Long Duration Fixed Income


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Institutional Strategy Update

Long Duration Fixed Income

As of 6/30/17

Portfolio Management

Investment Philosophy We believe a bottom-up, fundamentally driven investment process can generate riskadjusted outperformance and capital preservation over time. Our comprehensive bottom-up view drives decision-making at a macro level, enabling us to make informed risk and sector allocation decisions.

Darrell Watters 

Head of U.S. Fundamental Fixed Income | Portfolio Manager



31 years of financial industry experience

Market Environment The Bloomberg Barclays U.S. Long Government/Credit Bond Index gained 4.39% in the second quarter. Investment-grade corporate credit was the strongest-performing asset class in the index. Long-corporate spreads tightened approximately 11 basis points, continuing the first quarter’s trend. The asset class was supported by a generally successful earnings season and strong demand for new issuance.

Mayur Saigal

Economic data, however, was decidedly weak during the quarter. While the unemployment rate continued to fall, job gains were lackluster and wage growth tapered. The Manufacturing Purchasing Managers’ Index slid. Core inflation, as measured by the Consumer Price Index, receded to 1.7% in May, the lowest reading since June 2015. Softer data coupled with a lack of reform progress from Washington nearly stamped out the reflation trade. The U.S. dollar lost ground, inflation breakevens retreated and longer dated Treasury yields rallied for much of the period. Many investors expected June’s interest rate increase by the Federal Reserve (Fed) to be the second and final hike of the year. The Fed did indeed raise its benchmark rate by 25 basis points and also outlined a plan to unwind its balance sheet, although no start date was specified. Fed Chairwoman Janet Yellen acknowledged the sequential slowdown in inflation as transitory and cited continued improvement in the labor market and steady economic growth as sufficient rationale for future rate increases. Market participants largely doubted that the state of the economy could justify tightening in line with Fed expectations – until the last week of the quarter. Late in the period a string of hawkish comments from developed-world central banks suggested that the era of ultra-accommodative monetary policy is nearing its end and government bonds began to sell off. Still, the U.S. Treasury curve flattened for the quarter. Short-term yields rose on Fed-driven volatility and intermediate and longer dated Treasurys rallied as investors expressed concern over the economic outlook. The 30-year Treasury yield notably fell 18 basis points to 2.83%, down from 3.01% in March. The decline in rates led to a decrease in the pension funded status. The funded ratio, as measured by the Milliman 100 Pension Funding Index (PFI), ended June at 83.5% versus 84.6% in March. However, the funded ratio has benefited from higher discount rates and positive asset returns over the last 12 months and is much improved from 76.7% last year.

Performance (%)

2Q 2017

YTD

1 Year

3 Year

5 Year

Since Inception

Composite (gross)

4.72

6.50

0.35

5.98

5.04

6.84

Composite (net)

4.65

6.36

0.07

5.70

4.76

6.55

Benchmark

4.39

6.03

-1.07

5.28

4.26

6.04

Difference (gross vs. index)

+0.33

+0.47

+1.42

+0.70

+0.78

+0.80



Head of Fundamental Fixed Income Risk Management



Portfolio Manager



15 years of financial industry experience

Michael Keough 

Portfolio Manager



11 years of financial industry experience

Strategy Characteristics Benchmark

Bloomberg Barclays Long Government/Credit Index

Duration Target

+/- 1 year

Expected Tracking Error 50 – 150 bps Minimum Credit Rating

BB

Assets Under Management

$553.6 M

Available Vehicles

Separate account

Inception Date

9/1/11

Actual results may vary, and the information should not be considered or relied upon as a performance guarantee.

Past performance cannot guarantee future results. Investing involves risk, including the possible loss of principal and fluctuation of value. Returns greater than one year are annualized. Returns are expressed in U.S. dollars. Composite returns are net of transaction costs and gross of non-reclaimable withholding taxes, if The gross performance results presented do not reflect the deduction of investment advisory fees, and returns will be reduced by such advisory fees and other contractual expenses as described in the individual contract and Form ADV Part 2A. Net performance results do not reflect the deduction of investment advisory fees actually charged to the accounts in the composite but they do reflect the deduction of model investment advisory fees based on the maximum fixed fee rate in effect for the respective time period. Actual advisory fees may vary among clients invested in the strategy shown and may be higher or lower than model advisory fees. Composites may include accounts with performance-based fees. Returns for each client will be reduced by such fees and expenses as negotiated in any client contract as discussed in Form ADV Part 2A. Index returns are provided to represent the investment environment during the periods shown. The index is fully invested, including the reinvestment of dividends and capital gains. Index returns do not include transaction costs, management fees or other costs, and are gross of non-reclaimable withholding taxes, if any. FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION

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Janus Henderson Long Duration (As of 6/30/17) Rep. Account (%)

Benchmark Index (%)

Variance (%)

Average Exposure

Total Return

Average Exposure

Total Return

Yield Curve Effect

Portfolio vs. Bench Price Effect

16.85

0.64





-0.01

0.12







0.12





10.20

3.30



0.08

-0.02

0.05



0.11

Corporates (IG)

69.12

4.94

50.90

4.95

-0.04

-0.11

0.03

0.11

0.09

0.08

Corporates (HY)

0.12

3.02







0.00

0.00

0.01



0.01

Government

30.21

3.79

38.90

3.97

0.05

-0.17

0.03

0.06



-0.03

Cash & Equivalents

0.55









0.01

0.00

-0.01



0.00

0.00

-0.07

0.04

0.23

0.09

0.29

Sector Attribution (3/31/17 – 6/30/17)

Futures Government Related

Total

Manager Comments (2Q17) 





We are concerned with the weakening U.S. economic outlook, and simultaneously wary of how far spreads have tightened. The U.S. rate market had begun to price in a slower growth outlook, which would be less of a tailwind for risk markets, yet investors continued to express interest in equities and corporate credit. We found this disconnect concerning, along with the general complacency prevalent across markets, because any shift in sentiment would likely come with increased volatility. As such, we modestly de-risked the Portfolio. We reduced exposure to sectors that we believe are exhibiting poor fundamentals and those that we believe may engage in merger and acquisition (M&A) activity. We broadly reduced our energy allocation. As the ramp-up in U.S. supply continues to cause a supply/demand imbalance and put downward pressure on the price of crude oil, we believed it prudent to trim or close a number of our energy holdings. We increased emphasis on non-cyclical names with the ability to generate sustainable free cash flow even in an economic downturn. We added to the health care sector, in particular. We also sought to increase the credit quality of our corporate allocation. Our positioning in investment-grade corporate credit was the leading contributor to relative performance. Spreads tightened and our overweight allocation proved beneficial. Our security selection in the asset class also aided results. With corporate credit performing well,

Spread Carry

Excess Asset Allocation

Excess Security Selection

Total Out/Under Performance

our underweight allocations to both Treasury securities and government-related debt further supported outperformance. Government-related securities include government agency debt as well as debt issued by state-owned firms. No asset class meaningfully detracted from results. 

At the credit sector level, electric utilities and food and beverage were among the top contributors, primarily due to strong security selection. Brokerage, asset managers and exchanges also aided relative results, largely due to our overweight allocation. Our position in Raymond James Financial boosted results in the sector. We like the stability of the company’s business model and appreciate the management team’s conservative approach to the balance sheet. Standard & Poor's upgraded the company’s credit rating during the period and Raymond James is under review for an upgrade at Moody’s.



Relative sector detractors included pharmaceuticals, life insurance and media entertainment. All three sectors generated strong returns over the quarter, and our underweight allocations weighed on results. At the individual issuer level, a position in Georgia-Pacific modestly detracted from relative performance. We like the manufacturer of tissue, pulp, paper, packaging and building products for its solid and diverse business model. The issuer’s business diversity and strong credit metrics contributed to Moody’s decision to upgrade Georgia-Pacific’s credit rating during the period. Average Weight (%)

Relative Contribution (%)

5 Year Treasury Notes

4.65

-0.06

0.07

U.S. Treasury Notes/Bonds

30.21

-0.03

0.96

0.05

Goldman Sachs Group, Inc.

1.90

-0.02

JPMorgan & Co., Inc.

1.52

0.04

Georgia-Pacific

0.76

-0.02

10 Year Treasury Notes

0.97

0.03

U.S. Bancorp

0.76

-0.02

Average Weight (%)

Relative Contribution (%)

30 Year U.S. Treasury Bonds

3.15

0.10

30 Year U.S. Treasury Bonds

1.55

Raymond James Financial, Inc.

Top Contributors

Attribution is calculated by geometrically linking daily returns for the portfolio and the index. Total returns are gross of advisory fees and may differ from actual returns. Total returns represent the time a security or group was held within the portfolio. Sector allocation source: Barclays.

Bottom Detractors

Portfolio variance consists of three elements 1) Portfolio level impact of stock selection relative to the benchmark; 2) Group weight factors such as sectors, regions, or market capitalization; and 3) Total portfolio impact. Attribution calculation methodology source: Wilshire Atlas, daily Brinson-style performance attribution.

FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION

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Janus Henderson Long Duration (As of 6/30/17) Outlook 





U.S. growth and inflation will likely remain subdued for the remainder of the year. In our view, the lack of inflation is concerning, and the odds of the reflation trade returning are now greatly reduced. We anticipate longer dated Treasury yields will be generally range-bound as investors express concern around the U.S. economic outlook and amid a robust global demand for yield. Yields on the front end of the curve should continue to climb as the Fed looks to tighten. We believe the Fed’s eagerness to elevate interest rates off historical lows presents the opportunity for policy error, particularly amid flagging inflation data and uninspiring growth. Corporate credit spreads are approaching the tightest levels of the cycle and we see limited potential for further spread tightening. Companies are facing subdued top line growth along with moderate wage pressures and climbing health care costs. This has resulted in many companies purchasing growth through consolidation activity, while organic margin growth remains constrained. While we still believe relief in the form of pro-business policies will come from the Trump administration, any initiatives will likely be diluted, and take much longer to implement, versus original expectations. Without business-friendly initiatives from Washington, the sustainability of margins comes into question, in our view. A disappointing second-quarter earnings season could result in the delay of business investment until 2018, potentially causing risk markets to pull back and corporate credit spreads to widen. However, if considered successful, moderate spread tightening and a continued sideways grind in the credit markets is likely. In regards to long duration credit, the improvement in pension plans’ funded status is likely to drive increased implementation of liability driven investment strategies, which in turn could drive additional demand for the asset class. While we seek to participate in spread tightening, our primary goal is capital preservation and we intend to further increase the quality of our corporate allocation in the months ahead. We are looking for opportunities to increase the credit ratings profile of our holdings. Our analysts are also focused on identifying high-quality business models in traditionally defensive, non-cyclical sectors. We believe security avoidance is equally as important as security selection, particularly as late-cycle M&A risk grows. We remain thoughtful around position sizing with the intent of maintaining a well-diversified portfolio. This approach reflects our commitment to deliver capital preservation and strong risk-adjusted returns for our clients.

Long Duration portfolios, benchmarked to the Barclays Long Government Credit Bond Index, pursue maximum total return by investing in various income-producing securities. The portfolios will maintain an average-weighted effective maturity of ten years or greater and, under normal market conditions, will limit their investments in high yield/high risk bonds to less than 10%. Total return is expected to result from a combination of current income and capital appreciation, with income normally being the dominant component of total return. The composite was created in September 2011. *Bond ratings provided by Standard & Poor's. Not rated securities are not rated by S&P but may be rated by other rating agencies. Fixed income country, regional, sector and industry weights based on Barclays classifications. Equity equivalents may include common and preferred stock.

Rep. Account

Benchmark Index

90

534

Weighted Average Maturity

23.63

24.16

Effective Duration

15.17

15.24

Yield to Worst

3.63

3.65

Rep. Account

Benchmark Index

Treasuries

34.16

39.23

Credit (IG)

64.72

50.77



10.00

Other

0.99



Cash & Equivalents

0.14



Rep. Account

Benchmark Index



2.38

AA

39.73

48.53

A

16.50

20.79

BBB

41.84

27.74

BB

1.06

0.22

Not Rated*

0.73

0.35

Cash & Equivalents

0.14



Rep. Account

Benchmark Index

6 Month

0.01

0.01

2 Year

0.08

0.08

5 Year

0.29

0.29

10 Year

1.60

1.63

20 Year

6.00

6.03

30 Year

7.34

7.20

Characteristics Number of Issuers

Asset Allocation (%)

Government Related

S&P Ratings (%) AAA

Key Rate Duration

Information relating to portfolio holdings is based on the representative account in the composite and may vary for other accounts in the strategy due to asset size, client guidelines and other factors. The representative account is believed to most closely reflect the current portfolio management style. The views expressed are those of the portfolio managers and do not necessarily reflect the views of others in the organization. They are subject to change, and no forecasts can be guaranteed. The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. Janus Capital Management LLC serves as investment adviser. Janus Henderson is a trademark of Janus Henderson Investors. © Janus Henderson Investors. The name Janus Henderson Investors includes HGI Group Limited, Henderson Global Investors (Brand Management) Sarl and Janus International Holding LLC.

C-0917-12489 10-30-17 FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION

399-15-43680 09-17 Page 3 of 3