Market Sector Update

• Mid-cap growth stocks, as measured by the Russell Midcap Growth Index (Portfolio’s benchmark), gained 30.26% in the second quarter. This was another significant reversal from a very weak first quarter for the category, marking the end of a short-lived pandemic induced bear market correction. Outperformance in the index during the quarter came from companies that were strong performers prior to the pandemic: business models with low leverage, high levels of profitability, superior sales growth and high-market valuation.
• The Portfolio’s approach emphasizes quality business models and our willingness to take a long-range view to investing in strong companies with durable growth outlooks has afforded us the opportunity to reposition into a handful of stocks we have been considering yet wanted to buy at more reasonable valuations. The Portfolio outperformed the index in the second quarter and significantly led the benchmark on a trailing 12-month basis. Outperformance within the index came from energy, consumer discretionary, communication services, information technology and health care. Most were generally businesses with solid balance sheets and growth prospects that benefitted from the pandemic and the stay-at-home mandate. Utilities, real estate, materials, consumer staples, industrials and financials all underperformed the index in the quarter. Relative outperformance within the Portfolio came from information technology, consumer discretionary, financials, industrials, real estate, health care and materials. Energy, consumer staples and utilities contributed slightly to relative performance and communication services was a detractor.

Portfolio Strategy

• All sectors except communication services were additive to Portfolio’s relative performance for the quarter. Stock selection was the most significant contributor to the outperformance. This was due to the Portfolio’s focus of buying profitable companies with durable business models for the long term. Sector allocation weights also contributed slightly to the outperformance.
• Information technology was the strongest sector within the Portfolio and was an outperformer within the index for the quarter. Though our slight underweight position detracted a small amount to overall relative performance, stock selection was the strongest in this sector, making it the top overall relative sector performer for the quarter. The shelter- in-place mandate benefitted many technology companies that aided work from home transitions. Our overweight position in Twilio, Inc. posted a strong gain to the Portfolio as business communication transitioned quickly from face-to-face meetings to virtual meetings. The shelter-in-place mandate also benefitted e-commerce facilitation companies like Square, Inc., as consumers were still making purchase, but doing so from the comfort of their homes. Square posted a strong gain in the Portfolio and our overweight position versus the benchmark benefitted relative performance.
• Consumer discretionary was the second best contributor to performance, with both the slight overweight position and stock selection adding to the relative return. Chipotle Mexican Grill, Inc. was the largest holding in the Portfolio at quarter end and posted a strong gain in the period. Chipotle benefitted from an established omni-channel distribution platform, with significant contribution from web and app-based order facilitation. MercadoLibre, Inc. was also a standout performer in the Portfolio in the quarter. Health care, the second largest allocation in the Portfolio as well as the second largest overweight, posted a strong quarter for the Portfolio due to its position size and stock selection. Both DexCom, Inc. and ABIOMED, Inc. were overweight outperformers for the quarter. Intuitive Surgical, Inc. and Edwards Lifesciences, Corp. posted positive gains but underperformed the sector.
• Our slight overweight position to industrials was a drag on performance, but stock selection offset the overweight. Trex Company, Inc., a provider of composite decking solutions, was an overweight outperformer for the quarter. Trex appeared to benefit from shelter-in-place orders that may have encouraged at home workers to improve their environments. On the flip side, CoStar Group, Inc., an overweight position, posted positive returns for the quarter, but underperformed the overall industrials sector. Energy names rebounded significantly in the quarter as fears of greatly diminished worldwide demand for oil abated as global economies began to reopen. Our energy exposure added to relative performance, completely based on stock selection. We added marginal exposure to the sector through Noble Energy based on company’s growing cash flow stream in the Middle East where it is supplying natural gas through a recently completed pipeline project. The communication services sector was the lone relative detractor for the quarter. We owned Electronic Arts, Inc., which posted positive returns for the period, but failed to keep pace with the sector. We continue to have no exposure to the real estate sector, which added to overall relative performance. Our one holding in the consumer staples sector, Hershey Company, underperformed both the benchmark and the sector within the index. However, we were sufficiently underweight this sector, which underperformed the broader index in the quarter, to post a positive contribution to the overall Portfolio return. Cash, which averaged just over 2% in the quarter, detracted from the overall relative performance, while equity options detracted 0.23%.

Outlook

• We believe the U.S. economy is still on tenuous footing and the stock market is likely ahead of itself in assessing a return to economic growth and prospects for corporate profits. The week-over-week change in the CBOE VIX Index (a measurement of the market’s expectation of 30-day forward-looking volatility) maxed out at more than 120% at the end of first quarter, and while volatility has decreased consistently throughout second quarter, it is coming off the highest level we have seen in the past 20 years. Individual companies are uncertain how to guide for earnings and many have ceased guidance for the remainder of the year. Add to that the effects of reopening states’ economies and the resulting spikes in COVID-19 cases and we think this creates a mixture of tremendous uncertainty in the markets. What is certain is that recent fiscal and monetary stimulus has been unprecedented, and it seems like that is all the market has needed to process at this point as it looks forward. We still think 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, especially at the elevated valuations we are seeing in the market. We believe there is little doubt that businesses benefitting from shelter-in-place orders have weathered the volatility better than others. This includes technology companies assisting with working from home orders, and health care companies offering remote capabilities. We continue to see structural challenges for recreation and entertainment companies, restaurants and travel-related businesses where the uncertainty of recovery is most critical. The Portfolio’s approach of 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 June 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 06/30/2020: Chipotle Mexican Grill, Inc. 3.6, CoStar Group, Inc. 3.5, Electronic Arts, Inc. 3.2, MarketAxess Holdings, Inc. 3.2, DexCom, Inc. 3.0, Teradyne, Inc. 2.8, Square, Inc. 2.6, DocuSign, Inc. 2.6, Twilio, Inc. 2.6 and Fastenal Co. 2.6.

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.