Portfolio Commentary

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2Q18 Portfolio Commentary

Global Multi-Sector Bond Composite Investment Environment The bond market, as represented by the Bloomberg Barclays Global Aggregate Bond Index, returned -2.78% during the quarter. Government bonds outperformed corporate credit as investors flocked to more defensive assets on multiple occasions, although both asset classes generated negative returns. Securitized credit performed well. Rising trade tensions and the formation of a populist government in Italy were the primary causes of volatility. Investment-grade corporate spreads widened, with tapering demand for U.S. securities, debt-funded merger-andacquisition (M&A) activity and steady supply further impacting valuations. High-yield spreads also widened, but to a lesser degree. Late in the period, central bank action took center stage. The Federal Reserve (Fed) raised its benchmark rate for the second time this year, reflecting near-term confidence in the U.S. economy. However, while the Fed upwardly revised its short-term economic projections, it did not lift its long-term expectations for the terminal rate or economic growth. The Treasury curve flattened, with the spread between the 10-year bond and the 2-year note falling from 47 to 33 basis points. In Europe, the European Central Bank (ECB) extended its asset purchase program through year-end, at a reduced rate. In a decisively dovish move, the central bank also announced its plans to hold the overnight rate steady through summer 2019. Core European rates generally rallied, with particularly strong performance in intermediate-dated bonds.

Performance Discussion The Portfolio underperformed its benchmark, the Bloomberg Barclays Global Aggregate Bond Index. Our exposure to peripheral Europe weighed heavily on performance during the quarter and contributed to relative underperformance in our sovereign debt allocation. Volatility in the region stemmed from the increasing likelihood, and eventual approval, of a populist coalition government in Italy. We maintain a favorable outlook for Spain and Portugal, two countries that have tightened their fiscal belts and increased the competitive nature of their economies. We anticipate sovereign spreads to compress toward core European rates as Spain and Portugal benefit from both economic strength and ratings upgrade momentum. Mindful of the challenges in Italian politics, we trimmed our exposure but maintained an overweight allocation to both countries’ government bonds. This positioning negatively impacted performance, as the market still lumps Spain and Portugal together with Italy in times of stress.

Highlights • The Portfolio underperformed its benchmark during the quarter. • Our exposure to peripheral Europe weighed on relative performance, as investors grappled with the increasing likelihood, and eventual approval, of a populist coalition government in Italy. • We are growing ever more cautious on the global economic cycle, and we intend to maintain a more conservative stance. Page 1 of 3

Chris Diaz, CFA Portfolio Manager

Ryan Myerberg Portfolio Manager

2Q18 Portfolio Commentary Our out-of-index exposure to high-yield corporate credit further weighed on results, largely due to a position in Telecom Italia. Italy’s tumultuous political landscape negatively impacted the company during the quarter. We continue to like the Italian telecommunications issuer, but materially reduced our position on expectation that broader risk-off sentiment in the region would impact performance. Telecom Italia continues to execute well versus comparable investment-grade telecommunications issuers, and we believe it is a candidate for investment-grade ratings. The company has focused on operational improvements and repairing its balance sheet. We appreciate its ability to generate free cash flow and management’s emphasis on using that cash to pay down debt. While the aforementioned securities disappointed, other positioning performed as intended. As spreads widened, our underweight allocation to investment-grade corporate credit aided relative results. In our view, credit risk is asymmetrically skewed against us at this point in the credit cycle, and we have focused on diversifying our spread product exposure. Our

allocations to commercial mortgage-backed securities (CMBS) and assetbacked securities (ABS) also benefited relative performance. Within CMBS and ABS, we aim to invest in positions with the ability to generate more income than the index, which proved beneficial during the quarter. At the individual issuer level, an out-of-index position in Tesco supported relative performance. We owned the British multinational grocery and general merchandise retailer on the belief that it is a strong candidate for ratings upgrades. The company tendered for bonds during the quarter, which took us out of our position. Our overweight allocation to Australian government debt also aided results. With U.S. rates set to move higher, we sought duration opportunities in other parts of the globe, including Australia. In the absence of inflation, we expect the Reserve Bank of Australia to keep rates on hold, which they did during the quarter. Our exposure benefited when rates fell across the majority of the country’s sovereign curve.

For detailed performance information, please contact a Janus Henderson Institutional team representative.

Outlook We are growing ever more cautious on the global economic cycle, believing that we are closer to the end than we are to the beginning. We are watching for renewed signs of strength in Europe, or China, or emerging markets, to indicate that global growth can continue to expand. In the interim, we believe it will be difficult for risk assets to perform well. Volatility has also returned to markets as central banks begin to withdraw liquidity, and we are mindful of a number of geopolitical risks, including trade policy, that could incite a sustained risk-off mindset. As the Fed continues to hike, but the sustainability of growth long term remains uncertain, we expect a higher but flatter Treasury curve. Other major central banks have scaled back hawkish rhetoric, and we anticipate continued divergence in policy rates between the U.S. and the rest of the developed world. We remain underweight core U.S. and European interest rate risk, and continue to seek duration opportunities in countries where we expect central banks to reduce rates or keep them on hold. At this juncture, we find corporate credit to be generally unattractive. We acknowledge that U.S. corporate fundamentals are strong and tax reform is beneficial. However, rates are rising and valuations are near the expensive end of their ranges. As investment-grade issuers seek to buy growth to combat industry disruption, we anticipate that debt-funded M&A will weigh on valuations, as it has in recent months. Demand is also

tapering, due to a combination of new repatriation policies and higher hedging costs. In contrast, shrinking high-yield supply is supporting valuations. However, given that spreads remain near the tightest levels of this credit cycle, we question the sustainability of this trend. Emerging markets have also been challenged of late amid dollar strength and climbing U.S. rates. In the current environment, this is another asset class that we find generally unattractive, particularly given the potential for contagion from idiosyncratic issuer risk and the asymmetric risk profile of the asset class should markets encounter a major risk-off event. In light of this landscape, we intend to maintain a more conservative stance. We are focused on mitigating drawdown risk, particularly in our spread product portfolio, but we remain opportunistic. We will continue to seek favorable risk-adjusted carry opportunities in shorter-dated and floating rate spread products with minimal interest rate risk. We have renewed our emphasis on attractively valued, non-cyclical companies with business models designed to generate consistent free cash flow. Our analysts are also seeking issuers with fundamental improvement stories and the potential to generate outperformance, regardless of the broader market environment, as they progress through an upgrade cycle. Given the asymmetric risk at this point of the cycle, we believe security avoidance is as important as security selection. This approach aligns with our core tenets of capital preservation and delivering strong risk-adjusted returns.

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2Q18 Portfolio Commentary Representative Account Top Relative Contributors and Detractors Held for the Quarter Ended 6/30/18 Top Contributors

Average Weight (%)

Relative Top Detractors Contribution (%)

Average Weight (%)

Relative Contribution (%)

Republic of Argentina

2.21

0.08

Portugal (Republic of)

5.81

-0.19

Tesco PLC

0.97

0.07

Telecom Italia SpA

1.05

-0.09

Australia (Government Of)

4.89

0.05

Spain (Kingdom of)

4.52

-0.08

Sweden (Kingdom Of)

2.03

0.02

Japan (Govt of)

5.60

-0.05

Italy (Republic of)

2.31

0.02

Canada (Government Of)

4.58

-0.03

The holdings identified in this table, in compliance with Janus Henderson policy, do not represent all of the securities purchased, held or sold during the period. To obtain a list showing every holding as a percentage of the portfolio at the end of the most recently available disclosure period contact a Janus Henderson institutional team representative. Relative contribution is the difference between the contribution by ticker to the portfolio's performance versus that ticker's contribution to the benchmark's performance. It reflects how the portfolio's holdings impacted return relative to the benchmark. Cash and tickers not held in the portfolio are excluded.

For more information, please visit janushenderson.com. Past performance is no guarantee of future results. Discussion is based on performance gross of fees. 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. As of 6/30/18 the top ten portfolio holdings of the Representative Account are: Japan Government Ten Year Bond (3.80%), Canadian Government Bond (3.16%), Japanese Government CPI Linked Bond (3.06%), United States Treasury Note/Bond (2.68%), Australia Government Bond (2.53%), Australia Government Bond (2.41%), Japan Government Five Year Bond (2.09%), Italy Buoni Poliennali Del Tesoro (2.09%), Spain Government Bond (2.07%) and Portugal Obrigacoes do Tesouro OT (2.04%). There are no assurances that any portfolio currently holds these securities or other securities mentioned. Portfolio holdings are as of the date indicated, and are subject to change. This material should not be construed as a recommendation to buy or sell any security. The opinions are as of 6/30/18 and are subject to change without notice. Janus Henderson may have a business relationship with certain entities discussed. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. For fixed income portfolios, relative contribution is calculated by rolling up securities by C-0618-17931 10-30-18

ticker and comparing the daily returns for securities in the portfolio relative to those in the index. Relative contribution is based on returns gross of advisory fees, and may differ from actual performance. Investing involves risk, including the possible loss of principal and fluctuation of value. Global Multi-Sector Bond portfolios, benchmarked to the Bloomberg Barclays Global Aggregate Bond Index, pursue maximum total return through current income and capital appreciation by investing in intermediate-term global fixed income securities. The portfolios invest in US and non-US securities issued in both foreign currency and US dollars. Under normal market conditions, emerging market debt is permitted up to 30% and high yield debt to 35%. 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. Prior to September 2013 the composite was known as the Global Core Plus Bond Composite. The composite was created in February 2011. 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. Janus Capital Management LLC serves as investment adviser. FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION

388-42-40687 07/18

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