Market Sector Update

• The quarter provided clarity in the U.S. election, another COVID-19 relief package, while news of multiple effective vaccines boosted confidence that 2021 will see a return to normal. Investors looked through near term weakness to bid up lagging asset classes, resulting in winners all around. Real Estate Investment Trusts (REITs) were among the beneficiaries, returning 11.5% as measured by the FTSE NAREIT Equity REITs Index, which slightly lagged the S&P 500 Index.
• Overall the quarter can be summed up by saying simply, “the laggards became the leaders.” COVID-19 continues to weigh on real estate demand across most property types, but the welcome news of effective vaccines has shifted the outlook for the sector. Relative to earlier in the year, rental collections have improved dramatically, and the sector appears to have stabilized. Significant laggards, including retail and hotels, can now see a light at the end of what has been a very long tunnel.
• While it will likely take years for demand to return to pre-COVID levels, the specter of widespread tenant bankruptcies has faded. Optimism surrounding a return to normal activity levels across the economy and space demand resumption is driving expectations of 5% cash flow growth for REITs in 2021.

Portfolio Strategy

• The Portfolio underperformed its benchmark for the quarter. News of Pfizer’s vaccine came earlier than expected, and while decidedly positive for the U.S. population and economy, the sharp market reaction detracted from the Portfolio’s performance. The Portfolio was underweight hotels and retail, both of which increased more than 30% in a matter of days. Absent the price reaction of stocks on “Pfizer Monday,” the portfolio outperformed the index throughout the quarter.
• Office owners were the largest detractor from Portfolio performance as they were among the beneficiaries of the “vaccine on” rotation. Investors bid up the sector under the presumption that the work-from-home trend would dissipate. Our overweighting positions within office have been centered around suburban locations and biotechnology/life science.
• Residential holdings were a drag on performance. Though multifamily REITs initially rallied on positive vaccine news, the sector reversed due to the third wave of COVID-19 cases and fears of renewed lockdowns. Manufactured housing (MH) underperformed after delivering strong performance through the first three quarters of 2020, while single family rental REITs suffered from the same investor psychology as MHs. Nonetheless, growth fundamentals for 2021 remain in place with the population migration continuing to flow towards the suburbs.
• Hotel REITs and retail REITs were among the largest beneficiaries of the vaccine announcements. The Portfolio moved to an overweight position in retail REITS after starting the period at an underweight. Both mall and shopping center REITs soundly beating the broader REIT group. While tenant health has taken a step back, valuation in the space remains compelling. We believe the first half of 2021 will continue to show downward pointing occupancy statistics for the space, but after vaccinations of the broader population occur, we expect that to change course.
• In the vaccine-driven rotation to “value” stocks, industrial REITs lagged in the quarter. Our overweighting to the sector was a detractor, but we reduced exposure to fund relative value purchases in retail and hotels. The sector enjoys significant and strengthening tailwinds, including an explosion of online shopping growth that are unlikely to reverse.Self-storage REIT performance dragged on performance due to the Portfolio’s overweight position. Despite fears of new supply in certain markets on the horizon, the REITs have been able to successfully reinstate rent increases to existing customers while rebuilding occupancy.
• The net lease sector slightly outperformed the benchmark total return, as seemingly less focus was directed towards rent collection percentages. Though the space hurt the Portfolio’s relative performance, the focus for net lease remains on portfolios with a pathway to external or internal growth.
• The health care sector outperformed the index, led by senior housing, after trailing throughout the year. Senior housing was led by vaccine news and positive move-in rates, but it is yet to be seen whether occupancy has troughed. Medical office buildings (MOBs), which had outperformed senior housing up to this point, pulled back on a relative basis. The Portfolio’s tilt towards MOBs and life science during the quarter detracted as the market rotated towards senior housing and hospitals.
• Datacenter REITs lagged the broader REIT sector during the period. The portfolio shifted towards an equal-weight position during the quarter, leading it to be a positive contributor to results both for portfolio allocation and stock selection. The growth drivers for the space are strong, but stock valuation prices in this expected growth.

Outlook

• The Federal Reserve’s (Fed) intentions are clear – rates are to remain anchored near zero until inflation takes hold. The Fed remains committed to maintaining an aggressive pace of asset purchases, even as its balance sheet has grown by over $3.2 trillion since the end of February. Fiscal policy is playing a leading role with the late passage of a new COVID-19 relief bill provides for ongoing enhanced unemployment benefits, $600 stimulus checks, and continued aid for small businesses and transportation. At a value of $900 billion, while smaller than the $2.5 trillion CARES Act, the package still weighs in at over 4% of GDP. Under a Biden administration, policymakers are likely to support actions that seek to drive growth until the tide lifts all boats.
• While a strong rebound is likely, in our view we’re not going to return to the old normal. The pandemic accelerated trends that were already in place and focused an unflinching spotlight on imbalances and sectors with weak value propositions. Work from home is here to stay, and demand for office space and business travel will likely face a long recovery; as will brick-and- mortar retail. We do not believe many office, hotel and retail properties will ever recover pre-COVID-19 occupancy levels.
• On the bright side, the economy has been surprisingly resilient, and strong growth will ease the transition back to normality. REIT stocks remain attractively valued, particularly against the backdrop of Fed actions, improving economic growth, and low interest rates. Slow vaccine rollout, new vaccine-resistant strains, and higher 10-year U.S. Treasury rates are all risks that could cause the group to deliver uninspiring returns again in 2021.

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 FTSE NAREIT Equity REITs Index is designed to present investors with a comprehensive family of REIT performance indexes that spans the commercial real estate space across the U.S. economy. The FTSE NAREIT Equity REITs index contains all Equity REITs not designated as Timber REITs or Infrastructure REITs. 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 Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Investment risks associated with investing in real estate securities, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes and differences in real estate market values. Because the Fund invests more than 25% of its total assets in the real estate industry, the Fund may be more susceptible to a single economic, regulatory, or technical occurrence than a fund that does not concentrate its investments in this industry. These and other risks are more fully described in the fund'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.