Portfolio Commentary


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3Q17 Portfolio Commentary

Global Research Fund VIT Global Research Portfolio Investment Environment

Portfolio Management

Global equities rose during the quarter. Optimism early in the period was driven by the view that the global economy was experiencing a period of synchronized growth. Also supporting the rally was a well-received earnings season for U.S. stocks. Geopolitical concerns caused markets to wobble in August as North Korea fired missiles over Japan. Uncertainty surrounding monetary policy also gave investors pause. For much of the period, they dialed back expectations that the Federal Reserve (Fed) would raise interest rates again in 2017. But late-period comments by Fed officials, culminating in their September policy meeting, swung expectations back toward an additional increase by year-end. The central bank also unveiled its plan to reduce the size of its balance sheet beginning in October. The prospects of synchronized growth and a U.S. dollar that weakened over much of the period propelled emerging market stocks. Gains in the U.S. largely outpaced those in Europe.

Performance Discussion The Fund underperformed its benchmark, the MSCI World Index, and its secondary benchmark, the MSCI All Country World Index. 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 industrials and technology sectors detracted the most from relative performance during the quarter. Stock selection in the financial and energy sectors contributed to relative results. United Continental was one of our largest detractors. The company’s management team has said it will lower prices to challenge competitors that add capacity in their hub markets. While renewed worries about a price war negatively affected the stock, we agree with United’s near-term approach. In our view, United has a stronger financial position than its competitors and can withstand a price war to defend its market share in key cities. Once low cost carriers back out of those markets, we expect United to remain disciplined with capacity and pricing. We also believe the backdrop for United remains constructive as U.S. vacation and business travel demand remains high and Chinese travel – which is a larger market for United than other major airlines – remains strong.

Highlights • Global stocks gained during the quarter. • The Fund underperformed its benchmark. • We think equity markets can rise but we expect a broader dispersion of stock performance than we have seen in recent years because we believe there will be a broader range of earning outcomes. Page 1 of 4

Team Managed

3Q17 Portfolio Commentary British American Tobacco was another detractor. The stock was hurt in the quarter by the FDA’s announcement in late July that it wishes to reduce the nicotine content in combustible cigarettes. Following the completion of the acquisition of Reynolds American, the U.S. is now nearly half of British American Tobacco’s business. Despite the negative headlines, we believe that the Food and Drug Administration’s statement shows an increased importance being placed on “reduced harm tobacco products” and is an attempt to accelerate the switch from traditional cigarettes to next-generation products. This is an area where British American Tobacco is well placed, as a global e-vapor company globally, while their heated tobacco product, glo, has performed well following its launch in Japan and South Korea. Nike also detracted from performance. Sporting goods retailers collectively reported disappointing sales results this quarter, demonstrating that the operating environment in this important wholesale channel remains weak. We continue to like Nike, however, and believe its brand is a competitive advantage that would be hard for other sportswear companies to replicate. We’re cautiously optimistic that Nike is making a successful transition to becoming a direct-to-consumer business, and that innovations in its manufacturing capabilities will lower product costs and help the company improve margins. While those stocks detracted from our performance, we were pleased by the results of many other companies in our portfolio. NRG Energy was a top contributor. We have long felt the market was overly focused on the volatility of the utility company’s earnings and that NRG wasn’t getting enough credit for its cash flow generation potential. This quarter, the company concluded a four-month evaluation of its businesses, announcing a plan to shed some businesses, cut costs and deleverage. Management’s

articulation of this strategy has simplified the investment thesis and helped the market understand how the company plans to stabilize cash flows and realize significant cash generation from asset sales, which it intends to use to buy back stock. The details of the plan helped lift the stock significantly this quarter, but we still see upside going forward. Mastercard was another contributor. The stock was up after the company raised guidance and issued an upbeat outlook at its investor day. We were particularly encouraged to see the company is expanding its addressable market, moving more into business-to-business and business-to-consumer payments. Mastercard is a longtime holding that we have discussed in previous commentaries, and our reasons for owning the company remain the same. Over the long term, we believe payments companies such as Mastercard are poised to benefit as consumers and businesses switch from cash and check to plastic and electronic payments. Mastercard is particularly well positioned to benefit from this shift because a majority of its revenues are generated outside the U.S., where many markets have a lower penetration of card and electronic payments and are experiencing significantly faster electronic purchase volume growth. Keyence, a Japan-based factory automation company, also contributed. Impressive revenue growth and margin expansion drove the stock higher this quarter. We continue to see Keyence as one of our best long-term investment ideas in Japan. We view the company’s success as the result of its unique business model, which is centered on value-added consulting services provided by a skilled direct sales team. By partnering with clients to develop custom solutions to meet their specific needs, Keyence is able to command solid pricing for its services while still delivering value for their end clients. Keyence has been growing its direct sales force headcount at 15% to 20% annually.

For detailed performance information, please visit janushenderson.com/performance.

Outlook We think equities remain attractive and earnings growth should continue to drive returns. It does not mean a pure growth rally. Stocks with low multiples based on earnings and book value, such as financials and some cyclical industrials, could rally. Economic recovery or rising rates have the potential to release pent-up earnings growth in some of these firms. We don’t think defensive stocks, among them consumer staples or higherdividend-yielding companies, will fare as well. These stocks are more often found in value indices. We still like health care and technology because the

right companies in these sectors have tremendous growth and compelling business models. The wrong companies in these sectors, by the way, face pressure from a lack of innovation and an eroding competitive position. That importance between winning and growing companies and the challenged laggards is a compelling story of the market today. We think equity markets can rise but we expect a broader dispersion of stock performance than we have seen in recent years because there will be a broader range of earning outcomes. This dynamic underpins the case for active investing.

Top Contributors and Detractors for the Quarter Ended 9/30/17 Top Contributors

Ending Weight (%)

Contribution (%) Top Detractors

Ending Weight (%)

Contribution (%)

NRG Energy Inc

1.09

0.37

United Continental Holdings Inc

0.89

-0.22

Mastercard Inc

1.42

0.22

Allergan PLC

0.78

-0.15

Keyence Corp

1.04

0.22

British American Tobacco PLC

1.49

-0.12

ASML Holding NV

1.16

0.22

NIKE Inc

0.64

-0.11

Alibaba Group Holding Ltd (ADR)

1.12

0.22

Shire PLC

1.12

-0.10

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 recent publicly available disclosure period, contact 800.668.0434 or visit janushenderson.com/info.

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3Q17 Portfolio Commentary Top Contributors

Top Detractors

NRG Energy: NRG Energy owns and operates a diverse portfolio of power-generating facilities, primarily in the U.S. We think the wholesale energy provider will benefit from a long-term process of retiring coal plants and a rebound in natural gas prices. We also believe management’s plan to cut costs and divest some businesses will help the company significantly grow free cash flow.

United Continental Holdings: United Continental is one of the world’s largest airline carriers. Returns on invested capital are rising and likely to improve, in our view. Moreover, we believe capacity reductions have given large airlines such as United more pricing power.

Mastercard: The global card payment network connects consumers, financial institutions, merchants, governments and businesses, enabling them to use electronic forms of payment instead of cash and checks. We like Mastercard for its high-returning business and growth potential as well as its strong balance sheet and quality management team. A majority of its revenues are generated outside the U.S., where many markets have a lower penetration of cards/electronic payments and are experiencing significantly faster electronic purchase volume growth. Keyence Corp.: The Japan-based company manufactures sensors and measuring instruments used for factory automation and high technology hobby products. We believe Keyence has a wide competitive moat due to its value-added consulting and advice to manufacturers on how to improve the efficiency and safety of customer product lines. ASML Holding: The company supplies photolithography equipment to the semiconductor industry. We believe its extreme ultraviolet lithography (EUV) equipment will play a key role in making future semiconductors cheaper, smaller and more efficient, and that the technical sophistication behind its equipment is an enduring competitive advantage for the company. Alibaba: The Chinese e-commerce company provides consumer-toconsumer, business-to-consumer and business-to-business sales services via web and mobile platforms. We think increased spending power for the Chinese consumer and rapid growth in e-commerce in China are long-term tailwinds for the company. We also believe that take rates will continue to trend up for the company.

Allergan Plc: Allergan is a Dublin, Ireland-based pharmaceuticals business with leading therapies in eye care and medical aesthetics and dermatology. In our opinion, the market undervalues Allergan’s durable growth franchises, such as the popular wrinkle treatments Botox and Juvéderm. We also like that an increasing percentage of Allergan’s business is based on cash payments, rather than reimbursement, and that the company has a strong pipeline. British American Tobacco: We continue to like British American Tobacco for what we believe is a unique balance between revenue growth, high and improving margins and best-in-class cash-flow metrics. Nike: We believe the footwear and apparel maker can benefit from the growing relevance of sport in global culture. Operationally, Nike continues to innovate in both its supply chain and manufacturing capabilities, which should help the company lower total product costs and improve margins. We also are confident that Nike’s investments in an omnichannel retail experience, including a fast-growing collection of websites, will help the company to grow despite a challenging environment for brick-and-mortar retailers. Shire: We favor this biopharmaceutical company for its strong franchises in markets such as ophthalmology, neurology, genetic diseases, immunology and hematology. The company has about twothirds of its revenue base in rare-disease biotechnology products, which generally target highly specialized markets, allowing for substantial operating efficiencies. Shire is also enjoying the development of a new franchise in eye diseases, such as dry eye.

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3Q17 Portfolio Commentary

For more information, please visit janushenderson.com. Please consider the charges, risks, expenses and investment objectives carefully before investing. For a prospectus or, if available, a summary prospectus containing this and other information, please call Janus Henderson at 800.668.0434 or download the file from janushenderson.com/info. Read it carefully before you invest or send money. Past performance is no guarantee of future results. Call 800.668.0434 or visit janushenderson.com/performance for current month-end performance. Discussion is based on the performance of Class I Shares. The discussion and data quoted are based upon the results, holdings and characteristics of the similarly managed Janus Henderson mutual fund. Such data may vary for the Janus Henderson VIT portfolio due to asset size, investment guidelines and other factors. We believe the mutual fund most closely reflects the portfolio management style for this strategy. As of 9/30/17 the top ten portfolio holdings of Janus Henderson Global Research Fund are: Alphabet Inc (2.86%), Safran SA (1.76%), Coca-Cola Co (1.76%), Unilever NV (1.53%), British American Tobacco PLC (1.47%), TOTAL SA (1.46%), JPMorgan Chase & Co (1.46%), Mastercard Inc (1.39%), BNP Paribas SA (1.39%) and AIA Group Ltd (1.38%). There are no assurances that any portfolio currently holds these securities or other securities mentioned. The opinions are as of 9/30/17 and are subject to change at any time due to changes in market or economic conditions. 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 portfolio and is gross of advisory fees. Fixed income securities and certain equity C-0917-13346 01-15-18

securities, such as private placements and some share classes of equity securities, are excluded. Performance may be affected by risks that include those associated with nondiversification, portfolio turnover, short sales, potential conflicts of interest, foreign and emerging markets, initial public offerings (IPOs), high-yield and highrisk securities, undervalued, overlooked and smaller capitalization companies, real estate related securities including Real Estate Investment Trusts (REITs), derivatives, and commodity-linked investments. Each product has different risks. Please see the prospectus for more information about risks, holdings and other details. Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets. When valuations fall and market and economic conditions change it is possible for both actively and passively managed investments to lose value. MSCI World IndexSM reflects the equity market performance of global developed markets. MSCI All Country World IndexSM reflects the equity market performance of global developed and emerging markets. Index performance does not reflect the expenses of managing a portfolio as an index is unmanaged and not available for direct investment. 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. Funds distributed by Janus Henderson Distributors 188-42-16669 10/17

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