Market Sector Update

• The ICE BAML US High Yield Index continued its streak of positive returns in the first quarter of 2021, returning 0.90%, which is the fourth quarter in a row of positive consecutive returns. Spreads on the index ended the quarter at 352 basis points (bps), which is 35 bps tighter versus year end.
• Leverage loans continued to gain in the quarter, returning 1.86% as the markets believe rates have bottomed and the economic recovery takes shape. Spreads ended the quarter at 420 bps versus 460 bps at year end. Split B/CCC loans (+6.66%) outperformed B loans (+1.60%) and BB loans (+0.83%).
• The best performing sectors in the ICE BAML US High Yield Index were entertainment, airlines and publishing, which were up 21.6%, 5.1% and 4.3%, respectively. Conversely, the worst performing sectors were utilities, restaurants and cable, which returned -1.3%, -0.99% and -0.57%, respectively.
• The $3.4 billion of default/distressed volume is the lowest quarterly default total since $2.3 billion defaulted in third quarter of 2018. Including distressed exchanges, the U.S. high-yield default rate decreased to 5.37% at the end of the quarter. Meanwhile, the loan default rate including distressed exchanges decreased to 3.66%.
• For the quarter, the $158.6 billion of high yield new issuance easily surpassed the prior high of $145.5 billion in second quarter 2020. Leverage loan new issuance totaled $300.5 billion in the period, and leverage finance markets remain wide open.
• High yield funds reported outflows of $10.2 billion in the quarter versus positive flows of $6 billion last quarter. Floating rate loan funds reported inflows of $11.1 billion in the period as investors respond to stronger global growth rates and a corresponding rise in interest rates.

Portfolio Strategy

• The Portfolio meaningfully outperformed during the quarter returning low-single digits versus 0.90% for the ICE BAML US High Yield Index and 0.93% for the Morningstar peer group.
• The high yield bond portion of the Portfolio (64% of Portfolio net assets) outperformed the index by low-single digits. Contributors to performance were credit picks in telecommunications (both wireline and wireless), rentals and aerospace/defense. The biggest detractor from performance was driven by an underweight to the energy sector.
• Leverage loan investments (26% of Portfolio net assets) outperformed both the index and the peer group by midsingle digits. Credits in the retail, manufacturing and electronic sectors drove the outperformance. Detractors from performance were credits in the food and broadcasting sectors.
• Equities (8% of Portfolio net assets) outperformed both the index and the Morningstar peer group, returning low double-digits. The Portfolio’s equity position in New Cotai drove the majority of the outperformance, partially offset by Laureate and McDermott.

Outlook

• In our last outlook, we stated that credit markets were wide open to those wishing to issue debt and at absolute yields that were the lowest in history. We also observed that the vaccine rollout was just beginning but looked to have a high probability of being ramped up and successful by the end of May or June. Both characterizations remain true today and continue to drive the credit and equity markets tighter (in terms of spreads) and higher (in terms of overall prices), respectively.
• As investors have started to see the light at the end of the COVID-19 tunnel and economic activity has started to accelerate, rates have moved up quickly with the 10-year U.S. Treasury rate increasing 76 bps so far this year. With vaccinations ramping to over three million per day on average, herd immunity should be upon us mid-to-late summer. If we remain on this track and variants of the virus remain under control, we think the Federal Reserve (Fed)’s stance on accommodative policy for the foreseeable future will become increasingly debated. This will most likely lead to a continued march higher in rates. Longer term, we believe the Fed is more worried about deflation than inflation and will want to see solid data on inflation before tapering purchases and ultimately raising the federal funds rate some time in 2022.
• High yield credit has shrugged off the increase in rates with positive returns year to date. It is our view that rising rates aren’t necessarily a bad thing for high yield credit. Higher rates normally are accompanied by improving economic growth, better corporate profits and lower unemployment, all of which leads to levered companies being able to better service their debt obligations as the economy recovers.
• We continue to have an outsized weighting to leverage loans which should serve us well as they have low interest rate risk and their seniority in the capital structure makes them less susceptible to price declines. Loans have also benefitted from a technical tail wind this year as the asset class has seen inflows of $11 billion.
• We acknowledge that with spreads and yields being at or near historical lows, finding great risk reward investments is increasingly difficult. We have passed on opportunities where the compensation, i.e. coupon, has not fit the risk. We will continue to let our fundamental research drive our investment decisions with a laser focus on making sure we are being compensated for the risks we are taking.

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 March 31, 2021, 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 ICE BofAML US High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. It is not possible to invest directly in an index.

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 holdings as a percent of net assets as of 3/31/2021: State Street Institutional U.S. Government Money Market Fund – 4.2%; iShares iBoxx $ High Yield Corporate Bond ETF – 2.8%; New Cotai Participation Corp., Class B – 2.4%; Staples, Inc., 7.5%, 4/15/2026 – 2.3%; Olympus Merger Sub, Inc., 8.5%, 10/15/2025 – 2.2%; NFP Corp., 6.9%, 8/15/2028 – 2.1%; PAE Holding Corp., 5.3%, 10/19/2027 – 1.7%; West Corp., 5.0%, 10/10/2024 – 1.6%; Altice France Holding S.A., 10.5%, 5/15/2027 – 1.6%; Comstock Escrow Corp., 9.8%, 8/15/2026 – 1.3%

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. 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 below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher rated bonds. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. These and other risks are more fully described in the Portfolio's prospectus. Not all funds or fund classes may be offered at all broker/ dealers.

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.