Market Sector Update

• It is rather surreal to reflect on all that has transpired since this time last year. Despite times of dissension, difficulty, and tragedy over the last twelve months, we sense a refreshing feeling of optimism. While the impacts of the pandemic linger on, the momentum behind the vaccination campaign and gradual return of mobility has breathed life into the global economy. The fiscal and monetary stimulus put in place over the last year have been helpful to blunt the acute economic impacts from COVID-19 with an encouraging trend of strengthening economic data. Of note, our economy added 1.6 million jobs in the first quarter which represents approximately 62% of the 22 million jobs lost during the first couple of months of the pandemic. Also encouraging was a 37-year high in manufacturing activity, strengthened significantly with strong orders and low inventory expected to support ongoing production in the coming months. This optimism is evident in asset markets with the S&P 500 Index advancing to a new all-time high.
• The S&P 500 Index, the Portfolio’s equity benchmark, advanced 6.17% with the energy, financials and industrials sectors leading the advance. While every sector saw positive returns, the traditionally defensive consumer staples and utilities sectors were the most significant laggards. It is worth highlighting that the information technology sector, long a market darling, posted a modest 2.0% return for the quarter as the market’s advance broadened to include other sectors.
• The Portfolio’s fixed-income benchmark, the Bloomberg Barclays U.S. Government/Credit Index, declined 4.28% as interest rates rose and credit spreads narrowed slightly. The 10-year Treasury yield rose significantly to end the quarter at 1.74%, up 82 basis points (bps) from the start of the year. The Treasury curve steepened sharply with the spread relationship between the 2-year and the 10-year Treasury bond at 158 bps, up from 79 bps at the start of the year. Investment-grade credit spreads narrowed 6 bps during the quarter to 86 bps, well below the 20-year average of 144 bps and 4 bps tighter than when 2020 began.

Portfolio Strategy

• The Portfolio posted a solid gain during the quarter and outperformed its benchmark index and peer group. Outperformance was driven by an overweight to equities and strong security selection in both the equity and fixedincome sleeves. For the quarter, the Portfolio’s equity weight averaged 69%, fixed income averaged 30%, with a very modest cash balance.
• Within the Portfolio’s equity sleeve, strong stock selection in the consumer discretionary and industrials sectors as well as overweight allocations to the financials and energy sectors were meaningful contributors to relative performance. The quarter saw a broad-based rally, so detractors were few and far between. An underweight allocation and poor stock selection in the materials sector and poor stock selection in the health care sector hampered relative performance.
• Positions in Goldman Sachs, Snap-on Inc, Canadian Natural Resources, Lowe’s Co. and Micron Technology, Inc. posted particularly strong results. Offsetting this strength was poor performance from Autodesk, Inc., Cerner Corp, Electronic Arts and V.F. Corp.
• Within the fixed-income sleeve, our allocation to corporate credit was a meaningful contributor to outperformance. Our underweight of Treasuries and strong security selection in the energy and industrial sectors were notable contributors to relative performance. At the end of the quarter, the fixed-income sleeve had a duration of 7.38 years which is in line with the benchmark. During the quarter with investment-grade spreads continuing their move tighter, we reduced our corporate exposure with the proceeds invested in Treasuries. At quarter end, our allocation to corporate credit was in line with the benchmark and the fixed-income sleeve was slightly overweight Treasuries.

Outlook

• As we look ahead, global economic growth is likely to rebound meaningfully in the near term as economies re-open and stimulus has its intended effect. As the vaccination campaign expands and mobility increases, we expect an acceleration in economic growth. We anticipate the more recent trend of a broadening of the equity market to continue as more cyclical companies see their earnings recover from the pandemic. During the quarter, after a strong run of performance, we began the process of reducing our exposure to investment grade and non-investment grade credit with the proceeds invested in Treasuries which has closed the large underweight versus the benchmark.
• The economic impacts of COVID-19 are likely to be persistent though less punitive. We have seen growing evidence of a sharp rebound in economic activity and expect it to continue in the short term in part due to the lagged effects of fiscal and monetary stimulus put in place over the last several months. As economies recover, we are closely watching inflation rates and inflation expectations, which have been modest and must remain so in order to allow central banks to maintain their accommodative monetary policies.
• While we continue to monitor macroeconomic forces and trends, we maintain an emphasis on finding perceived high quality, growing companies whose securities are trading at a reasonable valuation with visible catalysts to drive relative outperformance over the next twelve months. This approach has served investors well over time, and our confidence in it has not waned.

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 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.

The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-cap U.S. equity market. The index includes 500 of the top companies in leading industries of the U.S. economy. The Bloomberg Barclays U.S. Government/Credit Index measures the performance of U.S. dollar-denominated United States Treasuries, government-related, and investment-grade U.S. corporate securities that have a remaining maturity of greater than or equal to one year. In addition, the securities have $250 million or more of outstanding face value and are fixed-rate and non-convertible securities. It is not possible to invest directly in an index.

Top 10 equity holdings as a percent of net assets as of 03/31/2021: Microsoft Corp. 3.3%; Goldman Sachs Group, Inc. 2.0%; Micron Technology, Inc. 2.0%; Zimmer Holdings, Inc. 2.0%; Lowe's Co., Inc. 2.0%; Constellation Brands, Inc. 1.9%; Autodesk, Inc. 1.7%; Electronic Arts, Inc. 1.7%; JPMorgan Chase & Co. 1.7%; and Anthem, Inc. 1.7%.

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 duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

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. Fixed-income securities are subject to interest rate risk and, as such, the net asset value of the Portfolio may fall as interest rates rise. The lower-rated securities in which the Portfolio may invest may carry greater risk of nonpayment of interest or principal then higher-rated bonds. In addition to the risks typically associated with fixed-income securities, loan participations in which the Portfolio may invest carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loan participations may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. The Portfolio’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform nondividend paying stocks and the market as a whole over any period of time. In addition, there is no guarantee that the companies in which the Portfolio invests will declare dividends in the future or that dividends, if declared, will remain at current levels or increase over time. The amount of any dividend the company may pay may fluctuate significantly. In addition, the value of dividend-paying common stocks can decline when interest rates rise as fixed-income investments become more attractive to investors. This risk may be greater due to the current period of historically low interest rates. The Portfolio typically holds a limited number of stocks (generally 45 to 55). As a result, the appreciation or depreciation of any one security held by the Portfolio will have a greater impact on the Portfolio’s net asset value than it would if the Portfolio invested in a large number of securities. The value of a security believed by the Portfolio’s manager to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease. 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.