Market Sector Update

• Around most of the world, the quarter was a continued 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. During the quarter, good news of an economic boom was priced into the bond market as the U.S. 10-year rose from 0.9% to 1.7 %. Discussions of inflation and when will the U.S. Federal Reserve (Fed) taper and raise rates increased. Also a reality is that COVID-19 is not going away as quickly as it entered, with countries having to again lockdown as the new variants take a grip on unvaccinated citizens, resulting in some unease in growth forecasts. The U.S. released stimulus for pandemic relief and infrastructure and is looking to pass a $2 to $3 trillion infrastructure and human infrastructure multi-year plan by fall. Investors are focused on the benefits of spending, but not focused on future bills in the form of higher corporate taxes and the resultant negative impact on earnings outlooks. Investors are starting to realize that U.S.-Chinese relations under the Biden Administration will not improve. In fact, so far it has deteriorated. The Biden Administration is coordinating and leading our U.S. allies to put pressure on China to change its ways on trade, technology theft, cyber warfare, human rights, and relations with its Asian neighbors. China has lashed out towards Europe, Australia, and others. This is an issue that will not go away and is a risk to the markets given the interlinkage of the global economy.
• The “V” shape global economic rebound is still resulting in a “V” shape market. Short-term rates remained low and are being promised to be kept low by central banks (long term). The U.S. made sound progress on vaccinations and re-opening, conversely Europe struggled with vaccine deployment which led to new rounds of lockdowns in France, Italy and Germany. As expected, global economic indicators still point to a strong economic global snap back as economies are reopened and, in some cases, inventories are rebuilt. Global purchasing managers’ (factory) and (services) 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 8.6% during the quarter, while the broad global market rose 4.9%. The U.S market led the way, with cyclicals outperforming. The Asian region was also higher but lagged. While all sectors posted gains this quarter, the best performing sectors were the most economically sensitive sectors. The market continued the rotation to offensive sectors, with energy, materials, financials, consumer discretionary, and industrials performing well. They outperformed the more defensive consumer staples, health care, communication services, utilities and real estate sectors.

Portfolio Strategy

• The Portfolio posted positive absolute performance but underperformed its benchmark. Sector allocation was the main driver of relative underperformance, while slightly 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 aided relative performance during the period. Currency effects detracted from performance for the period as the Portfolio was underweight the U.S. dollar which strengthened 3.6% versus other global currencies.
• 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 energy and consumer discretionary, while selection in information technology and financials was a drag on relative performance. Geographically, stock selection was positive in Europe while negative in the U.S. and Asia. Additionally, our overweight in Europe and underweight in the U.S. was a drag on relative performance.
• We are currently overweight utilities and industrials, while underweight materials, communication services, consumer staples and real estate. During the quarter, we also added to energy and financials. We found a few names, relative to fundamentals, we believe were well positioned for growing free-cash-flow and higher dividends given the strong global policy responses to aid the economy. We funded this by going further underweight in communication services as the competition outlook was getting worse. We also trimmed exposure to health care. Our information technology exposure was also trimmed due to strong returns, reducing the risk/reward profile. Our overweight in utilities and industrials are tied to the long-term trend of electrification of the world’s economy to counter global warming via energy efficiency and renewables. We believe the industrials we own will benefit from the strong global economy for the next few years due to strong government spending and investing as well as sustained accommodative central bank policy. By region, we added to Europe and funded this via Asia and U.S. exposures. Many of the names we own in Europe are very global in their exposures.

Outlook

• We remain fairly optimistic regarding our outlook for economic growth and growth in corporate earnings. We see a lot of dry powder and fuel for economic growth in a few key forms. From a consumer point of view, the combination of a variety of government support schemes, stimulus payments, recovering employment and (to a degree) inability to spend have driven savings rates to quite high levels relative to history. We think the savings rate is a coiled spring that will propel consumption as vaccination occurs and COVID-19 restrictions are lifted. While employment in many sectors of the economy has been slow to recover, we think this gap should also close as consumer spending increases – driving a recovery that can feed on itself for some time. Progress on COVID-19 vaccine deployment, as well as the ultimate durability of efficacy, are key to future potential growth. As demonstrated during periods of relaxation of COVID-19 restrictions during the past year, a desire and ability to return to normality – if not make up for lost time – should drive a strong rebound in activity. The pace at which vaccines are being deployed varies dramatically around the world, and we expect economic growth to be similarly uneven with a somewhat start-stop characteristics for much of the year.
• Adding further potential growth impulses are the variety of government infrastructure and development spending programs in the U.S. and numerous countries internationally. Scope and timing here are uncertain as many of these programs are more long-tailed in nature, as opposed to nearer-term in orientation. However, this spending may provide a tailwind to growth over the near to intermediate term as well. Our optimism on growth is tempered in many areas by valuation, with many markets around the world at all-time highs, valuation multiples in many areas at elevated levels, and the outlook for returns is more muted. Additionally, many of the most obvious beneficiaries of recovering growth have been bid up to levels that simply do not appear justifiable. There are still pockets of opportunity in various areas, but we expect this to be a headwind to returns relative to growth. We remain optimistic that our longer-term horizon and disciplined approach to business quality, valuation and intermediate-term outlook will allow us to find attractive opportunities.

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 March 31, 2021, 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.

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.