N-CSR 1 d305672dncsr.htm PENN SERIES FUND, INC. Penn Series Fund, Inc.
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-CSR

 

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-03459

 

 

Penn Series Funds, Inc.

(Exact name of registrant as specified in charter)

 

 

600 Dresher Road Horsham, PA 19044

(Address of principal executive offices) (Zip code)

 

 

Steven Viola

Penn Series Funds, Inc.

600 Dresher Road

Horsham, PA 19044

(Name and address of agent for service)

 

 

Registrant’s telephone number, including area code: (215) 956-8129

Date of fiscal year end: December 31

Date of reporting period: December 31, 2016

 

 

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

 

 

 


Table of Contents

Item 1. Reports to Stockholders.

The Report to Shareholders is attached herewith.


Table of Contents

LOGO

 


Table of Contents

Dear Investor:

Thank you for your continued affiliation with The Penn Mutual Life Insurance Company. The confidence and trust you place in us reaffirms our commitment to helping policyholders take advantage of all life’s possibilities. We also take pride in being a financially strong mutual insurance company that delivers on our promises, and I’m very pleased to bring you the following capital markets summary. Please remember that regardless of what the markets may bring, short-term performance changes should not distract you from your long-term financial plan, and it’s a good idea to meet with your investment professional regularly to make sure that your asset allocation remains on target.

Stocks moved solidly higher in 2016 despite experiencing one of the worst-ever starts to a new year. A rebound in oil prices, easy global monetary policy and better-than-expected U.S. economic data offset the sharp losses witnessed earlier in the year. The global reach for yield also factored heavily in equity market performance during the year. In the first half, defensive sectors, including utilities, telecommunications, and consumer staples, offered higher dividend yields and posted strong performance, while banks and financials struggled due to the prospect for “lower for longer” interest rates and flattening yield curves. Equity sector performance reversed course after the U.S. Presidential election with cyclical, financials, and small cap stocks leading the stock market higher with the prospect for stimulative fiscal policies to supplant the easy monetary policies that have been in place. Despite a slight pick-up in the third quarter, Gross Domestic Product (GDP) growth remained rather anemic during 2016 and will likely post an underwhelming gain of approximately 2.0% or lower for the full year. The unemployment rate ended the year at nearly a nine-year low of 4.7% and remains in line with the Fed’s estimate of the equilibrium long-run employment rate. In this environment, the U.S. stock market, as measured by the Wilshire 5000 Equity Index, returned a solid 13.37 percent for the full twelve-month period ending December 31.

On a relative basis, small capitalization stocks provided higher returns than did mid and large capitalization stocks during the year. Small capitalization stocks, as measured by the Russell 2000 Index, returned 21.31 percent, while mid capitalization stocks, as measured by the Russell Midcap Index returned 13.80 percent and large capitalization stocks, as measured by the Russell 1000 Index, returned 12.05 percent. From a style perspective, value stocks quite handily outperformed growth stocks in the all market capitalizations, with the widest disparity being in the small capitalization space. For instance, small cap value stocks, as measured by the Russell 2000 Value Index returned 31.74 percent while small cap growth stocks, as measured by the Russell 2000 Growth Index returned 11.32 percent. Lastly, U.S. equity Real Estate Investment Trusts (REITs), which enjoyed a pleasant start to the year, underperformed the broader equity market for the full year as interest rate concerns applied downward pressure.

International markets, were mixed for the year with emerging market stocks posting a solid 11.60 percent return, as measured by the MSCI Emerging Markets Index, and developed international stocks returning a very modest 1.51 percent, as measured by the MSCI EAFE Index. The commodity rally in 2016 benefited emerging market equity performance after posting years of disappointing results. Oil finished 2016 at approximately $54 a barrel – up over 45% for the year. Equity returns across Europe were again lackluster due to disappointing economic growth and uncertainty surrounding the impact of Brexit.

Investment-grade fixed-income securities significantly underperformed high yield bonds during the twelve-month period as noninvestment-grade bonds benefited from the rebound in oil prices and strength in energy-sector issuers, which make up a large percentage of U.S. high yield indexes. Investment-grade bonds, as measured by the Bloomberg Barclays U.S. Aggregate Index, returned 2.65 percent and the Credit Suisse High Yield Bond Index, returned a strong 18.26 percent. At the beginning of 2016, markets priced in an additional three interest rate hikes by the Federal Reserve (Fed). However, tightening credit conditions during the first quarter, disappointing global economic growth and the proliferation of negative interest rate policies in Europe and Japan kept the Fed on hold until December, when they tightened monetary policy for the second time in ten years and more importantly increased the number of expected hikes for 2017 from two to three.

Once again, we thank you for the privilege of serving your financial needs and encourage you to work closely with your financial professional to continue to explore your options throughout all life’s stages.

Sincerely,

 

LOGO

David M. O’Malley

President and Chief Operating Officer

The Penn Mutual Life Insurance Company

President

Penn Series Funds, Inc.

Source: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are subject to change as subsequent conditions vary. All economic and performance information is historical and not indicative of future results.


Table of Contents

Table of Contents

Penn Series Funds, Inc. Annual Report

Management’s Discussion of Fund Performance (Unaudited)

 

Limited Maturity Bond Fund

    2  

Quality Bond Fund

    3  

High Yield Bond Fund

    4  

Flexibly Managed Fund

    6  

Balanced Fund

    8  

Large Growth Stock Fund

    9  

Large Cap Growth Fund

    11  

Large Core Growth Fund

    13  

Large Cap Value Fund

    15  

Large Core Value Fund

    17  

Index 500 Fund

    19  

Mid Cap Growth Fund

    21  

Mid Cap Value Fund

    23  

Mid Core Value Fund

    25  

SMID Cap Growth Fund

    27  

SMID Cap Value Fund

    29  

Small Cap Growth Fund

    31  

Small Cap Value Fund

    33  

Small Cap Index Fund

    35  

Developed International Index Fund

    37  

International Equity Fund

    39  

Emerging Markets Equity Fund

    41  

Real Estate Securities Fund

    43  

Aggressive Allocation Fund

    45  

Moderately Aggressive Allocation Fund

    47  

Moderate Allocation Fund

    49  

Moderately Conservative Allocation Fund

    51  

Conservative Allocation Fund

    53  

Important Information about Fund Expenses (Unaudited)

    55  

Schedules of Investments

    58  

Statements of Assets and Liabilities

    168  

Statements of Operations

    176  

Statements of Changes in Net Assets

    180  

Financial Highlights

    188  

Notes to Financial Statements

    203  

Report of Independent Registered Public Accounting Firm

    230  

Tax Information

    231  

Disclosure of Portfolio Holdings

    232  

Voting Proxies on Fund Portfolio Securities

    232  

Board Approval of Investment Sub-Advisory Agreements

    232  

Fund Management

    234  

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Limited Maturity Bond Fund

The Penn Series Limited Maturity Bond Fund returned 2.59% for the twelve-month period ending December 31, 2016, compared to the 1.28% return for its benchmark, the Bloomberg Barclays Capital U.S. Government/Credit 1-3 Year Index for the same time period.

The Federal Reserve (Fed) maintained a cautious approach to tightening monetary policy during 2016. In a repeat of 2015, the Fed waited until December for its one interest rate hike. The 2-year Treasury note finished 2016 at 1.19%, up 14 basis points from the start of the year. We expect the Federal Reserve to increase rates more rapidly during 2017 as both economic growth and inflation rates appear ready to accelerate.

Conservative duration, or interest rate risk, benefitted Fund performance during the second half of the year as interest rates across the yield curve moved higher. Additionally, we added to Treasury Inflation Protected securities (TIPs) during the second half of the year in order to profit from rising inflation.

Fund overweight exposure to higher yielding structured securities and corporate debt represented another source of value-added performance during the year. We will continue to search for the best total return opportunities for the Fund among short duration fixed income assets.

Penn Mutual Asset Management, LLC

Investment Adviser

Cumulative Performance Comparison

December 31, 2006 — December 31, 2016

 

LOGO

 

An investment of $10,000 in the Limited Maturity Bond Fund on December 31, 2006 would have grown to $12,429. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the Bloomberg Barclays Capital U.S. Government Credit 1–3 Year Bond Index, during the same period. A $10,000 investment in the Bloomberg Barclays Capital U.S. Government Credit 1–3 Year Bond Index on December 31, 2006 would have grown to $12,728.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     10 Year  

Limited Maturity Bond Fund

     2.59     0.81     2.20

Bloomberg Barclays Capital U.S. Government/Credit 1-3 year Index

     1.28     0.92     2.44

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments2
 

Corporate Bonds

     45.3

Asset Backed

     23.9

U.S Treasury Obligations

     16.8

Commercial Mortgage Backed

     13.0

Residential Mortgage Backed

     1.0
  

 

 

 
     100.0
  

 

 

 

 

2  Portfolio holdings are presented as a percentage of total investments before short-term investments.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Quality Bond Fund

The Penn Series Quality Bond Fund returned 4.31% for the twelve-month period ending December 31, 2016, compared to the 2.65% return for its benchmark, the Bloomberg Barclays Capital U.S. Aggregate Bond Index for the same time period.

The equity and credit markets staged a dramatic turnaround after a disappointing start of the year. The start of this recovery coincided to the day with oil prices bottoming in mid-February as fears of widespread defaults in the energy sector quickly dissipated. Expanding global central bank bond purchase programs (quantitative easing) to include corporate debt helped sustain the rally throughout the balance of 2016.

Treasury yields increased modestly during 2016 but the first half and second halves of the year were mirror opposites in terms of rate moves. Treasury yields fell sharply during the first half of the year as negative interest rate policies from global central banks helped drive even long-term sovereign bond yields into negative territory. The 10-year Treasury reached record low levels in July at 1.36% and then quickly reversed course. The pace of rate increases gathered steam after the Trump victory on Election Day. Investors priced in prospects for higher economic growth and inflation arising from likely passage of fiscal stimulus and less restrictive regulation under the new Administration. The 10-year Treasury yield finished the year at 2.45%.

Our short duration positioning (interest rate sensitivity) in the Fund since mid-year benefited performance. Recent purchase activity of Treasury Inflation Protected securities (TIPs) also added to returns during the quarter. Inflation pressures are likely to keep building in the United States economy due to tightening labor market conditions and likely passage of protectionist trade policies.

Fund holdings of corporate bonds and structured securities (including collateralized loan obligations) represented another source of excess return during the year. We have been gradually reducing exposure in the corporate and structured sectors as spreads narrowed. We will continue to look for the best relative value opportunities across the fixed income markets and take advantage of interest rate volatility with tactical duration management as we enter 2017.

Penn Mutual Asset Management, LLC

Investment Adviser

Cumulative Performance Comparison

December 31, 2006 — December 31, 2016

 

LOGO

An investment of $10,000 in the Quality Bond Fund on December 31, 2006 would have grown to $15,250. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the Bloomberg Barclays Capital U.S. Aggregate Bond Index, during the same period. A $10,000 investment in the Bloomberg Barclays Capital U.S. Aggregate Bond Index on December 31, 2006 would have grown to $15,301.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     10 Year  

Quality Bond Fund

     4.31     1.96     4.31

Bloomberg Barclays Capital U.S. Aggregate Bond Index

     2.65     2.23     4.34

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments2
 

Corporate Bonds

     39.2

Commercial Mortgage Backed

     17.1

U.S Treasury Obligations

     15.6

Asset Backed

     13.2

Residential Mortgage Backed

     10.5

Agency Obligations

     2.6

Municipal Bonds

     1.8
  

 

 

 
     100.0
  

 

 

 

 

2  Portfolio holdings are presented as a percentage of total investments before short-term investments.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

High Yield Bond Fund

The Penn Series High Yield Bond Fund returned 15.83% for the twelve-month period ending December 31, 2016, compared to the 18.26% return for its benchmark, the Credit Suisse High Yield Bond Index.

High yield bonds ended 2016 with impressive gains in excess of 17%. Commodity-related sectors and lower-rated bonds led outperformance for the year, posting gains that significantly exceeded those of other market segments and higher qualities. Market disruptions, most notably in June around the U.K. referendum were surprisingly short-lived, in part due to stimulus measures from major central banks. Oil prices rebounded from bouts of volatility amid expectations of an OPEC deal to cut production and rallied after the formal agreement was announced in late November. Following Donald Trump’s surprising victory in the U.S. Presidential election, Treasury yields rose sharply across all maturities in anticipation of stimulative fiscal policies under the incoming administration. In December, as widely expected, the Federal Reserve announced an increase in the federal funds target rate range by 25 basis points, marking only the second rate increase since the global financial crisis.

Credit selection within energy weighed in relative performance. Not owning certain low-quality credits, particularly those rated CCC and below, resulted in underperformance within the sector. West Texas Intermediate crude oil ended 2015 at $37 per barrel and rose to $48 in September 2016. Uncertainty surrounding the November OPEC meeting caused oil price volatility for most of that month, but OPEC leaders emerged with a formal agreement to cut production, which exceeded expectations. The price of oil rallied further, to end the year at $54 per barrel, equating to a return of 45% for 2016. This bolstered the performance of energy-related issuers.

Food sector positioning — a combination of our underweight allocation and credit selection — benefited relative performance. The security selection impact was partly due to the portfolio’s holdings of Minerva S.A., one of Brazil’s largest producers of protein products. The company’s results were resilient in 2016 despite a challenging industry backdrop. From a demand perspective, the recent opening of the U.S. market should lead to higher volumes in the year ahead, especially if other markets follow the U.S. move.

Although we have been selectively adding to our holdings in the metals and minerals industry, our underweight

allocation and credit selection detracted from relative results. This sector rallied in 2016 after posting a loss of 18% last year.

Underweight allocations in the transportation and health care segments were supportive, but credit selection in health care offset part of the positive impact.

Our reserves position — averaging 3-4% of assets and necessary for portfolio liquidity — was the notable detractor within a strong performance environment. From a quality perspective, the Fund’s underweight to higher quality bonds contributed to performance. BB-rated bonds underperformed the broader market, especially in the fourth quarter as rates rose.

High yield bonds appear well positioned given the improving economic environment, the relatively short duration of the asset class, and the likelihood of gradually rising rates. The technicals of income demand are considerable and have the potential to drive future gains. We believe energy and metals issuers will continue to dominate bankruptcy activity. However, an uptick in oil prices may have extended the life of these troubled companies, and the peak in default rates could be behind us. These sectors also enjoyed a considerable run in 2016. Upcoming political developments across the globe bring a level of uncertainty, but, for now, confidence in corporates appears strong.

Penn Mutual Asset Management, LLC

Investment Adviser

T. Rowe Price Associates, Inc.

Investment Sub-Adviser

 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Cumulative Performance Comparison

December 31, 2006 — December 31, 2016

 

LOGO

An investment of $10,000 in the High Yield Bond Fund on December 31, 2006 would have grown to $19,122. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the CSFB High Yield Bond Index, during the same period. A $10,000 investment in the CSFB High Yield Bond Index on December 31, 2006 would have grown to $19,680.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     10 Year  

High Yield Bond Fund

     15.83     7.10     6.70

CSFB High Yield Bond Index

     18.26     7.15     7.14

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments2
 

BBB/BB Rated & Above

     10.2

BB Rated

     6.5

BB/B Rated

     28.2

B Rated

     13.6

B/CCC Rated

     20.8

CCC and Below

     1.7

Not Rated

     2.5

Loan Agreements

     14.1

Equity Securities

     2.4
  

 

 

 
     100.0
  

 

 

 

 

2  Portfolio holdings are presented as a percentage of total investments before short-term investments.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Flexibly Managed Fund

The Penn Series Flexibly Managed Fund returned 8.06% for the twelve-month period ending December 31, 2016, compared to its benchmarks the S&P 500 Index’s return of 11.96%.

The Fund’s equity holdings drove performance, and the Fund’s fixed income holdings also posted a positive return during the one-year period.

After a sour start to the year, driven by fears of a global economic slowdown, especially in China, and a collapse in oil prices, stocks worked their way higher through late June. After a brief but intense sell-off as the U.K. unexpectedly voted in favor of leaving the European Union, stocks resumed their upward trajectory amid expectations that global central banks would provide additional monetary stimulus. After trading mostly flat prior to the November 8 U.S. elections, an unexpected presidential victory by Donald Trump sparked a feverish stock market rally in anticipation of a friendlier regulatory environment and stimulative fiscal policies, including tax cuts and increased infrastructure spending. In contrast, domestic bond market returns were mostly negative for the period. U.S. Treasury yields jumped following Donald Trump’s election victory amid increased expectations for U.S. fiscal stimulus and higher inflation.

While we continue to be cautious on the equity market overall given stretched valuations and uncertain U.S. policy, we opportunistically added to select equities during the year that we believe will be solid performers in most economic scenarios. We also trimmed holdings that had performed well. We continued to maintain exposure to covered calls, which give us the benefits of owning a stock while providing downside protection.

Our overall fixed income weight increased from the prior year, as we added to select high yield and investment-grade securities, while we trimmed bank debt. Although high yield spreads compressed during the year, we continue to believe that high yield is an attractive asset class on a risk/reward basis that stands to benefit should there be an increase in nominal economic growth. Within investment-grade corporate bonds, our weight increased during the year as we added to select opportunities that offered idiosyncratic investment opportunities. Overall, we continue to favor shorter-duration paper, as Treasury rates remain relatively low.

The health care sector contributed to relative performance, due to stock selection. Within the sector, UnitedHealth Group and Becton, Dickinson & Company helped results. Conversely, the information technology sector detracted from relative performance due to stock selection and our underweight exposure, and off-benchmark holding NetScout Systems hindered results, as did Visa.

Going forward, we will closely monitor the ramifications of this post election optimism occurring amid the later stages of the U.S. economic cycle. In particular, we remain mindful of political developments that would disappoint investors, who priced in expectations for higher economic growth, higher infrastructure spending, lower corporate taxes, and fewer regulations. Despite the recent rise in equity markets, we are finding opportunities to purchase attractively priced shares of high-quality companies that we believe will be solid performers in most economic scenarios. Overall, we have maintained the Fund’s conservative positioning.

Penn Mutual Asset Management, LLC

Investment Adviser

T. Rowe Price Associates, Inc.

Investment Sub-Adviser

Cumulative Performance Comparison

December 31, 2006 — December 31, 2016

 

LOGO

An investment of $10,000 in the Flexibly Managed Fund on December 31, 2006 would have grown to $20,991. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the S&P 500 Index, during the same period. A $10,000 investment in the S&P 500 Index on December 31, 2006 would have grown to $19,568.

 

 

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Table of Contents

Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     10 Year  

Flexibly Managed Fund

     8.06     12.28     7.70

S&P 500 Index

     11.96     14.66     6.95

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments2
 

Consumer, Non-cyclical

     32.8

Financials

     17.5

Consumer, Cyclical

     13.5

Communications

     10.0

Technology

     8.9

Industrials

     7.3

Utilities

     4.7

Energy

     4.5

Basic Materials

     0.6

Asset Backed

     0.2
  

 

 

 
     100.0
  

 

 

 

 

2  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent broad industry sectors. Each industry sector consists of one or more specific industry classifications.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Balanced Fund

The Penn Series Balanced Fund returned 8.37% for the twelve-month period ending December 31, 2016, compared to its benchmarks, the S&P 500 Index’s return of 11.96% and the Bloomberg Barclays Capital U.S. Aggregate Bond Index’s return of 2.65% for the same time period.

The Balanced Fund is comprised of a target allocation of 60% to an equity fund and 40% to a fixed income fund. The equity allocation of the Fund is comprised of the Penn Series Index 500 Fund which seeks a total return that corresponds to that of the S&P 500 Index. The fixed income allocation of the Fund consists of an allocation to the Penn Series Quality Bond Fund.

At the broad asset class level, the Balanced Fund’s equity allocation performed in line with its broad equity benchmark the S&P 500 Index for the one-year period. The Fund’s fixed income allocation outperformed the Bloomberg Barclays Capital U.S. Aggregate Bond Index for the one-year time period.

The short duration positioning (interest rate sensitivity) in the Fund since the middle of the year benefited performance. Recent purchase activity of Treasury Inflation Protected securities (TIPs) also added to returns. Fund holdings of corporate bonds and structured securities (including collateralized loan obligations) represented another source of excess return during the year.

Penn Mutual Asset Management, LLC

Investment Adviser

Cumulative Performance Comparison

August 25, 2008 — December 31, 2016

 

LOGO

An investment of $10,000 in the Balanced Fund on August 25, 2008 would have grown to $18,323. For the purpose of comparison, the graph also shows the change in the Fund’s benchmarks, the S&P 500 Index and the Bloomberg Barclays Capital U.S. Aggregate Bond Index, during the same period. A $10,000 investment in the S&P 500 Index on August 25, 2008 would have grown to $20,790. A $10,000 investment in the Bloomberg Barclays Capital U.S. Aggregate Bond Index on August 25, 2008 would have grown to $14,096.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     Since
Inception2
 

Balanced Fund

     8.37     9.07     7.51

S&P 500 Index

     11.96     14.66     9.16

Bloomberg Barclays Capital U.S. Aggregate Bond Index

     2.65     2.23     4.20

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.
2  The Fund’s inception date was August 25, 2008.

Asset Allocation Target as of 12/31/16

 

Index 500

     60.0

Intermediate Bonds

     40.0
  

 

 

 
     100.0
  

 

 

 
 

 

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Table of Contents

Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Large Growth Stock Fund

The Penn Series Large Growth Stock Fund returned 1.10% for the twelve-month period ending December 31, 2016, compared to the 7.08% return for its benchmark, the Russell 1000 Growth Index.

Overall, stock selection was the major reason for relative underperformance, but group weighting was also negative. Health care, information technology, and industrials and business services were the largest relative detractors. Financials, materials, and real estate were leading outperformers.

Despite a sharp sell-off at the beginning of the year, U.S. stocks rose in 2016, with major indexes reaching record highs near year-end and resulting in strong full-year gains for many investors. Small- and mid-cap stocks substantially outperformed large-caps, and value stocks strongly surpassed growth across all market capitalizations, as measured by Russell indexes. The Federal Reserve raised short-term rates in December and projected three rate increases in 2017.

Health care was the largest relative detractor largely on stock selection, but underweighting the sector was also negative. Shares of Allergan declined early in the year when its proposed merger with Pfizer was called off after the U.S. Treasury Department issued a notice aimed at curbing the benefits of tax inversions. While we still maintain a constructive view, we subsequently trimmed our position.

Information technology detracted on stock selection, but overweighting the sector was helpful. Early in the year, LinkedIn provided disappointing 2016 guidance that sent shares sharply lower. While we thought that LinkedIn’s core Talent Solutions business was a high-quality asset, we had a few areas of concern. We eliminated the stock in the first quarter and had begun to unwind our position before Microsoft’s takeover announcement.

Industrials and business services detracted on both stock selection and underweighting. United Continental, which was reduced significantly at the end of the second quarter and subsequently eliminated from the Fund, was a net detractor for the year.

Financials was the leading outperformer due to stock selection. Shares of global investment bank Morgan Stanley rose sharply in the second half of the year along with the broader financials sector. Following the election, asset managers got a boost based on expectations that the

Department of Justice’s fiduciary rule could be rolled back under the incoming administration.

Real estate outperformed on stock selection. Our exposure to wireless tower operator American Tower contributed to relative performance, particularly in the first half of the year when defensive businesses that pay dividends were heavily in favor. The company is structured as a real estate investment trust and pays out the majority of its income to shareholders.

Large-cap growth stock valuations appear relatively attractive versus their value counterparts and compared with small- and mid-cap stocks, which recorded strong fourth-quarter and 12-month gains. We are not concerned that interest rates are rising because moderately rising rates are a sign that the economy is growing. If President Trump’s agenda is pursued successfully, multinational companies should benefit from improving global growth. Large-cap growth stocks would benefit from a rollback in corporate tax rates and an increase in infrastructure spending in 2017.

Penn Mutual Asset Management, LLC

Investment Adviser

T. Rowe Price Associates, Inc.

Investment Sub-Adviser

Cumulative Performance Comparison

December 31, 2006 — December 31, 2016

 

 

LOGO

An investment of $10,000 in the Large Growth Stock Fund on December 31, 2006 would have grown to $20,856. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the Russell 1000 Growth Index, during the same period. A $10,000 investment in the Russell 1000 Growth Index on December 31, 2006 would have grown to $22,265.

 

 

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Table of Contents

Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     10 Year  

Large Growth Stock Fund

     1.10     14.87     7.63

Russell 1000 Growth Index

     7.08     14.50     8.33

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments2
 

Communications

     28.7

Consumer, Non-cyclical

     20.2

Consumer, Cyclical

     16.5

Financials

     14.5

Technology

     14.2

Industrials

     4.9

Utilities

     0.7

Basic Materials

     0.3
  

 

 

 
     100.0
  

 

 

 

 

2  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent broad industry sectors. Each industry sector consists of one or more specific industry classifications.

 

 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Large Cap Growth Fund

The Penn Series Large Cap Growth Fund returned 5.96% for the twelve-month period ending December 31, 2016, compared to the 7.08% return for its benchmark, the Russell 1000 Growth Index.

Sluggish global growth weighed on both developed and emerging market (“EM”) economies during much of the reporting period, though signs of improved growth became evident in late 2016. The U.S. Federal Reserve increased interest rates by 25 basis points at the end of the period, the second hike of the cycle which began in December 2015. Globally, however, central bank policy remained highly accommodative, which forced many government, and even some corporate, bond yields into negative territory during the period. During the first half of the period, the United Kingdom voted to leave the European Union (“EU”), beginning a multi-year process of negotiation in order to achieve “Brexit.” While markets initially reacted to the vote with alarm, the spillover to European and EM economies was relatively short-lived, although risks of further hits to EU cohesiveness could re-emerge. Late in the period, the surprising U.S. Presidential election outcome prompted a significant rally in equities and a rise in bond yields in anticipation of a reflationary policy mix from the incoming Trump administration.

Weak stock selection within the consumer staples sector detracted from the Fund’s performance relative to the Index. Overweight positions in infant and children’s pediatric nutrition producer Mead Johnson Nutrition and beauty products manufacturer Coty dampened relative results.

The Fund’s lack of exposure to the strong-performing utilities and communications sector also hurt relative performance. Specifically, not holding shares of telecommunications company Verizon Communications held back relative results as the stock outperformed the benchmark during the reporting period.

Elsewhere, not owning shares of strong-performing software giant Microsoft, health insurance and Medicare/Medicaid provider UnitedHealth Group and computer graphics company NVIDIA detracted from relative performance. The Fund’s position in pharmaceutical and medical products maker Abbott Laboratories and Swiss diagnostics and pharmaceutical company Roche Holding Ltd, and overweight positions in athletic footwear and apparel equipment company NIKE and pharmacy benefits

management and clinic healthcare account administration services company Express Scripts, further weighed on relative results.

Security selection in the health care sector contributed to relative returns. Not holding a position in biotech firm Gilead Sciences and an overweight position in vision and medical device maker Cooper Companies benefited relative performance.

Stock selection and, to a lesser extent, an overweight position in the industrial goods & services sector also aided relative results. The Fund’s position in shares of industrial machinery company Colfax bolstered relative performance.

Security selection in the special products & services sector further contributed to relative performance. Here, overweight positions in management consulting firm Accenture and global banking and payment technologies provider Fidelity National Information Services benefited relative results.

Individual stocks that contributed to relative performance included overweight positions in semiconductor company Texas Instruments, railroad franchise Union Pacific and financial services firm Charles Schwab. The portfolio’s position in shares of semiconductor manufacturer Taiwan Semiconductor (Taiwan) and luxury goods company LVMH (France) further aided relative performance.

Penn Mutual Asset Management, LLC

Investment Adviser

MFS Investments

Investment Sub-Adviser

 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Cumulative Performance Comparison

December 31, 2006 — December 31, 2016

 

LOGO

An investment of $10,000 in the Large Cap Growth Fund on December 31, 2006 would have grown to $13,553. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the Russell 1000 Growth Index, during the same period. A $10,000 investment in the Russell 1000 Growth Index on December 31, 2006 would have grown to $22,265.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     10 Year  

Large Cap Growth Fund

     5.96     9.83     3.09

Russell 1000 Growth Index

     7.08     14.50     8.33

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments2
 

Consumer, Non-cyclical

     35.2

Technology

     15.9

Consumer, Cyclical

     14.0

Financials

     9.7

Communications

     9.6

Industrials

     8.6

Basic Materials

     6.4

Energy

     0.6
  

 

 

 
     100.0
  

 

 

 

 

2  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent broad industry sectors. Each industry sector consists of one or more specific industry classifications.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Large Core Growth Fund

The Penn Series Large Core Growth Fund returned 0.12% for the twelve-month period ending December 31, 2016, compared to the 7.08% return for its benchmark, the Russell 1000 Growth Index for the same time period.

While the distinct and vastly different equity market environments of 2016 proved challenging, relative performance was still materially impacted by bottom up security selection. As such, strong security selection in the health care and materials sectors was offset by disappointing results within information technology and industrial sectors.

Within health care, Edwards LifeSciences continued to be a life saver. Edwards is focused on technologies that treat heart disease and is a leader in the market for transcatheter heart valves (THV). The company has reported strong results driven by a significant increase in THV sales and raised its 2016 guidance as strong sales of its nonsurgical heart valves drove better-than-expected profit and revenue.

Also within health care, our position in UnitedHealth Group proved additive to returns. UnitedHealth, the largest managed care company, reported results that were above consensus expectations and raised earnings guidance during the year. The company is benefitting on several fronts as their steady revenue growth is the result of both growth in members, particularly in Medicare Advantage and Medicaid plans, as well as increasing prices.

Within the technology sector, specific weakness was visible in the software industry as a combination of company specific issues and concerns over enterprise spending pressured portfolio holdings. Tableau Software, a data visualization software company, reported disappointing quarterly results driven by an unexpected decline in licensing revenue. As a result, shares of Tableau declined sharply.

Earlier in the year, Palo Alto Networks’ mixed results and lofty expectations weighed on the stock. While network security remains a priority for corporations, the industry has fallen victim to very difficult earnings comparisons. This was following the hyper-growth these companies experienced in the wake of several high profile cyber-attacks. After a strong run up, and given the likely growth deceleration and near term lack of catalysts, we exited the position in favor of higher conviction ideas.

Alexion Pharmaceuticals was a detractor in health care. Alexion, a biotechnology firm focused on therapies for rare disorders, reported double-digit sales growth for its flagship blood disorder drug, Soliris. Alexion also reported strong initial sales of two recently approved treatments for muscle disorders. However, profits were weaker than expected and the company guided future results lower.

Within industrials, growing uncertainty “derailed” the outlook for Kansas City Southern. Given that roughly 30% of railroad operator Kansas City Southern’ s revenues are tied to cross-border shipping, with particular focus on rail lines into Mexico, the results of the U.S. presidential election caused rising uncertainty around the company’s intermediate term growth opportunities. Possible changes to trade agreements such as NAFTA and the potential for increased tariff rates on U.S./Mexico trade created considerable investor concern. Additionally, the potential benefits of corporate tax reform for Kansas City Southern are less than that of its railroad peers. As such, many investors sold their holding of Kansas City Southern to fund the purchase of other transportation companies.

The commentary provided above was from the former sub-adviser of the Fund, Wells Capital Management who was the manager of the Fund until December 1, 2016.

During the period, the outcome of the U.S. Presidential election continued to drive a broad sector rotation out of high growth companies, particularly ones in information technology, into cyclical areas which are perceived to be potential beneficiaries of proposed policy changes, including banks and industrial conglomerates. This was a headwind for the Fund.

Information technology and consumer discretionary were the top detractors in the Fund over the period, due to mixed stock selection in each sector. Social media holdings Twitter and Facebook were the greatest detractors in information technology. Twitter was the fourth greatest detractor in the Fund; its shares languished as speculation regarding a potential acquisition of the company by a strategic buyer, which had buoyed the shares earlier in the year, subsided. Facebook has continued to execute well so we attribute the weakness in its shares largely to a general sell-off in high growth technology-oriented companies after the U.S. election, particularly ones in the internet and software-as-a-service areas. Within information technology, the weakness in these holdings was partly offset by strength in payment processor MasterCard, which was the third greatest contributor in the Fund.

 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

In consumer discretionary, several of the portfolio’s retail-oriented holdings detracted, including Dollar Tree, Michael Kors, and TJX Companies. The weak performance of these holdings was, however, partly offset by strength in global hotel operator Marriott, which was the fourth greatest contributor in the portfolio.

Health care was the top contributor in the Fund over this period, due to favourable stock selection. Zoetis, a leader in veterinary medicines and vaccines, was the top contributor both in the sector and across the portfolio. The company has made progress on cost reduction efforts and experienced positive trends in its production animal and companion animal businesses.

As a team, we believe having a market outlook can be an anchor. Our focus is on assessing company prospects over three to five years, and owning a portfolio of high quality companies with diverse business drivers not tied to a particular market environment.

The commentary provided above is from the current sub-adviser of the Fund, Morgan Stanley Investment Management who became the manager of the Fund on December 1, 2016.

Penn Mutual Asset Management, LLC

Investment Adviser

Morgan Stanley Investment Management

Investment Sub-Adviser

Cumulative Performance Comparison

August 25, 2008 — December 31, 2016

 

LOGO

An investment of $10,000 in the Large Core Growth Fund on August 25, 2008 would have grown to $16,368. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the Russell 1000 Growth Index, during the same period. A $10,000 investment in the Russell 1000 Growth Index on August 25, 2008 would have grown to $21,779.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     Since
Inception2
 

Large Core Growth Fund

     0.12     11.93     6.07

Russell 1000 Growth Index

     7.08     14.50     9.77

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.
2  The Fund’s inception date was August 25, 2008.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments3
 

Communications

     31.7

Consumer, Cyclical

     21.3

Consumer, Non-cyclical

     14.4

Financials

     13.3

Industrials

     10.4

Technology

     6.0

Basic Materials

     1.7

Energy

     1.2
  

 

 

 
     100.0
  

 

 

 

 

3  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent broad industry sectors. Each industry sector consists of one or more specific industry classifications.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Large Cap Value Fund

The Penn Series Large Cap Value Fund returned 11.62% for the twelve-month period ending December 31, 2016, compared to the 17.34% return for its benchmark, the Russell 1000 Value Index.

The rough start to 2016 made for an uphill climb. The financial sector cratered out the gate, and despite our relative underweight, the sector topped the first quarter’s worst performer. Concerns about a weaker global economy, credit spreads and a flattening U.S. yield weighed on sentiment and fundamentals. Although financials rallied as the year wore on, they underperformed on a relative basis for 2016. It was also a challenging year for health care due to mixed fundamentals and increased political scrutiny primarily over drug pricing. Unfortunately, a quick election rally faded as the pricing debate continued and yield-oriented and defensive stocks retreated.

Our best-performing holdings included Halliburton, JPMorgan and United Healthcare. Oil and gas service company Halliburton rallied as investors viewed the failed merger with Baker Hughes positively. After the broken deal, North American land drilling and completion activity showed improvement just as Halliburton’s market share was reaching new highs. JP Morgan shares began to rise in July after the Brexit-induced selloff, and following the presidential election, the prospects of better economic growth, higher interest rates, lower corporate taxes and less-stifling regulation propelled the stock even higher. United Healthcare performed well due to continued business momentum and market share gains across commercial, Medicare, PBM and health care services divisions. We continue to like the company’s long-term ability to drive intrinsic growth.

Teva Pharmaceuticals, Marathon Oil, and Allergan detracted from performance. Marathon sold off aggressively along with oil at the beginning of 2016. The company’s heavy debt load spooked investors. Lacking conviction to add, we sold our stub position and rotated the proceeds into Hess Corporation. Teva was hurt by poor sentiment in the generic drug industry and stock-specific issues including price deflation, concerns about the firm’s acquisition of Allergan’s generic business, and a litigation risk that could invalidate the company’s intellectual property on its most profitable drug. While concerns could persist, we believe the company has reset investor expectations with achievable 2017 guidance. Allergan’s stock underperformed mostly due to the failed merger

with Pfizer. We believe Allergan’s core portfolios will continue to deliver strong growth. We view recent weakness as a buying opportunity and do not think the current valuation reflects potential late-stage pipeline success.

Looking ahead, Donald Trump’s agenda items, tax reform, and higher infrastructure spending have led investors to raise growth expectations for the next few years. The financial sector appears poised to benefit from a growing economy and two potential Federal Reserve rate hikes in 2017. The strong post-election stock market rally suggests investors are optimistic, but uncertainty could provide buying opportunities in the first half of 2017. Regardless of the direction of the markets, we continue to take a long-term, security-specific approach and view opportunities according to our reward to risk profiles.

Penn Mutual Asset Management, LLC

Investment Adviser

Loomis, Sayles & Co.

Investment Sub-Adviser

Cumulative Performance Comparison

December 31, 2006 — December 31, 2016

 

LOGO

An investment of $10,000 in the Large Cap Value Fund on December 31, 2006 would have grown to $15,102. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the Russell 1000 Value Index, during the same period. A $10,000 investment in the Russell 1000 Value Index on December 31, 2006 would have grown to $17,445.

 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     10 Year  

Large Cap Value Fund

     11.62     12.38     4.21

Russell 1000 Value Index

     17.34     14.80     5.72

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments2
 

Financials

     31.0

Consumer, Non-cyclical

     18.0

Industrials

     14.2

Energy

     10.3

Consumer, Cyclical

     8.0

Communications

     7.1

Technology

     7.0

Utilities

     2.9

Basic Materials

     1.5
  

 

 

 
     100.0
  

 

 

 

 

2  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent broad industry sectors. Each industry sector consists of one or more specific industry classifications.
 

 

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Table of Contents

Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Large Core Value Fund

The Penn Series Large Core Value Fund returned 9.55% for the twelve-month period ending December 31, 2016, compared to the 17.34% return for its benchmark, the Russell 1000 Value Index for the same time period.

In a period of unanticipated political developments including the Brexit vote in June and the U.S. Presidential election results in November, U.S. equity markets advanced higher, with most U.S. equity indices posting double-digit gains over the one year period.

Stocks were buoyed by continued improvement in the nation’s economy, with continued declines in unemployment, coupled with housing sector gains. Donald Trump’s victory in the U.S. Presidential election marked a turning point for U.S. stocks, which soared following the election. The rally continued into December before stalling in the final weeks of the period.

The broad-based “Trump Bump” particularly favored financial stocks, which received another boost in mid-December when the Federal Reserve raised its benchmark interest rate. Other sectors which delivered strong performance results over the period included the energy and materials sectors, which benefited from rising commodity prices.

The Fund’s underperformance versus the Index was primarily due to unfavorable security selection, while sector allocation results also detracted. Overall, the largest detractors during the quarter by sector were financials, health care, and information technology. Unfavorable stock selection in financials was the largest detractor to relative performance. Negative stock selection results in health care and information technology, as well as an underweight exposure to the strong-performing financials sector, also weighed on relative performance results.

In financials, the Fund’s exposure to Credit Suisse was the largest detracting stock at the individual position level. Overweight positions in Invesco, XL Group, and MetLife also hurt relative results. Within health care, the Fund’s exposure to non-benchmark holdings, Teva Pharmaceutical Industries and McKesson, weighed on performance. A position in Allergan also detracted. Elsewhere, overweight positions in supermarket operator Kroger and REIT company Simon Property Group represented a drag on relative performance.

From a sector allocation perspective, underweight exposures to the underperforming consumer sectors, both

consumer discretionary and consumer staples, aided relative performance. At the stock level, the top contributors were overweight positions in financial services company Charles Schwab, apparel retailer Michael Kors, and oil and natural gas exploration and production company EOG Resources. Elsewhere, the Fund’s holdings in Industrials firms C.H. Robinson Worldwide and Rockwell Automation benefited performance.

Looking back, 2016 proved to be a year of tumult as there was so much uncertainty surrounding global macro and political variables that investors generally lacked conviction. The consensus view now is that the economy may improve, interest rates will rise, the dollar will be strong and inflation will be higher — and that this is all good for risk assets like equities. That may turn out to be true, but we think there’s a wider range of uncertainties now than before the election, because we don’t know exactly which policies will be implemented, and in what form.

We believe it is possible investors may have gotten too enthusiastic on some industries under a Trump administration, while sell-offs in other parts of the market could be overdone. That creates the opportunity to fade the rallies in some sectors, and buy the dips in others. For example, financial and energy stocks have been bid higher by investors, while health care and information technology are among the biggest recent losers.

We believe the current market backdrop could reward fundamental analysis and active management as wider performance dispersion and contrarian opportunities are beginning to emerge.

Penn Mutual Asset Management, LLC

Investment Adviser

Eaton Vance Management

Investment Sub-Adviser

 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Cumulative Performance Comparison

August 25, 2008 — December 31, 2016

 

LOGO

An investment of $10,000 in the Large Core Value Fund on August 25, 2008 would have grown to $16,349. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the Russell 1000 Value Index, during the same period. A $10,000 investment in the Russell 1000 Value Index on August 25, 2008 would have grown to $20,007.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     Since
Inception2
 

Large Core Value Fund

     9.55     12.65     6.06

Russell 1000 Value Index

     17.34     14.80     8.66

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.
2  The Fund’s inception date was August 25, 2008.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments3
 

Financials

     29.4

Consumer, Non-cyclical

     20.1

Energy

     13.9

Industrials

     10.9

Communications

     7.1

Utilities

     6.4

Consumer, Cyclical

     5.3

Technology

     4.9

Basic Materials

     2.0
  

 

 

 
     100.0
  

 

 

 

 

3  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent broad industry sectors. Each industry sector consists of one or more specific industry classifications.
 

 

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Table of Contents

Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Index 500 Fund

The Penn Series Index 500 Fund returned 11.52% for the twelve-month period ending December 31, 2016, compared to the 11.96% return for its benchmark, the S&P 500 Index.

After the tumultuous opening act of 2016, investor nerves were soothed to some degree as February closed, provided one measures comfort by an intra-month recovery in the price levels of developed equity markets. The relief rally in growth assets that began in the middle part of February continued for the better part of March, taking the S&P 500 Index to a modest 1.4% gain for the first quarter overall. The improvement in global manufacturing data was highlighted by a return to expansionary readings for the U.S. ISM manufacturing index in March after bottoming at post-crisis lows in December 2015.

As the second quarter of 2016 opened, the “reflation trade” that commenced in mid-February and closed out the end of the first quarter of 2016 continued apace in April with growth assets broadly posting positive returns, though with some signs of consolidation towards the end of the month. Leading the way for the month was a near 20% gain in crude oil prices. The moniker “reflation trade” represents the inverse of the “deflation trade” in which oil prices collapsed by more than 70% over the past two years.

Global equity markets demonstrated an air of complacency in August of 2016. This was in sharp contrast to the third quarter of 2015, when markets experienced their most volatile period since 2011. In fact, the S&P 500 Index did not experience a daily price move of greater than 1%, up or down, between July 8 and September 8. Using 30-day realized volatility as a measure, it was chronicled by The Wall Street Journal on August 23 that the 30 preceding trading days had been the least volatile for the S&P 500 Index in over two decades.

In a year notable for unexpected challenges to the established political order, November 8, 2016 delivered another entry to that ledger in the largely unanticipated victory of Donald Trump over Hillary Clinton to close out the highly contentious U.S. presidential election campaign. Within U.S. equities, a significant sector rotation that was already underway in the second half of 2016 from high-yielding defensive sectors to cyclicals accelerated in the fourth quarter after the U.S. election. As 2016 drew to a close in December, the Federal Reserve (Fed) as widely expected raised interest rates on December 15 for the first time since December of 2015.

On an individual security level, the top positive contributors to the Fund’s performance were JP Morgan Chase, Exxon Mobil Corporation, and AT&T Corporation. The top negative contributors to the Fund’s performance were Allergan, Gilead Sciences, and Alexion Pharmaceuticals.

Penn Mutual Asset Management, LLC

Investment Adviser

State Street Global Advisors

Investment Sub-Adviser

Cumulative Performance Comparison

December 31, 2006 — December 31, 2016

 

LOGO

An investment of $10,000 in the Index 500 Fund on December 31, 2006 would have grown to $19,252. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the S&P 500 Index, during the same period. A $10,000 investment in the S&P 500 Index on December 31, 2006 would have grown to $19,568.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     10 Year  

Index 500 Fund

     11.52     14.24     6.77

S&P 500 Index

     11.96     14.66     6.95

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments2
 

Consumer, Non-cyclical

     22.4

Financials

     18.8

Communications

     13.2

Technology

     13.2

Industrials

     10.0

Consumer, Cyclical

     9.3

Energy

     7.5

Utilities

     3.2

Basic Materials

     2.3

U.S. Treasury Obligations

     0.1
  

 

 

 
     100.0
  

 

 

 

 

2  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent broad industry sectors. Each industry sector consists of one or more specific industry classifications.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Mid Cap Growth Fund

The Penn Series Mid Cap Growth Fund returned 6.42% for the twelve-month period ending December 31, 2016, compared to the 7.33% return for its benchmark, the Russell Midcap Growth Index.

The managers primarily emphasize a bottom-up approach and may look at a number of factors in its consideration of a company. These include new or innovative products or services, adaptive or creative management, strong financial and operational capabilities to sustain multi-year growth, market potential, profit potential, stable and consistent revenue, earnings, and cash flow.

Sectors that contributed positively to the Fund’s performance were energy, financials, materials, industrials and health care. Those sectors that made a negative contribution were technology, consumer discretionary and consumer staples. Cash was 28 basis points to the negative.

The Fund utilized equity index options as a portfolio hedge to protect against key macro events in the spring and fall, including the election in November. Put options were used as an alternative to raising cash, allowing the Fund to be protected without sacrificing potential upside. Portfolio hedging impacted the Fund to the negative. The Fund also utilized equity options on individual stocks as a means to gain exposure and generate premium income. This strategy included both written puts and purchased call options on a variety of stocks and impacted the fund to the positive.

The sector allocation effect was an important factor for performance, particularly given an overweight position in the energy sector, which was a very strong outperformer in both the Fund and the Index. Stock selection in the technology sector was a detractor, where lack of ownership in NVIDIA Corporation, which performed well for the Index, was a significant opportunity cost. The currency effect on the portfolio was a negative, primarily related to ownership of Burberry and the weakness of the British pound post Brexit. Burberry made an overall small positive contribution to portfolio performance last year, as the performance of the stock more than offset the currency impact.

The Fund’s energy exposure made a strong positive contribution to performance. We were overweight this outperforming sector, and portfolio names significantly outperformed the group in the Index.

The top three securities detracting from absolute performance for the period were Alkermes Plc, Diplomat Pharmacy, Inc. and Acadia Healthcare Co. Inc. The top three securities contributing to the Fund’s performance were Continental Resources, Inc., Microchip Technology, Inc. and Cme Group, Inc.

Penn Mutual Asset Management, LLC

Investment Adviser

Ivy Investment Management

Investment Sub-Adviser

Cumulative Performance Comparison

December 31, 2006 — December 31, 2016

 

LOGO

An investment of $10,000 in the Mid Cap Growth Fund on December 31, 2006 would have grown to $17,613. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the Russell Midcap Growth Index, during the same period. A $10,000 investment in the Russell Midcap Growth Index on December 31, 2006 would have grown to $21,257.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     10 Year  

Mid Cap Growth Fund

     6.42     9.75     5.83

Russell MidCap Growth Index

     7.33     13.51     7.83

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments2
 

Consumer, Non-cyclical

     27.7

Consumer, Cyclical

     25.9

Technology

     13.2

Industrials

     12.5

Financials

     10.6

Communications

     5.5

Energy

     4.6
  

 

 

 
     100.0
  

 

 

 

 

2  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent broad industry sectors. Each industry sector consists of one or more specific industry classifications.

 

 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Mid Cap Value Fund

The Penn Series Mid Cap Value Fund returned 17.20% for the twelve-month period ending December 31, 2016, compared to the 20.00% return for its benchmark, the Russell Midcap Value Index.

The 2016 investment year was volatile, to say the least. At the beginning of the year, investors were concerned about the potential for a recession and marked stocks down, with the Russell Mid-Cap Value index down 12% at its low. As the year progressed, the domestic economy performed better and stocks rallied, only to retreat again when the U.K. voted to exit the European Union. The surprise victory of Trump for the presidency and a Republican win in both the House and Senate sent the stock market to record highs during the fourth quarter.

The Fund’s cyclical positioning benefited from the Trump rally during November and December. Regional bank stocks, led by Bank United, M&T Bank, and Comerica, appreciated significantly during the fourth quarter. Additionally, our overweight position compared to the Index in the producer durables sector added to performance. This outperformance was helped by the proposed acquisition of B/E Aerospace by Rockwell Collins for a significant premium to its trading value and to our purchase price earlier in the year. American Airlines was also a standout performer as airline stocks are viewed as a beneficiary of stronger economic growth. Detracting from performance during the fourth quarter were Zimmer Biomet, Ashland, and Teradata, all of which came under selling pressure as their reported earnings were below expectations.

In 2016 the Fund benefited from merger and acquisition and restructuring activity — ADT, our largest holding at the time, was acquired by Apollo, Tyco approved a merger with Johnson Controls, and B/E Aerospace agreed to be acquired by Rockwell Collins. Our energy holdings also performed well as energy prices rebounded meaningfully from very depressed levels — Devon, after a long restructuring of buying and selling assets, had a sharp rise, and Oneok bounced back from extremely low levels at the end of 2015.

Hurting performance during 2016 was our overweight position to the benchmark in technology, as some of our technology holdings (Nuance, Skyworks, Teradata) came under pressure from reduced earnings expectations. They were also pressured by Trump’s victory, as many of our technology names have large foreign exposure. Also

detracting from performance for the year was GNC, which materially missed earnings expectations and the CEO was fired. We decided to sell the position as our investment thesis changed due to increasing internet competition and the potential sale of the company was delayed.

After eight years of the Obama administration’s economic policy of tax, spend and regulate, we have become very optimistic that Trump’s economic plan will be positive for domestic economic growth and therefore stocks, over the long term. We are concerned however that we are late in the economic cycle and that corporate profit growth could come under pressure in the near term from higher wages and a stronger dollar. Additionally, we think any new economic policy put forth by the Trump Administration won’t become effective until late in 2017, at the earliest, and consequently won’t have an impact on economic growth until 2018. The recent run-up in the stock market post the election has raised valuation levels that ignore the potential for adverse news including slowing profit growth, rising interest rates, unfavorable geopolitical news, or implementation of some of Trump’s populist policies. Nevertheless, we believe that our investment discipline of buying cash generating, franchise companies, selling at discounts to our estimates of intrinsic value should continue to generate solid returns over time.

Penn Mutual Asset Management, LLC

Investment Adviser

Neuberger Berman Management

Investment Sub-Adviser

 

 

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Management’s Discussion of Fund Performance

 

Cumulative Performance Comparison

December 31, 2006 — December 31, 2016

 

LOGO

An investment of $10,000 in the Mid Cap Value Fund on December 31, 2006 would have grown to $18,236. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the Russell Midcap Value Index, during the same period. A $10,000 investment in the Russell Midcap Value Index on December 31, 2006 would have grown to $20,780.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     10 Year  

Mid Cap Value Fund

     17.20     13.97     6.19

Russell MidCap Value Index

     20.00     15.70     7.59

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments2
 

Industrials

     20.8

Consumer, Non-cyclical

     18.5

Technology

     18.2

Financials

     13.7

Consumer, Cyclical

     10.1

Energy

     7.1

Utilities

     6.4

Basic Materials

     4.0

Communications

     1.2
  

 

 

 
     100.0
  

 

 

 

 

2  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent broad industry sectors. Each industry sector consists of one or more specific industry classifications.
 

 

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Management’s Discussion of Fund Performance

 

Mid Core Value Fund

The Penn Series Mid Core Value Fund returned 22.77% for the twelve-month period ending December 31, 2016, compared to the 20.00% return for its benchmark, the Russell Midcap Value Index.

Security selection and an overweight in financials contributed positively to relative performance. Security selection in insurance and an overweight in the banking industry were particularly helpful. Banks suffered early in the year as interest rates fell, creating earnings visibility pressure. In the second half of the year, yields rose on the 10-year, and banks benefited. Higher interest rates, a steeper yield curve, the potential for lower corporate tax rates, optimism for economic growth and better credit, and the potential for an easing regulatory burden were ultimately catalysts for appreciation in the sector.

Within the industrials sector, many more stable businesses, like waste management companies, rose early in the year as they were viewed as equity bond proxies. In the second half of the year, more cyclical sectors rose on improved economic visibility and Trump’s election. Defense stocks also rose after the election. Against this backdrop, the portfolio’s security selection and an overweight in industrials contributed to the Fund’s outperformance. An overweight position in Tyco performed particularly well.

Underweights in the real estate and utilities sector helped performance. These sectors were hurt by rising interest rates in the fourth quarter. The Fund’s underweight in real estate and utilities is driven by the team’s belief that these sectors are generally overvalued. Security selection in utilities was also strong. Electric utility Westar Energy surged on the announcement of its acquisition by Great Plains Energy.

Security selection and an underweight in telecommunication services stocks also added to results. The team remained underweight in the sector throughout the year due to its concerns regarding competitive dynamics and valuations.

Semiconductor company Applied Materials was the top contributor to performance. Its stock price rose after the company experienced order strength. Also, the company held an analyst day in mid-September that showed improvement in market share.

The materials sector outperformed on rising commodity prices during the year and increased expectations for infrastructure spending following the election. The metals

and mining industry generated 60% returns on the year. The team has had minimal exposure to the industry, as the metals and mining industry generally has lower-quality participants. Also, the team has had valuation concerns on those names that meet the team’s quality criteria.

Despite the positive overall impact of the Fund’s health care holdings, the largest detractor from the Fund’s relative performance came from health care holding LifePoint Health. This is a hospital company with facilities in rural and non-urban communities. Toward the beginning of 2016, LifePoint Health reported weaker volumes for fourth-quarter earnings due to a milder flu season versus the prior year. The stock also fell on concerns over the possibility of decelerating growth rates. In the second quarter, the stock declined because of concerns over the end of the benefit in volumes from the Affordable Care Act (ACA). In the third quarter, the company reported that it missed revenues due to weak volumes. Earnings also missed estimates because of two one-time items: the company incurred temporary staffing costs to cover physician departures, and it implemented a new billing system at a recently acquired hospital.

The team continues to build the portfolio using a bottom-up, stock-specific process. Through its fundamental research, the team seeks higher-quality, mid-sized companies temporarily selling at a discount.

The post-election stock rally and rise in interest rates were catalysts for outperformance in many cyclical names and for underperformance in more defensive, yield-oriented sectors. As such, the team reduced exposures to several positions in the financials, industrials, and energy sectors in the fourth quarter as valuations rose. Conversely, the team increased exposures to some health care and consumer staples holdings as valuations fell.

Penn Mutual Asset Management, LLC

Investment Adviser

American Century Investment Management

Investment Sub-Adviser

 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Cumulative Performance Comparison

December 31, 2006 — December 31, 2016

 

LOGO

An investment of $10,000 in the Mid Core Value Fund on December 31, 2006 would have grown to $19,551. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the Russell Midcap Value Index, during the same period. A $10,000 investment in the Russell Midcap Value Index on December 31, 2006 would have grown to $20,780.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     10 Year  

Mid Core Value Fund

     22.77     15.77     6.93

Russell MidCap Value Index

     20.00     15.70     7.59

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments2
 

Financials

     30.9

Industrials

     19.0

Consumer, Non-cyclical

     15.2

Energy

     13.2

Utilities

     8.0

Consumer, Cyclical

     7.2

Technology

     5.6

Communications

     0.7

Basic Materials

     0.2
  

 

 

 
     100.0
  

 

 

 

 

2  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent broad industry sectors. Each industry sector consists of one or more specific industry classifications.
 

 

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Management’s Discussion of Fund Performance

 

SMID Cap Growth Fund

The Penn Series SMID Cap Growth Fund returned 6.27% for the twelve-month period ending December 31, 2016, compared to the 9.73% return for its benchmark, the Russell 2500 Growth Index for the same time period.

For the period, security selection in the health care, telecommunications services, and energy sectors proved additive to returns. Selection in the information technology and industrial sectors was the primary source of underperformance.

Within health care, our positions in Alere, Aligh Technology and Veeva Systems contributed nicely to performance during the period. Alere agreed to be acquired by Abbott Laboratories sending share prices higher. Align Technology, the manufacturer of the Invisalign orthodontic treatment posted a near flawless execution after growing above expectations the previous two quarters. Veeva provides cloud-based customer relationship management (CRM) software with a specific emphasis on the life sciences industry. The company has a dominant market share position within the pharmaceutical industry where roughly 50% of the largest companies use Veeva’s platform.

Within consumer discretionary, Vail Resorts, operator of world class resorts and ski areas globally, with prominent properties in the Western United States. Vail showed a combination of strong visitations as well as rising pricing metrics per visit.

Additionally within the consumer discretionary sector, Burlington Stores has been a stand out in a challenging retail environment. Strong recent results supported our thesis of Burlington as a superior growth operator in the U.S. retail market. Burlington reported better than expected same stores sales as well as improved margins.

Within the technology sector, specific weakness was visible in the software industry as a combination of company specific issues and concerns over enterprise spending pressured portfolio holdings. Tableau Software, a data visualization software company, reported disappointing quarterly results driven by an unexpected decline in licensing revenue. As a result, shares of Tableau declined sharply. During the year, shares came under pressure as the company reported higher integration costs and lower cost synergies from a recent acquisition.

Imperva’s mixed results weighed on the stock. While network security remains a priority for corporations, the industry has fallen victim to difficult comparisons following

the hyper-growth these companies experienced in the wake of several high profile cyber-attacks.

Within industrials, growing uncertainty “derailed” the outlook for Kansas City Southern. Given that roughly 30 % of railroad operator Kansas City Southern’ s revenues are tied to cross-border shipping, with particular focus on rail lines into Mexico, the results of the U.S. presidential election caused rising uncertainty around the company’s intermediate term growth opportunities.

Lastly, within consumer staples, merger integration issues weighed on TreeHouse Foods. TreeHouse shares declined 17% after reporting earnings that were below consensus expectations and cut its forecast for future growth.

The commentary provided above was from the former sub-adviser of the Fund, Wells Capital Management who was the manager of the Fund until December 1, 2016.

In December, stock selection within materials and energy sectors contributed to relative returns while stock selection within industrials and information technology sectors detracted from relative returns.

In December, regional bank First Republic was a top contributor to relative returns. Shares benefitted from the prospect of less regulation, higher interest and growth rates. First Republic Bank offers lending and private banking services to higher end customers in select markets on the east and west coasts of the United States. We believe a combination of strong management, a high quality franchise, and strategic industry positioning makes First Republic an attractive investment opportunity. Additionally, retailer Kate Spade was a top contributor to relative returns during the period. Following a disappointing last several years for the stock, shares spiked near the end of December as the company announced it was considering a sale of its business.

Commercial foodservice company, Middleby was a top detractor from relative returns. In December, shares gave back some of their prior gains from November, and we believe the cause of the decline in share price was less company specific but rather a continued rotation into more cyclical stocks post-election. In our view, management continues to execute well across the business and we are positive on Middleby’s traction in its commercial food business and Viking acquisition. Additionally, water technology company, Xylem was a top detractor from relative returns in December. We believe the cause of the decline in share price was less company specific but rather a continued rotation into more cyclical stocks post-election.

 

 

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Management’s Discussion of Fund Performance

 

In our view, Xylem may benefit from secular growth and the recovery of water utility spending.

We continue to believe that equities are more attractive than other asset classes in a potentially improving growth environment. We expect to see stimulative fiscal and pro-business policy leading to stronger U.S. and global growth. CEO confidence is already increasing and could reignite a willingness to invest in growth. Corporate earnings have been constrained by weak revenue growth in the last couple of years but stronger economic growth and inflation could boost revenues and extend the profit cycle. Stronger economic growth and revenue-driven earnings growth in the U.S. is a positive backdrop for equities.

The commentary provided above is from the current sub-adviser of the Fund, Goldman Sachs Asset Management who became the manager of the Fund on December 1, 2016.

Penn Mutual Asset Management, LLC

Investment Adviser

Goldman Sachs Asset Management

Investment Sub-Adviser

Cumulative Performance Comparison

August 25, 2008 — December 31, 2016

 

LOGO

An investment of $10,000 in the SMID Cap Growth Fund on August 25, 2008 would have grown to $20,678. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the Russell 2500 Growth Index, during the same period. A $10,000 investment in the Russell 2500 Growth Index on August 25, 2008 would have grown to $21,550.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     Since
Inception2
 

SMID Cap Growth Fund

     6.27     11.65     9.08

Russell 2500 Growth Index

     9.73     13.88     9.63

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.
2  The Fund’s inception date was August 25, 2008.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments3
 

Consumer, Non-cyclical

     27.2

Industrials

     23.7

Consumer, Cyclical

     15.3

Financials

     12.6

Technology

     12.3

Basic Materials

     4.6

Communications

     3.1

Energy

     1.2
  

 

 

 
     100.0
  

 

 

 

 

3  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent broad industry sectors. Each industry sector consists of one or more specific industry classifications.
 

 

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Management’s Discussion of Fund Performance

 

SMID Cap Value Fund

The Penn Series SMID Cap Value Fund returned 25.20% for the twelve-month period ending December 31, 2016, compared to the 25.20% return for its benchmark, the Russell 2500 Value Index for the same time period.

Equities advanced during the year despite heightened political and economic uncertainty following the election of Donald Trump as U.S. President. Rising U.S. interest rates and expectations of higher inflation prompted an accelerated move away from safer parts of the market toward riskier stocks and sectors. Small-caps surged on expectations that they would benefit disproportionately from President Trump’s policy agenda.

Defensive stocks underperformed during the year. Materials stocks were the strongest performers of 2016, driven by a rising commodity prices. Financials did well after a strong fourth quarter, driven by positive sentiment from the U.S. election result. The shift away from safety unfolded around the world, with stocks that are seen as bond proxies in sectors such as utilities, real estate and consumer staples underperforming the broad market.

Overall security selection contributed to performance, led by the Fund’s industrials and technology holdings. Stock selection in the materials and financials sectors detracted from relative performance. Overall sector allocation had a negative effect on performance for the period, as an overweight in consumer discretionary and an underweight to financials more than offset the benefits from an underweight in real estate and an overweight in energy.

Leading contributors for the period included Finisar, a manufacturer of optical communications components. The company delivered stronger-than-expected sales and earnings growth driven by robust end-market demand for its high-end telecommunication and data communication products. Advanced Micro Devices, a maker of microprocessor chips, also contributed to performance during the year. The stock has benefited from new management who has introduced new products and improved its balance sheet. Retailer Children’s Place was also among the top contributors during the year.

Among the detractors for the year was LifePoint Health, a regional health care provider. Shares fell on market concerns regarding changes in health care policy under the new administration, specifically concern surrounding possible reduction or removal of the Affordable Care Act. A reduction or removal of the act could increase the number of uninsured patients the hospital system treats. Similarly,

shares of Molina Healthcare, a Medicaid health care provider, fell with general weakness in the sector as well as specific concerns that prospective changes in the Medicaid program could adversely impact the company’s profitability. U.S. retailer Crocs Retail was also among the top detractors during the year.

As we enter 2017, the equity landscape is as unsettled as it has been for quite some time. Political developments around the world, including a new president in the U.S. and the U.K.’s exit from the European Union, have created uncertainty for the global economy. When combined with the end of historic central bank easing in the aftermath of the global financial crisis, these shifts have the potential to create dramatic changes in corporate profitability.

While little is sure about exact policies that will be enacted in the U.S. over the next two years, there is broad consensus around a few themes. Corporate tax rates will likely decline, and the regulatory burden faced by U.S. companies will probably lessen. Repatriation of corporate cash trapped overseas also seems a strong possibility. Inflation expectations and interest rates increased post election and may rise further if these policies drive wage growth in a tight U.S. labor market. While it is tempting to consider these shifts as certain, the reality is that, as with all policy proposals, “the devil is in the details.” Winners and losers will emerge, but we do not share the market’s seemingly confident forecast about who they will be.

Penn Mutual Asset Management, LLC

Investment Adviser

AllianceBernstein

Investment Sub-Adviser

 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Cumulative Performance Comparison

August 25, 2008 — December 31, 2016

 

LOGO

An investment of $10,000 in the SMID Cap Value Fund on August 25, 2008 would have grown to $24,820. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the Russell 2500 Value Index, during the same period. A $10,000 investment in the Russell 2500 Value Index on August 25, 2008 would have grown to $21,933.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     Since
Inception2
 

SMID Cap Value Fund

     25.20     16.19     11.49

Russell 2500 Value Index

     25.20     15.04     9.86

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.
2  The Fund’s inception date was August 25, 2008.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments3
 

Financials

     22.7

Industrials

     19.6

Consumer, Cyclical

     16.9

Energy

     11.5

Consumer, Non-cyclical

     10.9

Technology

     9.3

Communications

     4.8

Utilities

     2.8

Basic Materials

     1.5
  

 

 

 
     100.0
  

 

 

 

 

3  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent broad industry sectors. Each industry sector consists of one or more specific industry classifications.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Small Cap Growth Fund

The Penn Series Small Cap Growth Fund returned 8.71% for the twelve-month period ending December 31, 2016, compared to the 11.32% return for its benchmark, the Russell 2000 Growth Index.

Despite a broad sell-off in January and February and uncertainty created by the U.K.’s vote to leave the European Union in June, U.S. stocks ended the year with strong gains. Positive economic data contributed to performance, as well as the election of Donald Trump, as investors welcomed the prospect of a pro-growth agenda. In another sign of the economy’s strength, the Federal Reserve (Fed) hiked its benchmark rate in December, only the second time in a decade that the Fed has done so. Improvements in a key manufacturing survey and steady job gains were factors in allowing the Fed to act.

As part of our investment process, we focus on identifying companies with higher-quality business models and predictable, growing revenue streams. Given our emphasis on predictability and stability, we expect our portfolio to outperform the Index in weak or uncertain economic environments, leading to outperformance over full market cycles. We underperformed the benchmark this year, due to our performance late in the year, which was not a market environment best suited for our investment style. In sharp market rallies driven by expectations of a stronger economy we are not surprised to trail the benchmark as companies we view as economically dependent or lower quality outperform.

Stock selection in the technology sector detracted from our relative performance. SS&C Technologies was a leading detractor within the sector. The company provides a number of investment and financial software-enabled services to asset managers, including many alternative managers. Weaker performance by some hedge funds has led to concerns the industry could shrink, and that has weighed on the stock. We also believe that SS&C is a logical consolidator of other hedge fund service providers that may look to get out of the business.

SolarEdge Technologies was another detractor. We like the company because it has a unique technology that speeds up the installation process of solar power inverters, and is best suited for complex solar roof panel installations. The stock was down this year because its revenue growth rate is down from the heady clip of the past few years, but over

the long term, we continue to believe that SolarEdge is uniquely positioned to benefit from the secular tailwind of solar power adoption.

Outside the technology sector, Diplomat Pharmacy was a large detractor. The stock was down after a pharmacy benefit manager demanded higher rebates on the drugs it purchases from Diplomat. While we find this development concerning, we believe there continue to be attractive aspects to the investment, particularly the role Diplomat plays within the biotech industry.

While the companies discussed above detracted from performance, we were pleased by the results of many other stocks in the Fund. Aerospace parts supplier HEICO Corp. was our top contributor to performance. After an inventory correction from some of the major airlines that order HEICO’s parts, orders have picked back up again and that helped drive the stock. We continue to like the company’s long-term outlook, and think it is a company with durable growth characteristics.

Belden CDT Inc. was another top contributor. The stock rebounded in the first quarter of the year, after its earnings and guidance reassured investors about the company. A commitment to pay down some of its debt has also reassured investors.

Nordson Corp. was another contributor worth highlighting. The company makes adhesive dispensing systems for consumer packaged goods companies, industrial companies and original equipment manufacturers that produce mobile phones and other electronic devices. The company has increased its penetration among Asian original equipment manufacturers, which has driven growth during the year.

Penn Mutual Asset Management, LLC

Investment Adviser

Janus Capital Management

Investment Sub-Adviser

 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Cumulative Performance Comparison

December 31, 2006 — December 31, 2016

 

LOGO

An investment of $10,000 in the Small Cap Growth Fund on December 31, 2006 would have grown to $15,460. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the Russell 2000 Growth Index, during the same period. A $10,000 investment in the Russell 2000 Growth Index on December 31, 2006 would have grown to $21,109.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     10 Year  

Small Cap Growth Fund

     8.71     11.35     4.46

Russell 2000 Growth Index

     11.32     13.74     7.76

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments2
 

Consumer, Non-cyclical

     34.9

Industrial

     18.8

Technology

     18.4

Consumer, Cyclical

     11.0

Financial

     8.7

Communications

     3.7

Basic Materials

     3.2

Energy

     0.9

Diversified

     0.4
  

 

 

 
Total      100.0
  

 

 

 

 

2  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent broad industry sectors. Each industry sector consists of one or more specific industry classifications.
 

 

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Management’s Discussion of Fund Performance

 

Small Cap Value Fund

The Penn Series Small Cap Value Fund returned 24.75% for the twelve-month period ending December 31, 2016, compared to the 31.74% return for its benchmark, the Russell 2000 Value Index.

Following a global sell-off at the beginning of the year, U.S. equities stabilized and rebounded in February, as market sentiment improved on more dovish global central banks, stronger economic data and an oil price recovery. Markets were dominated in June by the U.K. referendum to leave the European Union (“Brexit”). Equities sold off following a surprise “Leave” result, but later recovered due to a combination of improving risk sentiment and a dovish Bank of England. Following the unexpected victory of Donald Trump in the U.S. election in November, equities quickly reversed a short-lived selloff and surged on anticipation of the pro-growth impact of President-elect Trump’s fiscal stimulus plan. The Fed raised rates by 25 basis points in December 2016, as had been largely anticipated, and set a more hawkish 2017 rate path, causing equities to fall at the end of the year. The best performing sectors over the year were energy, telecommunication services and financials, while the worst performing sectors were health care, real estate and consumer staples.

In the Fund for the year, our investments in the financials and materials sectors detracted from results, whereas the energy and telecommunication services sectors contributed to performance.

For the year, Life Storage, an owner and operator of self-storage properties, was a top detractor from returns. Its shares fell after the company announced weaker-than-expected second quarter earnings and lowered forward guidance in light of a deceleration in same store revenue growth. In our view, moderation in the self-storage industry’s fundamentals was exacerbated by the company’s outsized exposure to Texas relative to its peers, as storage capacity increased in the region. Despite this year’s underperformance, we maintain our conviction in the newly-created Life Storage following Sovran Self Storage’s acquisition of Life Storage and the subsequent rebranding.

Over the previous year, Burlington Stores, a discount clothing retailer, was a top contributor to results. After an unusually warm winter in 2015, investor expectations for coat sales significantly declined which pressured the stock price. The stock subsequently rebounded after the company reported strong first quarter results that

exceeded consensus and management’s expectations. Management also raised its outlook for the full year. Its shares rose throughout the remainder of the year as discount retailers continued to capture market share from traditional retailers. The company also executed on its strategic goals of improving margins and inventory management. We continue to hold a positive view on the company and its position in the discount retailer industry, but are managing position sizing given the stock’s strong returns in 2016.

As we enter 2017, we see an increasingly positive backdrop as the U.S. transitions to a potentially pro-growth environment. In our view, most companies will benefit from aggressive fiscal policy, including lower taxes and increased spending, and a less restrictive regulatory environment. In the near-term, however, uncertainty around policy specifics and timing could increase volatility. While our aggregate return expectations are lower than in recent years given relatively full valuations, we believe U.S. equities still look more attractive than most other asset classes. Accordingly, we favor high quality, domestically-oriented companies with strong management teams. Additionally, after several years of thematic-driven markets, we are excited about the prospect of increasing dispersion at the stock level.

Regardless of the market direction, our fundamental, bottom-up stock selection continues to drive our process, rather than headlines or sentiment. We maintain high conviction in the companies that we own and believe they have the potential to outperform relative to the broader market regardless of the growth environment.

Penn Mutual Asset Management, LLC

Investment Adviser

Goldman Sachs Asset Management

Investment Sub-Adviser

 

 

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Management’s Discussion of Fund Performance

 

Cumulative Performance Comparison

December 31, 2006 — December 31, 2016

 

LOGO

An investment of $10,000 in the Small Cap Value Fund on December 31, 2006 would have grown to $22,829. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the Russell 2000 Value Index, during the same period. A $10,000 investment in the Russell 2000 Value Index on December 31, 2006 would have grown to $18,354.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     10 Year  

Small Cap Value Fund

     24.75     15.32     8.61

Russell 2000 Value Index

     31.74     15.07     6.26

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments2
 

Financials

     48.4

Consumer, Non-cyclical

     10.8

Consumer, Cyclical

     8.2

Basic Materials

     8.1

Communications

     8.0

Technology

     7.8

Industrials

     6.2

Energy

     2.5
  

 

 

 
     100.0
  

 

 

 

 

2  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent broad industry sectors. Each industry sector consists of one or more specific industry classifications.
 

 

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Management’s Discussion of Fund Performance

 

Small Cap Index Fund

The Penn Series Small Cap Index Fund returned 20.37% for the twelve-month period ending December 31, 2016, compared to the 21.31% return for its benchmark, the Russell 2000 Index for the same time period.

After the tumultuous opening act of 2016, investor nerves were soothed to some degree as February closed, provided one measures comfort by an intra-month recovery in the price levels of developed equity markets. The relief rally in growth assets that began in the middle part of February continued for the better part of March, taking the S&P 500 Index to a modest 1.4% gain for the first quarter overall. The improvement in global manufacturing data was highlighted by a return to expansionary readings for the U.S. ISM manufacturing index in March after bottoming at post-crisis lows in December 2015.

As the second quarter of 2016 opened, the “reflation trade” that commenced in mid-February and closed out the end of the first quarter of 2016 continued apace in April with growth assets broadly posting positive returns, though with some signs of consolidation towards the end of the month. Leading the way for the month was a near 20% gain in crude oil prices. The moniker “reflation trade” represents the inverse of the “deflation trade” in which oil prices collapsed by more than 70% over the past two years.

Global equity markets demonstrated an air of complacency in August of 2016. This was in sharp contrast to the third quarter of 2015, when markets experienced their most volatile period since 2011. In fact, the S&P 500 Index did not experience a daily price move of greater than 1%, up or down, between July 8 and September 8. Using 30-day realized volatility as a measure, it was chronicled by The Wall Street Journal on August 23 that the 30 preceding trading days had been the least volatile for the S&P 500 Index in over two decades.

In a year notable for unexpected challenges to the established political order, November 8, 2016 delivered another entry to that ledger in the largely unanticipated victory of Donald Trump over Hillary Clinton to close out the highly contentious U.S. presidential election campaign. Within U.S. equities, a significant sector rotation that was already underway in the second half of 2016 from high-yielding defensive sectors to cyclicals accelerated in the fourth quarter after the U.S. election. As 2016 drew to a close in December, the Federal Reserve (Fed) as widely expected raised interest rates on December 15 for the first time since December of 2015.

On an individual security level, the top positive contributors to the Fund’s performance were Advanced Micro Devices Inc, Microsemi Corporation, and US Silica Holdings Inc. The top negative contributors to the Fund’s performance were Impax Laboratories Inc, Ultragenyx Pharmaceutical Inc, and RH.

Penn Mutual Asset Management, LLC

Investment Adviser

State Street Global Advisors

Investment Sub-Adviser

Cumulative Performance Comparison

August 25, 2008 — December 31, 2016

 

LOGO

An investment of $10,000 in the Small Cap Index Fund on August 25, 2008 would have grown to $20,217. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the Russell 2000 Index, during the same period. A $10,000 investment in the Russell 2000 Index on August 25, 2008 would have grown to $22,487.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     Since
Inception2
 

Small Cap Index Fund

     20.37     13.68     8.79

Russell 2000 Index

     21.31     14.46     9.11

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.
2  The Fund’s inception date was August 25, 2008.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments3
 

Financials

     28.1

Consumer, Non-cyclical

     18.4

Industrials

     13.8

Consumer, Cyclical

     11.6

Technology

     10.3

Communications

     6.4

Basic Materials

     4.2

Energy

     3.5

Utilities

     3.4

Government

     0.2

Diversified

     0.1
  

 

 

 
     100.0
  

 

 

 

 

3  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent broad industry sectors. Each industry sector consists of one or more specific industry classifications.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Developed International Index Fund

The Penn Series Developed International Index Fund returned 0.35% for the twelve-month period ending December 31, 2016, compared to the 1.51% return for its benchmark, the MSCI EAFE Index for the same time period.

With a starting point of continued slow and uneven economic growth for developed economies dating back to the end of the global financial crisis, investors in 2016 have so far navigated a storm of additional uncertainties including softening economic growth and policy missteps in China, a degree of disenchantment in the ability of global central banks to influence market outcomes and a vote by Britain on June 23 to exit its 43 year membership in the European Union. Remarkably, against this challenging backdrop, global equities ended the first half of the year basically where the year started. After selling off aggressively to kick off the year through the second week of February, global equities clawed back into positive territory for the year through June 23, only to see those gains extinguished when the surprise outcome of the ‘Brexit’ vote was learned on June 24, leaving the MSCI World Index down 1.7% before rebounding smartly to put the index back in positive territory on a year-to-date basis as of June 30.

Global markets entered the third quarter riding the tailwind of an aggressive snap back rally following the surprising June 23 U.K. referendum vote to leave the European Union. After declining by 7.1% in the two days following the referendum, the MSCI World Index advanced 5.3% the final three days of June and an additional 4.3% through the end of July.

Among the many suggestions attempting to justify the relatively optimistic tone for markets entering 2017, the resilience of markets in the previous 12 months is certainly deserving of some credit. Despite a surprise vote by the United Kingdom electorate to exit the European Union on June 23, output in the U.K. did not collapse as many predicted, and continental Europe thus far does not seem to have been materially impacted. China, after causing considerable market anxiety to open 2016 on a sharp fall in its currency and fears of a rapid economic growth slowdown, faded from being a top concern for global investors in 2016, turning in what is expected to be a respectable 6.7% rate of growth. Likewise, commodity prices opened the year falling sharply, only to find a bottom in mid-February – providing timely relief to commodity exporting emerging markets such as Brazil and Russia. Also aiding emerging markets and keeping global

financial conditions easy was a cautious U.S. Federal Reserve that hiked rates just once in 2016, where a more aggressive rate of tightening had been forecast entering the year. In the United Kingdom, the Bank of England did engage in some easing measures by reducing short-term interest rates and also extending their quantitative easing program. Both the Bank of Japan (BOJ) and European Central Bank (ECB) have held back from the additional monetary stimulus anticipated earlier in 2016 despite falling far short on their inflation goals, and the efficacy of existing unconventional monetary policy measures has come under increasing scrutiny.

On an individual security level, the top positive contributors to the Fund’s performance were Royal Dutch Shell plc Class B, Royal Dutch Shell plc Class A, and BP plc. The top negative contributors to the Fund’s performance were Novo Nordisk A/S Class B, Teva Pharmaceutical Industries Limited, and Roche Holding Ltd Genusssch.

Penn Mutual Asset Management, LLC

Investment Adviser

State Street Global Advisors

Investment Sub-Adviser

Cumulative Performance Comparison

August 25, 2008 — December 31, 2016

 

LOGO

An investment of $10,000 in the Developed International Index Fund on August 25, 2008 would have grown to $11,469. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the MSCI EAFE Index, during the same period. A $10,000 investment in the MSCI EAFE Index on August 25, 2008 would have grown to $12,406.

 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     Since
Inception2
 

Developed International Index Fund

     0.35     5.86     1.65

MSCI EAFE Index

     1.51     7.02     2.61

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.
2  The Fund’s inception date was August 25, 2008.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments3
 

Japan

     24.2

United Kingdom

     15.3

France

     9.6

Germany

     9.3

Switzerland

     9.2

Australia

     7.3

Netherlands

     5.5

Spain

     3.1

Hong Kong

     2.9

Sweden

     2.9

Italy

     1.8

Denmark

     1.6

Singapore

     1.4

Belgium

     1.2

Ireland

     1.2

Finland

     1.0

Israel

     0.7

Norway

     0.7

Luxembourg

     0.3

Austria

     0.2

New Zealand

     0.2

China

     0.1

Jersey

     0.1

Portugal

     0.1

South Africa

     0.1
  

 

 

 
     100.0
  

 

 

 

 

3  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent the countries in which the securities are denominated.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

International Equity Fund

The Penn Series International Equity Fund returned -5.16% for the twelve-month period ending December 31, 2016, compared to the 5.01% return for its benchmark, the MSCI ACWI ex U.S. Index.

International equities withstood a multitude of shocks in 2016. Despite economic and political uncertainty weighing on markets at times, equities performed reasonably well, helped by emerging market equities’ outperformance for the majority of this year, driven by the U.S. Federal Reserve’s deceleration of monetary policy normalization, strengthening commodity prices and improving fundamentals.

Risk aversion dominated markets early in the year as investors contemplated falling oil prices, slower growth in China, and changing U.S. Federal Reserve monetary policy. By the second quarter, encouraging economic data and supportive central bank policies strengthened European equities, although the United Kingdom’s vote to exit the European Union eclipsed other developments. The Brexit vote was followed by a sell-off in global risk assets and a sharp decline in the British pound against its major trading currencies.

International equities recovered rapidly from the Brexit sell-off, and high quality stocks participated in the rally. Equity markets responded positively to continued loose monetary policy in developed markets, as well as OPEC’s tentative agreement to cut production. And, equity performance of key emerging markets, such as China, Brazil, Korea and Taiwan, strengthened.

Investors were drawn to Philip Morris International’s relative safety after the uncertainty resulting from the Brexit vote, as the company continues to perform well. Philip Morris International produces and sells cigarettes under brands such as Marlboro and L&M. In our opinion, the company has strong pricing power, leading brands, consistent constant currency earnings growth, opportunities for cost savings, and a large dividend.

British American Tobacco (BAT) was a top contributor over the period. Its stability and consistency of earnings became well sought after post the Brexit vote. While based in the U.K., its earnings come from outside of the U.K. Currency, after years of being a headwind, is turning into a tailwind due to favorable currency translation as BAT reports its earnings in Great Britain Pound. Earlier in the year, the company also reported solid numbers, again, highlighting its strong business model even in volatile markets.

Novo Nordisk corrected sharply in late October when the company lowered its mid-term target for operating profit growth to 5%. The main culprit is price erosion in the long-acting insulin segment because of a new competitor entering the space. The expectation now is that Novo’s earnings growth will be in low single digits over the next couple of years due to the headwinds described above, rising to high single digits in the subsequent years. As a result, we hold a much smaller position in Novo than in years past.

Persimmon Plc underperformed due to the increased long-term uncertainty due to the effects of Brexit and the difficulty in predicting its impact on the U.K. residential market. As such, we exited the position. However, we maintain our belief that Persimmon is still among the best homebuilders in the UK, a well-run company growing at an attractive rate.

We believe the global economic recovery will continue in 2017. Developed economies are likely to continue strengthening, albeit slowly. Since the 2008 financial crisis, developed economies have benefited from the extraordinary measures undertaken by major central banks and the healing that comes from the passage of time.

For several decades, investors have become accustomed to a constant direction in the world economy, led by the United States and other developed markets outsourcing production to lower cost emerging market based companies. Any shift in the U.S. position on trade direction is likely to have a magnified impact on global supply chains and, if so, could result in a number of secondary impacts.

Penn Mutual Asset Management, LLC

Investment Adviser

Vontobel Asset Management

Investment Sub-Adviser

 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Cumulative Performance Comparison

December 31, 2006 — December 31, 2016

 

LOGO

An investment of $10,000 in the International Equity Fund on December 31, 2006 would have grown to $12,482. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the MSCI ACWI ex-U.S. Index, during the same period. A $10,000 investment in the MSCI ACWI ex-U.S. Index on December 31, 2006 would have grown to $11,514.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     10 Year  

International Equity Fund

     –5.16     5.35     2.24

MSCI ACWI ex-U.S. Index

     5.01     5.48     1.42

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments2
 

United Kingdom

     16.0

United States

     11.6

India

     9.3

Switzerland

     9.1

France

     7.8

Japan

     6.3

Canada

     5.7

Ireland

     5.2

China

     4.1

Netherlands

     4.1

Spain

     3.5

Germany

     3.4

Belgium

     3.2

South Africa

     2.4

Denmark

     2.2

Mexico

     2.0

Australia

     1.9

Brazil

     1.2

Hong Kong

     1.0
  

 

 

 
     100.0
  

 

 

 

 

2  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent the countries in which the securities are denominated.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Emerging Markets Equity Fund

The Penn Series Emerging Markets Equity Fund returned 5.80% for the twelve-month period ending December 31, 2016, compared to the 11.60% return for its benchmark, the MSCI Emerging Markets Index for the same time period.

Positive contributors to the Fund’s performance during the period included our stock selection and underweight allocation to China and our stock selection and overweight allocation to Peru. Stock selection in Pakistan also contributed, as did the Fund’s zero allocation to Malaysia. Stock selection in India added value during the period, but it was partially offset by an unfavorable overweight allocation. Stock selection in Panama and Turkey also contributed.

Key detractors from performance included the Fund’s stock selection and underweight allocation to Taiwan and Russia, as well as stock selection and a neutral allocation to Brazil. Stock selection in Korea, Indonesia and South Africa also hampered returns.

From a sector perspective, stock selection in and underweight allocations to health care and telecommunications contributed to returns. Stock selection in consumer staples and information technology also added to results but gains were partially offset by the negative impact of an overweight to consumer staples and underweight to information technology. Stock selection in and an underweight allocation to the energy sector detracted from results, as did stock selection in financials. Derivatives did not have a material impact on performance for the period.

The outlook for emerging markets overall finally began improving in 2016 after five previously disappointing years. In a world facing lower economic growth from a combination of demographic pressure, lower trade volumes and a huge increase in debt, we own what we call a “post-China world” portfolio, seeking those pockets of growth in countries where we believe domestic consumer demand is strong and credit growth is in healthy early stages — and far from the excess as it has been in China, Brazil and Turkey.

In our view, the building blocks are in place for recovery in many emerging market countries. Markets may still experience some turbulence from the potential for disappointment with China’s growth or any depreciation of China’s currency and uncertainty about the course of the U.S. presidential election, economic outlook and precise path of the Federal Reserve.

From a thematic perspective, we continue to own and seek companies benefiting from healthy domestic demand and the growth of the aging population, where demand is high for health care and consumer experiences and services, including travel and leisure activities. We also see demand for financial services in countries with low credit penetration. We are seeking to minimize the Fund’s exposure to countries highly dependent on trade and where credit growth has greatly exceeded the pace of economic growth over the past five years. With global trade declining as protectionism is becoming more politically appealing and geopolitical tension rising in such areas as the South China Sea and the Middle East, we are also focused on identifying innovative companies benefiting from domestic infrastructure projects and defense spending.

We still consider Central and Eastern Europe an attractive investment opportunity. Growth in the region remains healthy, mostly driven by strong consumption, which has been boosted by rising employment, growing real wages and increasingly more affordable credit. After years of tightening, fiscal policy is set to loosen, but budget deficits should remain below the 3% level. Investment lagged in 2016 due to less absorption of European Union funds, but absorption should accelerate in 2017, driving up public fixed investment spending and further supporting growth.

As we have for many years, we remain underweight China and countries with decelerating growth or heavy dependence on exports such as Russia, Taiwan and Korea in the portfolio. Debt levels in China continue to rise to unprecedented levels and ongoing overcapacity issues and the continued property downturn will likely lead to further weakness in industrial production and related investment.

Penn Mutual Asset Management, LLC

Investment Adviser

Morgan Stanley Investment Management

Investment Sub-Adviser

 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Cumulative Performance Comparison

August 25, 2008 — December 31, 2016

 

LOGO

An investment of $10,000 in the Emerging Markets Equity Fund on August 25, 2008 would have grown to $10,263. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the MSCI Emerging Markets Index, during the same period. A $10,000 investment in the MSCI Emerging Markets Index on August 25, 2008 would have grown to $10,950.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     Since
Inception2
 

Emerging Markets Equity Fund

     5.80     1.18     0.31

MSCI Emerging Markets Index

     11.60     1.64     1.51

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.
2  The Fund’s inception date was August 25, 2008.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments3
 

China

     14.2

South Korea

     10.9

Taiwan

     9.2

India

     8.3

Brazil

     7.9

Mexico

     5.8

Indonesia

     5.4

Hong Kong

     5.0

Philippines

     3.7

South Africa

     3.6

Russia

     3.3

Poland

     3.2

Peru

     2.3

Thailand

     2.2

Argentina

     2.0

Pakistan

     1.7

United States

     1.4

Netherlands

     1.1

Austria

     0.9

Czech Republic

     0.9

United Kingdom

     0.9

Chile

     0.7

Germany

     0.7

Portugal

     0.7

Switzerland

     0.7

Egypt

     0.6

Panama

     0.6

Japan

     0.5

Colombia

     0.5

Hungary

     0.5

Spain

     0.3

Turkey

     0.3
  

 

 

 
     100.0
  

 

 

 

 

3  Portfolio holdings are presented as a percentage of total investments before short-term investments. The categories shown represent the countries in which the securities are denominated.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Real Estate Securities Fund

The Penn Series Real Estate Securities Fund returned 5.49% for the twelve-month period ending December 31, 2016, compared to the 8.52% return for its benchmark, the FTSE NAREIT Equity REIT Index.

Real estate securities produced favorable returns in 2016, a year in which the asset class experienced several distinct phases. Listed real estate rallied in the first quarter, a period that was challenging for stocks broadly, as global growth slowed and interest rates declined. As growth improved and slowdown fears subsided, however, expectations of a Federal Reserve interest rate hike modestly pressured REITs. Donald Trump’s surprise victory in the November U.S. Presidential election accelerated growth and inflation expectations due to the anticipated impact of changes in fiscal and tax policies. This prompted a rotation out of fixed income and higher-yielding equities into more growth-oriented investments. During this third phase, the more cyclical real estate sectors produced favorable returns, while those considered being more defensive generally declined.

Industrial and data center landlords were among the top-performing U.S. sectors during the year. The pair continued to benefit from secular growth trends, including burgeoning internet retailing and cloud computing, which resulted in healthy pricing power for the sectors’ property owners.

Hotels were particularly strong in the second half of the year. Investors looked ahead to the end of the new supply cycle, anticipating that industry fundamentals would recover in 2017 along with the economy.

Office REITs on the West Coast enjoyed healthy gains early in the year thanks to the thriving tech sector, while New York City and Washington, D.C. landlords rallied strongly in the wake of the Presidential election. Health care experienced a wide dispersion in returns. Companies with the most stable cash flows, such as owners of medical office buildings, generally performed quite well, while those with skilled nursing care tenants underperformed amid concerns that regulatory issues could threaten tenants’ profit margins.

Apartments lagged the benchmark for the year. Despite generally healthy demand for apartments, investors were concerned that the sector’s cash-flow growth is peaking amid rising supply. Regional malls declined despite still-strong fundamentals following store closing

announcements from several high-profile retailers, including Sears and Macy’s. Continued gains in e-commerce and a general change in how people are spending their disposable income added to those concerns.

Our stock selection in health care was a large detractor from relative performance, although this was partially offset by our underweight allocation in the sector. We had an out-of-index position in Brookdale Senior Living, which declined in the period. We also did not own Senior Housing Properties Trust, which had a sizable gain. Our underweight and stock selection in diversified REITs also detracted. This was attributable largely to our allocation to Vornado Realty Trust at various times during the year. Our security selection in hotels further detracted, including our underweight in the strongly performing Host Hotels & Resorts.

Our stock selection in office REITs was a large contributor to relative performance, including overweights in several West Coast-centered landlords that advanced strongly during the period. Our underweight in self storage, the industry’s poorest-performing sector in the year, also contributed to relative performance. Our underweight in the shopping center owners, which lagged the benchmark, further contributed.

After years of disappointing growth, we expect the global economy to accelerate in 2017, led by strength in the U.S., but with Europe and Japan also seeing improvement. The promise of tax reforms and increased fiscal spending under the Trump administration has lifted expectations for higher asset prices and yields in the U.S. On balance, in the near term we expect the Trump effect to add to the growth and inflation trends that were already underway. In the long term, we believe a focus on more infrastructure spending, lower taxes, and less regulation and a more pro-business attitude from the government could be positive for the economy.

Penn Mutual Asset Management, LLC

Investment Adviser

Cohen & Steers Capital Management

Investment Sub-Adviser

 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Cumulative Performance Comparison

December 31, 2006 — December 31, 2016

 

LOGO

An investment of $10,000 in the Real Estate Securities Fund on December 31, 2006 would have grown to $14,592. For the purpose of comparison, the graph also shows the change in the Fund’s benchmark, the FTSE NAREIT Equity REIT Index, during the same period. A $10,000 investment in the FTSE NAREIT Equity REIT Index on December 31, 2006 would have grown to $16,417.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     10 Year  

Real Estate Securities Fund

     5.49     11.58     3.85

FTSE NAREIT Equity REIT Index

     8.52     12.01     5.08

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.

Portfolio Composition as of 12/31/16

 

     Percent of
Total Investments2
 

Apartments

     21.5

Diversified

     15.9

Office Property

     15.7

Regional Malls

     9.0

Healthcare

     8.2

Industrials

     7.2

Lodging

     4.7

Strip Centers

     4.7

Storage & Warehousing

     4.5

Building & Real Estate

     3.7

Hotels & Resorts

     2.3

Manufactured Homes

     2.1

Healthcare Services

     0.5
  

 

 

 
     100.0
  

 

 

 

 

2  Portfolio holdings are presented as a percentage of total investments before short-term investments.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Aggressive Allocation Fund

The Penn Series Aggressive Allocation Fund returned 7.46% for the twelve-month period ending December 31, 2016, compared to its benchmarks, the Russell 3000 Index’s return of 12.74% and the Bloomberg Barclays Capital U.S. Aggregate Bond Index’s return of 2.65% for the same time period.

The Aggressive Allocation Fund is comprised of a target allocation of 90% equity funds and 10% fixed income funds. The equity allocation of the Fund is comprised of domestic equity funds ranging from large capitalization funds to small capitalization funds as well as developed international and emerging markets equity funds and the fixed income portion is primarily allocated to intermediate-term bond funds.

At the broad asset class level, the Aggressive Allocation Fund’s equity allocation underperformed its broad equity benchmark, the Russell 3000 Index for the one-year period. Detracting most from performance during the period versus the equity Index was the Fund’s underlying asset class allocations to developed international equity stocks as international equity significantly underperformed the strong returns of the domestic equity market. Contributing to the equity performance versus the Index were the Fund’s underlying asset class allocations to large, mid and small cap value as value-oriented stocks considerably outperformed growth-oriented stocks across all market capitalizations during the year.

At the individual fund level, the Fund’s allocation to mid cap value equity contributed the most to performance during the period. Detracting most from performance during the period at the underlying fund level were allocations to international equity, emerging markets equity and large cap value.

The Fund’s fixed income allocation performed outperformed the Bloomberg Barclays Capital U.S. Aggregate Bond Index for the one-year time period due to its asset class allocation to high yield fixed income.

As a result of the annual analysis of the asset class allocations of the Fund conducted each September with changes implemented October 3, the asset class allocation to large cap growth, mid cap growth, small cap growth, and domestic real estate securities were reduced which allowed for an increase to the asset allocations to large cap value, mid cap value, international stocks, emerging market stocks, high yield bonds and short-term bonds. These asset class changes became effective at the

beginning of the fourth quarter and will continue to be in effective until the next annual review. However, the Fund is continually reviewed to help ensure that it remains consistent with its investment objective by making adjustments, when necessary, of specific sub-accounts within an asset class as well as automatic rebalancing of the Fund on a quarterly basis.

Penn Mutual Asset Management, LLC

Investment Adviser

Cumulative Performance Comparison

August 25, 2008 — December 31, 2016

 

LOGO

An investment of $10,000 in the Aggressive Allocation Fund on August 25, 2008 would have grown to $16,249. For the purpose of comparison, the graph also shows the change in the Fund’s benchmarks, the Russell 3000 Index and the Bloomberg Barclays Capital U.S. Aggregate Bond Index, during the same period. A $10,000 investment in the Russell 3000 Index on August 25, 2008 would have grown to $21,506. A $10,000 investment in the Bloomberg Barclays Capital U.S. Aggregate Bond Index on August 25, 2008 would have grown to $14,096.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     Since
Inception2
 

Aggressive Allocation Fund

     7.46     9.82     5.98

Russell 3000 Index

     12.74     14.67     9.24

Bloomberg Barclays Capital U.S. Aggregate Bond Index

     2.65     2.23     4.34

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.
2  The Fund’s inception date was August 25, 2008.
 

 

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Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Asset Allocation Target as of 12/31/16

 

International Stocks

     24.0

Large Cap Value Stocks

     19.0

Mid Cap Value Stocks

     13.0

Emerging Markets

     11.0

Large Cap Growth Stocks

     7.0

Small Cap Value Stocks

     6.0

Intermediate Bonds

     5.0

Small Cap Growth Stocks

     4.0

Mid Cap Growth Stocks

     3.0

Short Term Bonds

     3.0

Domestic REITs

     3.0

High Yield Bonds

     2.0
  

 

 

 
     100.0
  

 

 

 
 

 

46


Table of Contents

Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Moderately Aggressive Allocation Fund

The Penn Series Moderately Aggressive Allocation Fund returned 7.52% for the twelve-month period ending December 31, 2016, compared to its benchmarks, the Russell 3000 Index’s return of 12.74% and the Bloomberg Barclays Capital U.S. Aggregate Bond Index’s return of 2.65% for the same time period.

The Moderately Aggressive Allocation Fund is comprised of a target allocation of 80% equity funds and 20% fixed income funds. The equity allocation of the Fund is comprised of domestic equity funds ranging from large capitalization funds to small capitalization funds as well as developed international and emerging markets equity funds and the fixed income portion is primarily allocated to intermediate-term and short-term bond funds.

At the broad asset class level, the Moderately Aggressive Allocation Fund’s equity allocation slightly underperformed its broad equity benchmark, the Russell 3000 Index for the one-year period. Detracting most from performance during the period versus the equity Index was the Fund’s underlying asset class allocations to developed international equity stocks as international equity significantly underperformed the strong returns of the domestic equity market. Also detracting from performance was the asset class allocation to large cap growth stocks. Contributing to the equity performance versus the Index were the Fund’s underlying asset class allocations to large, mid and small cap value as value-oriented stocks considerably outperformed growth-oriented stocks across all market capitalizations during the year.

At the individual fund level, the Fund’s allocation to mid cap value equity contributed the most to performance during the period. Detracting most from performance during the period at the underlying fund level were allocations to international equity, emerging markets equity and large cap value.

The Fund’s fixed income allocation performed outperformed the Bloomberg Barclays Capital U.S. Aggregate Bond Index for the one-year time period due to its asset class allocation to high yield fixed income.

As a result of the annual analysis of the asset class allocations of the Fund conducted each September with changes implemented October 3, the asset class allocation to large cap growth, mid cap growth, small cap growth, international stocks, domestic real estate securities, high yield bonds and intermediate-term bonds were reduced. This allowed for an increase to the asset allocations to

large cap value, mid cap value, small cap value, emerging market stocks, and short-term bonds. These asset class changes became effective at the beginning of the fourth quarter and will continue to be in effective until the next annual review. However, the Fund is continually reviewed to help ensure that it remains consistent with its investment objective by making adjustments, when necessary, of specific sub-accounts within an asset class as well as automatic rebalancing of the Fund on a quarterly basis.

Penn Mutual Asset Management, LLC

Investment Adviser

Cumulative Performance Comparison

August 25, 2008 — December 31, 2016

 

LOGO

An investment of $10,000 in the Moderately Aggressive Allocation Fund on August 25, 2008 would have grown to $17,059. For the purpose of comparison, the graph also shows the change in the Fund’s benchmarks, the Russell 3000 Index and the Bloomberg Barclays Capital U.S. Aggregate Bond Index, during the same period. A $10,000 investment in the Russell 3000 Index on August 25, 2008 would have grown to $21,506. A $10,000 investment in the Bloomberg Barclays Capital U.S. Aggregate Bond Index on August 25, 2008 would have grown to $14,096.

 

 

47


Table of Contents

Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     Since
Inception2
 

Moderately Aggressive Allocation Fund

     7.52     8.87    
6.60

Russell 3000 Index

     12.74     14.67     9.24

Bloomberg Barclays Capital U.S. Aggregate Bond Index

     2.65     2.23     4.34

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.
2  The Fund’s inception date was August 25, 2008.

Asset Allocation Target as of 12/31/16

 

Large Cap Value Stocks

     20.0

International Stocks

     19.0

Intermediate Bonds

     11.0

Mid Cap Value Stocks

     10.0

Large Cap Growth Stocks

     8.0

Emerging Markets

     8.0

Short Term Bonds

     7.0

Small Cap Value Stocks

     6.0

Mid Cap Growth Stocks

     3.0

Small Cap Growth Stocks

     3.0

Domestic REITs

     3.0

High Yield Bonds

     2.0
  

 

 

 
     100.0
  

 

 

 
 

 

48


Table of Contents

 

Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Moderate Allocation Fund

The Penn Series Moderate Allocation Fund returned 6.96% for the twelve-month period ending December 31, 2016, compared to its benchmarks, the Russell 3000 Index’s return of 12.74% and the Bloomberg Barclays Capital U.S. Aggregate Bond Index’s return of 2.65% for the same time period.

The Moderate Allocation Fund is comprised of a target allocation of 60% equity funds and 40% fixed income funds. The equity allocation of the Fund is comprised of domestic equity funds ranging from large capitalization funds to small capitalization funds as well as developed international and emerging markets equity funds and the fixed income portion is primarily allocated to intermediate-term and short-term bond funds.

At the broad asset class level, the Moderate Allocation Fund’s equity allocation performed in line with its broad equity benchmark, the Russell 3000 Index for the one-year period. Detracting from performance during the period versus the equity Index was the Fund’s underlying asset class allocations to developed international equity stocks as international equity significantly underperformed the strong returns of the domestic equity market. Also detracting from performance was the asset class allocation to large cap growth stocks. Contributing to the equity performance versus the Index were the Fund’s underlying asset class allocations to large, mid and small cap value as value-oriented stocks considerably outperformed growth-oriented stocks across all market capitalizations during the year.

At the individual fund level, the Fund’s allocation to mid cap value equity contributed the most to performance during the period. Detracting most from performance during the period at the underlying fund level were allocations to international equity, emerging markets equity and large cap value.

The Fund’s fixed income allocation performed outperformed the Bloomberg Barclays Capital U.S. Aggregate Bond Index for the one-year time period due to its asset class allocation to high yield fixed income.

As a result of the annual analysis of the asset class allocations of the Fund conducted each September with changes implemented October 3, the asset class allocation to large cap growth, mid cap growth, small cap growth, domestic real estate securities, high yield bonds and cash equivalents were reduced. This allowed for an increase to the asset allocations to large cap value, mid cap value,

small cap value, emerging market stocks, intermediate-term bonds and short-term bonds. These asset class changes became effective at the beginning of the fourth quarter and will continue to be in effective until the next annual review. However, the Fund is continually reviewed to help ensure that it remains consistent with its investment objective by making adjustments, when necessary, of specific sub-accounts within an asset class as well as automatic rebalancing of the Fund on a quarterly basis.

Penn Mutual Asset Management, LLC

Investment Adviser

Cumulative Performance Comparison

August 25, 2008 — December 31, 2016

 

LOGO

An investment of $10,000 in the Moderate Allocation Fund on August 25, 2008 would have grown to $15,738. For the purpose of comparison, the graph also shows the change in the Fund’s benchmarks, the Russell 3000 Index and the Bloomberg Barclays Capital U.S. Aggregate Bond Index, during the same period. A $10,000 investment in the Russell 3000 Index on August 25, 2008 would have grown to $21,506. A $10,000 investment in the Bloomberg Barclays Capital U.S. Aggregate Bond Index on August 25, 2008 would have grown to $14,096.

 

 

49


Table of Contents

Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     Since
Inception2
 

Moderate Allocation Fund

     6.96     7.30     5.57

Russell 3000 Index

     12.74     14.67     9.24

Bloomberg Barclays Capital U.S. Aggregate Bond Index

     2.65     2.23     4.34

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.
2  The Fund’s inception date was August 25, 2008.

Asset Allocation Target as of 12/31/16

 

Intermediate Bonds

     27.0

International Stocks

     14.0

Large Cap Value Stocks

     13.0

Large Cap Growth Stocks

     7.0

Short Term Bonds

     10.0

Mid Cap Value Stocks

     9.0

Emerging Markets

     5.0

High Yield Bonds

     3.0

Small Cap Value Stocks

     5.0

Mid Cap Growth Stocks

     3.0

Small Cap Growth Stocks

     2.0

Domestic REITs

     2.0
  

 

 

 
     100.0
  

 

 

 
 

 

50


Table of Contents

Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Moderately Conservative Allocation Fund

The Penn Series Moderately Conservative Allocation Fund returned 6.03% for the twelve-month period ending December 31, 2016, compared to its benchmarks, the Russell 3000 Index’s return of 12.74% and the Bloomberg Barclays Capital U.S. Aggregate Bond Index’s return of 2.65% for the same time period.

The Moderately Conservative Allocation Fund is comprised of a target allocation of 40% equity funds and 60% fixed income funds. The equity allocation of the Fund consists of domestic equity funds comprised of large capitalization and mid capitalization funds and a slight allocation to small capitalization stocks as well as developed international equity funds and a small allocation to emerging market equities. The fixed income portion is mostly allocated to intermediate-term and short-term bond funds.

At the broad asset class level, the Moderately Conservative Allocation Fund’s equity allocation slightly outperformed its broad equity benchmark, the Russell 3000 Index for the one-year period. Contributing to the equity performance versus the Index were the Fund’s underlying asset class allocations to large, mid and small cap value as value-oriented stocks considerably outperformed growth-oriented stocks across all market capitalizations during the year. Detracting from performance during the period versus the equity Index was the Fund’s underlying asset class allocations to developed international equity stocks as international equity significantly underperformed the strong returns of the domestic equity market. Also detracting from performance was the asset class allocation to large cap growth stocks.

At the individual fund level, the Fund’s allocation to mid cap value equity contributed the most to performance during the period. Detracting most from performance during the period at the underlying fund level were allocations to international equity, emerging markets equity and large cap value.

The Fund’s fixed income allocation performed outperformed the Bloomberg Barclays Capital U.S. Aggregate Bond Index for the one-year time period due to its asset class allocation to high yield fixed income.

As a result of the annual analysis of the asset class allocations of the Fund conducted each September with changes implemented October 3, the asset class allocation to large cap growth, mid cap growth, high yield bonds and cash equivalents were reduced. This allowed for an

increase to the asset allocations to large cap value, small cap value, emerging market stocks, intermediate-term bonds and short-term bonds. These asset class changes became effective at the beginning of the fourth quarter and will continue to be in effective until the next annual review. However, the Fund is continually reviewed to help ensure that it remains consistent with its investment objective by making adjustments, when necessary, of specific sub-accounts within an asset class as well as automatic rebalancing of the Fund on a quarterly basis.

Penn Mutual Asset Management, LLC

Investment Adviser

Cumulative Performance Comparison

August 25, 2008 — December 31, 2016

 

LOGO

An investment of $10,000 in the Moderately Conservative Allocation Fund on August 25, 2008 would have grown to $14,852. For the purpose of comparison, the graph also shows the change in the Fund’s benchmarks, the Russell 3000 Index and the Bloomberg Barclays Capital U.S. Aggregate Bond Index, during the same period. A $10,000 investment in the Russell 3000 Index on August 25, 2008 would have grown to $21,506. A $10,000 investment in the Bloomberg Barclays Capital U.S. Aggregate Bond Index on August 25, 2008 would have grown to $14,096.

 

 

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Table of Contents

Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     Since
Inception2
 

Moderately Conservative Allocation Fund

     6.03     5.64     4.85

Russell 3000 Index

     12.74     14.67     9.24

Bloomberg Barclays Capital U.S. Aggregate Bond Index

     2.65     2.23     4.34

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.
2  The Fund’s inception date was August 25, 2008.

Asset Allocation Target as of 12/31/16

 

Intermediate Bonds

     36.0

Short Term Bonds

     20.0

Large Cap Value Stocks

     13.0

International Stocks

     9.0

Large Cap Growth Stocks

     5.0

High Yield Bonds

     4.0

Mid Cap Value Stocks

     4.0

Emerging Markets

     3.0

Small Cap Value Stocks

     3.0

Domestic REITs

     2.0

Small Cap Growth Stocks

     1.0
  

 

 

 
     100.0
  

 

 

 
 

 

52


Table of Contents

Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Conservative Allocation Fund

The Penn Series Conservative Allocation Fund returned 4.71% for the twelve-month period ending December 31, 2016, compared to its benchmarks, the Russell 3000 Index’s return of 12.74% and the Bloomberg Barclays Capital U.S. Aggregate Bond Index’s return of 2.65% for the same time period.

The Conservative Allocation Fund is comprised of a target allocation of 80% fixed income funds and a target allocation of 20% in domestic and international equity funds. The fixed income funds predominately consist of short-term and intermediate-term bonds and the equity fund allocations consist of mostly large capitalization funds with a small exposure to developed international equity funds.

At the broad asset class level, the Conservative Allocation Fund’s asset class exposure to high yield bonds outperformed the Bloomberg Barclays Capital U.S. Aggregate Bond Index for the one-year period, thus, asset allocation had a positive contribution on performance during the period. However, the Fund’s underlying fund allocations to short-term bonds did detract slightly from Fund performance during the period.

The Fund’s equity allocation slightly underperformed its broad equity benchmark, the Russell 3000 Index. The Fund’s asset class allocation to developed international stocks hindered its equity performance during the period as international stocks underperformed domestic stocks during the year. The Fund’s underlying fund allocation to large cap value did aid performance during the period.

As a result of the annual analysis of the asset class allocations of the Fund conducted each September with changes implemented October 3, the asset class allocation to large cap growth, mid cap growth, international stocks, high yield bonds and cash equivalents were reduced. These reductions allowed for the increase to the asset allocations to large cap value, emerging market stocks, domestic real estate, intermediate-term bonds and short-term bonds. These asset class changes became effective at the beginning of the fourth quarter and will continue to be in effective until the next annual review. However, the Fund is continually reviewed to help ensure that it remains consistent with its investment objective by making adjustments, when necessary, of specific sub-accounts within an asset class as well as automatic rebalancing of the Fund on a quarterly basis.

Penn Mutual Asset Management, LLC

Investment Adviser

Cumulative Performance Comparison

August 25, 2008 — December 31, 2016

 

LOGO

An investment of $10,000 in the Conservative Allocation Fund on August 25, 2008 would have grown to $13,761. For the purpose of comparison, the graph also shows the change in the Fund’s benchmarks, the Russell 3000 Index and the Bloomberg Barclays Capital U.S. Aggregate Bond Index, during the same period. A $10,000 investment in the Russell 3000 Index on August 25, 2008 would have grown to $21,506. A $10,000 investment in the Bloomberg Barclays Capital U.S. Aggregate Bond Index on August 25, 2008 would have grown to $14,096.

Average Annual Total Returns1 as of 12/31/16

 

     1 Year     5 Year     Since
Inception2
 

Conservative Allocation

     4.71     3.67     3.89

Russell 3000 Index

     12.74     14.67     9.24

Bloomberg Barclays Capital U.S. Aggregate Bond Index

     2.65     2.23     4.34

 

1  The performance information shown here does not reflect variable account charges and fees. Past performance is not predictive of future performance. Shares may be worth more or less when redeemed than when purchased. Assumes reinvestment of all dividends.
2  The Fund’s inception date was August 25, 2008.
 

 

53


Table of Contents

Penn Series Funds, Inc.

Management’s Discussion of Fund Performance

 

Asset Allocation Target as of 12/31/16

 

Intermediate Bonds

     46.0

Short Term Bonds

     30.0

Large Cap Value Stocks

     9.0

High Yield Bonds

     4.0

International Stocks

     4.0

Large Cap Growth Stocks

     3.0

Mid Cap Value Stocks

     2.0

Domestic REITs

     1.0

Emerging Markets

     1.0
  

 

 

 
     100.0
  

 

 

 
 

 

54


Table of Contents

Important Information about Fund Expenses

Hypothetical Examples of a $1,000 Investment (Unaudited)

 

We believe that it is important for you to understand the effect of fees on your investment. All mutual funds have operating expenses. As a participant in any of the Penn Series Funds, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund. A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio.

The Penn Series Funds are the underlying investment vehicles for the variable life and variable annuity contracts issued by The Penn Mutual Life Insurance Company and its subsidiary, The Penn Insurance and Annuity Company. These contracts have transaction costs, additional administrative expense fees and mortality and expense risk charges. Because of these additional expenses, the costs to investors will be higher than the figures shown in the following expense examples. The expense examples below are intended to help you understand your ongoing costs (in dollars) of investing in each fund and to compare these costs with the ongoing costs of investing in other funds.

These examples are based on an investment of $1,000 invested for six months beginning July 1, 2016 and held through December 31, 2016. The examples illustrate your fund’s costs in two ways:

 

    Actual Fund Performance in the table below provides information about actual account values and actual expenses. The “Ending Value” shown is derived from the fund’s actual return, and “Expenses Paid During Period” shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading entitled “Expenses Paid During Period.”

 

    Hypothetical 5% Annual Return is intended to help you compare your fund’s costs with those of other mutual funds. It assumes that the fund had a return of 5% before expenses during the period shown, but that the expense ratio is unchanged. In this case — because the return used is not the fund’s actual return — the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s cost by comparing this hypothetical example with the hypothetical examples that appear in shareholders reports of other funds. Because the return used is not an actual return, it may not be used to estimate the actual ending account value or expenses you paid for the period.

Please note that the expenses shown in the table are only meant to highlight and help you compare your ongoing costs of investing in the funds and do not reflect any fees and charges deducted under your insurance contract. The “Annualized Expense Ratio” represents the actual expenses for the six-month period indicated and will be different from the expense ratio in the Financial Highlights which is for the year ended December 31, 2016.

Disclosure of Fund Expenses

For the Period July 1, 2016 to December 31, 2016

Expense Table

 

      Beginning
Value
July 1,
2016
     Ending
Value
December 31,
2016
     Annualized
Expense
Ratio
     Expenses
Paid During
Period *
 
Money Market Fund                                    
Actual      $1,000.00         $1,000.06         0.48%         $2.41   
Hypothetical      $1,000.00         $1,022.69         0.48%         $2.45   
Limited Maturity Bond Fund                                    
Actual      $1,000.00         $1,007.63         0.69%         $3.47   
Hypothetical      $1,000.00         $1,021.64         0.69%         $3.50   

 

55


Table of Contents

Important Information about Fund Expenses

Hypothetical Examples of a $1,000 Investment (Unaudited)

 

      Beginning
Value
July 1,
2016
     Ending
Value
December 31,
2016
     Annualized
Expense
Ratio
     Expenses
Paid During
Period *
 
Quality Bond Fund                                    
Actual      $1,000.00         $990.13         0.66%         $3.29   
Hypothetical      $1,000.00         $1,021.79         0.66%         $3.35   
High Yield Bond Fund                                    
Actual      $1,000.00         $1,075.24         0.87%         $4.52   
Hypothetical      $1,000.00         $1,020.73         0.87%         $4.41   
Flexibly Managed Fund                                    
Actual      $1,000.00         $1,027.81         0.89%         $4.55   
Hypothetical      $1,000.00         $1,020.60         0.89%         $4.54   
Balanced Fund                                    
Actual      $1,000.00         $1,040.20         0.18%         $0.94   
Hypothetical      $1,000.00         $1,024.21         0.18%         $0.93   
Large Growth Stock Fund                                    
Actual      $1,000.00         $1,078.01         0.96%         $5.00   
Hypothetical      $1,000.00         $1,020.27         0.96%         $4.87   
Large Cap Growth Fund                                    
Actual      $1,000.00         $1,019.10         0.89%         $4.52   
Hypothetical      $1,000.00         $1,020.61         0.89%         $4.53   
Large Core Growth Fund                                    
Actual      $1,000.00         $1,013.67         0.85%         $4.30   
Hypothetical      $1,000.00         $1,020.82         0.85%         $4.32   
Large Cap Value Fund                                    
Actual      $1,000.00         $1,099.34         0.89%         $4.71   
Hypothetical      $1,000.00         $1,020.60        
0.89%
  
     $4.54   
Large Core Value Fund                                    
Actual      $1,000.00         $1,077.23         0.90%         $4.67   
Hypothetical      $1,000.00         $1,020.58         0.90%         $4.56   
Index 500 Fund                                    
Actual      $1,000.00         $1,076.56         0.36%         $1.87   
Hypothetical      $1,000.00         $1,023.32         0.36%         $1.82   
Mid Cap Growth Fund                                    
Actual      $1,000.00         $1,041.18         0.95%         $4.89   
Hypothetical      $1,000.00         $1,020.29         0.95%         $4.85   
Mid Cap Value Fund                                    
Actual      $1,000.00         $1,108.45         0.77%         $4.09   
Hypothetical      $1,000.00         $1,021.21         0.77%         $3.93   
Mid Core Value Fund                                    
Actual      $1,000.00         $1,110.70         1.03%         $5.46   
Hypothetical      $1,000.00         $1,019.90         1.03%         $5.24   
SMID Cap Growth Fund                                    
Actual      $1,000.00         $1,054.56         1.05%         $5.41   
Hypothetical      $1,000.00         $1,019.81         1.05%         $5.33   

 

56


Table of Contents

Important Information about Fund Expenses

Hypothetical Examples of a $1,000 Investment (Unaudited)

 

      Beginning
Value
July 1,
2016
     Ending
Value
December 31,
2016
     Annualized
Expense
Ratio
     Expenses
Paid During
Period *
 
SMID Cap Value Fund                                    
Actual      $1,000.00         $1,185.32         1.20%         $6.60   
Hypothetical      $1,000.00         $1,019.02         1.20%         $6.12   
Small Cap Growth Fund                                    
Actual      $1,000.00         $1,068.41         1.00%         $5.21   
Hypothetical      $1,000.00         $1,020.04         1.00%         $5.10   
Small Cap Value Fund                                    
Actual      $1,000.00         $1,187.09         0.96%         $5.27   
Hypothetical      $1,000.00         $1,020.26         0.96%         $4.88   
Small Cap Index Fund                                    
Actual      $1,000.00         $1,181.07         0.64%         $3.53   
Hypothetical      $1,000.00         $1,021.86         0.64%         $3.28   
Developed International Index Fund                                    
Actual      $1,000.00         $1,041.02         0.82%         $4.20   
Hypothetical      $1,000.00         $1,020.97         0.82%         $4.17   
International Equity Fund                                    
Actual      $1,000.00         $939.88         1.11%         $5.41   
Hypothetical      $1,000.00         $1,019.49         1.11%         $5.65   
Emerging Markets Equity Fund                                    
Actual      $1,000.00         $995.13         1.64%         $8.22   
Hypothetical      $1,000.00         $1,016.80         1.64%         $8.34   
Real Estate Securities Fund                                    
Actual      $1,000.00         $964.30         0.95%         $4.70   
Hypothetical      $1,000.00         $1,020.29         0.95%         $4.85   
Aggressive Allocation Fund                                    
Actual      $1,000.00         $1,045.09         0.32%         $1.62   
Hypothetical      $1,000.00         $1,023.54         0.32%         $1.60   
Moderately Aggressive Allocation Fund                                    
Actual      $1,000.00         $1,043.04         0.29%         $1.50   
Hypothetical      $1,000.00         $1,023.65         0.29%         $1.49   
Moderate Allocation Fund                                    
Actual      $1,000.00         $1,032.94         0.29%         $1.48   
Hypothetical      $1,000.00         $1,023.67         0.29%         $1.47   
Moderately Conservative Allocation Fund                                    
Actual      $1,000.00         $1,021.25         0.30%         $1.51   
Hypothetical      $1,000.00         $1,023.62         0.30%         $1.52   
Conservative Allocation Fund                                    
Actual      $1,000.00         $1,009.08         0.31%         $1.57   
Hypothetical      $1,000.00         $1,023.56         0.31%         $1.58   

 

 

* Expenses are equal to the fund’s annualized expense ratio multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (184), then divided by 366.

 

57


Table of Contents

Penn Series Funds, Inc.

Schedule of Investments — December 31, 2016

Money Market Fund

 

    Par
(000)
    Value†  
AGENCY OBLIGATION — 54.2%    

 

 

 

 

 

   

 

 

 

 

 

Federal Farm Credit Banks

   

4.875%, 01/17/17

  $ 1,000      $ 1,001,957   

0.780%, 01/30/17•

    4,000        4,000,114   

0.836%, 02/14/17•

    7,000        7,001,018   

0.760%, 02/23/17•

    1,000        1,000,021   

0.806%, 03/29/17•

    1,000        1,000,111   

Federal Home Loan Banks

   

0.752%, 01/30/17•

    500        500,148   

0.625%, 02/02/17

    1,850        1,850,123   

0.750%, 02/21/17

    1,000        1,000,385   

0.720%, 03/06/17

    500        500,176   

0.875%, 03/10/17

    500        500,332   

1.000%, 03/10/17

    1,000        1,000,792   

0.424%, 04/06/17•

    4,500        4,500,633   

0.625%, 04/26/17

    2,000        2,000,691   

0.621%, 06/01/17•

    2,000        2,000,000   

0.675%, 09/05/17•

    1,885        1,886,305   

0.928%, 09/07/17•

    2,000        2,003,112   

Federal Home Loan Mortgage Corp.

   

0.500%, 01/27/17

    1,035        1,035,066   

5.000%, 02/16/17

    1,730        1,739,757   

0.875%, 02/22/17

    3,202        3,203,953   

1.000%, 03/08/17

    3,570        3,573,466   

1.056%, 04/26/17•

    300        300,291   

1.250%, 05/12/17

    1,299        1,302,256   

0.720%, 11/13/17•

    4,725        4,731,421   

Federal National Mortgage Association

   

1.250%, 01/30/17

    6,623        6,627,474   

5.000%, 02/13/17

    3,660        3,679,461   

1.125%, 04/27/17

    800        801,237   

5.000%, 05/11/17

    1,702        1,729,173   

0.759%, 07/20/17•

    1,500        1,501,450   

Tennessee Valley Authority

   

5.500%, 07/18/17

    5,000        5,130,834   
   

 

 

 
Total AGENCY OBLIGATION
(Cost $67,101,757)
        67,101,757   
   

 

 

 
U.S. TREASURY OBLIGATIONS — 34.1%   

U.S. Treasury Note

   

0.640%, 01/31/17•

    6,000        6,000,204   

3.125%, 01/31/17

    2,000        2,004,261   

0.625%, 02/15/17

    5,000        5,000,889   

4.625%, 02/15/17

    2,000        2,010,032   

0.875%, 02/28/17

    5,000        5,003,066   

3.000%, 02/28/17

    1,000        1,003,921   

0.750%, 03/15/17

    1,000        1,000,375   

0.500%, 03/31/17

    3,000        2,999,538   

3.250%, 03/31/17

    1,000        1,006,483   

0.500%, 04/30/17

    1,700        1,699,802   

0.630%, 04/30/17•

    4,000        4,000,786   

0.875%, 04/30/17

    1,000        1,001,268   

0.875%, 05/15/17

    1,000        1,001,193   

0.625%, 05/31/17

    1,500        1,499,897   

0.625%, 06/30/17

    2,000        1,999,718   

0.608%, 07/31/17•

    5,000        5,001,163   
   

 

 

 
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $42,232,596)
        42,232,596   
   

 

 

 
    Number of
Shares
    Value†  
SHORT-TERM INVESTMENTS — 3.9%       

 

 

 

 

 

Goldman Sachs Financial Square Funds - Government Fund
(Cost $4,920,718)

    4,920,718      $ 4,920,718   
   

 

 

 
TOTAL INVESTMENTS — 92.2%
(Cost $114,255,071)
      $ 114,255,071   
   

 

 

 
Other Assets & Liabilities — 7.8%        9,609,538   
   

 

 

 
TOTAL NET ASSETS — 100.0%      $ 123,864,609   
   

 

 

 

 

 

See Security Valuation Note.
Variable Rate Security.

 

Maturity
Schedule (days)
   Market
Value
     Percentage of
Portfolio
    Cumulative  

1 to 7

   $ 33,310,827         29.2     29.2

8 to 14

     4,731,421         4.1     33.3

15 to 30

     16,666,341         14.6     47.9

31 to 60

     28,495,848         24.9     72.8

61 to 90

     12,584,274         11.0     83.8

91 to 120

     5,803,289         5.1     88.9

121 to 150

     4,032,622         3.5     92.4

150+

     8,630,449         7.6     100.00

 

   

Total Per Trial Balance

   $ 114,255,071         100.00  
  

 

 

    

 

 

   

Summary of inputs used to value the Fund’s investments as of 12/31/2016 are as follows (See Security Valuation Note):

 

ASSETS TABLE  
Description   Total
Market
Value at
12/31/2016
    Level 1
Quoted
Price
    Level 2
Significant
Observable
Input
    Level 3
Significant
Unobservable
Input
 

U.S. TREASURY OBLIGATIONS

  $ 42,232,596      $      $ 42,232,596      $   

AGENCY OBLIGATION

    67,101,757               67,101,757          

SHORT-TERM INVESTMENTS

    4,920,718        4,920,718                 

 

 

TOTAL INVESTMENTS

  $ 114,255,071      $ 4,920,718      $ 109,334,353      $   

 

 

It Is the Fund’s practice to recognize transfers in and transfers out at the fair value as of the beginning of period. The Fund did not have any transfers in and transfers out of Level 2 or Level 3 fair value hierarchy during the reporting period.

The accompanying notes are an integral part of these financial statements.

 

 

58


Table of Contents

Penn Series Funds, Inc.

Schedule of Investments — December 31, 2016

Limited Maturity Bond Fund

 

    Par
(000)
   
Value†
 
ASSET BACKED SECURITIES — 24.0%    

 

 

 

 

 

   

 

 

 

 

 

Ally Auto Receivables Trust 2014-2
2.100%, 03/16/20

  $ 1,000      $ 1,006,056   

Ally Master Owner Trust 2012-5
1.540%, 09/15/19

    1,000        1,001,422   

AmeriCredit Automobile Receivables Trust 2013-5
2.290%, 11/08/19

    1,000        1,004,281   

Black Diamond CLO 2006-1A Luxembourg SA, Class C
1.577%, 04/29/19 144A @,•

    2,000        1,986,532   

Black Diamond CLO 2006-1A Luxembourg SA, Class D
2.237%, 04/29/19 144A @,•

    2,500        2,486,662   

BMW Vehicle Lease Trust 2015-1
1.240%, 12/20/17

    1,102        1,102,248   

Brentwood CLO Corp. 2006-1A
1.706%, 02/01/22 144A @,•

    2,000        1,920,990   

Chesapeake Funding LLC 2014-1A
1.452%, 03/07/26 144A @,•

    1,080        1,066,646   

Chrysler Capital Auto Receivables Trust 2013-BA
2.240%, 09/16/19 144A @

    1,705        1,713,424   

Consumers Securitization Funding LLC 2014-A
1.334%, 11/01/20

    1,494        1,482,526   

Continental Airlines 2012-3 Class C Pass Through Trust
6.125%, 04/29/18

    1,500        1,560,000   

CPS Auto Receivables Trust 2014-A
1.210%, 08/15/18 144A @

    29        28,642   

Cratos CLO Ltd. 2007-1A D
3.311%, 05/19/21 144A @,•

    2,000        1,999,000   

Emerald Aviation Finance Ltd. 2013- 1, STEP
4.650%, 10/15/38 144A @

    2,445        2,478,382   

Entergy Arkansas Restoration Funding LLC
2.300%, 08/01/21

    1,124        1,131,576   

Equity One Mortgage Pass-Through Trust 2004-1
4.145%, 04/25/34•

    5        5,235   

Ford Credit Auto Owner Trust 2012-D
1.970%, 05/15/19

    1,800        1,801,256   

Ford Credit Auto Owner Trust 2013-D
1.540%, 03/15/19

    2,780        2,781,617   

Ford Credit Auto Owner Trust 2014-A
1.710%, 05/15/19

    1,450        1,454,051   

Gleneagles CLO Ltd. 2005-1A C
1.786%, 11/01/17 144A @,•

    303        302,416   

Golden Credit Card Trust 2012-4A
1.390%, 07/15/19 144A @

    2,000        2,001,125   

Honda Auto Receivables Owner Trust 2014-2
0.770%, 03/19/18

    538        537,095   

Hyundai Auto Lease Securitization Trust 2014-B
1.540%, 12/17/18 144A @

    1,100        1,100,667   

Jasper CLO Ltd. 2005-1A
1.786%, 08/01/17 144A @,•

    557        556,965   
    Par
(000)
   
Value†
 
 

 

   

 

 

 

 

 

   

 

 

 

 

 

Rockwall CDO II Ltd. 2007-1A
1.586%, 08/01/24 144A @,•

  $ 2,065      $ 2,011,192   

SACO I, Inc. 2005-4
1.656%, 06/25/35 144A @,•

    11        11,290   

Santander Drive Auto Receivables Trust 2013-2
1.950%, 03/15/19

    1,222        1,224,017   

SLM Private Education Loan Trust 2012-A
2.104%, 08/15/25 144A @,•

    345        344,943   

SLM Student Loan Trust 2005-10
1.152%, 10/26/26 •

    2,438        2,404,268   

Symphony CLO III Ltd. 2007-3A
1.566%, 05/15/19 144A @,•

    2,500        2,480,720   

Toyota Auto Receivables 2016-C
1.000%, 01/15/19

    2,000        1,996,633   

Volvo Financial Equipment LLC Series 2013-1A
1.620%, 08/17/20 144A @

    1,000        1,000,079   

Voya CLO V Ltd. 2007-5A
3.736%, 05/01/22 144A @,•

    2,000        2,007,216   

Westchester CLO Ltd. 2007-1A B
1.326%, 08/01/22 144A @,•

    2,500        2,408,462   

World Financial Network Credit Card Master Trust 2012-B
1.760%, 05/17/21

    2,032        2,036,435   
   

 

 

 
TOTAL ASSET BACKED SECURITIES
(Cost $50,258,646)
      50,434,069   
   

 

 

 
COMMERCIAL MORTGAGE BACKED SECURITIES — 12.6%   

BAMLL Commercial Mortgage Securities Trust 2013-DSNY, Class B
2.204%, 09/15/26 144A @,•

    1,000        1,000,424   

Bear Stearns Commercial Mortgage Securities Trust 2007-PWR17
1.370%, 06/11/50 144A @,•

    2,000        1,967,886   

FREMF 2011-K701 Mortgage Trust, Class B 2011
4.286%, 07/25/48 144A @,•

    2,000        2,028,752   

FREMF Mortgage Trust Series 2010-K6 Class B
5.358%, 12/25/46 144A @,•

    3,000        3,239,821   

FREMF Mortgage Trust Series 2012-K708 Class C
3.751%, 02/25/45 144A @,•

    2,000        2,043,063   

FREMF Mortgage Trust Series 2012-K710 Class C
3.821%, 06/25/47 144A @,•

    2,110        2,111,035   

FREMF Mortgage Trust Series 2013-KF02 Class C
4.534%, 12/25/45 144A @,•

    399        404,257   

FREMF Mortgage Trust, Series 2013-K713 Class C
3.165%, 04/25/46 144A @,•

    2,400        2,355,254   

Government National Mortgage Association 2011
3.200%, 11/16/44

    1,703        1,716,163   
 

 

59


Table of Contents

Penn Series Funds, Inc.

Schedule of Investments — December 31, 2016

Limited Maturity Bond Fund

 

    Par
(000)
   
Value†
 
COMMERCIAL MORTGAGE BACKED SECURITIES — (continued)   

GS Mortgage Securities Corp. Trust 2013-NYC5 2013
3.649%, 01/10/30 144A @,•

  $ 2,000      $ 2,022,234   

GSCCRE Commercial Mortgage Trust 2015-HULA Class B
3.004%, 08/15/32 144A @,•

    2,000        2,007,971   

Hilton USA Trust 2014-ORL B
1.739%, 07/15/29 144A @,•

    2,500        2,464,470   

WFRBS Commercial Mortgage Trust 2012-C7 Class XA
1.500%, 06/01/45 144A @,•

    53,775        3,247,436   
   

 

 

 
TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES
(Cost $26,955,852)
        26,608,766   
   

 

 

 
CORPORATE BONDS — 43.4%   
Airlines — 7.7%   

American Airlines 2013-2 Class C Pass Through Trust
6.000%, 01/15/17 144A @

    1,949        1,951,143   

Continental Airlines 1999-2 Pass Through Trust
7.256%, 09/15/21

    2,250        2,413,078   

Continental Airlines 2000-2 Pass Through Trust
7.707%, 10/02/22

    516        557,416   

Delta Air Lines 2007-1 Class B Pass Through Trust
8.021%, 02/10/24

    1,267        1,455,283   

Delta Air Lines 2010-1 Class A Pass Through Trust
6.200%, 01/02/20

    1,201        1,264,247   

Delta Air Lines 2012-1 Class B Pass Through Trust
6.875%, 05/07/19 144A @

    2,209        2,377,332   

Northwest Airlines 2007-1 Class A Pass Through Trust
7.027%, 05/01/21

    1,183        1,320,790   

Northwest Airlines 2007-1 Class B Pass-Through Trust
8.028%, 05/01/19

    1,883        1,979,161   

UAL 2009-2A Pass-Through Trust
9.750%, 07/15/18

    351        351,903   

US Airways 2012-1 Class B Pass Through Trust
8.000%, 04/01/21

    2,266        2,515,052   
   

 

 

 
      16,185,405   
   

 

 

 
Auto Manufacturers — 1.0%   

American Honda Finance Corp.
1.550%, 12/11/17

    2,000        2,001,730   
   

 

 

 
Banks — 4.4%   

HSBC Holdings PLC
2.499%, 01/05/22•

    2,000        2,037,266   

JPMorgan Chase & Co.
2.000%, 08/15/17

    2,000        2,007,412   

JPMorgan Chase Bank NA
1.450%, 09/21/18

    1,000        995,622   
    Par
(000)
    Value†  
 

 

   

 

 

 

 

 

   

 

 

 

 

 

Banks — (continued)   

State Street Corp.
4.956%, 03/15/18

  $ 3,000      $ 3,099,363   

Wells Fargo Bank NA
6.000%, 11/15/17

    1,000        1,037,792   
   

 

 

 
      9,177,455   
   

 

 

 
Beverages — 1.3%   

Anheuser-Busch InBev Worldwide, Inc.
1.576%, 08/01/18•

    900        905,527   

Constellation Brands, Inc.
7.250%, 05/15/17

    1,750        1,785,000   
   

 

 

 
      2,690,527   
   

 

 

 
Chemicals — 1.0%   

CF Industries, Inc.
6.875%, 05/01/18

    2,000        2,105,280   
   

 

 

 
Computers — 0.9%   

EMC Corp.
1.875%, 06/01/18

    2,000        1,977,830   
   

 

 

 
Diversified Financial Services — 5.1%   

AerCap Aviation Solutions BV
6.375%, 05/30/17

    1,000        1,017,750   

Air Lease Corp.
2.625%, 09/04/18

    2,000        2,013,946   

Ally Financial, Inc.

   

3.600%, 05/21/18

    1,000        1,007,500   

3.250%, 11/05/18

    1,000        1,001,250   

Ford Motor Credit Co. LLC
1.724%, 12/06/17

    2,000        1,998,488   

Icahn Enterprises LP
3.500%, 03/15/17

    1,000        1,001,875   

Visa, Inc.
1.200%, 12/14/17

    2,646        2,645,624   
   

 

 

 
      10,686,433   
   

 

 

 
Electric — 1.1%   

Israel Electric Corp. Ltd.
6.700%, 02/10/17 144A @

    1,000        1,002,316   

San Diego Gas & Electric Co.
1.914%, 02/01/22

    1,261        1,245,578   
   

 

 

 
      2,247,894   
   

 

 

 
Electronics — 0.7%   

Fortive Corp.
1.800%, 06/15/19 144A @

    1,500        1,490,672   
   

 

 

 
Food — 2.1%   

Kellogg Co.
1.750%, 05/17/17

    1,500        1,503,522   

McDonald’s Corp.
5.800%, 10/15/17

    1,500        1,551,228   

Mondelez International Holdings Netherlands BV
1.625%, 10/28/19 144A @

    1,500        1,470,438   
   

 

 

 
      4,525,188   
   

 

 

 
 

 

60


Table of Contents

Penn Series Funds, Inc.

Schedule of Investments — December 31, 2016

Limited Maturity Bond Fund

 

    Par
(000)
   
Value†
 
CORPORATE BONDS — (continued)   
Healthcare Products — 0.5%   

Stryker Corp.
2.000%, 03/08/19

  $ 1,000      $ 1,000,490   
   

 

 

 
Healthcare Services — 2.6%   

Abbott Laboratories
2.350%, 11/22/19

    2,000        2,002,358   

Aetna Inc.
1.700%, 06/07/18

    1,500        1,498,609   

Fresenius Medical Care US Finance, Inc.
6.875%, 07/15/17

    1,000        1,026,250   

HCA, Inc.
3.750%, 03/15/19

    1,000        1,027,500   
   

 

 

 
      5,554,717   
   

 

 

 
Internet — 0.5%   

eBay Inc.
2.500%, 03/09/18

    1,000        1,008,779   
   

 

 

 
Machinery — Diversified — 1.4%   

Stanley Black & Decker, Inc.

   

1.622%, 11/17/18

    2,000        1,987,686   

2.451%, 11/17/18

    1,000        1,008,569   
   

 

 

 
      2,996,255   
   

 

 

 
Media — 2.0%   

Cablevision Systems Corp.
8.625%, 09/15/17

    1,000        1,040,000   

Comcast Cable Communications LLC
8.875%, 05/01/17

    2,150        2,204,081   

Thomson Reuters Corp.
1.300%, 02/23/17

    1,000        1,000,042   
   

 

 

 
      4,244,123   
   

 

 

 
Oil & Gas — 1.9%   

Chevron Corp.
1.345%, 11/15/17

    2,000        2,002,384   

Murphy Oil Corp.
3.500%, 12/01/17

    1,000        1,005,000   

Statoil ASA
3.125%, 08/17/17

    1,000        1,011,386   
   

 

 

 
      4,018,770   
   

 

 

 
Oil & Gas Services — 1.0%   

Schlumberger Holdings Corp.
2.350%, 12/21/18 144A @

    2,000        2,016,498   
   

 

 

 
Pharmaceuticals — 0.9%   

Shire Acquisitions Investments Ireland DAC
1.900%, 09/23/19

    2,000        1,974,644   
   

 

 

 
Pipelines — 1.0%   

Midcontinent Express Pipeline LLC
6.700%, 09/15/19 144A @

    1,000        1,050,000   

Williams Partners LP/ACMP Finance Corp.
4.875%, 05/15/23

    1,000        1,018,668   
   

 

 

 
      2,068,668   
   

 

 

 
Semiconductors — 1.2%   

NXP BV/NXP Funding LLC144A @

   

3.750%, 06/01/18

    1,000        1,015,000   

5.750%, 03/15/23

    1,000        1,055,000   
    Par
(000)
   
Value†
 
 

 

   

 

 

 

 

 

   

 

 

 

 

 

Semiconductors — (continued)   

Samsung Electronics America, Inc.
1.750%, 04/10/17 144A @

  $ 495      $ 495,223   
   

 

 

 
      2,565,223   
   

 

 

 
Software — 1.2%   

Activision Blizzard Inc.
2.300%, 09/15/21 144A @

    1,000        975,848   

CDK Global, Inc.
3.800%, 10/15/19

    1,500        1,511,250   
   

 

 

 
      2,487,098   
   

 

 

 
Telecommunications — 1.9%   

Crown Castle Towers LLC
6.113%, 01/15/40 144A @

    1,867        2,022,822   

Sprint Spectrum Co. LLC
3.360%, 03/20/23 144A @

    2,000        2,003,740   
   

 

 

 
      4,026,562   
   

 

 

 
Transportation — 0.8%   

Canadian National Railway Co.
5.850%, 11/15/17

    1,700        1,765,850   
   

 

 

 
Trucking and Leasing — 1.2%   

Aviation Capital Group Corp.
2.875%, 09/17/18 144A @

    1,500        1,518,750   

GATX Corp.
1.250%, 03/04/17

    1,000        999,725   
   

 

 

 
      2,518,475   
   

 

 

 
TOTAL CORPORATE BONDS
(Cost $91,227,212)
      91,334,566   
   

 

 

 
RESIDENTIAL MORTGAGE BACKED SECURITIES — 1.0%   
Collateralized Mortgage Obligations — 1.0%   

Fannie Mae REMICS 2017-14 A6
0.956%, 10/25/37•

    2,047        2,044,570   
   

 

 

 
Fannie Mae Pool — 0.0%   

4.000%, 06/01/20

    88        90,516   
   

 

 

 
TOTAL RESIDENTIAL MORTGAGE BACKED SECURITIES
(Cost $2,124,048)
        2,135,086   
   

 

 

 
U.S TREASURY OBLIGATION — 16.3%       

 

 

 

 

 

U.S. Treasury Note

   

0.750%, 12/31/17

    5,250        5,241,385   

1.000%, 02/15/18

    16,700        16,705,878   

1.000%, 03/15/18

    1,250        1,250,586   

1.250%, 12/15/18

    3,000        3,003,282   

0.875%, 04/15/19

    1,500        1,486,524   

1.125%, 04/30/20

    1,500        1,479,317   

0.125%, 04/15/21

    2,550        2,564,393   

United States Treasury Inflation Indexed Bond.
0.125%, 04/15/20

    2,581        2,607,387   
   

 

 

 
TOTAL U.S TREASURY OBLIGATION
(Cost $34,479,672)
      34,338,752   
   

 

 

 
 

 

61


Table of Contents

Penn Series Funds, Inc.

Schedule of Investments — December 31, 2016

Limited Maturity Bond Fund

 

    Number of
Shares
    Value†  
SHORT-TERM INVESTMENTS — 1.5%       

 

 

 

 

 

BlackRock Liquidity Funds FedFund Portfolio - Institutional Shares
(Cost $3,130,298)

    3,130,298      $ 3,130,298   
   

 

 

 
TOTAL INVESTMENTS — 98.8%
(Cost $208,175,728)
      $ 207,981,537   
   

 

 

 
Other Assets & Liabilities — 1.2%        2,494,279   
   

 

 

 
TOTAL NET ASSETS — 100.0%     $ 210,475,816   
   

 

 

 

 

 

See Security Valuation Note.
144A @ Security sold within the terms of a private placement memorandum, restricted and/or exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and may be sold only to dealers in the program or other “accredited investors”. Unless otherwise indicated, the security is considered liquid.
Variable Rate Security.

CLO — Collateralized Loan Obligation

LLC — Limited Liability Company.

LP — Limited Partnership.

PLC — Public Limited Company.

REMICS — Real Estate Mortgage Investment Conduits.

STEP — Step Coupon Bond.

 

Country Weightings as of 12/31/2016††  

United States

     83

Cayman Islands

     8   

Canada

     2   

Luxembourg

     2   

Netherlands

     2   

Ireland

     1   

United Kingdom

     1   

Other

     1   

 

 

Total

     100

 

 

 

††% of total investments as of December 31, 2016

Summary of inputs used to value the Fund’s investments as of 12/31/2016 are as follows (See Security Valuation Note):

 

ASSETS TABLE
 
Description   Total
Market
Value at
12/31/2016
    Level 1
Quoted
Price
    Level 2
Significant
Observable
Input
    Level 3
Significant
Unobservable
Input
 

U.S TREASURY OBLIGATION

  $ 34,338,752      $      $ 34,338,752      $   

ASSET BACKED SECURITIES

    50,434,069               50,434,069          

COMMERCIAL MORTGAGE BACKED SECURITIES

    26,608,766               26,608,766          

CORPORATE BONDS

    91,334,566               91,334,566          

RESIDENTIAL MORTGAGE BACKED SECURITIES

    2,135,086               2,135,086          

SHORT-TERM INVESTMENTS

    3,130,298        3,130,298                 

 

 

TOTAL INVESTMENTS

  $ 207,981,537      $ 3,130,298      $ 204,851,239      $   

 

 

It Is the Fund’s practice to recognize transfers in and transfers out at the fair value as of the beginning of period. The Fund did not have any transfers in and transfers out of Level 2 or Level 3 fair value hierarchy during the reporting period.

The accompanying notes are an integral part of these financial statements.

 

 

62


Table of Contents

Penn Series Funds, Inc.

Schedule of Investments — December 31, 2016

Quality Bond Fund

 

    Par
(000)
    Value†  
AGENCY OBLIGATIONS — 2.6%    

 

 

 

 

 

   

 

 

 

 

 

Federal Home Loan Bank Bonds — 2.2%   

Federal Home Loan Mortgage Corp.
3.062%, 12/01/24

  $ 5,636      $ 5,752,682   

Federal Home Loan Mortgage Corp.
3.010%, 07/01/25

    5,405        5,469,516   
   

 

 

 
      11,222,198   
   

 

 

 
Government National Mortgage Association — 0.4%   

Government National Mortgage Association
4.456%, 10/16/45•

    2,000        2,143,634   
   

 

 

 
TOTAL AGENCY OBLIGATIONS
(Cost $13,937,472)
      13,365,832   
   

 

 

 
ASSET BACKED SECURITIES — 13.4%   

Brentwood CLO Corp. 2006-1A
1.706%, 02/01/22 144A @,•

    4,000        3,841,980   

Chase Issuance Trust 2007-B1
0.954%, 04/15/19•

    2,000        1,999,453   

Chrysler Capital Auto Receivables Trust 2014-BA
2.700%, 05/15/20 144A @

    3,000        3,033,554   

Cole Park CLO Ltd. 2015-1A
3.130%, 10/20/28 144A @

    2,993        2,930,240   

Conseco Financial Corp. 1996-10
7.240%, 11/15/28 •

    407        347,194   

Cratos CLO Ltd. 2007-1A D
3.311%, 05/19/21 144A @,•

    3,000        2,998,500   

Cratos CLO Ltd. 2007-1A E
5.911%, 05/19/21 144A @,•

    3,000        2,999,829   

Emerson Place CLO Ltd. 2006-1A C
1.650%, 01/15/19 144A @,•

    3,200        3,158,563   

Ford Credit Auto Owner Trust 2012-D
1.010%, 05/15/18

    1,604        1,603,874   

Ford Credit Auto Owner Trust 2013-D
1.540%, 03/15/19

    6,800        6,803,956   

Gleneagles CLO Ltd. 2005-1A C
1.786%, 11/01/17 144A @,•

    379        378,021   

Honda Auto Receivables Owner Trust 2014-1
1.040%, 02/21/20

    3,750        3,749,245   

Jasper CLO Ltd. 2005-1A
1.786%, 08/01/17 144A @,•

    1,026        1,025,988   

Keycorp Student Loan Trust 2006-A
1.307%, 09/27/35•

    3,300        3,267,358   

Rockwall CDO II Ltd. 2007-1A144A @,•

   

1.136%, 08/01/24

    2,265        2,258,826   

1.586%, 08/01/24

    4,000        3,895,772   

SACO I, Inc. 2005-4
1.656%, 06/25/35 144A @,•

    34        33,871   

SLC Student Loan Trust 2005-1
1.102%, 02/15/45•

    5,889        5,010,164   

SLM Student Loan Trust 2005-10
1.152%, 10/26/26•

    5,000        4,930,820   

SLM Student Loan Trust 2012-6
1.756%, 04/27/43•

    7,205        6,398,598   

Voya CLO V Ltd. 2007-5A
3.736%, 05/01/22 144A @,•

    2,500        2,509,020   
    Par
(000)
    Value†  
 

 

   

 

 

 

 

 

   

 

 

 

 

 

Westchester CLO Ltd. 2007-1A B
1.326%, 08/01/22 144A @,•

  $ 4,500      $ 4,335,232   
   

 

 

 
TOTAL ASSET BACKED SECURITIES
(Cost $68,018,954)
      67,510,058   
   

 

 

 
COMMERCIAL MORTGAGE BACKED SECURITIES — 17.3%   

CFCRE Commercial Mortgage Trust 2011-C1
4.961%, 04/01/44 144A @,•

    1,000        1,078,271   

Chase Mortgage Trust 2016-2 2016
3.750%, 12/01/45 144A @,•

    3,629        3,598,474   

FREMF Mortgage Trust Series 2010-K6 Class B
5.358%, 12/25/46 144A @,•

    7,795        8,418,135   

FREMF Mortgage Trust Series 2012-K18 Class B
4.255%, 01/25/45 144A @,•

    6,000        6,312,635   

FREMF Mortgage Trust Series 2012-K19 Class C
4.173%, 05/25/45 144A @,•

    4,500        4,489,059   

FREMF Mortgage Trust Series 2012-K20 Class C
3.869%, 05/01/45 144A @,•

    6,000        5,935,717   

FREMF Mortgage Trust Series 2012-K21 Class C
3.938%, 07/01/45 144A @,•

    4,720        4,667,963   

FREMF Mortgage Trust Series 2012-K23 Class C
3.782%, 10/01/45 144A @,•

    5,000        4,858,550   

FREMF Mortgage Trust Series 2012-K707 Class B
3.883%, 01/01/47 144A @,•

    8,272        8,499,652   

FREMF Mortgage Trust Series 2012-K710 Class C
3.821%, 06/01/47 144A @,•

    5,175        5,177,539   

FREMF Mortgage Trust Series 2012-K711 Class C
3.562%, 08/01/45 144A @,•

    6,000        5,977,449   

FREMF Mortgage Trust Series 2013-K27 Class C
3.616%, 01/01/46 144A @,•

    5,000        4,774,362   

FREMF Mortgage Trust Series 2013-K28 Class C
3.494%, 06/01/46 144A @,•

    4,751        4,496,970   

FREMF Mortgage Trust Series 2013-KF02 Class C
4.534%, 12/25/45 144A @,•

    399        404,257   

FREMF Mortgage Trust Series 2014-K41 Class B
3.831%, 11/01/47 144A @,•

    5,000        4,960,897   

FREMF Mortgage Trust Series 2014-K503 Class B
3.002%, 10/01/47 144A @,•

    5,000        5,002,367   

FREMF Mortgage Trust Series 2015-K44 Class B
3.685%, 01/01/48 144A @,•

    5,000        4,818,180   
 

 

63


Table of Contents

Penn Series Funds, Inc.

Schedule of Investments — December 31, 2016

Quality Bond Fund

 

    Par
(000)
    Value†  
COMMERCIAL MORTGAGE BACKED SECURITIES — (continued)   

GS Mortgage Securities Trust 2013-NYC5 Class G
3.649%, 01/01/30 144A @,•

  $ 2,000      $ 2,022,234   

Hilton USA Trust 2014-ORL Class B
1.739%, 07/15/29 144A @,•

    1,500        1,478,682   

JP Morgan Chase Commercial Mortgage Securities Trust 2007-LDP10
5.420%, 01/01/49

    366        366,152   
   

 

 

 
TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES
(Cost $88,322,011)
        87,337,545   
   

 

 

 
CORPORATE BONDS — 39.7%   
Aerospace & Defense — 0.6%    

Lockheed Martin Corp.
3.100%, 01/15/23

    3,000        3,032,799   
   

 

 

 
Airlines — 3.7%   

American Airlines 2013-2 Class C Pass Through Trust
6.000%, 01/15/17 144A @

    4,122        4,126,667   

Continental Airlines 2012-3 Class C Pass Through Trust
6.125%, 04/29/18

    3,500        3,640,000   

Delta Air Lines 2007-1 Class A Pass Through Trust
6.821%, 02/10/24

    2,110        2,426,049   

Delta Air Lines 2015-1 Class B Pass Through Trust
4.250%, 01/30/25

    2,824        2,872,964   

U.S. Airways 2010-1 Class B, Pass Through Trust
8.500%, 10/22/18

    2,640        2,699,532   

United Airlines 2016-1 Class AA Pass Through Trust
3.100%, 01/07/30

    3,000        2,895,000   
   

 

 

 
      18,660,212   
   

 

 

 
Apparel — 0.6%    

Under Armour, Inc.
3.250%, 06/15/26

    3,000        2,833,278   
   

 

 

 
Banks — 4.2%    

Bank of America Corp.
5.650%, 05/01/18

    1,000        1,047,762   

JPMorgan Chase & Co.
3.875%, 09/10/24

    3,600        3,642,613   

Morgan Stanley
5.950%, 12/28/17

    2,050        2,133,701   

State Street Corp.
4.956%, 03/15/18

    7,915        8,177,153   

USB Capital IX
3.500%, 10/29/49•

    3,000        2,463,750   

Wells Fargo & Co.
3.000%, 02/19/25

    4,000        3,842,556   
   

 

 

 
      21,307,535   
   

 

 

 
    Par
(000)
    Value†  
 

 

   

 

 

 

 

 

   

 

 

 

 

 

Beverages — 0.6%    

Anheuser-Busch InBev Finance, Inc.
3.650%, 02/01/26

  $ 3,000      $ 3,045,570   
   

 

 

 
Biotechnology — 0.8%    

Amgen, Inc.
2.700%, 05/01/22

    3,000        2,970,543   

Biogen, Inc.
6.875%, 03/01/18

    1,000        1,057,529   
   

 

 

 
      4,028,072   
   

 

 

 
Chemicals — 0.6%    

CF Industries, Inc.
6.875%, 05/01/18

    3,000        3,157,920   
   

 

 

 
Commercial Services — 0.6%    

Drawbridge Special Opportunities Fund LP
5.000%, 08/01/21 144A @

    2,000        1,925,000   

ERAC USA Finance LLC
2.350%, 10/15/19 144A @

    1,000        999,112   
   

 

 

 
      2,924,112   
   

 

 

 
Computers — 0.6%    

Diamond 1 Finance Corp.
5.450%, 06/15/23 144A @

    3,000        3,182,217   
   

 

 

 
Diversified Financial Services — 2.9%   

Air Lease Corp.
3.750%, 02/01/22

    2,000        2,060,094   

American Express Co.

   

6.150%, 08/28/17

    2,000        2,059,670   

4.900%, 12/29/49•

    3,500        3,320,625   

GE Capital International Funding Co. Unlimited Co.
4.418%, 11/15/35

    4,000        4,191,628   

General Electric Capital Corp.
7.500%, 08/21/35

    2,263        3,032,223   
   

 

 

 
      14,664,240   
   

 

 

 
Electric — 0.2%   

Enel Finance International NV
6.250%, 09/15/17 144A @

    1,000        1,030,515   
   

 

 

 
Engineering & Construction — 0.6%   

SBA Tower Trust
3.156%, 10/15/45 144A @

    3,000        3,016,800   
   

 

 

 
Food — 2.5%   

Kellogg Co.

   

2.650%, 12/01/23

    3,000        2,902,179   

4.500%, 04/01/46

    3,000        2,931,672   

Kraft Heinz Foods Co.
3.000%, 06/01/26

    2,000        1,877,674   

Land O’ Lakes, Inc.
6.000%, 11/15/22 144A @

    3,500        3,815,000   

WM Wrigley Jr. Co.
2.400%, 10/21/18 144A @

    1,000        1,008,947   
   

 

 

 
      12,535,472   
   

 

 

 
 

 

64


Table of Contents

Penn Series Funds, Inc.

Schedule of Investments — December 31, 2016

Quality Bond Fund

 

    Par
(000)
    Value†  
CORPORATE BONDS — (continued)   
Forest Products & Paper — 0.5%   

Georgia-Pacific LLC
3.163%, 11/15/21 144A @

  $ 2,500      $ 2,529,773   
   

 

 

 
Healthcare Products — 1.8%   

Abbott Laboratories
3.750%, 11/30/26

    3,000        2,979,273   

Becton Dickinson and Co.
3.300%, 03/01/23

    1,103        1,107,817   

Covidien International Finance SA
6.000%, 10/15/17

    1,000        1,035,620   

Edwards Lifesciences Corp.
2.875%, 10/15/18

    1,000        1,015,020   

Stryker Corp.
3.375%, 11/01/25

    2,000        1,987,298   

Zimmer Biomet Holdings, Inc.
4.625%, 11/30/19

    1,000        1,057,637   
   

 

 

 
      9,182,665   
   

 

 

 
Housewares — 0.4%   

Newell Rubbermaid, Inc.
4.200%, 04/01/26

    2,000        2,087,560   
   

 

 

 
Insurance — 1.2%   

New York Life Insurance Co.
5.875%, 05/15/33 144A @

    4,925        5,857,071   
   

 

 

 
Investment Companies — 0.2%   

Ares Capital Corp.
4.875%, 11/30/18

    1,000        1,036,497   
   

 

 

 
Lodging — 0.7%   

Marriott International, Inc.
4.500%, 10/01/34

    3,500        3,427,575   
   

 

 

 
Media — 1.3%   

Belo Corp.
7.750%, 06/01/27

    2,000        2,140,000   

Charter Communications Operating LLC
4.464%, 07/23/22

    3,000        3,135,093   

Comcast Cable Holdings LLC
9.875%, 06/15/22

    1,000        1,291,416   
   

 

 

 
      6,566,509   
   

 

 

 
Mining — 0.2%   

Goldcorp, Inc.
3.625%, 06/09/21

    1,000        1,015,906   
   

 

 

 
Oil & Gas — 2.7%   

BG Energy Capital PLC
4.000%, 10/15/21 144A @

    1,000        1,062,947   

BP Capital Markets PLC
2.500%, 11/06/22

    2,500        2,450,470   

HollyFrontier Corp.
5.875%, 04/01/26

    3,000        3,065,736   

Murphy Oil Corp.
3.500%, 12/01/17

    3,000        3,015,000   

Tesoro Corp.
5.125%, 12/15/26 144A @

    4,000        4,045,600   
   

 

 

 
      13,639,753   
   

 

 

 
    Par
(000)
    Value†  
 

 

   

 

 

 

 

 

   

 

 

 

 

 

Pharmaceuticals — 2.9%   

Abbvie, Inc.
2.300%, 05/14/21

  $ 3,000      $ 2,939,358   

GlaxoSmithKline Capital, Inc.
5.375%, 04/15/34

    1,000        1,170,296   

Mead Johnson Nutrition Co.
4.125%, 11/15/25

    2,000        2,044,780   

Mylan NV
3.000%, 12/15/18 144A @

    2,000        2,014,464   

Perrigo Co. PLC
4.000%, 11/15/23

    3,134        3,106,787   

Zoetis, Inc.
4.500%, 11/13/25

    3,000        3,180,444   
   

 

 

 
      14,456,129   
   

 

 

 
Pipelines — 1.1%   

Midcontinent Express Pipeline LLC
6.700%, 09/15/19 144A @

    2,000        2,100,000   

Regency Energy Partners LP/Regency Energy Finance Corp.
5.875%, 03/01/22

    2,000        2,200,116   

Williams Partners LP/ACMP Finance Corp.
4.875%, 05/15/23

    1,500        1,528,002   
   

 

 

 
      5,828,118   
   

 

 

 
Real Estate Investment Trusts — 1.1%   

American Tower Corp.
4.700%, 03/15/22

    2,500        2,669,670   

Kimco Realty Corp.
2.800%, 10/01/26

    3,000        2,789,271   
   

 

 

 
      5,458,941   
   

 

 

 
Retail — 1.9%   

McDonald’s Corp.
5.700%, 02/01/39

    2,110        2,432,024   

Rite Aid Corp.
6.125%, 04/01/23 144A @

    4,000        4,300,000   

Walgreens Boots Alliance, Inc.
1.750%, 05/30/18

    3,000        3,002,997   
   

 

 

 
      9,735,021   
   

 

 

 
Semiconductors — 0.6%   

NXP BV/NXP Funding LLC
5.750%, 03/15/23 144A @

    2,824        2,979,320   
   

 

 

 
Software — 1.3%   

Activision Blizzard, Inc.
6.125%, 09/15/23 144A @

    2,000        2,188,222   

CDK Global, Inc.
3.800%, 10/15/19

    3,500        3,526,250   

Qunitiles IMS, Inc.
5.000%, 10/15/26 144A @

    1,000        1,002,500   
   

 

 

 
      6,716,972   
   

 

 

 
Telecommunications — 2.0%   

Alcatel-Lucent USA, Inc.
6.500%, 01/15/28

    3,000        3,097,500   
 

 

65


Table of Contents

Penn Series Funds, Inc.

Schedule of Investments — December 31, 2016

Quality Bond Fund

 

    Par
(000)
    Value†  
CORPORATE BONDS — (continued)   
Telecommunications — (continued)   

Crown Castle Towers LLC
3.663%, 05/15/45 144A @

  $ 4,000      $ 4,010,840   

Sprint Spectrum Co. LLC
3.360%, 03/20/23 144A @

    3,000        3,005,610   
   

 

 

 
      10,113,950   
   

 

 

 
Transportation — 0.8%   

BNSF Railway Co. 2015-1 Pass Through Trust
3.442%, 06/16/28 144A @

    2,831        2,822,408   

Federal Express Corp 1999 Pass Through Trust
7.650%, 07/15/24

    1,028        1,177,624   
   

 

 

 
      4,000,032   
   

 

 

 
Trucking and Leasing — 0.5%   

Aviation Capital Group Corp.
2.875%, 09/17/18 144A @

    2,500        2,531,250   
   

 

 

 
TOTAL CORPORATE BONDS
(Cost $200,375,843)
      200,581,784   
   

 

 

 
MUNICIPAL BONDS — 1.8%   

State of Georgia
5.000%, 12/01/27

    3,500        4,297,965   

State of North Carolina
5.000%, 06/01/26

    4,100        4,966,002   
   

 

 

 
TOTAL MUNICIPAL BONDS
(Cost $9,248,126)
      9,263,967   
   

 

 

 
RESIDENTIAL MORTGAGE BACKED SECURITIES — 10.7%   
Fannie Mae Pool — 10.2%    

4.000%, 08/01/41

    5,385        5,682,984   

2.500%, 01/01/43

    2,857        2,733,115   

2.500%, 02/01/43

    8,285        7,925,199   

3.000%, 03/01/43

    7,819        7,817,197   

2.500%, 05/01/43

    11,258        10,749,355   

3.500%, 09/01/43

    1,481        1,526,758   

3.000%, 01/01/47

    15,000        14,901,207   
   

 

 

 
      51,335,815   
   

 

 

 
Freddie Mac Gold Pool — 0.4%   

3.500%, 01/01/41

    1,959        2,017,882   
   

 

 

 
Ginnie Mae Pool — 0.1%   

6.000%, 10/15/38

    323        366,154   

6.000%, 10/15/38

    202        229,808   
   

 

 

 
      595,962   
   

 

 

 
TOTAL RESIDENTIAL MORTGAGE BACKED SECURITIES
(Cost $54,131,787)
        53,949,659   
   

 

 

 
U.S TREASURY OBLIGATION — 15.9%   

U.S. Treasury Bond

   

2.250%, 11/15/24

    3,000        2,981,601   

2.125%, 05/15/25

    2,500        2,450,780   

1.625%, 05/15/26

    2,700        2,517,750   

4.375%, 02/15/38

    7,000        8,698,592   

3.000%, 05/15/42

    3,000        2,974,923   
    Par
(000)
    Value†  
 

 

   

 

 

 

 

 

   

 

 

 

 

 

3.125%, 02/15/43

  $ 4,000      $ 4,052,968   

2.875%, 05/15/43

    3,000        2,897,694   

3.625%, 08/15/43

    4,200        4,657,569   

3.750%, 11/15/43

    3,500        3,968,261   

2.500%, 05/15/46

    3,000        2,666,016   

U.S. Treasury Inflation Indexed Bonds

   

0.625%, 01/15/24

    4,662        4,743,870   

0.250%, 01/15/25

    9,696        9,535,369   

0.375%, 07/15/25

    7,135        7,096,621   

1.000%, 02/15/46

    3,061        3,073,504   

U.S. Treasury Note

   

0.625%, 08/31/17

    500        499,610   

2.000%, 07/31/22

    1,000        996,328   

1.500%, 02/28/23

    2,500        2,404,492   

1.750%, 05/15/23

    5,000        4,869,920   

2.500%, 08/15/23

    4,000        4,070,936   

2.000%, 02/15/25

    5,000        4,866,405   
   

 

 

 
Total U.S TREASURY OBLIGATION
(Cost $81,885,438)
      80,023,209   
   

 

 

 
    Number of
Shares
    Value†  
SHORT-TERM INVESTMENTS — 0.1%       

 

 

 

 

 

BlackRock Liquidity Funds FedFund Portfolio - Institutional Shares
(Cost $343,611)

    343,611        343,611   
   

 

 

 
TOTAL INVESTMENTS — 101.5%
(Cost $516,263,242)
      $ 512,375,665   
   

 

 

 
Other Assets & Liabilities — (1.5)%        (7,526,756
   

 

 

 
TOTAL NET ASSETS — 100.0%     $ 504,848,909   
   

 

 

 

 

See Security Valuation Note.
144A @ Security sold within the terms of a private placement memorandum, restricted and/or exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and may be sold only to dealers in the program or other “accredited investors”. Unless otherwise indicated, the security is considered liquid.
Variable Rate Security.

CLO — Collateralized Loan Obligation

LLC — Limited Liability Company.

LP — Limited Partnership.

PLC — Public Limited Company.

 

Country Weightings as of 12/31/2016††  

United States

     90

Cayman Islands

     6   

Ireland

     2   

Netherlands

     1   

United Kingdom

     1   

 

 

Total

     100

 

 

††% of total investments as of December 31, 2016

 

 

66


Table of Contents

Penn Series Funds, Inc.

Schedule of Investments — December 31, 2016

Quality Bond Fund

 

Summary of inputs used to value the Fund’s investments as of 12/31/2016 are as follows (See Security Valuation Note):

 

ASSETS TABLE  
Description   Total
Market
Value at
12/31/2016
    Level 1
Quoted
Price
    Level 2
Significant
Observable
Input
    Level 3
Significant
Unobservable
Input
 

U.S TREASURY OBLIGATION

  $ 80,023,209