Market Sector Update

• Markets rebounded sharply during the quarter as large scale fiscal and monetary policy actions globally helped support markets and the world gradually began to reopen post shutdowns aimed at containing COVID-19. Both equities and riskier parts of fixed-income markets had a banner quarter for returns.
• Valuation dispersions have widened to almost unprecedented levels. This is true in both equity and credit markets. Valuation gaps between growth and value equities are near record levels. In credit markets, high yield has lagged the rebound relative to investment-grade credit and, within high-yield markets, lower quality paper remains at a steep discount.
• Despite the rebound in risky asset prices, safe-haven assets like Treasuries and gold remain well bid. Treasury yields were almost unchanged during the quarter, while gold rose nearly 13%. High levels of economic uncertainty will likely continue to fuel demand for safe assets. The savings rate hit a record high of 32.2% in April.
• A number of economic indicators, such as gross domestic product (GDP), unemployment and manufacturing output, saw eye popping drops as the effects of worldwide shutdowns impacted activity. Stimulus measures such as the Coronavirus Aid, Relief and Economic Security (CARES) Act and fiscal programs across a large swath of countries prevented the downturn from being more pronounced.

Portfolio Strategy

• The Portfolio posted strong positive performance but trailed its global equity benchmark during the quarter. Despite solid performance from each asset class, the Portfolio’s multi-asset approach was the key detriment to relative performance for the period. Despite positive gains from the Portfolio’s fixed-income portfolio, it could not match the performance of equities over the period, up nearly 20%. This type of environment will typically be a headwind to performance for our multi-asset Portfolio when one asset class performs so well. Nevertheless, some of the safer, diversifying assets we own, such as gold, had double-digit return profiles.
• The equity portfolio provided a relative tailwind during the quarter as both stock selection and sector allocation were positive during this historic market rally. While our overall exposure to energy is quite small, our position in Reliance Industries Ltd., a large Indian conglomerate, provided a significant boost to performance. Their energy business is under pressure (albeit not as bad as global peers) but it is a diversified company with retail operations and a telecommunications business that is doing well.
• Stock selection in materials, with exposure to a gold miner, Barrick Gold Corp., and a diversified natural resources business, Glencore International plc, helped as commodities rallied off a sharp drop in March. We also added to Amazon.com, Inc. early in the quarter and trimmed our Wal-Mart Stores, Inc. position, which proved beneficial.
• The portfolio struggled with stock selection in information technology and consumer discretionary, though there were some notably strong performers in those sectors as well. Poor performance in Subaru Corp., an auto original equipment manufacturer, was offset by Aptiv plc, an auto-parts manufacturer. Auto demand has been soft, but Aptiv recovered from March lows. We believe the company is uniquely positioned as it provides high-tech components, a growth area of the industry. Generally, the portfolio has been decreasing exposure to cyclicals and international companies. During the quarter, we added Apple, Inc. as we believe it is a well-positioned, stable brand and a direct beneficiary of the upcoming 5G cycle.
• The fixed-income portfolio rebounded sharply from its rough performance in the first quarter. It returned more than 14% during the period. We were successfully able to minimize many of our mistakes during the first quarter and rotate the portfolio sharply toward investment-grade credit. This was helped considerably by the record amount of investment-grade issuance as companies looked to ensure liquidity. It gave us ample opportunity to participate in the new-issue market at perceived attractive levels. We went from almost no exposure to investment-grade to an approximately 25% allocation in the diversifying sleeve during April and have remained near that level.

Outlook

• The economic environment still holds a large amount of uncertainty. Concerns on a second wave of the COVID-19 pandemic and how human behavior will change remain unanswered. Our investment approach remains steadfastly focused on evaluating potential investments from a quantifiable, fundamental approach. We have sought investments in business models that we believe can perform well and weather the storm in a variety of market environments. Our preferences from last quarter to lean toward gold and investment-grade credit remain unchanged.
• Our equity portfolio witnessed relatively few changes during the quarter. We changed a small handful of positions and trimmed a few winners but, otherwise, it has remained fairly constant. As we mentioned earlier, we have rotated a sizeable chunk of the diversifying portfolio into investment-grade credit and we remain comfortable with that positioning. That was funded by selling a portion of our high-yield and bank loan exposure as well as trimming some Treasury and Treasury Inflation-Protected Securities (TIPS) exposure at the margin.
• Our risk budget has risen since the beginning of March. This is in spite of us making relatively few changes to the equity portfolio and increasing the credit quality of the fixed-income portfolio considerably. This is rather counterintuitive, and a result of cross-asset-class-correlations having risen markedly in our predictive risk model since the March selloff. We construct the portfolio from a bottom-up framework. In the current environment, we are comfortable with a slightly higher risk profile knowing that we have upgraded the overall quality of the portfolio. At around 82%, we remain well within the bounds of our 70-90% target of expected risk relative to the equity benchmark.

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 June 30, 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 06/30/2020: Microsoft Corp., 3.0%; Amazon.com, Inc. 2.7%, Taiwan Semiconductor Manufacturing Co. Ltd., 2.6%; Visa, Inc., Class A, 2.0%; Adobe, Inc. 1.8%; Zimmer Holdings, Inc. 1.6%, ASML Holding N.V., Ordinary Shares 1.6%, Intuit, Inc. 1.5%, ORIX Corp. 1.5% and Ingersoll-Rand, Inc. 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. 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.