Market Sector Update

• The quarter was defined by a marked turn in central bank policy. Global central banks abruptly turned dovish, with the president of the European Central Bank (ECB) expressly foretelling additional easing during a policy speech in mid- June. This was followed by dovish rhetoric from the U.S. Federal Reserve (Fed) and several emerging market central banks cut interest rates.
• The changes caused interest rates globally to drop – in some cases to record low levels. The 10-year U.S. Treasury fell toward 2% and yields in Europe fell precipitously, with 10-year points on multiple euro-denominated curves falling into negative territory. The Bank of Japan indicated that its yield curve control, which had been targeting 10-year yields around 0%, no longer had a lower boundary. Roughly $13 trillion of debt globally had negative yields at quarter-end.
• The market started fully pricing-in rate cuts by the Fed and ECB before the end of the summer, with additional rate cuts from the Fed by year end. Credit spreads rallied as the market started to expect that quantitative-easing programs could be restarted and central bank balance sheets expanded.
• Equities generally welcomed the dovish tilt by central banks and added to first-quarter performance, despite softening economic data. Softer data from the Institute for Supply Management and on capital goods as well as uneven employment data added to concerns about the global economy. Chinese equities were a notable underperformer, even as the G20 Summit meeting in late June prompted a temporary truce in ongoing trade tensions between the U.S. and China.
• Gold was a big beneficiary during the quarter of the tilt in central bank policy and rose to its highest level since mid- 2013. Other commodities such as oil, gas and copper did not perform well, as weakening economic data hurt prices. The one exception was iron ore, which benefited from several mine closures which constrained supply.
• Through all of this, the U.S. dollar remained fairly stable as expectations of lower U.S. rates were offset by dovishness of other central banks and weakening economic data.

Portfolio Strategy

• The Portfolio had a strong positive return during the quarter and outperformed its all-equity benchmark. Gold was the best-performing asset class. The equity portfolio outpaced the benchmark, while the fixed income portfolio slightly lagged the benchmark.
• Within the equity portfolio, performance was driven largely by stock selection, especially in the technology, industrials, consumer staples and health care sectors. Qualcomm was one of the Portfolio’s strongest performers, driven by its settlement with Apple, Inc. We felt the likelihood of that result was underappreciated by the market. We trimmed that position after the event. Microsoft Corp., which we also trimmed, continued to contribute as well.
• Within industrials, the Portfolio’s tilt toward aerospace and defense continued to provide a tailwind given renewed rumblings in the Middle East as well as further Chinese activity in the South China Sea. In addition, Schneider Electric SE (France) and Larsen & Toubro (India) added to the sector’s performance.
• On the negative side, Philip Morris International suffered along with its industry after standout first-quarter performance, and Glencore International plc continued to underperform mining peers because of low iron ore exposure and nagging regulatory issues. While the performance of Asia-Pacific holdings exceeded the benchmark, the Portfolio’s position in China Unicom Ltd., a mobile and fixed-line operator, detracted amid concerns about higher capital expenditures, which we think are overblown.
• The fixed income portfolio lagged the benchmark but still provided positive returns for the quarter. Global interest rates rallied, which helped holdings in longer-duration Treasuries and investment-grade fixed income positions. The investment-grade credit positions were helped by the rally in spreads, which also benefited high yield and emerging market fixed income exposure in the Portfolio. The one detractor was in the bank loan holdings, which generally underperformed as the market shifted towards pricing-in Fed rate cuts.
• Gold rose more than 9% and again reinforced the large position in the Portfolio as a risk diversifier against global macro risks and central bank policy that is intended to combat them. We tend not to place too much emphasis on technical factors, but it is noteworthy that gold has broken through persistent resistance to rise above $1,400 per ounce.

Outlook

• While we were expecting further support from global central banks, the timing and magnitude of the dovish tilt was not expected. We thought the shift would be more gradual, especially given the fact that the Fed was hiking interest rates as recently as December and the ECB just started trying to normalize policy.
• Uncertainty remains elsewhere in the global backdrop with tariffs and trade wars representing a wildcard with an unpredictable outcome, despite the apparent truce that was agreed to during the G20 meeting.
• As a result we have been operating near the bottom end of our risk budget of 70-90% of the expected risk of the benchmark and expect to remain there for the foreseeable future. We are exploring how to adjust the nature of some of our risk-diversifying assets. Given very low interest rates, we are increasingly uncomfortable holding a number of assets that we have traditionally held to diversify risk, mainly long-duration Treasuries. We are exploring replacements mainly in the mortgage market, which could provide similar diversification without exposing the Portfolio to as much interest-rate risk.
• Our outlook on the global economy remains subdued and we are skeptical about a recovery in the second half of the year, as many had predicted. As a result, risk in the equity portfolio has been reduced and we have slightly taken down credit risk in the fixed income portfolio.

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, 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 06/30/2019: Microsoft Corp., 3.13%; Airbus SE, 2.22%; Nestle S.A., Registered Shares, 1.90%; Wal-Mart Stores, Inc., 1.83%; Fiserv, Inc., 1.83%; AIA Group Ltd.,&br;1.58%; Adobe, Inc., 1.56%; Visa, Inc., Class A, 1.51%; Pfizer, Inc., 1.36%; Sampo plc, A Shares, 1.33%.

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.