Market Sector Update

• The quarter saw a sharp rebound in optimism due to strong global stimuli by governments and central banks. Fears regarding the COVID-19 pandemic faded during the first half of the quarter though started to reappear in the U.S. and in select emerging markets. This is in contrast with Europe, China and other developed markets that have seen a steady decline in pandemic cases. As a result, their economies are rebounding. As expected, global economic indicators are pointing to a strong market snap back as economies are reopened and, in some cases, inventories are rebuilt. The quarter resulted in one of the fastest market rebounds on record despite a projected U.S. and global recession. Global purchasing managers’ (factory) indices and consumer confidence are expected to continue to rebound strongly as those surveys are released this summer.
• 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 lead to a jump in gross domestic product (GDP) from the first 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 within the U.S. service and industrial economies experienced declines in activity as various re-imposed, stay-in-place and social distancing measures were enacted in an effort to flatten the curve of rising COVID-19 cases.
• The Portfolio’s benchmark index was up strongly (approximately 13%) during the quarter, and U.S. equity markets rocketed from the sharp bear market from the first quarter of 2020. While all sectors posted gains, the best performing sectors were the offensive sectors – materials, information technology, consumer discretionary and industrials. The poorest performing sectors included utilities, consumer staples, real estate and health care.

Portfolio Strategy

• The Portfolio posted positive performance and outperformed its benchmark. Solid stock selection was the main driver of performance relative to the benchmark, while sector and country allocation was neutral to relative performance during the period. Currency effects detracted from performance for the period.
• From a sector allocation perspective, the Portfolio’s overweight position in information technology and underweight position in communication services aided relative performance. On the other hand, an underweight allocation in consumer discretionary and energy hurt relative performance. Stock selection was most positive in financials, health care, utilities and materials, while selections in consumer discretionary, industrials and energy were a drag on relative performance. Geographically, stock selection was positive in Europe and in the U.S., while negative in Asia.
• From an individual security perspective, the greatest relative contributors to performance were Morgan Stanley, Eastman Chemical Co., Schneider Electric S.A., Qualcomm, Inc. and Anglo American plc. The greatest individual relative detractors from performance were Tokio Marine Holdings, Inc., Philip Morris International Inc., BAE Systems plc, Guangdong Investment Ltd. and Exelon Corp.
• We are currently overweight health care, information technology and utilities, while underweight energy, consumer discretionary and communication services. During the quarter, we reduced our underweight in financials as we believe valuations of a few names relative to fundamentals were pricing in too much bad news given the strong global policy responses to aid the economy. We funded this by lowering our overweight in health care, which has performed well during the downturn. We remain overweight health care 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. While U.S drug pricing is facing downward pressure, reform will depend on the political outcome post the November U.S. election.
• 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., 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. This is self-inflicted as Europe and Asia have kept the spread of the virus under control after slowly opening their economies. We believe the risk of a second wave is relatively high as the fall/winter arrives before a COVID-19 vaccine becomes available. This is one reason why we are balanced in our portfolio construction and not overweight perceived lower quality names and industries.
• Our broad view is for a sharp pickup in near-term economic activity with mixed corporate earnings. 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 June 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 06/30/2020: Taiwan Semiconductor Manufacturing Co. Ltd. 3.6%, Cisco Systems, Inc. 3.3%, ENEL S.p.A. 3.2%, AstraZeneca plc 3.1%, Samsung Electronics Co. Ltd. 3.0%, Nestle S.A., Registered Shares 3.0%, Roche Holdings AG, Genusscheine 3.0%, Verizon Communications, Inc. 2.9%, Procter & Gamble Co. 2.8% and Amgen, Inc. 2.6%.

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.