Short Duration

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Institutional Strategy Update

Short Duration

As of 6/30/17

Investment Philosophy

Portfolio Management

We believe a bottom-up, fundamentally driven investment process can generate riskadjusted outperformance and capital preservation over time. Our comprehensive bottomup 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 Economic data 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 yield on the 2-year note finished June at 1.38%, up from 1.25% at the end of March. Corporate credit spreads continued to tighten. Investment-grade spreads compressed approximately 9 basis points amid a generally successful first quarter earnings season and strong demand for new issuance. High-yield spreads also tightened but were more volatile, due in part to a general weakness in the price of crude oil.

Mayur Saigal 

Head of Fundamental Fixed Income Risk Management



Portfolio Manager



15 years of financial industry experience

Strategy Characteristics Benchmark

Bloomberg Barclays 1-3 Year

Duration Target

+/-25% of index

Typical Plus Sectors

High Yield, Non-U.S. (US dollar denominated), Bank Loans, ABS, CMBS

Assets Under Management

$3.3 billion

Available Vehicles

Separate account Institutional mutual fund

Performance (%)

2Q 2017

YTD

1 Year

3 Year

5 Year

10 Year

Composite (gross)

0.76

1.30

1.34

1.42

1.83

3.57

Composite (net)

0.62

1.03

0.79

0.96

1.47

3.23

Bloomberg Barclays 1-3 Year U.S. Government/Credit Index

0.31

0.72

0.35

0.95

0.95

2.30

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

+0.45

+0.58

+0.99

+0.47

+0.88

+1.27

Various account minimums or other eligibility qualifications apply depending on the investment strategy or vehicle.

Difference (gross vs. index)

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 Short Duration (As of 6/30/17) Rep. Account (%)

Benchmark Index (%)

Variance (%)

Average Exposure

Total Return

Average Exposure

Total Return

Yield Curve Effect

Portfolio vs. Benchmark Price Effect

Spread Carry

Excess Asset Allocation

Excess Security Selection

Total Out/Under Performance

Corporates (IG)

62.95

0.66

24.08

0.60

0.01

0.02

0.05

0.06

0.00

0.15

Corporates (HY)

10.55

1.03

—

—

-0.01

0.01

0.04

0.04

—

0.08

Treasuries

12.38

0.19

61.06

0.19

0.00

0.00

0.02

0.03

—

0.05

ABS

6.74

0.49

—

—

0.00

0.00

0.01

0.01

—

0.01

Loans

4.62

0.46

—

—

—

0.00

0.03

-0.02

—

0.01

CMBS

2.26

0.46

—

—

0.00

0.00

0.00

0.00

—

0.00

Government Related

—

—

14.86

0.35

—

0.00

0.00

0.00

—

-0.01

Cash & Equivalents

0.49

—

—

—

—

0.00

0.00

0.00

—

0.00

0.00

0.03

0.15

0.11

0.00

0.29

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

Total

Manager Comments (2Q17) 

We continued to seek opportunities in corporate credit, but we modestly de-risked the Portfolio during the quarter. We are concerned with the deteriorating U.S. economic picture, 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 reduced exposure to sectors that we believe are exhibiting poor fundamentals, particularly those that we believe will look to engage in merger and acquisition (M&A) activity. We also increased emphasis on noncyclical names with the ability to generate sustainable free cash flow even in an economic downturn. Our U.S. Treasurys exposure remains relatively low and we maintain our cautious stance on rates. However, we did add duration over the quarter to help protect our overweight allocation in corporate credit.

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.



The Portfolio’s outperformance was largely driven by our corporate credit positioning. Spreads tightened over the quarter and both our overweight allocation to investment-grade corporate credit and our out-of-index exposure to high yield aided results. Our continued emphasis on securities that provide greater spread carry than the index further supported performance. Carry is a measure of excess income generated by the Portfolio’s holdings. As front-end Treasury yields ticked higher, the Portfolio’s underweight allocation to Treasurys also proved beneficial.



At the credit sector level, banking and technology led relative contributors. Outperformance in the banking sector was due in large part to our overweight allocation. Within technology, spread compression across a number of our overweight positions aided relative results.



No asset class or sector meaningfully detracted from relative performance. Our emphasis on prudent position sizes and maintaining a well-diversified portfolio resulted in minimal performance impact from individual corporate issuers.

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 Short 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. We are actively managing yield curve positioning with a focus on capital preservation. 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. If second quarter earnings are considered successful, further support for moderate spread tightening and a continued sideways grind in the credit markets are likely. However, a disappointing 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. 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.

Short Duration Bond portfolios, benchmarked to the Bloomberg Barclays US 13 Year Government/Credit Index, seek as high a level of current income as is consistent with preservation of capital. The portfolios will maintain an averageweighted effective maturity of three years or less under normal circumstances and may invest in high yield/high risk bonds up to 35%. Effective January 1, 2005 the composite definition was changed to include only proprietary mutual funds and exclude sub-advised pooled funds. Effective January 1, 2009 the composite definition was expanded to also include sub-advised pooled funds and separately managed institutional accounts. The composite was created in January 2003. *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.

Rep. Account

Benchmark Index

Number of Issuers

119

450

Weighted Average Maturity

2.19

1.93

Effective Duration

1.74

1.86

Yield to Worst

2.06

1.56

Rep. Account

Benchmark Index

Treasuries

16.56

61.76

Credit (IG)

59.56

23.21

Credit (HY)

9.25

0.00

CMBS

2.20

—

—

15.02

ABS

7.77

—

Bank Loans

4.39

—

—

—

0.27

—

Rep. Account

Benchmark Index

AAA

3.56

6.25

AA

25.44

72.08

A

15.87

10.23

BBB

41.39

10.33

BB

7.73

0.05

B

1.33

—

Not Rated*

4.41

1.05

Cash & Equivalents

0.27

—

Characteristics

Asset Allocation (%)

Government Related

U.S. MBS Cash & Equivalents

S&P Ratings (%)

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-1017-13096 10-30-17 FOR INSTITUTIONAL INVESTOR USE ONLY / NOT FOR PUBLIC VIEWING OR DISTRIBUTION

399-15-46077 10-17 Page 3 of 3