Market Sector Update

• The global economic picture continued to deteriorate during the quarter, with Europe slowing further and some concerning signs emerging in the U.S. As a more export-oriented economy, Europe has been particularly hard hit by the impact of global trade wars and flagging demand from emerging markets.
• In the U.S., Institute for Supply Management manufacturing data ticked down each month of the quarter, dropping below 50 in August and sliding further in September. Non-manufacturing data have also weakened – although it remains above 50 in expansion territory. Hiring has remained relatively strong while capital expenditures remain soft. It is difficult to separate the impacts of normal cyclical factors, such as inventories and financial leverage, from “less normal” factors, although it is clear that trade policy and tariffs, Brexit, the Hong Kong demonstrations and the unfolding U.S. presidential impeachment saga are contributing to the muted economic backdrop.
• The Federal Reserve cut rates twice during the quarter, announced a premature end to its balance sheet runoff and was required to conduct unplanned liquidity operations as repo stresses mounted. Similarly, the European Central Bank cut rates further into negative territory and announced more unconventional monetary policies including additional quantitative easing, deposit rate tiering and looser terms on liquidity facilities as global central banks struggled to achieve inflation mandates. A number of yield curves, particularly in Europe, saw rates hit all-time lows in mid-August in anticipation of additional central bank easing.
• Global equities finished the quarter roughly flat, as measured by the MSCI ACWI Index, with considerable movement intra-quarter. Markets took their cues from a variety of drivers, ranging from trade-related tweets to economic data to Argentina polling. In addition, large intra-sector movements took hold in the second half of the quarter, with quality growth valuations coming under pressure and value and cyclical characteristics prevailing.
• The drop in interest rates globally saw most major bond indexes provide positive returns, with rates generally outperforming credit (spreads widened). The U.S. dollar stayed strong, with the U.S. Dollar Index (DXY) hitting a 2-year high and China allowing the renminbi to weaken.

Portfolio Strategy

• The Portfolio posted a small negative return during the quarter and slightly underperformed its all-equity benchmark, which was roughly flat over the same period. The equity portfolio slightly lagged the benchmark, largely due to stockspecific factors. Our fixed income portfolio also underperformed, posting a slightly negative return for the period. Gold was the standout performer on both an absolute and relative basis.
• Detractors from equity performance included holdings in health care, where a small biotech position declined more than 50%; financials and communication services. Energy stocks were weak in the quarter, with midstream and downstream companies outperforming those in exploration and production (E&P). While the Fund’s E&P exposure has declined over the last year or so, it still includes two companies, both based in North America. Geographically, relative performance was weakest in the U.S. and, to a lesser extent, Japan. Holdings in Europe and Asia-Pacific were positive contributors with positions in South Korea and Taiwan leading the way.
• The fixed income portfolio was hit hard by a position in U.S. dollar-denominated bonds in Argentina. An unexpected result from national primary elections indicated Argentina may return to Peronist rule following national elections in October. This caused bonds to sell-off sharply, invoking memories of past Argentine defaults. At this point, we have maintained the Portfolio’s position in the bonds. While the results were a clear negative to the Argentine credit story, we now believe the debt trades below likely recovery value if Argentina is forced to restructure. The bonds are held as a higher-risk diversifying asset to the portfolio as the Argentine credit story is relatively uncorrelated with other assets.
• Outside of a couple additional weak credits, other areas of fixed income did their jobs during the quarter: Treasuries and mortgages had returns in the mid- to high-single-digits while various positions in European bank credit performed well despite general weakness in their equities. For instance, an Italian bank equity position we hold lost just over 4% while two credit positions we hold in the same issuer rose 8% and 9% during the quarter.
• Gold again served its purpose, posting a positive return as central banks resumed aggressive monetary policy actions. The Portfolio's gold position rose by a mid single digit during the quarter and was the top performing asset class in the Portfolio for the second straight quarter. It helped mitigate slightly weaker returns in the quarter from other asset classes and provided excess return against the benchmark.

Outlook

• Similar to last quarter, our outlook on the global economy remains subdued. If anything, we are incrementally more concerned as data continues to weaken and the existential factors remain unresolved. We think the environment is not conducive in particular to large-scale capital expenditures and trade, which has us particularly cautious on large-scale global exporters.
• The environment also means we are unchanged in where we sit within our risk budget. The Portfolio remains at the bottom end of its 70-90% band of expected volatility relative to the benchmark.
• Central bank action during the quarter further reinforced our reasons to own gold as a diversifying asset. It now represents almost 6% of the portfolio and is the largest individual position. That is likely to remain the case since we think it also is likely that central banks will continue to pursue unconventional monetary policies in attempting to achieve their desired policy outcomes.

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 Sept. 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.

The U.S. Dollar Index ( DXY) is an index of the value of the U.S. dollar relative to a basket of foreign currencies.

The MSCI ACWI Index captures large- and mid-capitalization equities in 23 developed market countries and 24 emerging markets countries and covers approximately 85% of global equities. 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.