Market Sector Update
- The first quarter was in many ways the inverse of the quarter prior and likely caught a large chunk of the professional
investment world off-guard. The seemingly synchronized global stall of fourth-quarter 2018 gave way to an abruptly
dovish U.S. Federal Reserve (Fed) and increasingly dovish European Central Bank (ECB), an increase in stimulus in
China, new promises via tweets by President Donald Trump of trade progress with China, and a huge comeback in the
price of crude oil with West Texas Intermediate crude bouncing 30%.
- Last quarter’s losers were largely this quarter’s winners. The new twist, if there is one, is that long-term rates in the
developed world – having risen through most of 2018 – fell through most of the quarter, and caused yield curves to
flatten further and, in some cases, invert.
- While many are confused about the overarching message from the markets, it appears bonds and equities are
indicating that growth is likely to rebound from the depths of the fourth quarter and inflation will be well-contained.
Some would call that a “Goldilocks” environment.
- Some of the more cyclical areas of the equity market thus led the rally (information technology, energy and
industrials), while rate-sensitive areas responded to bond market signals. Real estate was near the top and financials
were near the bottom. Safe-haven assets such as utilities and consumer staples gave back some of their relative
performance from the prior quarter.
- It was the best of both worlds for high yield, with duration assets backed by falling long-term rates and credit spreads
tightening with the rally in risk assets.
- While U.S. equities generally outperformed the rest of the world in U.S. dollar terms, the renewed stimulus in China
reignited the local market, with the SSE Composite Index (Shanghai) rallying 27% in dollar terms, leading the overall
emerging markets index by 10%.
- India equities kept up during the quarter and rose 8% despite massive outperformance in the fourth quarter that was
driven by falling oil prices. Oil is a key component of India’s current account deficit. We view this performance in the
face of rising oil prices in the first quarter as an overall positive signal as India looks to important elections in the
- The Portfolio had a positive return in the quarter but underperformed its all-equity benchmark index. The Portfolio
entered the fourth quarter just below the midpoint of its defined risk budget, at about 80% of expected benchmark
volatility, and maintained that exposure through the first quarter.
- Key detractors to performance were in the technology sector, where the Portfolio lacked enough exposure to the
bounce in semiconductors and hardware, and consumer discretionary and health care, where stock selection hurt as
- Contributors to performance were led by industrials, where Airbus rallied 39% during the quarter, helped in part by
Boeing’s problems with its 737 Max aircraft.
- In fixed income, both rates and credit performed well but performance significantly lagged equities. We largely
started upgrading the quality of the fixed income portfolio toward the end of the quarter as credit spreads tightened
- Standalone fixed income performance was relatively strong. Most of the Fund’s rate exposure outside the Treasury
Inflation Protected Securities (TIPS) market is longer duration. The credit portfolio performed well as spreads rallied
and the bank loan positions, which faced a headwind from falling rate expectations, held up well because of good
- Gold helped cushion the equity stumble in the fourth quarter but cooled this quarter and rose only 0.7%.
- We lamented that we had not reduced risk a bit further after the fourth quarter, but feel fortunate to have stuck with
our positioning into the first quarter.
- We believe some factors that began to go right at the start of the year could continue on a positive trajectory. These
include a rebound in China’s growth, driven by stimulative policies, leading to renewed growth for its trading partners;c
ontinued support from the Fed and the ECB, as expectations for a further tightening of policy have diminished.;
improving U.S. economic data, with long rates falling (an important tailwind for housing); and likely improvement in
Europe, though there are wildcards such as Brexit and global demand for European autos.
- We expect to stay in the middle of our risk budget, with equities at just under 70% of assets under management. We
will remain disciplined with price targets, taking advantage of what we believe are mispricings in equities or credit. We
will continue to make room for what we consider our best ideas, sizing them appropriately and offsetting unwanted
risks in an effort to produce equity-like returns with less risk.
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
March 31, 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 03/31/2019: Microsoft Corp., 3.18%; Airbus SE, 2.09%; Pfizer, Inc., 1.98%; Nestle S.A., 1.76%; Visa Inc., Class A, 1.74%; Amazon.com, Inc., 1.74%; Wal-Mart Stores,
Inc., 1.63%; Royal Dutch Shell PLC, Class A, 1.54%; QUALCOMM, Inc., 1.53%; AIA Group Ltd., 1.47%.
The SSE Composite Index reflects all stocks traded at the Shanghai Stock Exchange. It is not possible to invest directly in an index.
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. The Portfolio may allocate its assets among different asset classes of varying correlation around the globe. The Portfolio's Equity Sleeve typically holds a limited
number of stocks (generally 50 to 70). As a result, the appreciation or depreciation of any one security held by the Fund may have a greater impact on the Portfolio’s NAV than it would if it invested in a larger number
of securities. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign
regulations. These risks are magnified in emerging markets. The Portfolio’s Diversifying Sleeve includes fixed-income securities, that are subject to interest-rate risk and, as such, the net asset value of the Portfolio
may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Loans (including loan assignments, loan participations and
other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and
sometimes trade infrequently on the secondary market. The Portfolio may seek to hedge market risk via the use of derivative instruments. Such investments involve additional risks. Investing in commodities is generally
considered speculative because of the significant potential for investment loss due to cyclical economic conditions, sudden political events, and adverse international monetary policies. Markets for commodities are
likely to be volatile and the Portfolio may pay more to store and accurately value its commodity holdings than it does with the Portfolio’s other holdings. 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.