Market Sector Update

• Around the world, the quarter was a sea of optimism that 2021 will be a lot better than 2020 with COVID-19 fading and loads of government stimuli as well as cheap money to help businesses and consumers rebound. Good news is viewed as good news, and bad news is viewed as a driver of addition stimulus (thus the phrase “bad is good” has returned to the investment mantra). Despite the “blue wave” not materializing from the U.S. elections, stimulus for pandemic relief and infrastructure in 2021/2022 is estimated to be $1 to $2 trillion. Corporate and higher personal income taxes are likely going higher with Biden’s victory, but the market will worry about that later. Multiple, highly efficacious vaccine approvals have desensitized the market to the second uptick in COVID-19 hospitalizations and fatalities in both the U.S. and Europe. The general view is the end of the pandemic is now in sight. Investors have also been less focused on the deterioration in U.S.-China relations that unfolded in final months of the Trump administration – choosing to believe a more pragmatic approach will come.
• The “V” shape economic rebound is still resulting in a “V” shape market. Rates remained low and were promised to be kept low by central banks (long term). Fears regarding the COVID-19 pandemic were real as Europe led to new closures, and concerns mounted in the U.S. as cases reached new highs as temperatures cooled. As expected, global economic indicators still point to a strong market snap back as economies are reopened and, in some cases, inventories are rebuilt, though doubts build over its sustainability and timing as consumers have retrenched in parts of the world. Global purchasing managers’ (factory) indices and consumer confidence are expected to continue to stay strong, but moderate with more mix readings expected in the future.
• The Portfolio’s benchmark index was up approximately 16% during the quarter, and U.S. equity markets continued their upward climb from the sharp bear market from the first quarter of 2020 and ended the year higher. While all sectors posted gains this quarter, the best performing sectors were the most economically sensitive sectors, with much of this performance coming after initial announcements in November with respect to COVID-19 vaccine efficacy. The market rotated to offensive sectors, with energy, materials, financials, consumer discretionary and information technology significantly outperforming more defensive sectors.

Portfolio Strategy

• The Portfolio posted positive absolute performance but underperformed its benchmark. Sector allocation was the main driver of underperformance relative to the benchmark, while positive stock selection offset some of the sector allocation drag. While the Portfolio’s region and country allocations are typically a residual of the Portfolio’s stock selection approach, country allocation was a drag to relative performance during the period. Currency effects aided performance for the period as the Fund was overweight the euro and the British pound which strengthened versus the currency basket in our index.
• From a sector allocation perspective, the Portfolio’s overweight positions in utilities and health care as well as underweight position in energy hurt relative performance. This was somewhat offset by our underweight to consumer staples which underperformed. Stock selection was most positive in information technology, financials and utilities, while selection in energy, health care and consumer discretionary was a drag on relative performance. Geographically, stock selection was positive in Asia and in the U.S., while negative in Europe.
• From an individual security perspective, the greatest relative contributors to performance were Samsung Electronics Co. Ltd., Morgan Stanley and Citigroup, Inc., while the largest detractors were Amgen, Inc., AstraZeneca plc and Lockheed Martin Corp.
• We are currently overweight utilities and industrials, while underweight energy, materials and real estate. During the quarter, we also added to industrials and utilities. We found a few names, relative to fundamentals, that we believe were pricing in too much bad news given the strong global policy responses to aid the economy. We funded this by going market weight information technology based on less attractive valuations and lowering our overweight in health care, which has higher potential policy risks post the U.S. election. We remain slightly overweight health care but market weight pharmaceutical stocks as we believe several stocks continue to be mispriced/undervalued due to negative sentiment surrounding U.S. health care/drug price reform.
• 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 (six months) 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 shorterterm market dislocations or other factors that the market has underappreciated.

Outlook

• We are cautiously optimistic on our 2021 outlook for economic growth and corporate earnings. Savings rates in many economies have expanded significantly during the pandemic as a result of government support schemes as well as the effect that COVID-19 related restrictions have had on the ability (as opposed to willingness) of consumers to spend. As vaccination programs progress, we see the savings rate as a coiled spring for consumption in numerous areas that have suffered during the pandemic. While many of these areas may take some time to return to normality, and normal will differ from pre-pandemic conditions, we see this as a tailwind for consumption that will drive recovery in employment in key parts of the service economy. To a degree, corporations have also been operating under tighter constraints with respect to investment in several areas. As COVID-19 restrictions unlock and confidence builds in the broader recovery, we also expect a recovery in corporate spending analogous to a typical early stage economic recovery. All these typical recovery dynamics are being boosted by substantial levels of stimulus from governments around the world.
• While much ink has been spilled recently on extreme valuations in certain segments of financial markets, our view of valuation within our universe is more balanced. Valuations in certain segments and stocks are no longer as compelling after the strong rally in broader equities over the past several months. However, we believe more robust and broader economic growth is creating a more favorable investment backdrop in numerous more economically sensitive areas that have lagged over the past few years. We have been finding attractive opportunities in these sectors that fit our key criteria of attractive businesses, sustainable financial structures, attractive valuations and, in particular, improving underlying business fundamentals that are not fully appreciated by other investors.

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 December 31, 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. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

Top 10 equity holdings as a percent of net assets as of 12/31/2020: Samsung Electronics Co. Ltd. 5.2%, Taiwan Semiconductor Manufacturing Co. Ltd. 5.0%, Morgan Stanley 3.3%, Procter & Gamble Co. 3.3%, ENEL S.p.A. 2.9%, Verizon Communications, Inc. 2.8%, Schneider Electric S.A. 2.8%, Citigroup, Inc. 2.7%, Unilever plc 2.6% and Philip Morris International, Inc. 2.5%.

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.