Annual Reports - Northwestern Mutual

Large Cap Core Stock Portfolio
Objective: Portfolio Strategy: Net Assets:
Long-term growth of capital and income. Invest primarily in equity securities of large U.S. companies. $311 million
Portfolio Overview
Mason Street Advisors acts as the investment adviser for the Large Cap Core Stock Portfolio. The Portfolio seeks long-term
growth of capital and income. The Portfolio seeks to achieve these objectives primarily by investing in the equity securities of
companies selected for their high quality and growth potential. The Portfolio’s holdings will consist primarily of equity
securities of large companies that may include both “growth” and “value” stocks. The Portfolio’s strategy is to actively
manage a portfolio of selected equity securities with a goal of outperforming the total return of the S&P 500 ® Index. The
Portfolio attempts to reduce risk by investing in many different economic sectors, industries and companies. The Portfolio’s
manager may underweight or overweight selected economic sectors against the sector weightings of the S&P 500 ® Index to
seek to enhance the Portfolio’s total return or reduce fluctuations in market value relative to the S&P 500 ® Index.
Market Overview
Financial markets endured a brutal 2008, which saw the failure of a number of leading financial institutions, credit markets
freeze up, and the U.S. government take a series of extraordinary steps to support the economy and financial system. The crisis
was a result of the ongoing sub-prime mortgage meltdown, which spread rapidly through the domestic financial sector and into
virtually every segment of global financial markets. For all of 2008, returns for large-, medium- and small-sized companies
were –37.60%, –41.46% and –33.79%, as measured by the Russell 1000, Russell MidCap and Russell 2000 Stock Indices,
respectively. No sector of the market had positive returns for the year, and value-oriented stocks held up modestly better than
growth stocks, as measured by the Russell style indices.
Portfolio Results
The Large Cap Core Stock Portfolio returned –38.74% for all of 2008. By comparison, the S&P 500 ® Index returned –37.00%.
(This Index is unmanaged, cannot be invested in directly, and does not include administrative expenses or sales charges.) The
Portfolio’s Large-Cap Core Funds peer group average return was –38.76%, according to Lipper Analytical Services, Inc., an
independent mutual fund ranking agency.
The Portfolio’s absolute return reflected the unprecedented turmoil affecting the economy and financial markets in what was
the worst year for stocks since the Great Depression. In that environment, no sector contributed positively to results. Relative
to the benchmark, the Portfolio’s underperformance was driven by positioning in the Energy and Industrials sectors. The
leading contribution to relative return by far came from positioning in the Health Care sector.
Relative to the benchmark, Energy shares detracted most, behind an underweight position in the big, integrated oil companies
and an overweight to the equipment and services names. We favor the long-term industry dynamics and structural position of
the service companies relative to the integrateds. Unfortunately, that positioning detracted during 2008, as the diversified oil
companies held up better than the oil services firms. The leading detractors in this space were an underweight position in
Exxon Mobil, and an overweight to equipment and services firm National Oilwell Varco.
Another source of weakness was positioning in the Industrials sector. The leading detractors were manufacturers and parts
suppliers tied to the market for commercial airliners and business jets. These were Textron and Spirit AeroSystems Holdings.
We liked the backlog and book of business these companies touted; nevertheless, investors worried that slower economic
growth would throttle demand for commercial jets.
At the other end of the spectrum, our stock selection was most effective in the Health Care sector, behind positioning in the
biotechnology segment. We favor biotechnology shares over big pharmaceutical names because biotech stocks tend not to
have the same worries as pharma about patent expiries, generic competition, and modest new drug pipelines. The leading
contributors in biotech were Gilead Sciences and Celgene. Gilead is the dominant player in the market for AIDS drugs, while
Celgene offers best-in-class cancer drugs gaining approval for new applications.
However, performance in the Health Care sector would have been better but for our underweight to pharmaceutical shares.
These stocks generally held up well in 2008 because many investors viewed them as large, liquid safe haven plays.
Nevertheless, our stake in Teva Pharmaceutical—a leading generic provider that has the potential to benefit from the
increasing importance of generics in the health care industry—was a key contributor for the year. Selection and allocation
decisions also contributed to relative results in the Telecommunication Services, Utilities, and Materials sectors.
8 Large Cap Core Stock Portfolio