Annual Reports - Northwestern Mutual

Large Cap Blend Portfolio
Objective: Portfolio Strategy: Net Assets:
Long-term growth of capital and income. Invest primarily in equity and equity-related securities of $29 million
large U.S. companies.
Portfolio Overview
Mason Street Advisors, the investment adviser for the Large Cap Blend Portfolio, has engaged Capital Guardian Trust
Company to act as sub-adviser for the Portfolio. The Portfolio objectives are long-term growth of capital and income. The
Portfolio seeks to meet these objectives by investing at least 80% of its net assets (plus any borrowing for investment
purposes), in equity and equity-related securities of U.S. large-capitalization companies, defined as those with a market
capitalization range, at the time of investment, equal to that of the Portfolio’s benchmark, the S&P 500 ® Index. In selecting
investments, greater consideration is given to potential appreciation and future dividends than to current income. The Large
Cap Blend portfolio uses a multiple portfolio manager system in managing the Fund’s assets. Under this approach, the
Portfolio is divided into segments managed by individual managers. Each manager’s role is to decide how their respective
segment will be invested by selecting securities within the limits of the Portfolio’s objectives and policies.
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 the twelve months ended December 31, 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 Blend Portfolio returned –40.25% for the twelve months ended December 31, 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.) According to Lipper Analytical Services, Inc., an independent mutual fund ranking agency, the
average return of the Large-Cap Core Funds peer group was
–38.76%.
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 managed positive results. Relative to the
benchmark, the Portfolio’s underperformance was driven by positioning in the Financials and Consumer Discretionary sectors.
The leading contribution to relative return came from the Health Care sector.
Stock choices in the Financials sector detracted most from relative results, as the Portfolio was hurt by exposure to a number
of companies hit hard by the credit crisis. In past financial crises, high quality, large-cap financials earned their way out of
challenging economic and credit environments, and our analysis of several financial companies suggested the same could
happen this time. Unfortunately, we did not anticipate the depth and speed of the deterioration in fundamentals in the current
crisis. As a result, four of the top five detractors from relative results were Fannie Mae, Freddie Mac, Lehman Brothers and
Wachovia. On a positive note, a number of our stock picks in the sector worked well, as overweight positions in JPMorgan
Chase, Wells Fargo and Hudson City Bancorp were all top ten contributors for the year.
Another source of weakness was stock selection in the Consumer Discretionary sector. Gaming stock Las Vegas Sands, media
giant Gannett and fast food icon McDonald’s were leading detractors. It hurt to be underrepresented in shares of McDonald’s,
which we thought were expensive; nevertheless, the company benefited as tough economic times sent more cost-conscious
diners through its doors. Overweight positions in Las Vegas Sands and Gannett detracted largely because of worries about the
effect of slower economic growth on revenues. Las Vegas Sands faced additional concerns that recent anti-gambling policies
enacted by the Chinese government would hurt business at a key property.
The largest contribution to relative return came from an overweight position and stock selection in the Health Care sector,
particularly biotechnology shares. We favored biotechnology companies because they tend to be dynamic and innovative with
solid growth prospects, in contrast to big pharmaceutical firms, which often face worries about patent expirations and generic
competition. Biotechnology shares benefited from takeover activity as pharmaceutical firms sought to bolster their new drug
pipelines, which explains the outperformance of Genentech, ImClone Systems and Millennium Pharmaceuticals, which were
all either acquired or the subject of buyout offers in 2008.
Outlook
We will continue our focus on leading large-cap companies demonstrating growth potential whose shares are trading at
attractive valuations. One positive lesson from a very difficult 2008 is that we are now finding a great many high quality
12 Large Cap Blend Portfolio