Market Sector Update

• Global equity markets posted positive performance in the quarter despite rising fears around tariffs and implications of a possible trade war. A more protectionist approach to trade and increasing tariff risks, was a contributor to significant underperformance for emerging markets in the period. This was a reversal from the first quarter.
• The U.S. outperformed most developed markets, including Europe and Japan during the period. In addition, the U.S. dollar strengthened against most currencies, with emerging-market currencies particularly weak. Of note, growthoriented stocks outperformed value-oriented stocks during the period.
• On a sector basis, energy performed well in the period along with Information technology and consumer discretionary stocks. Underperformance coming from financials, industrials and telecommunication services.

Portfolio Strategy

• During the quarter, the Portfolio outperformed the benchmark driven primarily by strong stock selection and to a lesser degree sector allocation. Strong stock selection in information technology, consumer discretionary, industrials and health care benefitted performance. The overweight in information technology and consumer discretionary sectors and the underweight in financials all helped performace. Top relative individual contributors to outperformance included Start Today Co. Ltd., MasterCard, Inc., Class A, Adobe Systems, Inc., Amazon.com, Inc. and Facebook, Inc. Class A.
• These positives more than offset detractors to performance including poor stock selection in energy and the Portfolio’s exposure to growth-oriented stocks in China. Individual underperformers included Ping An Insurance Group Co. of China Ltd., H Shares, Isuzu Motors Ltd., Apple Inc. and Galaxy Entertainment Group.
• During the period, we materially reduced the Portfolio’s exposure to Chinese equities given the lack of predictability around tariffs. While we remain overweight China (primarily through e-commerce exposure) we reduced nearly half the Portfolio’s direct exposure to China. We have reallocated capital to higher conviction names with less political uncertainty. We increased exposure in industrials and health care to market weights.

Outlook

• U.S. economic growth remains solid, with labor markets strong, inflation hitting targets and consumer confidence as well as housing all solid. However, emerging markets are under pressure, Europe showed additional signs of slowing this quarter and Japan is facing uncertainty as a large exporter to the US. Tariffs, currencies, interest rate shifts and the impact from politics on economic growth feels harder to predict in the current environment and all have meaningful impacts on global equity markets. We are expecting market volatility and have focused the Portfolio’s exposure in holdings that have strong competitive moats and solid earnings growth.

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, 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: Airbus SE 5.0%, Microsoft Corp. 4.5%, Amazon.com, Inc. 4.2%, MasterCard, Inc., Class A 3.8%, Visa, Inc., Class A 3.7%, The Home Depot, Inc. 2.9%, United Health Group, Inc. 2.7%, Cognizant Technology Solutions Corp., Class A 2.7%, CME Group, Inc. 2.7% and Adobe Systems, 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. 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.