Market Sector Update

• The quarter saw a sharp decrease in optimism due to the COVID-19 pandemic and resulted in one of the fastest market corrections on record along with projections of a sharp U.S. and global recession. Global purchasing managers (factory) indices and consumer confidence are expected to crash as well as those surveys are released.
• The manufacturing part of the world’s economy had already dramatically slowed but this had been more than offset by a solid services economy. With the COVID-19 pandemic certain, service industries are now hard hit and manufacturing will further fall such as orders for cars, planes and other durable goods, resulting in falling capital expenditure budgets for new equipment. Additionally, several segments within the service and industrial economies of the U.S. and Europe will experience sharp declines in activity due to various stay-in-place and social distancing measures designed to flatten the curve of COVID-19 cases.
• The Portfolio’s benchmark index was down strongly (-26%) during the quarter and U.S. equity markets collapsed from all-time highs. While all sectors were down, the best performing sectors were the defensive sectors – health care, consumer staples, utilities and communication services. While the poorest performing were energy, consumer discretionary, financials and materials..

Portfolio Strategy

• The Portfolio posted negative performance but outperformed its benchmark. Both stock selection and sector allocation aided performance relative to the benchmark, while country allocation hurt relative performance during the period. Currency effects benefitted performance for the period.
• From a sector allocation perspective, the Portfolio’s overweight position in health care and underweight allocations in consumer discretionary and financials aided relative performance. On the other hand, an overweight allocation in energy and underweight in communication services hurt relative performance. Stock selection was most positive in energy, information technology, industrials, utilities, consumer discretionary and health care while selections in financials and materials and were a drag on relative performance. Geographically, stock selection was positive in Europe and in the U.S., while negative in China.
• From an individual security perspective, the greatest relative contributors to performance were AstraZeneca PLC, Enel SpA, Roche Holdings AG, Genusscheine, Verizon Communications, Inc. and Cisco Systems, Inc. The greatest individual relative detractors from performance were Citigroup Inc., ING Groep N.V., Certicaaten Van Aandelen, BNP Paribas S.A., PT Bank Mandiri (Persero) Tbk and Suncor Energy, Inc.
• We are currently overweight health care, information technology, industrials, and utilities, while underweight financials, energy, consumer discretionary and communication services. During the quarter, we shifted our overweight in energy to underweight as we believe valuations of a few names relative to fundamentals were no longer favorable due to the notable deterioration in the supply-demand outlook for crude oil. We continued to add to health care as we believe several stocks were mispriced/undervalued due to an overreaction of negative sentiment surrounding health care/drug price reform and would not see dramatic earnings downgrades and structural damage from the sharp economy recession. While U.S drug pricing is facing downward pressure, reform will depend on the political outcome post the November Presidential election. We also went from overweight to benchmark weight in consumer staples as we believe absolute and relative valuations will not match longer term fundamentals.
• 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, working from home, digital learning and so many other new experiences. 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., China and the U.K. (to name a few) have taken aggressive action in responds to the pandemic. We anticipate these areas will experience less severe intermediateterm pressure on growth and output. Other countries or economic blocs, such as the EU and 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.
• Our broad view is for a sharp decline in near-term economic activity and corporate earnings, followed by a steep (though partial) snapback. From that point, we expect a moderate pace of recovery as is typical following most downturns. As is also typical, the pacing of growth will be quite heterogeneous across companies, sectors and regions as adjustments occur to new realities, opportunities and uncertainties. Such an environment may offer substantial attractive investment opportunities for well-positioned businesses that can be acquired at valuations that may fail to reflect either new opportunities or excessively discount short-term uncertainties.

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, 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 03/31/2020: Verizon Communications, Inc. 3.8%, Taiwan Semiconductor Manufacturing Co. Ltd. 3.6%, AstraZeneca plc 3.4%, Nestle S.A., Registered Shares 3.3%, Roche Holdings AG, Genusscheine 3.3%, Procter & Gamble Co. 3.1%, Cisco Systems, Inc. 3.1%, Philip Morris International, Inc. 2.9%, ENEL S.p.A. 2.9% and Samsung Electronics Co. Ltd. 2.9%

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.