Market Sector Update

• January began with a strong but eerily complacent move higher in global equities, only to be stalled by strong U.S. payroll data and evidence of a renewed increase in wage growth.
• The asset market correction ripped through global equities and fixed income, with both beginning to discount the eventuality of higher inflation and ultimately tighter monetary policy in the U.S., Europe and Japan.
• The U.S. posture on trade and tariffs narrowed during the quarter to point more specifically at China and grant somewhat of a reprieve to U.S. allies and the North American Free Trade Agreement (NAFTA). The markets were forced to focus on rhetoric in order to handicap the odds of China agreeing, at least in part, to a more open stance toward unencumbered direct investment and low-tariff imports.
• U.S. equities outperformed most developed and emerging markets in local currency terms, but by a much narrower margin when incorporating U.S. dollar weakness versus most currencies. The relative tailwind to estimate revisions on U.S. stocks is likely to slow as analysts have, for the most part, incorporated lower tax rates into their forecasts through the quarter.
• U.S. interest rates rose as new payroll and wage data gave rise to renewed inflation fears. While credit spreads widened somewhat, the move was orderly and we do not think it signals an end to the current economic cycle. Bond markets outside the U.S. were mixed, although positive dollar returns were generally assisted by currency moves more than bond prices.

Portfolio Strategy

• The Portfolio had a positive return for the quarter and outperformed the negative return of its all-equity index.
• Within equity holdings in the Portfolio, the technology sector was the strongest relative contributor to performance. Holdings in Adobe Systems, Inc., Microsoft Corp., ASML Holding N.V. and Intuit, Inc., were key drivers. Selected holdings in industrials also contributed, including Airbus SE and Lockheed Martin Corp. An investment in Parker- Hannifin Corp., however, was a drag on performance. Parker-Hannifin Corp. no longer was a holding at quarter end.
• The Portfolio's investment in Chinese banks helped offset weakness in developed market financials.
• We added holdings in Walmart during the quarter. The timing detracted slightly from performance, but we maintained the position based on our view that company is beginning to position itself well for online competition with Amazon.com, Inc., and capitalizing on its extensive infrastructure and vendor relationships.
• Fixed-income holdings contributed to performance despite the rise during the quarter of U.S. 10-year Treasury yields as well as widening credit spreads. Foreign currency appreciation was a contributor, as was the shorter-duration posture thanks in part to variable rate structures.
• The Portfolio is positioned in a manner that we believe can insulate it from the “exit process” of zero-rate central bank policy by focusing on variable rate notes, high-coupons with short call dates and low dollar-priced high yield instruments where we believe credit is improving and pay down of debt is likely to occur.
• Gold rose slightly during the quarter and we think it may be transitioning from a fiat currency hedge to its traditional role as an inflation beneficiary – rising in value despite higher interest rates.
• We continued to add to fixed income exposure during the quarter. We are wary of the eventual end to zero (and negative) interest rate policies globally, as well as what appears to be a move toward normalization of inflation. Equity exposure in the Portfolio has declined slightly as we have reduced exposure to U.S. financials, added exposure to financials in Europe and Japan, and trimmed exposure to U.S. technology and industrials.

Outlook

• To the extent the U.S. economy continues to expand, assisted by fiscal stimulus, we think wage growth will remain healthy. In our view, that in turn will argue for a continuing normalization of U.S. Federal Reserve policy; we note that real short-term interest rates still were negative as the quarter ended.
• The market has begun to question the eventual normalization of European and even Japanese central bank policy – a stance which makes sense to us. Our views led us to increase our weighting to certain European and Japanese financials.
• While we do not expect a true trade war, we consider any escalation in the issue to be a key, identifiable risk factor, as is the renewed sanctions against Russia and its potential response. North Korea appears to be moving toward a more conciliatory stance, but that could change with a tweet and so we continue to closely monitor that situation.
• The policy stance of China, the world’s second-largest economy, remains of paramount importance, especially with respect to the growth of credit, infrastructure spending and thus the knock-on effects on the global commodity complex apart from oil.
• While we have altered our energy exposure somewhat and shifted slightly from U.S. exploration & production companies and oil services companies to include global integrated oil companies, we remain generally constructive on energy, given the stance of Saudi Arabia, Russia and the Organization of Petroleum Exporting Countries overall.

The opinions expressed are those of the Fund’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, 2018, 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 03/31/2018: Microsoft Corp., 3.87; AIA Group Ltd., 2.50%; JPMorgan Chase & Co., 2.34%; Amazon.com, Inc., 2.25%; Adobe Systems, Inc., 2.19%; Airbus SE, 2.07%; Pfizer, Inc., 1.99%; Lockheed Martin Corp., 1.92%; Alphabet, Inc., Class A, 1.92%; Intuit, Inc., 1.80%.

W. Jeffery Surles, CFA, became a co-portfolio manager on the Portfolio on Feb. 5, 2018.

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 from 0 to 100% of its assets between stocks, bonds and short-term instruments of issuers around the globe, as well as investments in precious metals and investments with exposure to various foreign 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. Fixed-income securities 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. The Portfolio may focus its investments in certain regions or industries, thereby increasing its potential vulnerability to market volatility. The Portfolio may seek to hedge market risk on various securities, increase exposure to various markets, manage exposure to various foreign currencies, precious metals and various markets, and seek to hedge certain event risks on positions held by the Portfolio via the use of derivative instruments. Such investments involve additional risks, as the fluctuations in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. 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 Portfolio's 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.