Market Sector Update
- Oil prices started to retreat in the quarter over concerns about rising shale oil production, a slowing global economy
and escalation of the U.S.-China trade tension.
- Brent crude oil is strongly in backwardation – meaning the current (spot) price is higher than the futures market price
– which typically suggests a tight physical oil market. Concerns about deteriorating global macro sentiment versus a
tight physical oil market have led to a disconnect between Brent futures and spot oil prices.
- The Trump Administration did not extend waivers during the quarter to allow selected countries to buy Iranian crude
oil and threatened penalties for anyone trading with that country.
- Geopolitical risks around the world have increased. Tensions between the U.S. and Iran continued to rise after Iran
shot down a U.S. military drone and was accused of being behind attacks on oil tankers in the Straits of Hormuz.
Roughly 20% of the world oil supply travels thru the Straits every day, raising fears of additional
disruptions. Geopolitical risk continues to affect production in Iran, Libya and Venezuela.
- The OPEC member countries plus Russia agreed to extend production cuts through the first quarter of 2020. OPEC
will review the cuts and could extend them again through the end of 2020, depending on global economic growth.
- The Portfolio had a negative return for the quarter and underperformed the negative return of its benchmark.
- Key detractors to the Portfolio’s performance relative to its benchmark included holdings in FTS International, Inc.,
Transocean Ltd., Whiting Petroleum Corp., Ensco plc-Class A and Chevron Corp.
- Key contributors to the Portfolio’s relative performance included holdings in Anadarko Petroleum Corp. and WEX,
Inc. The Portfolio also benefitted by not holding several underperforming equities that are benchmark components,
including ExxonMobil Corp., Occidental Petroleum Corp. and Conocophillips.
- About 38% of the equity holdings in the Portfolio were allocated to the Oil & Gas Exploration & Production industry
segment, followed by about 28% to Oil & Gas Equipment & Services and about 14% to Oil & Gas Refining & Marketing.
The Portfolio’s allocation to domestic equity was steady from the prior quarter at about 90% of net assets.
- The focus of the energy strategy remains on investing in companies that can create value over the full course of the
energy cycle. We identify those as companies that are low-cost operators, have strong balance sheets, have the ability
to grow profitably and have strong return on capital.
- We expect the oil markets to continue to be tight through 2019 because of draws on inventories and the extension
of OPEC’s production cuts into 2020. We think growth in U.S. shale production is likely to exceed worldwide demand
growth for 2019.
- The worldwide demand growth rate continues to be the greatest risk to oil prices. We believe it will slow in the second half of 2019. Nevertheless, demand growth has been better than the market expected despite the increased
tension between U.S. and China over trade issues.
- We expect geopolitical tensions in the Middle East to remain high and continue to be a factor in the oil market, with
no sign of talks in the future.
The opinions expressed are those of the Portfolio’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through
June 30, 2019, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is
not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives,
financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.
Top 10 equity holdings as a percent of net assets as of 06/30/2019: Concho Resources, Inc., 5.41%; Pioneer Natural Resources Co., 4.35%; Continental Resources, Inc., 4.31%; Diamondback Energy, Inc., 4.18%;
Valero&br;Energy Corp., 3.95%; Phillips 66, 3.82%; EOG Resources, Inc., 3.61%; Marathon Petroleum Corp., 3.37%; Parsley Energy, Inc., Class A, 3.36%; WEX, Inc., 3.35%.
Risk factors: The value of the Portfolio’s shares will change, and you could lose money on your investment. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification. Investing in the energy
sector can be riskier than other types of investment activities because of a range of factors, including price fluctuation caused by real and perceived inflationary trends and political developments, and the cost
assumed by energy companies in complying with environmental safety regulations. These and other risks are more fully described in the prospectus.
Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The
guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with
annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals.
Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.