly changed the narrative.
• The spread of the coronavirus led to significant de-risking of markets around the globe. Central banks around the world moved quickly to remove the risk of a credit freeze and massive liquidity issues. Global governments began to ramp up fiscal policy efforts to stymie the blunt force of rising unemployment, fund inadequately equipped health care systems, and provide cash flow to businesses that have been impaired by the containment efforts.
• The performance of momentum factor strategies (relative strength) overwhelmed the performance of value factor strategies (low valuations, such as price-to-earnings and price-to-cash flow) during the period. Growth (long-term earnings per share growth) and quality (return on assets and return on capital) strategies also performed well.

Portfolio Strategy

• Although it provided a negative return, the Portfolio outperformed its benchmark during the quarter by providing strong downside capture during a challenging market environment. Performance benefited from strong stock selection across numerous sectors: industrials, information technology, financials and real estate. Notable detractors during the period were communication services and consumer staples.
• Industrials posted a strong relative contribution to performance through overweight positions in CoStar Group and Verisk Analytics as investors remained attracted to the high growth and high recurring revenue business models of these companies. The Portfolio benefited from exiting its position in Boeing early in the quarter. The company saw negative returns as COVID-19 severely impacts the global aerospace industry. Detractors in the period included Stanley Black & Decker and Caterpillar. Both companies experienced negative returns as global economic growth outlooks have been revised lower.
• Information technology was another notable positive contributor led by an overweight position in NVIDIA Corp. where investors anticipated a benefit from COVID-19 related activities, including a surge in utilization at data centers and cloud computing requiring additional capacity due to shelter in place orders. Adobe and Microsoft were other positive contributors as investors continued to favor companies with relatively higher growth and visibility. Detractors included overweight positions in FleetCor, Motorola Solutions and Gartner.
• Communication services and consumer staples represented key detractors in the period. Within communication services, the Portfolio’s position in Walt Disney saw negative returns. The position was fully eliminated by March 2020. An underweight position in Netflix, which saw strong gains during the quarter, benefited from shelter in place orders around the globe. Consumer staples was negatively impacted through the Portfolio’s exposure to Coca-Cola, which underperformed relative to the benchmark due to a sharp decline in on-premise soda consumption at restaurants and venues due to COVID-19 disruptions worldwide.
• Portfolio changes include new positions in Cooper Companies, a leader in the contact lens market, and Tractor Supply, a unique retailer focused on consumables for the rural lifestyle. Positions eliminated during the quarter included Walt Disney, Boeing and Illumina.

Outlook

• Certainty is hard to find in the current environment, especially regarding the impact of the collective efforts intended to, 1) slow the spread of the virus, or 2) weather the economic impacts related to people sheltering from the virus. It is difficult to be confident in knowing if these efforts will prove successful or adequate to limit further downside risks, but we do know that additional resources will be made available if necessary, as is the case with bubbling momentum around a significant infrastructure deal in the U.S. Over the next two or three quarters economic data will represent the impacts from an unprecedented shock to the economic and social system around the globe. These data points are unlikely to provide comfort. Our current thinking is that the U.S. economy, with significant global monetary and fiscal support, survives this short-term stall and can return to growth in late 2020 and into 2021. It is important to recognize that the steep equity market decline has prepared many stocks for these negative revisions. As such, as these breathtaking revisions work through the system, we intend to focus on “normalized” earnings and growth. Long-term opportunities always present themselves during these periods of volatility. We further assume that businesses and personal lives will go back to something resembling the old normal, not some new environment in which everyone only works from home, has food delivered, and connects through video conferencing. We expect travel to domestic and global destinations to resume, we expect foodies to visit local eateries and maybe order sodas, we anticipate people will get their eyes checked and reorder contact lenses, and yes, people will go to the hardware store to purchase those new lithium-ion battery powered drills they have been wanting. Until those green shoots emerge, we believe our riskaware process lends itself to holding up well while in periods of market volatility. The secret sauce is that we own businesses we think are exceptional and can do well through a market cycle, not just in one flavor of a market cycle. This doesn’t mean they will always be “up and to the right” but we think when we wake up in the morning, no matter what has happened in the world, we will be comfortable owning these businesses. 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 March 31, 2020, 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 03/31/2020: Microsoft Corp. 9.7, Apple, Inc. 6.2, Amazon.com, Inc. 5.4, Visa, Inc. 4.7, Alphabet, Inc. 4.2, Coca-Cola Co. 3.3, Motorola Solutions, Inc. 3.2, Cerner Corp. 3.1, Adobe, Inc. 2.9, and NVIDIA Corp. 2.7.

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.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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. The Portfolio typically holds a limited number of stocks (generally 40 to 60), and the Portfolio’s portfolio manager also tends to invest a significant portion of the Portfolio’s total assets in a limited number of stocks. As a result, the appreciation or depreciation of any one security held by the Portfolio may have a greater impact on the Portfolio’s NAV than it would if the Portfolio invested in a larger number of securities or if the Portfolio’s portfolio manager invested a greater portion of the Portfolio’s total assets in a larger number of stocks. 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. 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.