Market Sector Update

• The quarter began on a positive note. Global equity markets started the period with strong levels of global liquidity, accommodative central banks, stable global economic growth and a recent phase 1 trade agreement between the U.S. and China. However, the environment quickly evolved as COVID-19 began spreading aggressively in Hubei Province, China and eventually around the globe. China’s equity markets bore the initial brunt of stock market pressure. By February, the virus had begun spreading to other parts of Asia, Europe and the U.S. Chinese stock markets calmed while European and U.S. markets fell substantially. As China aggressively quarantined patients and shut down travel to and from Hubei Province, the health crisis stabilized in China but was worsening around the rest of the world. Between January and March 23, the U.S. stock market (more than half of the global benchmark allocation weighting) was down 30% before staging a strong rally on aggressive monetary policy. At quarter end, much of the world was practicing some form of social distancing. Some businesses have closed with local economies functioning at a fraction of their capacity prior to the health crisis. China, facing the health crisis first, is furthest along in reopening their economy. In most parts of China, individuals have returned to their workplace and restaurants and shops have reopened.
• The impact of social distancing on the global economy has been profound. Unemployment is skyrocketing at a pace not seen in the past. The U.S. has 22 million unemployed, wiping out nearly a decade of job gains in weeks. Global gross domestic product (GDP) will be dramatically cut as the global economy shrinks rapidly and corporate earnings are under continued pressure. Despite all of this, equity markets staged a sharp rally at the end of March. The key driver of recent equity market strength is a result of aggressive, unprecedented global monetary stimulus put in place to back stop credit assets, offset lost income for individuals, finance small businesses that are temporarily shuttered, and reduce the potential for a negative, credit-driven tail risk.
• Global equity markets were down 21% in the quarter. Growth outperformed value by a significant margin as investors’ preferred large cap, quality growth during this period of uncertainty. Energy was a huge underperformer, suffering the largest percentage decline in oil prices on record on persistent demand weakness, lack of storage capacity and continued political tensions among energy producers. Health care, consumer staples, information technology and utilities outperformed the market. From a geographical standpoint, markets were broadly down across the globe. In developed markets, Japan was the best performer, while the U.S. modestly outperformed and Europe modestly underperformed the benchmark. Emerging markets also modestly underperformed, with outperformance in China offset by weakness in other parts of emerging markets, including much of Latin America and India.

Portfolio Strategy

• The Portfolio posted negative performance but outperformed its benchmark for the quarter. Stock selection was the primary contributor to outperformance, with strength in consumer discretionary, communication services and financials. The Portfolio's overweight allocation to information technology also benefited relative performance.
• Industrials, specifically exposure to Airbus SE, was the largest detractor from performance for the period. As travel reductions began to occur due to COVID-19, concerns regarding airplane deliveries mounted, adversely impacting Airbus. We believe Airbus’ valuation reflects a strong amount of skepticism regarding suppressed air travel demand and delays in aircraft deliveries and we continue to own shares.
• Amazon.com, Inc., Microsoft Corp., Ferrari N.V. and Dollar General Corp. were notable outperformers during the period. On the other hand, underperformers included Imperial Brands, Canadian Natural Resources Ltd., HCA Holdings, Inc. and our lack of ownership in Apple Inc. (which performed well in the quarter).

Outlook

• We are currently in an unprecedented environment. Social distancing and restrictions on activities implemented to curb the spread of COVID-19 and to reduce the risk of hospital systems being overwhelmed is something we haven’t experienced on a global scale. Businesses and services around the world are being temporarily closed, and human behavior is changing in ways that may stay with us for some time. We are focused on what the world may look like coming out of this pandemic, attempting to protect assets from unintended risks in the near term and focusing on businesses that are well positioned as we recover.
• In our perspective, the recent run up in equities, driving by unprecedented global stimulus, is disconnected from the challenges we expect during the process of getting economies up and running again. We are expecting an 18- month to two-year window before vaccines are readily available for the general population. Scaling production takes time even under the best of circumstances. While first responders and high-risk individuals may receive vaccines earlier, wide spread vaccination will take time. Until then, we are expecting modifications to daily life relative to a pre COVID-19 environment across the globe. These should differ depending on geography, but will likely include fewer large gatherings, less entertainment and travel and will have an impact on a wide range of issues, including consumer spending, the way businesses operate, industrial production, the pace of return to full employment and the credit risks associated with lower global economic output. Some of the changes we have made to the portfolio in-light of these concerns include a focus on some of the highest quality companies with strong balance sheets and persistent demand. We have sought to reduce the amount of risk in the portfolio by reducing our emerging market exposure, particularly to Brazil. We believe China could be a bright spot in emerging markets. Its ability to quickly quarantine areas and individuals with viral outbreaks as well as its extensive use of technology to monitor individuals’ exposure to patients who test positive puts that country in a better position to potentially contain the virus until a vaccine is available.
• Amazon remains one of our largest holdings, followed by Microsoft and Johnson & Johnson. In health care, we are focused on medical device companies and large pharmaceutical firms that should be able to withstand a downturn and also provide both diagnostic and therapeutic solutions to the current crisis. On the industrial front, we believe automation is a long-term secular trend as companies across sectors are trying to diversify supply chains and minimize geographic concentration. We think beneficiaries will include health care, industrial and technology companies that can provide automation tools. We are also looking at new technology platforms that facilitate productivity in a world with a desire for lower social interaction. Retail firms with online strength that may be taking share from brick and mortar competitors and continued secular winners may have even more of a tailwind in the current environment. We believe the current volatility and price dislocations represent an opportunity for stock pickers.

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 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.

Top 10 holdings as a percent of net assets as of 03/31/2020 include: Amazon.com, Inc. 6.1%, Microsoft Corp. 5.5%, Thermo Fisher Scientific, Inc. 3.4%, Visa Inc. Class A 3.1%, Ferrari N.V. 3.0%, Johnson & Johnson 2.9%, Airbus SE 2.8%, Ping An Insurance (Group) Co. of China Ltd., H Shares 2.7%, Adobe, Inc. 2.6% and Alimentation Couche-Tard, Inc. Class B 2.5%.

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 45 to 50). 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.