Portfolio Commentary


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4Q18 Portfolio Commentary

Long Duration Composite Investment Environment The Bloomberg Barclays U.S. Long Government/Credit Bond Index returned 0.78% for the quarter. Slowing economic growth in Europe and China, weakening U.S. data and a lack of resolution in U.S.-China trade relations shook investor confidence over the period. In December, the Federal Reserve (Fed) raised interest rates for the ninth time in this hiking cycle. Fed rhetoric added to market volatility as it created concern over the possibility that the central bank might maintain its hiking cadence despite economic and market weakness. Oil prices also made headlines as the West Texas Intermediate (WTI) price per barrel tumbled more than 40% intraquarter. Amid these events, a risk-off mindset prevailed. Weakness in equity markets and increasing risk premiums contributed to widening corporate credit spreads. Long corporate spreads widened more than 30% over the quarter, and drove the majority of spread widening for the full year. As financial conditions tightened, liquidity became more challenged, exacerbating market volatility late in the period. Investors turned to risk-free assets, and yields fell across the Treasury curve. A repricing in market expectations for the Fed’s ability to hike in 2019 also contributed to falling yields. The yield on the 30-year ended December at 3.01%, down from 3.21% in September. The corporate pension funded ratio, as measured by the Milliman 100 Pension Funding Index (PFI), improved to 89.9% from 87.6% one year ago, and remains near the highs of the last five years.

Darrell Watters Portfolio Manager

Michael Keough Portfolio Manager

Performance Discussion The Portfolio outperformed its benchmark, the Bloomberg Barclays U.S. Long Government/Credit Bond Index, for the quarter ended December 31, 2018. Tightening financial conditions, diminished liquidity and the credit rating downgrades of a few large investment-grade complexes helped to confirm our view that we are progressing through the later stages of the credit cycle. Given our late-cycle concerns and the darkening macroeconomic picture, we sought to upgrade the quality of our holdings, and to emphasize our highest-conviction positions. We decreased our allocations to the more cyclical midstream energy, automotive and building materials sectors. We added to more defensive sectors such as cable-satellite communications and packaging. Security selection drove relative outperformance during the quarter. Our positioning in AnheuserBusch InBev and General Electric – two single-A rated securities that were downgraded to BBB during the quarter – proved particularly beneficial to relative results. These downgrades were

Highlights • Concerns of a policy misstep by the Fed coupled with slowing global economic growth and continued trade tensions challenged riskier assets during the quarter. • The Portfolio outperformed its benchmark, with security selection the primary driver of relative results. • We are monitoring the pace of slowing growth and the impact of Fed policy for insight into whether this is another speed bump in an extended economic cycle or if recession probabilities are increasing. Page 1 of 3

Mayur Saigal Portfolio Manager

4Q18 Portfolio Commentary driven by a combination of challenged fundamentals, levering acquisitions and elevated leverage profiles. On a single name basis, General Electric led relative contributors. The company’s fundamentals have been weak for an extended time, and in lieu of deleveraging, it has focused on returning more than $80 billion of capital to shareholders since 2015. New CEO Larry Culp’s efforts to turn around the company and repair the balance sheet may take place over time, but the highly leveraged balance sheet was no longer able to support single-A ratings. Our zero weight in the credit when it fell out of the single-A index led GE to be a strong contributor.

We were materially underweight Anheuser-Busch, given soft fundamentals and the fact that its debt pay-down progress is happening at a slower-thanexpected pace. This positioning proved beneficial given the dramatic spread widening that followed its downgrade by Moody’s. While we were pleased with the performance of the aforementioned positioning, a number of our positions in BBB rated issuers disappointed. Specifically, holdings in Lowe’s and Raymond James Financial weighed on performance. Given the risk-off sentiment prevalent throughout the quarter, our overweight allocations to these issuers in the lowest tier of the investment-grade space held back relative results.

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

Outlook There are plenty of risk factors on the horizon, including slowing global economic growth, unresolved trade disputes, the potential for Fed policy error and the continued progression of the credit cycle. As a result, we expect market volatility to persist. We will be closely monitoring U.S. economic data, particularly inflation figures, as well as Fed rhetoric. This will be pivotal in assessing the likelihood of the Fed hiking in excess of what is warranted and potentially accelerating a U.S. slowdown, versus it pausing in 2019. We are mindful of wage pressures and an uptick in oil prices near period end, as well as the importance of the U.S. dollar. Continued dollar weakness could create inflationary pressures and threaten the Fed’s ability to pause. However, our base case is that the Fed will be more cautious in its cadence throughout 2019. While the U.S. economic and corporate fundamental outlook is slowing, we do not expect an immediate acceleration toward the cycle’s end. We

are monitoring the pace of slowing and the impact of Fed policy for insight into whether we are going through another modest slowdown in this extended cycle or if recession probabilities are increasing for 2020. High debt loads and diminishing liquidity create headwinds for the outlook. Tighter financial conditions and escalated market volatility could also negatively impact business confidence and capital investment trends in 2019. Despite recent spread widening, overall levels have only repriced to longerterm averages, which we generally do not believe offer just compensation for the stated risk factors and the likely increase in defaults and downgrades to come. Our outlook is cautious and we intend to be deliberate in our corporate credit positioning, emphasizing our highestconviction names with consistent free-cash-flow generation potential, strong management teams and a commitment to paying down debt. Thorough vetting of opportunities, coupled with security avoidance remains critical as we strive to deliver on our core tenets of capital preservation and strong risk-adjusted returns.

Representative Account Top Relative Contributors and Detractors Held for the Quarter Ended 12/31/18 Top Contributors

Average Weight (%)

Relative Top Detractors Contribution (%)

Average Weight (%)

Relative Contribution (%)

U.S. Ultra Long-Term Treasury Bond

13.52

0.76

5-Year Treasury Notes

12.45

-0.24

GE Capital Corp.

0.31

0.08

Ultra 10-Year U.S. Treasury Futures

-6.56

-0.20

Anheuser-Busch Inbev NV

0.48

0.04

5-Year Treasury Notes

-10.20

-0.16

2 Year Treasury Notes

3.51

0.03

Lowe's Cos

0.86

-0.07

Georgia-Pacific

0.73

0.02

Raymond James Financial, Inc

1.00

-0.05

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. Certain derivatives, such as Interest Rate Swaps, may be excluded.

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4Q18 Portfolio Commentary

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 12/31/18 the top ten portfolio holdings of the Representative Account are: United States Treasury Note/Bond (6.41%), United States Treasury Note/Bond (3.68%), United States Treasury Note/Bond (3.07%), United States Treasury Note/Bond (2.59%), United States Treasury Note/Bond (2.51%), United States Treasury Note/Bond (2.36%), United States Treasury Note/Bond (1.96%), United States Treasury Note/Bond (1.92%), United States Treasury Note/Bond (1.92%) and United States Treasury Note/Bond (1.86%). 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 12/31/18 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. C-1218-21895 04-30-19

For fixed income portfolios, relative contribution is calculated by rolling up securities by 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. Long Duration portfolios, benchmarked to the Bloomberg Barclays Long Government/Credit Index, pursue maximum total return by investing in various incomeproducing 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. Janus Henderson provides investment advisory services in the U.S. through Janus Capital Management LLC, together with its participating affiliates. Janus Henderson is a trademark of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc. FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION

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