Market Sector Update

• The fourth quarter of 2018 was marked by a notable sell-off in equity markets globally. Concerns of slowing global economic growth played into market declines. Fears that the U.S. Federal Reserve (Fed) might continue to raise rates despite signs of a slowing economy, negative impacts from rising tariffs, general concerns of a U.S. and China trade war, slowing Chinese growth, weaker European growth, and Brexit uncertainty were all contributing factors.
• Most developed markets were down generally in line with the broader market, with Germany, France Japan and the U.S. underperforming. The U.K., Spain and Italy modestly outperformed. In emerging markets, Brazil was the notable standout, up double digits in the wake of presidential elections that increase the likelihood of pro-business reforms. China was down double digits, but modestly outperformed relative to international markets in general.
• On a sector basis, utilities, real estate, consumer staples and health care all outperformed, while energy, information technology and consumer discretionary underperformed in this risk off quarter.

Portfolio Strategy

• The Portfolio underperformed the benchmark in the quarter driven by stock selection as strong performers earlier in the year reversed trend. Stock selection in industrials and health care were weak and more than offset positive selection in information technology and financials. The Portfolio’s underweight allocation to utilities, real estate and consumer staples and overweight allocation to consumer discretionary and information technology were all negative contributors.
• Individual detractors in the period included Airbus SE, Fresenius SE & Co. KGaA and Amazon.com, Inc. Positive contributors included CME Group, Inc., Dollar General Corp. and HDFC Bank Ltd. The Portfolio’s lack of exposure to Apple Inc., which significantly underperformed in the period on weaker-than-expected iPhone demand, was another positive.
• Earlier in the year, we significantly reduced exposure in emerging markets as well as cyclical technology, and continue to reduce cyclicality. We continue to gradually add more exposure to defensive sectors including health care and consumer staples.

Outlook

• The ongoing trade disputes between China and the U.S. have far reaching risks and in our opinion are unlikely to be quickly resolved. China’s growth has slowed significantly with consumer, industrial production and fixed-asset investment all weaker. We are expecting a challenging earnings season globally with the U.S., Europe and China all weaker as we enter 2019.
• In the U.S., tax cuts from last year start to annualize, weaker consumer confidence is negatively impacting demand and the disruptions from the ongoing government shutdown, now the longest in U.S. history, pressure growth. In Europe, Brexit uncertainty remains a concern, and both Germany and France have slowed. In China, growth looks as weak as it’s been in years with significant slow downs in the consumer, industrial production and fixed-asset investment despite government efforts to stimulate growth. Japan has been the one area of positive surprise in developed markets, but off of a low growth rate.
• We believe that our portfolio of sustainable growth companies with unique competitive advantages can perform well in the current environment of uncertainty. We continue to reduce exposure to firms we believe are most at risk to trade concerns and economic slowdown. We remain overweight health care and continue to look for opportunities to add to companies that can succeed in a wide range of economic outcomes.

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 Dec. 31, 2018, 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 include: Microsoft Corp. 4.7%, Airbus SE 4.5%, Amazon.com, Inc. 4.2%, United Health Group, Inc. 4.0%, CME Group Inc. 3.9%, Visa, Inc., Class A 3.3%, Cigna Corp. 3.2%, HCA Holdings, Inc. 3.1%, Dollar General Corp. 3.0% and Cognizant Technology Solutions Corp., Class A 2.6%.

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 45 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.