Market Sector Update

• Equity market performance was largely positive during the quarter. Hopes for an improved global trade environment, along with increased confidence around favorable monetary policy, offset deteriorating hard economic data. Hard data has softened progressively over the course of the year as the impact of tariffs and other aspects of the U.S.-China trade war have taken a toll on growth. Additionally, the uncertainty around the short- and long-term implications of a new long-term global trade paradigm appear to be causing marginal weakening in hiring and spending.
• Markets have been propped up to some degree by the prospects for an aggressive monetary response to weakening conditions, with both the U.S. Federal Reserve (Fed) and European Central Bank making sharp shifts toward much more accommodative policies in response to the aforementioned slowdown. Against this tailwind, the outlook on trade resolution was less favorable for most of the quarter. Markets gave back roughly half of their year-to-date gains during the month of May as the outlook for some sort of trade agreement worsened. However, the quarter finished on a strong note as positive news with respect to a freeze on additional tariffs and progress on other areas emerged from the G20 Summit in Japan.
• From a sector perspective, performance was mixed regarding pro-cyclical and stable sectors. Within the Portfolio’s benchmark, financial stocks were the strongest performers, with insurance companies being the most positive driver of performance in the sector. Industrials also outperformed on prospects for improved activity. Utilities were a strong performer, as was communication services, which was driven by the media components of this sector rather than the telecom constituents. Health care and real estate underperformed, as did energy on weak crude price dynamics..

Portfolio Strategy

• The Portfolio posted positive performance and performed in line with its benchmark for the quarter. Stock selection during the period was favorable, while sector allocation was a drag on relative performance. Geographic allocation was a positive relative contributor to performance, while currency positioning (a by-product of stock selection and sector/country decisions) was a drag on relative performance.
• Regarding sector allocation, the Portfolio’s underweight position in real estate was the largest positive relative contributor to performance. The Portfolio's overweight allocation to energy and health care, as well as being underweight financial services were negative relative return drivers.
• Stock selection in industrials, health care, consumer staples, materials and energy all contributed favorably to relative performance. Stock selection in communication services and information technology were both relative return headwinds. Lockheed Martin Corp., Wal-Mart Stores, Inc., Citigroup, Inc., LVMH Moet Hennessy – Louis Vuitton and Nestle S.A. were the most significant individual contributors to relative performance. Intel Corp., British American Tobacco plc, Philip Morris International, Inc., Taiwan Semiconductor Manufacturing Co. Ltd. and CNOOC Ltd. were the largest individual negatives with respect to relative performance.
• From a geographic allocation perspective, the Portfolio’s underweight position in Japan, along with favorable stock selection, more than offset the impact of being underweight the yen. The Portfolio’s overweight position in Europe, along with positive stock selection in that region helped relative performance. Stock selection in North America was a solid positive contributor to results, while stock selection in Asia ex Japan was a drag to relative performance.
• Our investment approach remains steadfastly focused on investing in perceived high-quality businesses with favorable near and intermediate fundamentals, generally rising dividends and attractive valuations. This approach is consistent across sectors and regions. The core of our approach is based on stock selection as the key driver of Portfolio inclusion and construction.
• Global growth has moderated due to trade concerns, as well as normalization of certain aspects of fiscal and monetary policy. One of the most noteworthy aspects of market performance over the past several quarters has been the violent risk-on/risk-off episodes that have occurred. We have attempted to take advantage of these episodes by adding to or establishing positions in companies that fit our key investment criteria when we believe those shares are reflecting excessive company-specific pessimism or overblown macro fears. We are particularly focused on businesses that we believe can deliver reasonable results in a slowing environment. From a broader portfolio construction point of view, we believe it as a bit of a fool’s errand to shift portfolio positioning in response to the latest tweets or headlines on trade or the latest perturbations with respect to monetary policy. This has been our view for several quarters and remains our view at present.

Outlook

• Global growth has clearly slowed over the past several quarters, in part due to trade uncertainty but also due to a return to trend from artificial stimulus (the U.S. in particular). This slowdown has been felt most sharply in Asia and Europe, while economic expansion in the U.S. has been slightly more resilient. Despite this softness, optimism about improving trade relations abounds after a truce was reached between President Donald Trump and Chinese President Xi Jinping at the G20 Summit in June. In our view, this optimism is reflected not only in stock prices but also in corporate guidance and forward earnings estimates. This quality is most pronounced in the U.S., and less so in Europe, Japan and Asia.
• Directionally, this sense of relief may be correct, though much work remains before there is an end to current trade hostilities. Additionally, if a deal is reached it is not entirely clear this event would be sufficient to drive a reacceleration of growth needed to meet earnings expectations and support current valuations.
• Our low-conviction, base view is that progress will be made, and a period of stability is likely to follow. In this case, we find some of the most intriguing opportunities to be outside the U.S. at present, given current expectations, coupled with current valuation differentials.

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: Royal Dutch Shell plc, Class A 4.1%, Lockheed Martin Corp. 3.5%, Nestle S.A., Registered Shares 3.4%, Pfizer, Inc., 3.3%, Taiwan Semiconductor Manufacturing Co. Ltd. 3.3%, Total S.A. 3.3%, AstraZeneca plc 2.8%, Citigroup, Inc. 2.8%, Samsung Electronics Co. Ltd. 2.8% and Tokio Marine Holdings, Inc. 2.7%.

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.