Market Sector Update

• Mid-cap growth stocks, as measured by the Russell Midcap Growth Index (Portfolio’s benchmark), were up in the fourth quarter following a down third quarter. This resulted in a robust 35.5% annual return for calendar year 2019, closing out the decade with the second best annual return over the time period.
• All sectors in the index, except for materials, posted positive returns in the quarter. This demonstrated a notable reversal from the mixed but defensively postured result in third quarter. The top absolute performing sectors for the index in the fourth quarter were health care, information technology, financials and energy. This was the first positive return for the energy sector since second quarter of 2018. Energy benefited from further OPEC production cuts, domestic supply growth deceleration and the agreed upon phase one trade war deal between China and the U.S.
• The fourth quarter saw growth continue to outperform value in the mid-cap space, after a brief value outperformance head fake in third quarter. The significant change in market leadership to defensives was short-lived, although valuation sensitivity continued to gain traction throughout fourth quarter as evidenced by both the high price-toearnings (expensive) stocks and the low price-to-earnings (cheap) stocks doing well. Even with a phase one trade war deal, there is enough political uncertainty going into 2020 that corporations are continuing to sit on the sidelines relative to production, choosing to wait for clearer economic direction. This is something we will continue to monitor.

Portfolio Strategy

• The Portfolio outperformed its benchmark in the fourth quarter, posting a positive return. While most of the relative outperformance came from stock selection, the Portfolio benefited slightly from relative sector underweights to consumer staples and real estate, and an overweight to health care.
• Consumer discretionary continues to be the biggest sector overweight in the Portfolio. While the overweight position was slightly negative, stock selection more than offset the drag, resulting in the sector being the top contributor for the quarter. Tiffany & Co. had a good quarter on the back of an unsolicited acquisition proposal from Louis Vuitton’s parent company. BorgWarner Inc., a multi-year holding, had another positive quarter for the Portfolio as management continues to execute above expectations while transitioning the business to become a major participant in hybrid/electric vehicle powertrain growth. In luxury goods, another multi-year holding, Lululemon Athletica, Inc., was a positive overweight for the quarter. The athleisure apparel company beat street estimates for third quarter earnings with continued growth from e-commerce and a strengthening men’s wear line.
• Health care was the top-performing sector in the index for the quarter, and while the Portfolio’s overweight position was a benefit, stock selection during the period detracted, particularly in pharmaceuticals and health care providers & services. Both Zoetis, Inc. and Laboratory Corporation of America posted positive results in the quarter but underperformed other comparable names in the index. This was more of a case of what the Portfolio didn’t own versus what it owned. Positives for the sector included DexCom, Inc., which posted strong third quarter numbers for its continuous glucose monitoring platform for Type 1 diabetes, and Seattle Genetics, which posted positive third quarter earnings coupled with positive early and later stage results for oncology therapies in its pipeline.
• The Portfolio’s financials sector position was overweight to the index with First Republic Bank, SVB Financial Group and MarketAxess Holdings Inc. all overweight outperformers. First Republic Bank posted a solid quarter by accelerating mortgage loan growth faster than expected in this current low interest rate environment. SVB Financial Group had a solid quarter on positive deposit growth and loan growth, consisting of healthy venture capital investment and private equity fundraising activity. MarketAxess beat street expectations for third quarter earnings per share by growing revenues higher than expected and experiencing better than expected expense management.
• Information technology was an underweight position in the quarter, with both allocation affect and stock selection negatives for the sector. Both Arista Networks, Inc. and Twilio, Inc. were negative performers in the quarter, but the majority of the underperformance was based in names the Portfolio did not have in the portfolio that benefited index performance.
• The Portfolio’s cash exposure continues to be at the low end of our normal range but was an incremental detractor to performance in the quarter.

Outlook

• The broad U.S. equity market reaccelerated in the quarter, based largely on a phase one trade war agreement, an acceptable level for the federal funds rate, and indications that the trade impasse had not meaningfully constricted global growth. What’s interesting is that the uncertainty around the U.S. political environment, including a president who has been impeached by the House of Representatives, seems to be of little consequence to the markets. While we appreciate that many of the rest of the world’s economies are challenged, it appears that the bottoming process is beginning to take place, with confidence growing around the trade agreement and motion in the finalization of the Brexit agreement. We continue to watch for signs of inflection in those economies, and while we are incrementally positive on the global environment, the impact of any inflection may be muted until things are settled somewhat here in the U.S. politically. As we expected, the Federal Reserve cut interest rates one final time in October, then signaled that it was comfortable with the current level.
• Lower-leveraged companies within the index outperformed higher-leveraged companies, flipping the script from third quarter and coming in line with our expectations. The market got its third interest rate cut on the year, but as we have stated in the past, we think the environment for companies to add leverage for debt refinancing and share buybacks is not the same as it was in the past cycle of rate cuts post the financial crisis of 2008. We don’t expect the tendency that we saw mid-decade of higher-debt companies outperforming lower-debt companies to once again become a trend.
• The Portfolio’s portfolio continues to express a more economically constructive and optimistic view, with a more assertive pro-growth, less defensive stance. We remain overweight the consumer discretionary, health care, financials and materials sectors. While we are underweight information technology, we still have a healthy exposure to the sector.
• We remain steadfast in our approach, maintaining that stock selection drives performance. However, we will prudently apply a macro overlay if need be, by utilizing more defensive sector exposure, cash and/or portfolio hedging. We continue to have no exposure to the real estate and energy sectors, which represent a combined 4.0% of the index.

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 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: CoStar Group, Inc. 3.5, Electronic Arts, Inc. 3.0, Chipotle Mexican Grill, Inc. 2.8, MarketAxess Holdings, Inc. 2.5, Transunion 2.5, Teradyne, Inc. 2.4, Tractor Supply Co. 2.4, Fastenal Co. 2.3, Keysight Technologies, Inc. 2.2 and Dexcom, Inc. 2.1.

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.

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. 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.