Market Sector Update

• The quarter was characterized by surprisingly strong equity markets, with the benchmark index rebounding more than 19% in the period. Among developed markets, Australia and Germany materially outperformed. The U.S. modestly outperformed the benchmark, while Japan, the U.K. and France all underperformed. Emerging markets were mixed with China underperforming on slow growth. Brazil, in contrast, surprisingly outperformed despite continued high rates of COVID-19 in that country. Every sector in the benchmark index posted positive returns in the period on the back of global stimulus in response to COVID-19. Information technology, consumer discretionary and materials were all particularly strong in the period, with utilities, consumer staples and real estate being the worst performers.
• The one consistent driver in the period that contributed to rising equity markets broadly was the role of central banks globally. The U.S. alone has provided roughly $7 trillion in stimulus, with more likely to come. To a lesser degree, countries around the world have engaged in accommodative policy to at least soften the impact from negative economic growth and unemployment associated with COVID-19. In many countries, unemployment is improving as the worst of the shutdowns were lifted and economies reopened. In our opinion, a more realistic test of equity markets will likely occur after stimulus winds down over time.

Portfolio Strategy

• The Portfolio outperformed the benchmark during the quarter driven primarily by positive stock selection, but also sector allocation. The Portfolio posted positive stock selection in every sector except for the consumer discretionary sector which underperformed. Stock election in energy, financials and consumer staples was particularly strong. An additional contributor was the significant overweight in information technology which outperformed and benefitted performance in the period. Cash was a drag in the period given the strong equity returns for the quarter and our underweight in materials (which had strong benchmark performance) hurt performance as well.
• Strong individual contributors in the period included PayPal, Inc., Infineon Technologies AG, Reliance Industries Ltd., Autodesk, Inc. and Amazon.com, Inc. In the case of PayPal and Amazon, both benefited from a shift towards online shopping in an environment of social distancing. While we continue to monitor valuation of the stocks, we do believe the secular trends towards continued share gains for both players will likely continue in a post COVID-19 era. Infineon and Autodesk both have economic sensitivity given their exposures to autos and construction respectively, but rebounded significantly in the quarter off lows as the global economy reopened.
• Our emphasis in the Portfolio today is on identifying industries and companies that may be long-term beneficiaries of secular shifts that may be still under appreciated by the market. Changes in how consumers shop may be more permanent as we expect online penetration to hold market share gains in many areas of consumption after COVID-19 health risks subside. Corporate travel slowdowns may be longer lasting than presumed as businesses are finding effective alternatives to face-to-face communication.
• We are also focused on companies that can benefit as the economy reopens and as we are seeing growth accelerate off low levels achieved during economic shut down. Consumers may be traveling less, but still have an appetite for local entertainment that is conducive to distancing.

Outlook

• While global economies are improving off of a low base and, in many cases, unemployment levels are starting to improve, the long-term pace of recovery remains uncertain. We are expecting a prolonged recovery versus a V-shaped recovery follow the shutdown of many of the world’s economies that occurred earlier this year due to COVID-19.
• In our opinion, it is unlikely that vaccines and herd immunity will be accomplished any time soon. While many countries in Asia and Europe have been effective at containing the spread of COVID-19 and are seeing solid growth off the bottom, other economies are slower to recover. The lack of viral containment in parts of the world (including the U.S., Brazil and India among others) has resulted in a slower recovery and, in some regions, additional economic shutdowns.
• In many parts of the world, particularly the U.S. where the incidence rate and hospitalizations for COVID-19 remains very high, significant modifications to daily life remain. These include various forms of social distancing, modified school schedules and rolling economic shut downs in specific local areas hard hit by the virus. The pace of employment recovery and overall economic productivity improvements are hard to predict, but our expectation is for a continued slow improvement.

The opinions expressed are those of the Portfolio’s manager 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.

Top 10 holdings as a percent of net assets as of 06/30/2020 include: Microsoft Corp. 5.5%, Amazon.com, Inc. 5.1%, Apple, Inc. 3.5%, PayPal Inc. 3.1%, Ferrari N.V. 2.8%, Johnson & Johnson 2.7%, Alimentation Couche- Tard, Inc. Class B 2.5%, Visa Inc. Class A 2.5%, Autodesk, Inc. 2.4% and Ping An Insurance (Group) Co. of China Ltd., H Shares 2.3%.

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. An investment in the Portfolio is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Prices of growth stocks may be more sensitive to changes in current or expected earnings than the prices of other stocks. Growth stocks may be more volatile or not perform as well as value stocks or the stock market in general. 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. The Portfolio typically holds a limited number of stocks (generally 50 to 70). As a result, the appreciation or depreciation of any one security held by the Portfolio may have a greater impact on the Portfolio’s net asset value than it would if the Portfolio invested in a larger number of securities. 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.