Market Sector Update

• The quarter saw a seesaw of optimism and pessimism among past stimuli, off-and-on future stimuli, the U.S. Presidential election, and the rebound in COVID-19 cases. The “V” shape economic rebound resulted in a “V” shape market. Rates remained low and were promised to be kept low by central banks. Fears regarding the COVID-19 pandemic faded and openings continued, but as the quarter closed, growth in COVID-19 cases in Europe led to new partial closures, and concerns mounted in the U.S. as cases rose and 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. Global purchasing managers’ (factory) indices and consumer confidence are expected to continue to stay strong after rebounding last quarter but with more mix readings expected in the future.
• As a result of the COVID-19 pandemic, service industries as well as manufacturing were especially hard hit. Despite the setback, many of these industries in developed markets have begun the reopening process, which we believe will likely continue to lead to a jump in gross domestic product (GDP) from the second quarter. That said, we believe certain industries, such as travel, airlines and other durable goods, will take much longer to recover and result in falling capital expenditure budgets for new equipment. Other sectors, such as information technology, have performed well as demand to connect remotely has exploded, resulting in increasing business technology and consumer spending. Later in the quarter, several segments and countries within the European Union (EU) economies experienced declines in activity as various re-imposed, stay-in-place orders were enforced. While we do not feel widespread lock downs will occur before the U.S. election, there is a risk that if the U.S. follows Europe (which had completely opened earlier and now is again starting to close) that certain areas of the U.S. will be under similar pressure to get COVID-19 somewhat under control. The market discounts the future and in six months the market expects better tests, COVID-19 treatments and a vaccine as well as more economic stimulus no matter who wins the U.S. Presidential election.
• The Portfolio’s benchmark index was up approximately 3% during the quarter, and U.S. equity markets continued their upward climb from the sharp bear market from the first quarter of 2020. While almost all sectors posted gains, the best performing sectors were the offensive sectors – materials, information technology, consumer discretionary and industrials. The poorest performing sectors included energy, financials, utilities, real estate and health care.

Portfolio Strategy

• The Portfolio posted positive performance and slightly outperformed its benchmark. Solid sector allocation was the main driver of performance relative to the benchmark, while stock selection and country allocation was a drag to relative performance during the period. Currency effects aided performance for the period as the Portfolio was overweight exposure to stronger currencies such as the euro and the British pound versus the weakening U.S. dollar.
• From a sector allocation perspective, the Portfolio’s overweight position in information technology and underweight position in energy aided relative performance. Stock selection was most positive in information technology, consumer staples and communication services, while selections in consumer discretionary, health care, industrials and utilities were 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 TSMC, Qualcomm and 3i Group plc, while the largest detractors were Cisco Systems, Citigroup and CNOOC Limited.
• We are currently overweight health care, information technology and utilities, while underweight energy, consumer staples, real estate and communication services. During the quarter, we also added to consumer discretionary and consumer services. We found a few names, relative to fundamentals, that were pricing in too much bad news given the strong global policy responses to aid the economy. We funded this by going underweight in consumer staples and lowering our overweight in health care (via trimming Pharmaceuticals), which has performed well during the downturn but has higher potential policy risks post the U.S. election. We remain 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. We believe the industry has better innovation and drug pipelines than in the past, with low relative valuation versus the market.
• 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

• 2020 will be a year we remember as a time of quarantines, lockdowns, social distancing and a divisive U.S. election. Also, it will be the year where developed markets gave up on caring about deficits as they piled on huge amounts of debt to avoid the depression post COVID-19 shutdowns. Quantitative easing is here to stay as well as low interest rates, otherwise interest expense alone would explode on those governments, corporates and consumers that are overleverage for any higher longer-term rate. Undoubtedly, this unusual moment will drive new areas of opportunity for well positioned businesses. One could see COVID-19 as a key moment impacting the trajectory of business travel, commercial real estate and many legacy models of behavior that will need to adopt and re-calibrate to a new world.
• From a broader geopolitical point of view, the willingness and ability to respond to the COVID-19 induced economic infarction has been quite uneven. On one end of the spectrum, the U.S., developed Asia, China and Europe have taken aggressive action in response to the pandemic. We anticipate these areas will experience less severe intermediateterm pressure on growth and output. Other countries, such as many emerging-market nations, lack the mechanisms, cohesion and/or sheer monetary and fiscal brute force needed to manage current downside risks. We anticipate the recovery in some of these areas to be more sluggish in scale and scope. A COVID-19 resurgence slowing the U.S. economic rebound is a risk that could grow if behavior does not change.

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 September 30, 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 09/30/2020: Taiwan Semiconductor Manufacturing Co. Ltd. 4.7%, Procter & Gamble Co. 3.8%, Samsung Electronics Co. Ltd. 3.7%, Verizon Communications, Inc. 3.1%, Schneider Electric S.A. 2.9%, ENEL S.p.A. 2.8%, Amgen, Inc. 2.8%, Cisco Systems, Inc. 2.8%, AstraZeneca plc 2.7% 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.