Market Sector Update

• The ICE BAML US High Yield Index continued its rebound in the fourth quarter, returning 6.5% and ending 2020 with a surprising full-year 6.2% gain after losing 13.1% in the first quarter of 2020. Spreads on the index ended 2020 at 386 basis points (bps), the tightest level post-COVID-19.
• Leverage loans continued to provide strong gains in December amid optimism for a cyclical recovery in 2021. Loan yields and spreads (3-year) ended 2020 at 5.1% and 486 bps, respectively. This is the lowest yield for the loan index since July 2014. Loans provided gains in 2020 totaling 3.2% - split-B/CCC-rated loans returned -0.91%, which underperformed BB and B loans, which were up 0.77% and 3.43%, respectively.
• The best performing sectors in the ICE BAML US HY Index in the period were publishing, airlines and energy, which were up 17.9%, 15.4% and 13.3%, respectively. Conversely, the worst performing sectors were cable, restaurants and building materials, which returned 2.5%, 2.8% and 3.3%, respectively.
• Default activity continued to decline, but still ended the quarter with $15.3 billion of paper defaulting. Energy, telecom and retail were the sectors with the heaviest volume of default activity.
• New issue activity in the quarter continued at a feverish pace with $96 billion of gross new issuance. For calendar year 2020, high yield had record gross issuance of $430 billion, 35% higher than the previous record in 2012.
• High Yield fund flows for the quarter were positive $6 billion, while flows for leverage loans were negative $107 million.

Portfolio Strategy

• The Portfolio had a high-single-digit return in the quarter, outperforming the ICE BAML US High Yield Index and the Morningstar peer group.
• The high-yield bond portion of the Portfolio (62% of Portfolio net assets) outperformed the index during the quarter. Contributors to performance were credit picks in services, rentals and telecom. The biggest detractors from performance in the period were underweight allocations to the energy and air transportation sectors.
• Leverage loan investments (26% of Portfolio net assets) outperformed both the index and the peer group during the quarter. Credits in the retail, energy and industrial sectors drove the outperformance. Detractors from performance were credits in the healthcare and mining sectors.
• Equities (8% of Portfolio net assets) underperformed both the index and the Morningstar peer group during the period.

Outlook

• In our previous commentary, we laid out several unknowns that would become clearer as year-end drew near. We now know that Joe Biden will be the next President of the United States, two vaccines have been approved for emergency use authorization, a second wave of COVID-19 is spreading throughout the country and another round of stimulus (or two) is on the way. The credit markets continue to be wide open to those wishing to issue debt and at absolute yield levels that are the lowest in history.
• With spreads compressing another 159 bps in the quarter to 444 bps, the high yield market has completely round tripped where it started at the outset of the COVID-19 pandemic. However, the comparisons with early 2020 ends there. Relative to a year ago, monetary and fiscal policies are more accommodative, demand technicals are stronger and the risk of overheating in the economy is lower. In addition, a full-on vaccine roll-out to achieve herd immunity looks to be a high probability by the May/June timeframe.
• With the assumption of a successful vaccine roll-out and uptake, our attention on the risk side of the equation turns to rates. The biggest question being – will the return of the reflation trade in the rates market reduce the value proposition of the high yield and leverage loan markets? We believe that returns are more constrained in the current environment but barring a massive (200 bps+) rate move, high yield should be able to withstand higher yields and provide positive excess returns.
• There is potential for rates to rise in 2021 as more stimulus gets pumped into the system and the world population, through a successful inoculation program, gets back to “normal”. The loan asset category looks particularly attractive as markets should start to price in the first Fed rate hike well in advance of there ever being one. We remain overexposed to the leverage loan asset class relative to our peers and believe 2021 has the potential for this allocation to meaningfully outperform.
• For those that have followed us, our main focus is on the credits we invest in and finding businesses that can outperform throughout the cycles. Our exhaustive due diligence process has served us well and helped us maintain exposure to those investments that over the long term can outperform.

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 Dec. 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.

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.

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.