Portfolio Commentary


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2Q18 Portfolio Commentary

Global Research Growth Equity Composite Investment Environment

Portfolio Management

• Broadly, global stocks finished the quarter with modest gains, as strong corporate earnings were offset by escalating trade tensions and other geopolitical events. • In Europe, for example, stocks rose on positive quarterly results, but later retreated as investors worried about Italy’s new populist government and the potential impact of a trade war on Europe’s export-oriented economy. • Among other regions, U.S. stocks finished the period in positive territory, while emerging markets sold off on a rising U.S. dollar, trade worries and higher interest rates.

Performance Discussion The Portfolio underperformed its benchmark, the MSCI All Country World Growth IndexSM. While we aim to outperform over shorter periods, our goal is to provide consistent outperformance long term by focusing on what we consider our strength: picking stocks and avoiding macroeconomic risks. Stocks are selected by our six global sector teams, which employ a bottom-up, fundamental approach to identify what we consider the best global opportunities. Our stock selection in the consumer and technology sectors detracted most from relative performance. Stock selection in the financial and industrial sectors contributed most to relative results. On an absolute basis, Nektar Therapeutics was our largest detractor. Shares of the biotech company fell after a clinical trial update on the company’s experimental immuno-oncology treatment, NKTR-214, showed melanoma and renal cell cancer patients did not respond as well to the drug as seen in earlier cohorts of patients. While the results were a setback, we believe that on further follow-up with larger numbers of patients that there will still be shown to be a benefit from the therapy. We still see exciting potential for NKTR-214 to be used in regimens to fight multiple types of cancer, and also like other treatments in the company’s pipeline. Taiwan Semiconductor (TSMC) was another detractor. The stock was down after the company lowered earnings guidance, due to weak demand in the smartphone supply chain. We are looking past the near-term noise, and continue to like the company’s long-term growth potential. In our view, Taiwan Semiconductor is exceedingly well placed within the semiconductor value chain as we believe it will manufacture the majority of mobile application processors in next-generation smartphones and tablets.

Highlights • Broadly, global stocks finished the quarter with modest gains, as strong corporate earnings were offset by escalating trade tensions and other geopolitical events. • The Portfolio underperformed its benchmark. • Although we don’t expect multiples to expand, we think stocks can deliver positive returns on underlying earnings growth. Page 1 of 4

Team Managed

2Q18 Portfolio Commentary Silicon wafer manufacturer Shin-Etsu Chemical also detracted. Stocks tied to many cyclical industries or businesses were down this quarter due to concerns about slower global growth in a protectionist trade environment, and Shin-Etsu was no exception. We continue to like the stock, however, and believe improving supply and demand dynamics for the silicon wafer industry have been underappreciated by the market. Amazon was one of our largest contributors to Portfolio performance. The stock was up after the company’s quarterly results topped consensus revenue and earnings estimates. Accelerating revenue for its nascent advertising business was particularly impressive. Amazon is a longtime holding in our portfolio and our views on the company remain the same: The company’s scale and distribution advantage have entrenched it as the dominant e-commerce platform, which should allow it to continue gaining consumer wallet share as shopping gravitates to online and mobile purchases. Meanwhile, Amazon Web Services is revolutionizing the way companies utilize IT services, using its scale to offer a disruptive pricing model to businesses seeking IT functions in the cloud.

Safran was another top contributor. The company manufactures commercial jet engines, including a partnership with General Electric for CFM and LEAP engines. Greater fuel efficiency associated with the LEAP engines has led to wide adoption by commercial airlines, and has helped lift the stock. Stronger-than-expected growth of its aftermarket business has been another driver. We continue to hold the stock and believe the cash-flow-generation potential of its LEAP engine business has been underestimated by the market. Salesforce also added meaningfully to performance. Another quarter of strong revenue and billings growth across its customer relationship management cloud offerings drove the stock higher. We continue to like Salesforce’s position as a leader in cloud-based enterprise software, and believe it will benefit as sales, marketing and customer service departments move more functions from on-premises software to the cloud, and as the company moves into new adjacencies through its platform ecosystem and acquisitions.

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

Outlook In recent months, global trade tensions have come to dominate equity markets. We believe these tensions now pose the greatest risk to stocks, especially if a trade war causes consumer and corporate confidence to wane. Indeed, individuals and companies are unlikely to spend if growth – supported by integrated supply chains and access to global markets – falters. So far, though, our analysts report that most firms seem undeterred by potential trade restrictions and continue to invest. We also see a healthy number of mergers and acquisitions, and retail sales have been robust. Given this behavior, we believe the economy remains on sound footing. We also think tariffs, if and when they are applied, will not be so severe that they lead to a debilitating trade war. After all, it would be counterproductive for the Trump administration to upset global economic growth or to sap the strength of the U.S. technology sector.

With that in mind, we think valuations look attractive. Large-cap stocks, in particular, have an average price-to-earnings (P/E) ratio of 16 to 17. Such P/Es are undemanding in light of continued strength in corporate earnings, still-unrealized savings from tax reform and historically low interest rates. Multiples for small- and mid-cap stocks have pushed higher, but these market caps benefit from a larger universe of stocks, allowing us to be selective. We believe attractive valuations and solid earnings will help offset higher long-term rates, should they materialize. Therefore, our base case remains: Although we don’t expect multiples to expand, we think stocks can deliver positive returns on underlying earnings growth. That leads us to favor growth stocks across most sectors, with a long-term bias toward growth sectors in health care and technology. Trade tensions may make headlines, but fundamentals drive our confidence.

Representative Account Top Contributors and Detractors for the Quarter Ended 6/30/18 Top Contributors

Ending Weight (%)

Ending Weight (%)

Contribution (%)

Amazon.com Inc

3.93

0.54

Nektar Therapeutics

0.29

-0.35

Safran SA

2.13

0.31

Taiwan Semiconductor Manufacturing Co Ltd (ADR)

1.47

-0.25

Facebook Inc

1.53

0.31

Starbucks Corp

1.19

-0.21

Alphabet Inc

4.08

0.29

British American Tobacco PLC

1.86

-0.19

Salesforce.com Inc

1.76

0.28

Shin-Etsu Chemical Co Ltd

1.04

-0.16

Contribution (%) Top Detractors

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.

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2Q18 Portfolio Commentary Top Contributors

Top Detractors

Amazon: We believe the online retailer offers an appealing combination of value and convenience. As a result, membership in its annual subscription service, Amazon Prime, has increased at a double-digit rate in recent years, creating a loyal base of shoppers who tend to spend more than non-Prime members. In addition, Amazon Web Services (AWS), the firm’s cloud-computing business, is an industry leader. Importantly, we believe AWS has a long runway of growth, as we are only in the early stages of companies shifting workloads from onsite servers to the cloud.

Nektar Therapeutics: Nektar Therapeutics is a clinical-stage biopharmaceutical company, which engages in developing therapies to address chronic pain, cancer and autoimmune diseases. The company has two leading drug candidates, NKTR-181, a treatment for moderate to severe chronic low back pain, and NKTR-214, a novel immunooncology (IO) therapy. We believe both drugs could have significant market potential.

Safran: Safran manufactures commercial jet engines, including a partnership with General Electric for CFM and LEAP engines. We like the recurring revenue streams associated with its aftermarket business servicing its jet engines, and also believe the market has underestimated its future free cash flow generation as its new LEAP engines gain market share. Due to the conservative front-loading of costs recognized on the development and production buildup for the new LEAP engine, we believe the company is under-stating its profitability, a factor which we believe is underestimated by the market. Facebook: The social networking website facilitates the sharing of information, photographs, website links and videos among family, friends and coworkers. We believe the company will be among the few mobile platform operators that disproportionately benefit from meaningful new developments in advertising/marketing models, which we expect will develop over the next several years. In particular, we think we are in the early phase of advertising dollars shifting to mobile, where Facebook is gaining traction with app developers, direct response advertisers, brand advertisers and small- to medium-size businesses. Alphabet: We believe the Internet search engine leader, which was formerly known as Google, is well positioned with a resilient core search business and optionality around YouTube, cloud computing and hardware. The company is also benefiting from the secular shift toward mobile, video, programmatic, and cross-device advertising. Salesforce: Salesforce is a global cloud computing company best known for its customer relationship management (CRM) solutions. We believe the flexibility and low-cost nature of the company’s cloud-based offerings give it a competitive advantage over on-premises legacy solutions.

Taiwan Semiconductor: TSMC is a leading foundry, or third-party manufacturer of semiconductor chips. We believe TSMC is a large beneficiary from the transition to mobile application processors in nextgeneration smartphones and tablets. Starbucks: The coffee retailer is a global brand, selling a habitual product, and we believe the company has a sustainable margin profile. Given these characteristics, we believe the stock trades at an attractive multiple relative to the market. Going forward, we like the potential for Starbucks to grow earnings per share and return cash to shareholders. British American Tobacco: The company produces a range of cigarettes and other tobacco products that it markets globally. Key brands include Dunhill, Kent, Pall Mall and Lucky Strike. British American continues to earn high returns on invested capital (ROIC), and we believe it is poised to generate steady profit growth as well as an attractive dividend yield. The company is a leader in innovation and growth, with a powerful brand portfolio and high consumer loyalty. We like the company’s geographic mix and competitive moat in nations including Brazil, Russia, Egypt and India. We believe the company will benefit from its acquisition of Lorillard, as roughly 20% of its profits will emanate from the U.S., which is presently an attractive tobacco market. Shin-Etsu Chemical: Shin-Etsu Chemical is the world’s largest manufacturer of polyvinyl chloride (PVC) and of silicon wafers for making semiconductors, and a leading provider of cellulose, silicone and integrated circuit photoresists. Given its market position, the company should benefit from increased demand and constrained supply for silicon wafers, in our view. We think the market is underappreciating the potential for significant price improvement for silicon wafers and its impact on the company’s profitability.

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2Q18 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 6/30/18 the top ten portfolio holdings of the Representative Account are: Alphabet Inc (4.07%), Amazon.com Inc (3.92%), Tencent Holdings Ltd (2.45%), Apple Inc (2.21%), Alibaba Group Holding Ltd (ADR) (2.17%), Visa Inc (2.15%), Safran SA (2.13%), Mastercard Inc (2.08%), British American Tobacco PLC (1.86%) and Salesforce.com Inc (1.76%). 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. Security contribution to performance is measured by using an algorithm that multiplies the daily performance of each security with the previous day’s ending weight in the C-0618-18368 10-30-18

portfolio and is gross of advisory fees. Fixed income securities and certain equity securities, such as private placements and some share classes of equity securities, are excluded. Investing involves risk, including the possible loss of principal and fluctuation of value. Global Research Growth Equity portfolios, benchmarked to the MSCI AC World Growth Index, invest in high conviction investment ideas selected by the Janus Henderson research team, based on rigorous fundamental research. Investments will primarily be in large and mid size companies from around the world. The portfolios generally contain 80 to 120 securities and maintain sector weightings, based upon how Janus Henderson aligns sector research teams, that closely follow the MSCI AC World Growth Index. Effective January 1, 2009 the composite definition was expanded to also include proprietary mutual funds. The composite was created in April 2005. 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

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