Market Sector Update

• Interest rates saw a significant rise during the quarter albeit from near record low levels. Optimism around vaccine rollouts and large government stimulus packages gave hope the economy could materially recover. The U.S. Federal Reserve (Fed) also made it clear that it intends to stay aggressive until inflation runs above target for some time. This stoked some fears that inflation could substantially rise.
• Optimism on the recovery also fueled many global equity markets to record highs with many of the more cyclical parts of the market leading the way. This is a marked change from the past couple of years which has seen growth factors and U.S. equities lead the way.
• Economic data continued to improve across the board. Employment, personal consumption, housing and manufacturing activity all strengthened during the quarter. Housing demand remained particularly strong even in the face of rising interest rates.
• The economic recovery has generally been stronger in the U.S. which has benefited from faster vaccine rollouts and fewer restrictions. Many overseas countries have had to re-impose restrictions as COVID-19 numbers hit a third wave.

Portfolio Strategy

• The Portfolio performed poorly during the quarter, trailing both its all-equity MSCI ACWI benchmark index and its Morningstar peer group. January was a particularly poor month for performance as we were hit by several positioning issues, especially on the equity side of the portfolio. While we recovered some of that performance as the quarter progressed, our equity return still trailed the index by about 20 basis points. While our fixed-income portfolio did outperform the Bloomberg Barclays U.S. Aggregate Bond Index (Barclays AGG) during the quarter, it still posted returns which were solidly negative.
• The energy and financial sectors led global equity returns for the period, but we didn’t fare too well in either. In energy, Canadian Natural Resources Ltd. rose 30% while our largest position, Reliance Industries Ltd. (India), could not quite muster 1%. We continue to remain underexposed to traditional exploration & production (E&P) and oil services, which led sector returns. While we were overweight financials during the quarter, the composition of that exposure did not capitalize on the steady upward shift in the U.S. yield curve. Goldman Sachs Group, Inc.’s return of 24% was offset by slight negative returns in several positions, including AIA Group Ltd., Ping An Insurance Group Co. of China Ltd. (Hong Kong), Housing Development Finance Corp. Ltd. (India), and Intercontinental Exchange in the U.S. While the health care sector posted barely positive performance for the quarter, the Portfolio’s health care performance was decidedly negative. Underperformance was driven by Sarepta Therapeutics, Inc., declining 56% during the quarter on disappointing progress in a clinical trial. Sarepta is a volatile stock and, as such, is a smaller position for us – impactful nonetheless given the magnitude of the move. Other richly valued health care holdings, which we would characterize as longer-duration stocks, also detracted. These included Masimo Corp. and Genmab A.S., the latter of which we added to during the quarter.
• On the positive side, our largest overweight in industrials added value, driven by Kansas City Southern (in the process of being acquired by Canadian Pacific) and Caterpillar, Inc., up 25% and 28%, respectfully. Given the move in Kansas City Southern and the decline in Canadian Pacific, we traded out of the former and into the latter during the quarter, maintaining some exposure to Kansas City Southern via options. Volkswagen AG, purchased early in the quarter, returned 40% during the period as investors realized its attractive positioning in electric vehicles even more quickly than we had anticipated. Alphabet, Inc. drove positive performance, rising 18% during the period, helping to overcome an underweight in the strong performing consumer services sector. Lastly, while our information technology overweight hurt from an allocation standpoint, stock selection more than offset that with strong moves in ASML Holding N.V., Seagate Technology, and Gartner, Inc.
• In addition, the Portfolio benefitted from a handful of single-stock-option positions, either augmenting returns of existing positions in the case of Volkswagen or providing new exposure in the case of Pinterest, Inc.
• The fixed-income portfolio slightly outperformed the Barclays AGG. This was mainly due to our credit heavy approach as well as our mortgage portfolio which is the only part of the portfolio that is short duration. Our overall duration positioning is quite long and was a significant detractor to performance. The long duration is mainly a result of our asset mix and risk diversification needs rather than our stance on interest rates. We mainly run a corporate credit portfolio, and credit is the longest duration asset type in the Barclays AGG. Further contributing to our long duration positioning was the use of longer duration Treasuries, mainly used for risk diversification purposes against our equity portfolio. Gold was also an issue for us during the quarter as rising real rates proved a detriment to the commodity’s performance.

Outlook

• We are still very hesitant to allow macro calls to influence the portfolio in a material way either through interest rate exposure on the fixed-income side or factor exposure on the equity side. Predicting the pace and timing of the recovery, especially as we have had such a deep cut to economic activity followed by large stimulus, is very difficult in our view. Combine that with the uncertainty around vaccine rollouts internationally and continued lockdowns globally, we are relatively neutral in our outlook. As a result, we continue to keep our factor exposure relatively neutral and our duration exposure moderate. The focus continues to remain heavily on security selection both on the equity and fixedincome sides of the portfolio.
• Most of the portfolio changes we have made are driven by our risk budget and overall risk framework. We are increasingly finding it difficult to find attractive areas to place risk in fixed-income markets given relatively low rates, near record low credit spreads, and fundamentals which are yet to fully rebound. As a result, when we look at risk on a security-by-security basis, we find it more attractive to take risk in individual equity securities. As a result, our equity weight has risen slightly and has also taken our risk budget back above its midpoint. To the extent the current backdrop persists, we would expect our equity weight to continue to rise and our risk budget to trend towards the higher end of its range.

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, 2021, 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 03/31/2021: Microsoft Corp., 2.8%; Visa, Inc., Class A, 1.9%; Alphabet, Inc. Class A 1.9%; Intuit, Inc. 1.7%; Ingersoll-Rand, Inc. 1.6%; Amazon.com, Inc. 1.6%; Samsung Electronics Co. Ltd. 1.5%; Union Pacific Corp. 1.5%; Adobe, Inc. 1.4%; and Fiserv, 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.

All information is based on Class I shares. 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. The Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index, representing most U.S. traded investment-grade bonds. It is not possible to invest directly in an index.

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