Market Sector Update

• Equity market performance this quarter was in many ways a mirror image of the previous quarter. During the prior period, equities rallied despite weakening hard data based on a growing belief the U.S. and China were working toward some sort of trade agreement that would lift the uncertainty weighing down global trade and growth. The most recent quarter saw a sharp decline in optimism on a trade resolution and a continued deterioration in growth across a variety of geographies.
• Global purchasing managers’ indices continued to weaken during the most recent quarter, and it has become clear that many segments within the industrial economies of the U.S. and Europe are now in a technical recession. The Portfolio’s benchmark index was down modestly during the quarter and U.S. equity markets remained near all-time highs, though underlying drivers of this result point to clear concerns on growth.
• Utilities, consumer staples and communication services were the top performing sectors during the quarter. The information technology sector also posted positive performance, though other cyclical sectors continued to show signs of deterioration, with materials, energy, financials and industrials underperforming during the period.

Portfolio Strategy

• The Portfolio posted positive performance and slightly outperformed its benchmark this quarter. Strong stock selection benefitted relative performance, while sector and country allocation was relatively neutral to performance during the period. Currency effects were a modest drag on relative performance.
• From a sector allocation perspective, the Portfolio’s overweight position in consumer staples was a positive driver of relative performance, while the Portfolio’s overweight position in energy was a drag on performance.
• Stock selection was most positive in information technology, industrials and health care, while stock selection in utilities was a drag on relative performance. Geographically, stock selection was positive in Europe, Asia-Pacific ex Japan and Japan, while negative in the U.S.
• The most significant individual drivers of stock specific performance included Taiwan Semiconductor Manufacturing Co. Ltd., AstraZeneca plc, Tokio Marine Holdings, Inc., Lockheed Martin Corp. and ENEL S.p.A. Top individual detractors from performance included Pfizer, Inc., Anglo American plc, Royal Dutch Shell plc, Class A, BOC Hong Kong (Holdings) Ltd. and E.ON AG.
• 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 growth was clearly slowing due to the direct impact and broader uncertainty created by U.S.-China trade uncertainty. Our low-conviction belief was that the pressure this was creating would drive the U.S. and China to reach some sort of agreement, likely limited in scope that would lift market uncertainty and help drive market stabilization and potentially reaccelerate economic growth. With the trade war continuing, we limited new Portfolio positions to those securities we believe are both attractively valued and have very clear company specific drivers that allow them to perform well despite broader macro/trade headwinds.
• At this point, the prospects for a meaningfully positive resolution on trade remain low. Additionally, the pressure this is putting on the industrial economy has increased in the U.S. and abroad. In our view, this re-calibration of global growth rates will continue to unfold for the foreseeable future, and points to further deceleration in corporate earnings growth in impacted sectors. Thus far, the crisis in confidence is mostly isolated to the corporate sector. Employment growth has slowed, but consumer spending dynamics have been resilient. Consumer balance sheets and savings levels currently offer a cushion to consumption and therefore to overall earnings and economic growth if the slowdown is, in fact, just a slowdown. Under this set of events, markets appear reasonably valued, though forward returns look modest given slower growth. In our view, markets are not currently reflective of contagion spreading to the consumer, and we see deeper earnings downgrades and performance below normal levels in such a scenario.

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 Sept. 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 09/30/2019: Taiwan Semiconductor Manufacturing Co. Ltd. 4.0%, Lockheed Martin Corp. 3.4%, Nestle S.A., Registered Shares 3.3%, AstraZeneca plc 3.2%, Philip Morris International, Inc. 3.2%, Verizon Communications, Inc. 3.1%, Tokio Marine Holdings, Inc. 3.1%, Royal Dutch Shell plc, Class A 2.9%, Samsung Electronics Co. Ltd. 2.9% and The Procter & Gamble Co. 2.8%.

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.