Market Sector Update

• Mid-cap growth stocks, as measured by the Russell Midcap Growth Index (Portfolio's benchmark), continued their fiscally charged rally off the pandemic lows in March. The index gained 9.37% during the third quarter of 2020. While the ongoing stimulus provided the foundation for economic recovery, performance in the index for the quarter continued for companies that were winners prior to the pandemic: business models with low leverage, superior sales growth and higher relative market valuations. The speed and magnitude of the reopening of the economy provided a positive backdrop for many companies, giving credence to better-than-expected earnings in the quarter. While the world continued to process the irregularities of the pandemic handling from region to region, no news in the market remained the excuse for upward trends in stock prices as up was the path of least resistance. Risks to the Portfolio quickly moved from assessing business model risk to focusing on valuation risk of the holdings within the Portfolio. We remain focused on our consistent and continual approach of emphasizing quality business models and balance sheets and a willingness to take a long-range view of investing in strong companies with durable growth outlooks. While significant uncertainties remain in the market, we were pleased with the overall positioning of the Portfolio throughout the quarter with the strategy outperforming the index over the period. Performance within the index came from communication services, consumer discretionary, industrials, materials, consumer staples and health care, broadening out from the second quarter stay-at-home mandate dominated performance theme. On balance, performance within the index continued thematically during the quarter: higher growth, lower debt and higher valuation companies outperformed while companies with lower profitability outperformed. This was a contrast to second quarter. The utilities, energy, real estate, financials and information technology sectors all underperformed the index in the quarter. Relative outperformance within the Portfolio came from the information technology, health care, materials, industrials and energy sectors. Our communication services, consumer discretionary, financials and consumer staples sectors negatively contributed to relative performance in the quarter.

Portfolio Strategy

• The Portfolio outperformed its benchmark for the period ended Sept. 30, 2020. All sectors except communication services, consumer discretionary, financials and consumer staples were additive to Portfolio performance relative to the index. Stock selection was the most significant contributor to the Portfolio's relative performance during the period. This is the focus of the strategy – buying profitable companies with durable business models for the long term, so we were pleased with strong, additive stock selection. Sector allocation weights also contributed slightly to performance. •Information technology was the strongest relative contributor within the Portfolio while the sector underperformed within the index. Our slight underweight to the sector added to relative outperformance for the quarter while our stock selection was the strongest in this sector for the Portfolio. The shelter-in-place mandate was a benefit for many technology companies that aided in work-from-home transitions. Our off-benchmark positions in both Advanced Micro Devices, Inc. and Square, Inc. were top contributors to relative performance in the sector.
• Health care, the Portfolio’s second largest allocation, posted strong performance for the Portfolio both from our slight underweight position and stock selection. Both Intuitive Surgical, Inc. and Edwards Lifesciences Corp. were offbenchmark outperformers for the period. Materials, an overweight in the portfolio for the quarter, added to returns as an overweight position and from stock selection. Scotts Miracle-Gro Co. held a significant overweight position in the Portfolio and had a strong return for the quarter. Our overweight position to industrials was additive on performance, as was the stock selection.
• Communication services was the largest sector relative detractor for the quarter. We owned a total of two names in the sector: Twitter, Inc. and Electronic Arts Inc., both of which are not held in the benchmark. While Twitter posted strong enough returns to offset the negative returns for Electronic Arts, it was the lack of exposure to names like Roku and Pinterest that created the drag on overall relative performance. Consumer discretionary was also a relative detractor to performance, with the slight overweight position adding to returns; however, it was not enough to offset negative relative returns from stock selection. We continue to have no exposure to real estate or utilities, which added to overall relative performance. Our lone holding in consumer staples outperformed both the index and the sector within the index. However, we were sufficiently underweight this sector, which outperformed the broader index in the third quarter – to post a negative contribution to the overall Portfolio return. Cash, which averaged over 2% in the quarter, detracted from the overall relative performance, while equity options were additive.

Outlook

• We still believe that the economy is on tenuous footing and the stock market is possibly ahead of itself in assessing a stable return to economic growth and prospects for corporate profits. While volatility as measured by the CBOE Volatility Index (VIX) has decreased consistently throughout the quarter, it is coming off the highest level we have seen in the past decade. Economic re-opening concerns have now evolved into concerns around economic sustainability, as colder months approach and COVID-19 cases begin to spike. Individual companies are still uncertain how to guide for earnings and are conservative at best. In addition, we are concerned that the U.S. market isn’t fully appreciating the full extent that the mandated economic shutdown may have on employment recovery over time. What is certain? The fiscal and monetary stimulus had been unprecedented, and that seems like all the market has needed to process at this point as it looks forward. As we have moved throughout 2020, our risk focus has shifted somewhat from business model risk to valuation risk. We still believe that company and consumer behavior will return to normal over the long term, but the duration of the economic uncertainty and thus, earnings power of companies to meet growth expectations in the shorter term are still cause for caution. While we are comfortable with the ability of the companies in our Portfolio to continue to deliver results, we are quite concerned with some of the elevated valuations we are seeing in the market. In certain cases, we have sold down position sizes based on our assessment of the risk return trade-off of the stocks at the current elevated levels. We will continue to be vigilant with our process in judging our belief in the duration of a company’s growth trajectory relative to the valuation we see in the marketplace. For active managers with established strategies, the market dislocations created by the pandemic are presenting opportunities to create alpha for shareholders, as business model earnings power and valuations become more diverse. Our consistent approach to seeking profitable companies with sound capital structures has served us well through the volatile first half of 2020. We will continue to manage the Portfolio with our eyes focused on the long term, while being mindfully aware of the short-term risks presented by the pandemic recovery.

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 Sept. 30, 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 09/30/2020: CoStar Group, Inc. 3.6, Chipotle Mexican Grill, Inc. 3.6, DocuSign, Inc. 2.9, Electronic Arts, Inc. 2.9, MarketAxess Holdings, Inc. 2.8, DexCom, Inc. 2.8, Twilio, Inc. 2.6, Fastenal Co. 2.5, Monolithic Power Systems, Inc. 2.5 and Teradyne, Inc. 2.3.

The Russell Midcap Growth Index measures the performance of the mid-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 mid-cap growth stocks may carry more risk than investing in stocks of larger more wellestablished companies. 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.