Market Sector Update

• It has been an exhausting year…and 2020 is merely half over! Markets have continued to exhibit historic levels of volatility with equity markets posting a dramatic rebound in the second quarter of 2020 as global central banks and government instituted aggressive monetary and fiscal policies to soften the negative economic impacts of COVID-19.
• We have all become numb to the adjectives at this point so we will simply update several statistics. The assets on the Federal Reserve’s (Fed) balance sheet currently exceed $7 trillion, up from $4 trillion to start the year with a far more diverse portfolio than is typical. The U.S. budget deficit, which was forecasted to be approximately $800 billion in January, is now estimated to be $3.8 trillion for the current fiscal year ending in September. There is widespread speculation that incremental stimulus will be announced in the coming weeks, which could inflate this number even further.
• In April, U.S. employment soared as a more than 20 million people filed unemployment claims, which was followed by a record increase of nearly 8 million jobs added in May and June. Even after this rebound, the unemployment rate currently sits at 11.1%, an uncomfortably high level. Unfortunately, the number of cases and deaths resulting from the COVID-19 virus continued to climb, which is first and foremost a tragic human loss and secondarily, a continuing threat to the global economy.
• The S&P 500 Index, the Portfolio’s equity benchmark, rallied 20.6% for the period. Every sector posted positive returns, with the consumer discretionary, information technology, energy, and materials sectors leading the advance.
• The Fund’s fixed income benchmark, the Bloomberg Barclays U.S. Government/Credit Index rose 3.7% as credit spreads narrowed. The 10-year Treasury yield was essentially unchanged at 0.65%, down 2 basis points (bps) from the start of the quarter. The Treasury curve steepened modestly with the spread relationship between the 2-year and the 10-year Treasury bond at 49 bps, up from 40 bps at the start of the quarter. Investment grade credit spreads narrowed significantly during the quarter to 150 bps, roughly in line with the 20-year average.

Portfolio Strategy

• The Portfolio delivered a positive return for the quarter, outperforming its benchmark and peer group.
• The outperformance was driven by security selection in the equity and fixed income sleeves, with each sleeve outperforming its respective benchmark. For the quarter, the equity weight of the Portfolio averaged 60.7%, with fixed income averaging 38.6% and the balance in cash.
• Within the Portfolio’s equity sleeve, an overweight of the consumer discretionary sector and strong stock selection in the information technology, industrials, consumer discretionary and energy sectors were meaningful contributors. The quarter saw a broad-based rally so detractors were few and far between, but stock selection in the health care sector hampered relative performance during the quarter.
• Within the fixed income sleeve, our allocation to Treasury inflation protected securities produced a positive return for the quarter, but underperformed nominal Treasuries which negatively impacted relative performance. In addition, poor security selection in the energy sector was a significant detractor. At the end of the quarter, the fixed income sleeve had duration around seven years, which is approximately in line with the benchmark.

Outlook

• Looking ahead, global economic growth is likely to rebound meaningfully in the near term as economies re-open and stimulus has its intended effect. However, we continue to expect heightened levels of uncertainty as governments, businesses and individuals adjust to the necessary realities of combating a global pandemic.
• Our thoughts and prayers go out to the growing number of people tragically impacted by this virus, as well as to those working tirelessly to contain it. As stewards of your capital, it is our responsibility to perform the seemingly coldhearted, but necessary analysis of the financial impacts of this pandemic on markets and individual securities.
• To that end, early in the quarter we deployed the majority of the Portfolio’s cash balance into equities and throughout the quarter, we continued to reduce our substantial position in Treasuries to fund purchases of equities, investmentgrade and high-yield fixed income instruments.
• The economic impacts of COVID-19 are likely to be persistent, however, the experience of other countries provides some hope, and increasingly evidence, that a sharp rebound in economic activity can commence once the spread of the virus slows. We have begun to see this rebound 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. We are concerned by the recent acceleration in COVID-19 cases, hospitalizations and deaths, which will slow the process of economic recovery. We are also carefully watching employment and credit statistics to discern the outlook for economic growth.
• While we continue to monitor macroeconomic forces and trends, we maintain an emphasis on finding high quality, growing companies whose securities are trading at a reasonable valuation with visible catalysts to drive relative outperformance over the next 12 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 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.

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.

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.

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 managers to be undervalued may never reach what the manager believes to be its full value, or such security’s value may decrease.

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.