Market Sector Update

• Equity markets stalled and long-term rates continued to fall (as yield curves flattened) during a meandering third quarter, but both began to rise anew in the fourth quarter. The change was based on the effects of a combination of global monetary, fiscal and trade policy along with some improved economic data.
• The U.S. Federal Reserve (Fed) cut the fed funds rate 25 basis points at the end of October and then held pat in December, stating that it would require a “significant and persistent” rise in inflation to consider raising interest rates.
• China also continued to relax monetary policy at the margin as it rolled out new fiscal priorities around infrastructure investments and eased various housing restrictions – two keys to Chinese economic growth.
• Although U.S. President Donald Trump has touted the strength of the current U.S. economy, the federal budget deficit eclipsed $1 trillion over the last 12 months. You don’t see that in every expansion, a dynamic that strengthens the case for gold.
• Global trade uncertainty eased during the quarter, with a “Phase 1” deal between the U.S. and China leading to an abandonment of the former’s new December tariff threat, along with halving certain previously levied tariff rates. In addition, China took initial steps in addressing intellectual property protection. The House of Representatives also passed the U.S.-Mexico-Canada Agreement on trade during the quarter – a replacement to the North American Free Trade Agreement – and it appears to be on its way to Senate approval.
• Global manufacturing data appeared to be forming a near-term bottom, especially in Europe and emerging markets, with important data points around new orders and inventories pointing to some recovery, albeit muted.

Portfolio Strategy

• The Portfolio had a positive return during the quarter but trailed the positive return of its global equity benchmark.
• The equity portion of the Portfolio performed roughly in-line with the benchmark. The fixed income portion also performed relatively well, given the steepening in global yield curves, and gold followed up a strong third quarter with a more subdued gain. Given the roughly 66% weighting in equities during the period, the overall performance lag versus the benchmark is consistent with what we would expect during quarters in which equities perform particularly strongly versus other asset classes.
• The relative strength in equities came primarily from positions in information technology and financials. Consumer discretionary positions hurt performance, with Subaru Corp. falling 12% in Japan and Dollar Tree, Inc. – a relatively new position – falling 17% in the U.S. The holding that was the second-largest equity weight, Taiwan Semiconductor Manufacturing Co. Ltd., rose 25% during the quarter with ASML Holding N.V. (Netherlands) and Samsung Electronics Co. Ltd. (South Korea) also boosting performance. The performance in financials holdings was driven by ICICI Bank Ltd. (India), BNP Paribas S.A. (France), UniCredit S.p.A. (Italy) and Citigroup, Inc. (U.S.). While holdings in the health care sector did not have much overall effect, one biotech position that had halved in the third quarter rebounded just over 70% in the fourth. Given the volatile nature of this stock, our position size is relatively small; however, we believe there is more potential opportunity ahead.
• As within equities, we have been trimming fixed income positions as spread targets are reached. This has mainly occurred in some of the investment-grade credit positions as well as in higher rated segments of the high yield market. While some of the proceeds were used to slightly increase the equity weight in the Portfolio, within fixed income we have increased exposure to select lower-rated names in high yield. We also continued to add exposure in the mortgage market. Positions were initiated in several non-qualifying mortgage securities with relatively short duration and what we believe are attractive yield profiles.

Outlook

• We entered 2020 with an equity weight of around 66%, with more than 25% in fixed income, almost 6% in gold and expected portfolio volatility of 74% of the benchmark’s. Over the last few months, we continued to trim positions as they approached our targets, redeploying that capital in what we believe are attractive areas of global equity and fixed income.
• For the first time in a long time, the Portfolio’s equity exposure is primarily outside the U.S., where strong relative performance has, in many cases, led to less appealing relative value. We have found opportunities in autos in Japan, oil exploration & production in Canada, and semiconductors and financials in Asia, among others. In fixed income, we have decreased the previously outsized exposure to European bank subordinated debt and are primarily looking to redeploy capital into bifurcated parts of the high yield markets, where the relative spreads between BB-rated credit and lower-rated segments of the market are at historically wide levels.
• We remain comfortable with the gold position despite strong performance in 2019. Many countries and their respective central banks are beginning to question the ability of monetary policy alone to drive economic growth, given slower population growth, rising dependency ratios, high and rising corporate debt, and a decline in China’s appetite for basic materials.
• The call for fiscal stimulus is strong and growing globally, buttressed by the growing acceptance of “Modern Monetary Theory,” which generally rejects conventional beliefs about government spending, money, taxes and budget deficits. We think it may just work…until it doesn’t. To the extent that deficits do matter, we think the gold market will sniff that out even as real interest rates begin to rise to send the warning – and what would central banks do then?

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 Dec. 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 12/31/2019: Microsoft Corp., 2.99%; Taiwan Semiconductor Manufacturing Co. Ltd., 2.98%; Fiserv, Inc., 2.45%; Wal-Mart Stores, Inc., 2.08%; Airbus SE, 1.73%; Visa, Inc., Class A, 1.72%; ORIX Corp., 1.70%; Nestle S.A., Registered Shares, 1.50%; Adobe, Inc., 1.45%; Ping An Insurance (Group) Co. of China Ltd., H&br;Shares, 1.38%.

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 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 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.