Market Sector Update

• The quarter saw many equity markets push to new all-time highs. The MSCI ACWI Index returned over 14% as risk assets posted another banner quarter. Meanwhile interest rates in most developed markets started to rise. Despite the increase, credit markets still performed well as credit spreads push back towards record tight levels.
• Most economic data continued to improve despite a second wave of COVID-19 cases. Housing continued to see strong demand, personal consumption was strong and manufacturing activity strengthened. Employment continued to rebound in both October and November before the virus surge led to softer labor conditions in December.
• The U.S. Federal Reserve (Fed) strengthened its forward guidance and made it clear they will continue quantitative easing even if we start to see the economy recover and inflation accelerate. Rates are likely to stay at or near zero for years to come.
• After much contention, Biden emerged as the winner of the U.S. Presidential election in November. Congress passed a second stimulus bill, which included another round of stimulus checks and extended unemployment benefits.

Portfolio Strategy

• The Portfolio posted strong returns for the quarter, but trailed its all-equity MSCI ACWI benchmark, capturing about 80% of the rise. As is usually the case in periods of strong equity performance, our mixed-asset approach lagged the benchmark. Each individual part of the portfolio generally had solid performance for its particular asset class. Our equity portfolio outperformed the benchmark by more than 50 basis points. The fixed-income portfolio returned over 6.5%, handily outpacing both broad fixed income and high-yield indices. The only pedestrian performer was gold, returning just under 1% for the period.
• Strong relative performance within equities was led by the information technology and industrials sectors (our two largest overweights), which also benefitted from strong stock selection. Financials and health care followed close behind, with performance driven by strong stock selection. Winners in the quarter included Aptiv plc, which we believe is well positioned to benefit from electric vehicle adoption and increasing technology load within auto designs, as well as Airbus SE, bouncing from its depressed levels driven by the pandemic. Samsung Electronics had a great quarter along with other memory-related semiconductor companies. Indian-based Housing Development Finance Corp. Ltd. rose sharply, eclipsing its prior peak from early 2020. In addition, the Portfolio benefitted from company-specific option positions where we were able to take advantage of what we perceived as subtle distortions in implied volatility, largely driven by outsized demand for calls to participate in a continued market rally.
• On the other hand, our energy exposure, concentrated in Reliance Industries Ltd. in India, detracted as we were unable to keep up with the rally in traditional exploration and production as well as oil service. Reliance fell during the quarter after strong year-to-date performance. Communication services, our largest underweight, also took a toll as Deutsche Telekom AG underperformed and we did not own several highly-valued stocks that did well, like Disney which rose 46% on strong customer adds in its direct-to-consumer business. Consumer discretionary (we don’t own Tesla) also detracted, while our consumer staples stocks were generally underwhelming.
• Fixed-income returns during the quarter were strong. We spent most of the quarter rotating positions within the investment-grade corporate market – primarily selling bonds we took down in the new issue market (appreciating heavily in April/May) and rotating into new issue bonds mainly from foreign corporations coming to access the U.S. dollar denominated investment-grade market. Most of our strong returns during the quarter were due to our large credit exposures. We also entered into a total-return swap on local Chinese government bonds during the quarter which provided solid returns.

Outlook

• Much of the controversy in the market centers around the outlook for inflation. With a newly confirmed government dominated by the democratic party, another round of stimulus, vaccines hopefully becoming widely available and a Fed intent on providing stimulus, many in the market are starting to anticipate a return to inflation. We think that is a macro call which is very difficult to predict and get correct. We prefer to make our focus on individual security selection and not pick stocks based on a thesis of higher rates or rotation towards value. In fixed income, we prefer to focus on credit selection and markets where positive real returns are available rather than make large duration calls.
• As part of this focus on security selections, we continue to keep our factor exposure relatively neutral, making sure we do not have large exposures to factors where valuation dispersions are still at very wide levels such as value, growth and momentum. Similarly, the fixed-income portfolio is heavy on credit-specific bets.
• We saw cross-asset class correlations normalize significantly during the back half of the year, which has dropped our risk budget from the high end of it 70-90% range back down to around 77%. With more flexibility in the risk budget, we are looking to take advantage of opportunities especially in equity markets which could slightly raise our risk profile going forward. In fixed-income markets, we currently see few opportunities to effectively take risk while being rewarded with the proper medium of returns.

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 December 31, 2020, 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 12/31/2020: Amazon.com, Inc. 2.8%; Microsoft Corp., 2.6%; Taiwan Semiconductor Manufacturing Co. Ltd., 2.5%; Visa, Inc., Class A, 2.0%; Intuit, Inc. 1.7%; Apple, Inc. 1.5%; Samsung Electronics Co. Ltd. 1.5%; Adobe, Inc. 1.5%; Ingersoll-Rand, Inc. 1.5%; and Aptiv plc 1.4%.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

The MSCI ACWI Index is designed to measure the equity market performance of developed and emerging markets. The Index consists of 46 country indexes comprising 23 developed and 23 emerging market country indexes. 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 Portfolio 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 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.