PERKINS SAMPLE LINE ONE PERKINS SAMPLE LINE VALUE TWO PERKINS GLOBAL FUND SUB-HEAD TITLE HERE | 3Q12 PORTFOLIO COMMENTARY | 2Q14 SUMMARY For the quarter, Perkins Global Value Fund underperformed its primary benchmark, the MSCI World Index, and its secondary benchmark, the MSCI All Country World Index. It was a strong period for global stocks, and both global indices reached new highs. While it is not very exciting to have lagged the benchmarks, we are pleased we captured a large portion of the gain, given what we believe is our relatively defensive positioning. The market environment continues to be short on bargains but long on risk, in our view. Therefore, we continue to work to position the portfolio in such a manner that it can participate should further gains lie ahead, while at the same time attempting to limit our exposure to turbulence or an outright drawdown should a more negative scenario unfold. Stock selection in industrials and consumer staples were positive contributors, as were our underweight positions in financials and consumer discretionary. From a country perspective, stock selection in France, Japan and Sweden aided relative results. Holdings in the information technology sector were a notable detractor, as was our underweight positioning in the sector. Our positions in the U.S. and Canada also contributed negatively. Currency hedges (investments to reduce the risk of adverse price movements in an asset) were slightly positive in aggregate as the U.S. dollar strengthened against the yen and the euro during the quarter. Our cash weighting continued to be sizable and held back performance. Portfolio Manager: Gregory Kolb, CFA Portfolio Manager: Tadd Chessen, CFA For detailed performance information, please visit www.janus.com/funds MARKET COMMENTARY Following a choppy start to the year, the U.S. equity market resumed its upward momentum during the second quarter. The unbridled stock run-up investors have enjoyed of late has now passed the five-year mark, without a meaningful decline in more than two years. Equities may continue to rise in the short term, of course, but these most recent gains have only escalated what we see as embedded risks in the current loftier valuations. Helping to fuel the rise in equity prices has been both multiple expansion and share repurchase programs. In 2013, most of the return of the S&P 500 Index was due to price-to-earnings (P/E) expansion. Coupled with this was share repurchase activity that totaled $598.1 billion last year and $188 billion in the first quarter of 2014, the highest amount in a quarter since 2007, based on data from Birinyi Associates. In the past, we have observed that strongly rising share repurchase activity has tended to correlate with market tops. For example, buybacks were all the rage in 2006-2007, when stocks were expensive, and then virtually disappeared in 2008-2009, when stocks were far less expensive. Given relatively higher valuations than other markets in which we can invest, as well as compressed risk/rewards, we remain underweight the U.S. market. The big news out of Europe in the quarter was the European Central Bank’s (ECB) decision in June to impose negative interest rates on its overnight depositors as it seeks to stimulate sluggish economic growth and fight off the threat of deflation. Euro-zone real gross domestic product (GDP) grew at 0.9% in the first quarter, an improvement from the contraction seen in 2013, but still a very discouraging rate of growth this far removed from the global financial crisis. Annual inflation in the euro-zone was running at 0.5% in May, well below the ECB’s stated objective of 2%. As we have noted in previous Page 1 of 5 Portfolio Manager: Chris Kirtley, CFA EXECUTIVE SUMMARY • Stocks continued their strong upward march, with global indices reaching new highs. • The current price-to-value relationship in the U.S. stock market is quite high, leading us to a significant underweight exposure to this market. • With bargain-priced stocks increasingly rare, we are attempting to reduce our exposure to potential losses should volatility return. PERKINS GLOBAL VALUE FUND PORTFOLIO COMMENTARY | 2Q14 communications, deflation makes it more difficult for heavily indebted peripheral euro zone governments to repay their accumulated debt burdens. Deflation also tends to be bad news for stocks as falling prices can squeeze both profits and shareholders’ equity. Given all of this, as well as the persistently strong euro – which has strengthened by more than 10% against the U.S. dollar and by more than 40% against the yen since mid-2012 – pressure appears to be building for the ECB to consider a more radical program of quantitative easing, similar to what has been implemented by the Federal Reserve (Fed). We question the likely effectiveness of this given already low levels of government bond yields and the fact that financing in the euro zone is much more tied to bank lending than in the U.S. (though with European banks still overleveraged, the bond market has gained some traction over the last few years). We continue to believe the better risk/rewards in Europe are the multinationals, which aren’t completely dependent on local macroeconomic dynamics playing out in a benign manner. Japan was the strongest major market in the second quarter, with the market up nearly 7% in U.S. dollars. The widely discussed hike in the sales tax in April, to 8% from 5%, does not seem to have negatively impacted consumption to the extent some had feared. Also positive was the Shinzo Abe administration’s release in June of its “New Growth Strategy,” which lays out a number of material structural changes that the government hopes to implement in the coming years, such as a reduction in the corporate tax rate to more globally competitive OUTLOOK AND POSITIONING Consider the following: the Shiller P/E ratio for the S&P 500 Index – which compares the current index price to average earnings over the past ten years, adjusted for inflation – stands at roughly 26x earnings. The ratio has only been materially higher on one occasion, the years surrounding the historic U.S. market peak in 2000. Professor Robert Shiller, co-recipient of the 2013 Nobel Memorial Prize in Economic Sciences, has gathered over 100 years of data for this quite reasonable metric of overall market valuation, and in almost all of the observed history it has been below the current level. This one fact does not make for a complete analysis of the current situation, nor does it say what comes next. But it is, in our view, a very clear warning sign. The current price-to-value relationship is quite high in the U.S. stock market, which may very well mean future returns will prove disappointingly low. This top down view dovetails with our bottom-up, company-bycompany research (which is identifying many overpriced stocks but few true bargains) and leads us to a significant underweight exposure to the U.S., which comprises roughly half of global levels and changes to the tax code to encourage more married women to remain in the workforce. Thus, it appears that the administration is making some progress on the so-called “Third Arrow” of Abenomics, which is important as it tries to create sustainable growth in domestic demand. We have trimmed our once sizable overweight position in Japan, given the strong run in many of our holdings. However, we are still identifying a number of attractive risk/reward opportunities, particularly at the lower end of the market-cap spectrum. Emerging markets also performed well during the quarter, modestly outperforming developed markets following several years of dramatic underperformance. Some of the capital flight from emerging markets that occurred last year when the Fed signaled an eventual tapering of quantitative easing has reversed in recent months, as Janet Yellen appears to have softened her stance and Treasury yields have declined year to date. The economic data out of China has also stabilized, easing market fears about this important driver of emerging market growth. Despite these apparent cracks of light, we remain cautious on emerging markets given structural imbalances in many of the countries (including, but not limited to, a reliance on foreign capital and persistent current account deficits), rapid credit growth over the last several years, and uncertainty surrounding China’s transition from an investment-driven economy to one powered more by domestic consumption. We don’t believe emerging market stock valuations, generally, offer very compelling risk/rewards yet. market cap. We are now also somewhat underweight Japan, which is a change for us, as we’ve trimmed and exited many of our holdings as they’ve rallied dramatically over the past two years. We have a modest overweight in Europe, where we favor the multinationals, many of which are among the highest quality companies in the world, in our view. The portfolio is overweight consumer staples, telecommunication services, utilities and health care, all sectors that are generally less economically sensitive than the overall market. Our cash holdings continue to be substantial at nearly 17% of the portfolio, and will give us “dry powder” in the event turbulence returns to the stock market (in the meantime, we remember the idea that cash is a far less risky asset than an overpriced stock). Finally, we continue to hedge a portion of our yen and euro exposures. We believe our portfolio is much more defensively positioned than the overall stock market, which reflects our skeptical view of the current optimism in financial markets and is in keeping with our risksensitive approach to compounding returns over the long-term. Thank you for your investment and continued confidence in Perkins Investment Management. Page 2 of 5 PERKINS GLOBAL VALUE FUND PORTFOLIO COMMENTARY | 2Q14 TOP CONTRIBUTORS AND DETRACTORS FOR THE QUARTER ENDED 6/30/14 Ending Weight (%) Contribution (%) Ending Weight (%) Contribution (%) Royal Dutch Shell PLC 2.19 0.31 CIT Group, Inc. 1.87 -0.10 BP PLC 2.21 0.23 Pfizer, Inc. 1.09 -0.09 G4S PLC 1.85 0.20 Procter & Gamble Co. 2.40 -0.05 Cenovus Energy, Inc. 1.67 0.20 Rogers Communications, Inc. 1.84 -0.03 PPL Corp. 2.29 0.19 Western Asset Mortgage Capital Corp. 0.33 -0.02 Top Contributors Top Detractors The holdings identified in this table, in compliance with Janus 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 877.33JANUS (52687) or visit janus.com/advisor/mutual-funds. TOP CONTRIBUTORS TOP DETRACTORS Royal Dutch Shell: Royal Dutch Shell is an oil and gas super major based in the UK. Following a series of operational missteps over the past few years that allowed us to build a large position on attractive terms, the new CEO appears to be setting the company on a better path by streamlining the asset base and lowering overall capital intensity, in our view. During the quarter, the company reported strong operating results driven by higher production in its upstream segment and increased profitability in its downstream assets. Further, Shell’s strategic repositioning appears to be running ahead of schedule; the company has already negotiated $11 billion of asset divestitures year to date. Finally, Shell has benefited from a more constructive commodity price environment given increasing geopolitical tensions in key oil producing regions around the world. CIT Group: The diversified specialty finance company has specialties in commercial lending, aircraft and rail leasing, and vendor finance. CIT funds itself with term debt, securitized debt and an Internet deposit franchise. We are attracted to CIT’s lending capabilities and strong balance sheet, with over $2 billion of excess capital or approximately 22% of its market cap. However, CIT is under-earning relative to its potential due to the limited U.S. economic recovery, an inability to return capital freely to shareholders due to regulatory supervision, and rationalizing the size of the business post crisis. While we believe the long-term earnings power is strong, these issues were on full display in the most recent quarterly results and have weighed on stock performance. We have increased our holding as the stock trades below economic book value and we believe downside risk is limited. BP: BP is an oil and gas super major based in the UK. Following its Macondo catastrophe in 2010, the company has spent the last several years attempting to settle its legal obligations, on the one hand, and overhauling all aspects of its business, on the other. To this end, the company has shed tens of billions of assets as its emphasis has shifted from production growth and being everywhere to generating maximum returns on capital employed. During the period, BP reported operating results that were above market expectations and raised its quarterly dividend for the second time in six months, reflecting management’s growing confidence in its long-term prospects. Similar to Royal Dutch Shell, BP also benefited from a hardening of the commodity price environment in response to rising geopolitical tensions around the globe. G4S: G4S is a leading global provider of security and outsourcing solutions to various industries and governments, operating in over 120 countries and employing more than Pfizer: During the past few years, the global pharmaceutical company has taken steps to unlock shareholder value by divesting noncore businesses, such as animal health and nutrition, to focus on its core pharmaceutical business. Furthermore, starting in 2014, the company began to manage commercial operations and provide financial transparency through a new global structure consisting of: innovative pharmaceuticals, vaccines, oncology and consumer health, and established pharmaceuticals. This structural change could lead to further divesting or spin-offs, in our view. However, in a somewhat surprising move, the company announced an interest in acquiring AstraZeneca, a large global pharmaceutical company domiciled in the UK. Despite the potential tax inversion benefits, and AstraZeneca’s solid pipeline, Pfizer’s stock subsequently underperformed, as the company created uncertainty related to its strategy of getting smaller and more focused. For now, Page 3 of 5 PERKINS GLOBAL VALUE FUND PORTFOLIO COMMENTARY | 2Q14 TOP CONTRIBUTORS (continued) TOP DETRACTORS (continued) 600,000 people. It is also a global leader in cash-handling services. Following a difficult start to the year, the stock performed better during the second quarter after reporting a decent trading update. New CEO Ashley Almanza appears to be making good progress with his restructuring plan, having now resolved many of the overhanging legacy issues of prior management. We believe G4S will execute the remainder of its plan successfully and continue to grow organically at mid-single digits, with a positive mix shift into higher margin emerging markets. Together with a renewed focus on return on capital and cash flow generation, we believe management’s efforts will lead to a normalization of earnings and potentially a higher valuation multiple over our investment time horizon. a potential acquisition of AstraZeneca appears to be off the table, but could certainly resurface at a later date. We believe the risk-reward remains attractive with or without a deal, and the stock trades near 13x estimated earnings for this year with a 3.5% dividend yield. Since we believe its riskreward remains favorable, we continue to hold the stock. Cenovus Energy: Cenovus is an integrated oil and gas company based in Canada. Formed in 2009 after splitting from Encana, the company has a strong production growth profile with low-cost and long-lived oil sands reserves. Following several disappointing quarters featuring higher costs and delayed production, the company reported first quarter results that were generally ahead of market expectations. The company also benefited from Encana’s listing of its royalty cash flow stream into a new vehicle, which fetched a very high valuation multiple when it began trading in May. Some analysts have speculated Cenovus may have “hidden” royalty assets worth as much as 10% of its current market capitalization. Lastly, Cenovus benefited from rising geopolitical tensions around the world, as noted with our other oil and gas holdings above. We believe the stock remains attractively priced relative to its long-term production and cash flow potential. PPL: PPL is an integrated utility that owns and operates regulated as well as merchant power generation assets in the U.S. and the UK. During the period, PPL reported very strong quarterly results driven by higher sales volumes at its regulated utilities. In line with its long-term strategic vision, PPL also announced that its merchant business will be spun off to shareholders and merged with the merchant power assets of Riverstone Holdings (a private equity firm) to form a new company, called Talen Energy. The market was very receptive to the transaction as it unlocks value at both the regulated utility and the merchant power business, the latter of which should benefit from improving power prices. Lastly, 10-year Treasury yields decreased during the quarter, which led many yield-focused investors to increase their holdings across the utility sector. Procter & Gamble: The Procter & Gamble Company manufactures and markets personal and household products. During the period, shares were down slightly as the company reported below-consensus sales on weak pricing, even as management reiterated sales and profit guidance for fiscal year 2014 (ending in June) and raised the quarterly dividend by 7%, marking the 58th consecutive year the company has increased its dividend. In addition to its dividend yield of more than 3%, P&G continues to repurchase shares and expects to retire 2% to 3% of shares outstanding in 2014, pushing total shareholder return to more than 5% including the dividend. We added to our position on weakness as we like the long-term outlook for P&G’s brands and categories, the solid balance sheet, the stability of the cash flow, and the ongoing emphasis on returning excess cash to shareholders. Rogers Communications: Rogers Communications, the largest wireless telecommunications and cable TV provider in Canada, declined slightly during the quarter after reporting mixed first quarter results. The company is in the middle of a transitional year following the appointment of new leadership and the introduction of lower pricing in its wireless plans. We believe short-term headwinds should moderate as pricing plans complete their first year later this year and as smartphone data consumption continues to grow. With its strong competitive position, robust balance sheet and generation of free cash flow, which the company has historically returned to shareholders, we feel Rogers remains an attractive risk-reward. Western Asset Mortgage Capital: Western Asset Mortgage Capital is an externally-managed mortgage real estate investment trust (REIT) that invests primarily in U.S. residential mortgage-backed securities. During the period, the company disappointed the market by reporting contraction in its book value per share at a time when many other mortgage REITs reported more favorable performance. Management also elected to raise common equity ahead of reporting its quarterly results in order to invest in new opportunities, compounding the market’s frustration. Despite unclear prospects in the near term, particularly given uncertainty around interest rates, we continue to hold the Page 4 of 5 PERKINS GLOBAL VALUE FUND PORTFOLIO COMMENTARY | 2Q14 TOP DETRACTORS (continued) stock as it appears to be deeply out of favor and trades at a low valuation. 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 at 877.33JANUS (52687) or download the file from janus.com/info. Read it carefully before you invest or send money. Past performance is no guarantee of future results. Call 877.33JANUS (52687) or visit janus.com/advisor/mutual-funds for current month-end performance. Discussion is based on performance of the Fund's "parent" share class (typically that with the longest history). As of 6/30/14 the top ten portfolio holdings of Perkins Global Value Fund are: Wells Fargo & Co. (2.45%), America Movil S.A.B. de C.V. (2.44%), Procter & Gamble Co. (2.40%), Oracle Corp. (2.33%), GlaxoSmithKline PLC (2.32%), Tesco PLC (2.30%), PPL Corp. (2.29%), Danone S.A. (2.27%), Microsoft Corp. (2.21%) and BP PLC (2.20%). There are no assurances that any Janus portfolio currently holds these securities or other securities mentioned in this commentary. The opinions are as of 6/30/14 and are subject to change at any time due to changes in market or economic conditions. Janus 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 securities, such as private placements and some share classes of equity securities, are excluded. A Fund’s performance may be affected by risks that include those associated with nondiversification, non-investment grade debt securities, highyield/high-risk securities, undervalued or overlooked companies, investments in specific industries or countries and potential conflicts of interest. Additional risks to a Fund may also include, but are not limited to, those associated with investing in foreign securities, emerging markets, initial public offerings, real estate investment trusts (REITs), derivatives, short sales, commodity-linked investments and companies with relatively small market capitalizations. Each Fund has different risks. Please see a Janus prospectus for more information about risks, Fund holdings and other details. Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility and differing financial and information reporting standards, all of which are magnified in emerging markets. Holding a meaningful portion of assets in cash or cash equivalents may negatively affect performance. MSCI World IndexSM is a market capitalization weighted index composed of companies representative of the market structure of developed market countries in North America, Europe and the Asia/Pacific Region. The index includes reinvestment of dividends, net of foreign withholding taxes. MSCI All Country World IndexSM is an unmanaged, free float-adjusted market capitalization weighted index composed of stocks of companies located in countries throughout the world. It is designed to measure equity market performance in global developed and emerging markets. The index includes reinvestment of dividends, net of foreign withholding taxes. A Fund’s portfolio may differ significantly from the securities held in an index. An index is unmanaged and not available for direct investment; therefore its performance does not reflect the expenses associated with the active management of an actual portfolio. Perkins Investment Management LLC is an indirect subsidiary of Janus Capital Group Inc. and serves as the sub-adviser on certain products. Funds distributed by Janus Distributors LLC C-0614-66942 10-15-14 188-15-16687 07/14 Page 5 of 5