Market Sector Update

• The quarter saw a sharp increase in optimism on a trade resolution and signs of a bottoming of global purchasing managers (factory) indices, which had been signaling a possible recession.
• The manufacturing part of the world’s economy has dramatically slowed but this has been more than offset by a solid services economy. Many segments within the industrial economies of the U.S. and Europe are now in a technical recession. The Portfolio’s benchmark index was up strongly during the quarter and U.S. equity markets hit all-time highs. Much of the market’s return this year has been via multiple expansion rather than faster earnings growth. There is a strong belief that global growth, which has recently slowed, has now bottomed.
• The best performing sectors were health care, industrials, materials and information technology. In a reversal from the third quarter, utilities, consumer staples and communication services were the worst performing sectors during the quarter.

Portfolio Strategy

• The Portfolio posted positive performance and performed in line with its benchmark this quarter. Stock selection benefitted relative performance, while sector and country allocation hurt relative performance during the period. Currency effects benefitted performance for the period.
• From a sector allocation perspective, the Portfolio’s overweight position in consumer staples was a drag to relative performance, while the Portfolio’s overweight position in information technology helped performance.
• Stock selection was most positive in information technology, financials and materials, while selection in health care, industrials and consumer staples were a drag on relative performance. Geographically, stock selection was positive in Asia-Pacific ex Japan and in the U.S., while negative in Europe.
• We are currently overweight information technology, consumer staples, health care and energy, while underweight financials, consumer discretionary and communication services. During the quarter, we lowered our overweight in consumer staples as we believe valuations relative to fundamentals were no longer as favorable. We added to health care as we believe several stocks were mispriced/undervalued due to an overreaction of negative sentiment surrounding health care/drug price reform. While U.S drug pricing is facing downward pressure, reform will depend on the political outcome post the November Presidential election.
• Our investment approach remains steadfastly focused on investing in what we believe are quality businesses with favorable near and intermediate fundamentals, generally rising dividends and attractive valuations. This approach is consistent across sectors and geographies. The core of our approach is based on stock selection as the key driver of portfolio inclusion and construction. As such, we do not significantly adjust portfolio positioning based on our shortterm economic outlook or other factors that could impact a company’s earnings outlook over the short run. However, a core part of our focus is on finding quality businesses that we believe are mispriced due to these shorter-term market dislocations or other factors that the market has underappreciated.

Outlook

• Last quarter, our view was that global growth was clearly slowing due to the direct impact and broader uncertainty created by U.S.-China trade uncertainty. Our belief was the pressure this was creating would drive the U.S. and China to reach a phase one agreement, likely limited in scope that would lift market uncertainty, help drive market stabilization and potentially reaccelerate economic growth. It looks as though this will likely happen as a phase one trade deal is scheduled to be signed early in 2020. Accompany a trade deal with stimulus from governments and central banks, we believe the global economy should regain some confidence and gather strength.
• We will continue to focus new Portfolio positions to those securities we believe are both attractively valued and have company specific drivers that allow them to perform well despite broader slow to moderate global growth environment.
• Trade disputes with China will continue, and in our view, will result in more uncertainty for corporations impacted by global trade. This has the potential to further earnings volatility in impacted sectors. Global employment growth has slowed, but consumer spending dynamics have been resilient. We believe consumer balance sheets and savings levels currently offer a cushion to consumption and therefore to overall earnings and economic growth. Under this set of events, the overall market appears reasonably valued, though different industries and corporations have different implied fundamentals that may offer opportunities for those with free cash flow and solid dividends.

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 Dec. 31, 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.

Risk factors: The value of the Portfolio’s shares will change, and you could lose money on your investment. 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. 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. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Dividend-paying investments may not experience the same price appreciation as non-dividend paying instruments. Dividend-paying companies may choose to not pay a dividend or the dividend may be less than expected.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.