Market Sector Update

• The fixed income markets were not immune to the volatility experienced by their equity counterparts during the first quarter. Investors wrestled with many macro tensions, including fears of tighter monetary policy, higher inflation, a significant drop in technology stocks, slower global growth data and the possibility of a trade war with China. Most credit asset classes ended the quarter in negative territory with 10-year Treasuries down (-2.40%), Investment-Grade Bonds falling (-2.21%), Emerging Market Bonds dropping (-1.78%) and High-Yield Bonds at a (-0.75%) loss. An outlier in the declines was the leverage loan sector, which posted gains of +1.58% year-to-date.
• Using the JPMorgan US High Yield Index as a reference, high yield spreads and yields peaked in mid-February and ended the quarter only slightly below those levels, with a spread of 410 basis points and a yield of 6.56% . To compare, the year-to-date low for high yield was a 368 basis points spread and a 5.87% yield. Dispersion amongst credit quality extended during the quarter with CCC credits returning + 0.74% and Bs relatively flat at -0.14%, while the highest quality of the non-investment grade asset class, BBs, finished at -1.70%.
• High yield mutual funds outflows continued during the first quarter, totalling $19.2 billion, following total 2017 outflows of $20.3 billion. February's outflow of $12.4 billion is the second-largest monthly outflow over the past six years.
• New issue activity accelerated in March, especially in gross high-yield activity, although the majority of new issuance was a result of re-financings.

Portfolio Strategy

• The Portfolio outperformed the benchmark (before the effects of sales charges) for the quarter.
• The Portfolio retains a 20.38% allocation to senior loans. The ICE Bank of America Merrill Lynch US High Yield Index does not have an allocation to loans within the index, but the exposure was a positive contributor to the Portfolio for the quarter. Loans have outpaced high yield bond performance for the last six consecutive months, indicative of the rising rate environment.
• Although the Portfolio employs a rigorous fundamental and bottom-up process, focused sector contributors for the bond portion of the portfolio would include the energy sector, the services sector and retail. Of note on the energy positions, performance was driven by a few select credit outperformers. Even though oil prices were higher for the quarter the energy sector of high yield was altogether down. The Portfolio continues to be underweight the sector. When compared to the index, the Portfolio has roughly one-third of the benchmark weighting.
• Detractors to the Portfolio from an attribution perspective would include the consumer goods and health care sectors. Although both of those sectors were down in the first quarter, the Portfolio has a larger allocation to consumer goods than the index. Again, we stress the emphasis on individual credit selection for this Portfolio, as opposed to predicting sector and macro movements.

Outlook

• Despite the recent volatility in the majority of asset classes, high yield credit spreads have only widened by 14 basis points. It felt a lot worse than it was, and the reality is that yields continue to be muted even in the midst of a rising rate environment. Demand remains stronger than supply, therefore, the new bonds coming to market bear a lackluster yield and are almost always oversubscribed and pushing yields even further by the time of pricing. Managing the amount of risk we are willing to take for moderate carry in this setting is becoming increasingly important.
• Even though high yield is more correlated to equities than other credit strategies, it historically has offered more downside protection than stocks in choppy times. Most of the aforementioned factors that brought on the volatility during the first quarter persist, accompanied by geopolitical tensions in Syria and a possible rollover in power within the House, given the announced departure of Paul Ryan in early 2019. It is difficult to say whether these issues or others could be the catalyst resulting in a significant widening of spreads that could make current valuations and yields seem expensive, but it continues to be our view that the tailwinds from corporate and individual tax reform, along with deregulation, and the resulting boost in consumer and business confidence will outweigh headwinds for now.
• Our view of three more interest rates hikes for 2018 is on par with consensus. A more active Federal Reserve Board should continue to bode well for our loan investments, as our flexibility to invest in that tranche of the capital structure will be an attractive differentiator for the strategy. The three-month LIBOR has risen since the beginning of 2018, a welcome yield improvement for the loan portion of the Fund.
• It is our view that finding value in the high-yield market has become increasingly more difficult, and considerable caution is warranted in making new investments. As such, we believe our continued process of bottom-up, in-depth fundamental research and analysis will guide us to those investments where the risk/reward is in our favor.

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 Mar. 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.

Diversification is an investment strategy that attempts to manage risk within your portfolio but it does not guarantee profits or protect against loss in declining markets.

The ICE BofAML U.S. HY Master II TR USD 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.

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.