Q: Perkins is a bottom-up manager, but banks are very much

tied to the economic backdrop. How does Perkins reconcile

this in its research analysis?

Tom Reynolds: Banks are levered expressions of their local

economies. Hence, in order to analyze these stocks properly we

need to understand the larger macroeconomic environment and

how individual companies fit strategically and fundamentally into

that picture. For example, the economy that a bank operates in

will dictate short- and long-term interest rates. This has an

impact on bank profitability, as spread income (the difference

between the rates banks borrow and lend at) is generally the top

revenue source. A bank with a large loan portfolio relative to its

earning assets will be more insulated from today’s low-rate/flat-

curve environment compared to a bank with a relatively large

mortgage-backed securities (MBS) portfolio. The local economy

also drives loan demand and competition. Texas, for example,

has a healthy economy, and banks have been able to grow

commercial loans faster than the national average in a rational

manner. Chicago, on the other hand, is experiencing economic

challenges, and some banks are competing fiercely on price and

structure to show growth, a potentially more dangerous scenario

for investors in the long run. Credit quality is also largely

dependent on the local economy. If home prices drop 70% in an

area, it doesn’t matter how good of an underwriter a bank is; it

still feels pain.

Tom Reynolds Research Analyst

Since 1980, Perkins Investment Management has approached value investing

from a unique perspective. Using extensive bottom-up, fundamental research to

identify high-quality, undervalued stock opportunities, we conduct rigorous

downside analysis on each prospective investment before focusing on upside

potential. Our research team shares insights and opinions with our clients and

partners through our Investment Viewpoints series. In this edition, Perkins’

Research Analyst Tom Reynolds and Portfolio Manager Greg Kolb discuss the

banking industry. They offer insights into how Perkins researches bank stocks

and why they believe the U.S. is currently offering more compelling investment

opportunities even with recent low European valuations.

Key Points Macro analysis is crucial to bank stock bottom-up research, since these securities

are largely leveraged expressions of their local economies.

Unquantifiable systemic risks in Europe have led us to avoid European banks and

underweight large U.S. money center and investment banks with significant euro-

zone exposure.

We are actively finding value in the U.S. with regional banks and institutions

positioned to benefit from current mortgage refinancing growth.

BANKING ON FUNDAMENTALS

November 2012

Greg Kolb, CFA Portfolio Manager

2

Another example of this macro sensitivity is on the investment

banking, capital markets and large money center side. Current

macro concerns and worldwide deleveraging are slowing

transaction velocity and client appetite for risk. This hurts capital

market revenues, dampens prospects for an active, fee-

generative IPO market and reduces the likelihood of rising

revenues from mergers and acquisitions advisory. Moreover, the

overall banking climate is now further complicated by substantial

country-level financial stress. JPMorgan’s (JPM) CEO Jamie

Dimon recently said, “Financial systems don’t exist where

sovereign credit fails.” The prospect that a country’s financial

system might possibly cease to exist is a top-down scenario with

massive ramifications on bottom-up analysis.

Greg Kolb: We’ve seen this in Europe, where a number of

sovereign governments have lost bond market access.

Government bonds that were previously viewed as risk-free,

whether from Greece, Spain or elsewhere, have suddenly

become incredibly risk tainted. This is a major negative

operating development for any bank in the region. Banks need

risk-free assets in their portfolios in the context of collateral and

basic transactions that are critical to everyday business

functions.

Q: What is different about the way Perkins evaluates bank

stocks compared to other investment managers?

Tom Reynolds: By closely examining a bank’s financial and

operating position from a downside risk perspective, we seek to

limit losses during periods of market duress. While other

investment managers may primarily focus their research on

searching for significant upside possibilities due to low price-to-

book value (P/B) or price-to-earnings (P/E) ratios, we prefer to

focus on characteristics indicating fundamental strength such as

credit quality, funding stability and equity capital, each of which

can help minimize losses in the event of economic stress.

Our analysis involves an appreciation that the financial system

as a whole is closely interconnected and all institutions, even

the highest-quality companies, are quite levered and extremely

dependent on both market and depositor confidence.

Consequently, we consider an extreme downside scenario even

when analyzing strong firms. The downside case for levered

financials can be severe. Consider a bank with a 5% equity-to-

asset ratio. At that capitalization rate, an immediate 3% hit to

assets, after adjusting for taxes and tax assets, yields a 39%

equity decline. Thus, while you might have thought you were

buying a bank at about 0.6x of book value, you are suddenly

buying at book value. Also, companies with seemingly large

amounts of capital can also experience stress if there are

funding mismatches. For example, a holding company may have

significant assets, but it may not have access to that capital if

held by a subsidiary with regulatory restrictions on its capital.

While valuation is important, operating strength is crucial.

Q: Did this approach help during the severe markets with

U.S. banks in 2008 and European financials in 2011?

Greg Kolb: As we would expect, our focus on downside risk

helped mitigate our losses to a large extent during these crisis

periods. In our U.S. strategies, our financial holdings did not fall

as much as financial holdings in their benchmarks during the

2008 financial collapse and in our global strategy we generally

avoided European bank stocks and had less of a decline in the

financial sector during 2011. Looking back over the past five

years of weak returns in the global stock markets, the financial

sector has been a key source of losses for investors. We believe

that minimizing the damage from these stocks has been

essential in navigating the tumult.

Tom Reynolds: We concentrate on identifying investments

where our fundamental analysis holds true even if the stock

price declines. The bank may be cheaper, but it isn’t less risky

per se. This process generally leads us to invest in core deposit-

funded banks with lower complexity. Both liquidity and low

complexity are important in times of crisis, and these types of

banks tend to be less dependent on something unquantifiable

on the downside: confidence. If a bank with large assets but

unclear credit quality suffers a small write-down and there isn’t a

lot of equity to absorb the loss, then it could easily lose the

confidence of the funding markets, be it wholesale funding or

depositors, and create a destructive negative feedback loop for

the company. For example, as a wholesale-funded bank’s stock

plummets, equity investors lose confidence, credit investors lose

confidence and then counterparties lose confidence, which all

feed on each other to either lower earnings due to reduced

client activity or, in the worst case, create a run on the bank.

Many of the big failures during the U.S. financial crisis involved

this type of negative feedback loop, including New Century,

Countrywide, Washington Mutual and National City.

3

Q: Is Perkins finding opportunities with European banks

today, given that the segment is down more than 50% and

significantly underperforming other sectors?

Greg Kolb: It’s true that many European banks, including some

attractive, higher-quality franchises, have fallen below long-term

average P/E and price-to-tangible-book value (P/TBV) ratios.

However, just because a stock is down in price does not mean

it’s attractive from a risk/reward perspective. U.S. bank stocks,

as a group, bottomed at approximately 55% of tangible book

value in 2008, but three of the 10 largest U.S. depository

institutions also failed or were taken over for almost nothing.

Three major U.S. investment banks suffered the same fate. The

average P/TBV in European financials is currently around 0.9x,

with several of the larger money center banks trading between

60% and 110% of tangible book value. This is well above the

trough levels experienced in the U.S. crisis.

At this point, we don’t believe the market is focused enough on

potential downside exposure, based on the significant

unresolved and, in many ways, unquantifiable systemic risks

across Europe. These include: 1) the size of the banking system

relative to gross domestic product (GDP) and the resultant

ability for European governments to bail out their banks, since

sovereign governments are already strained themselves; 2)

overall leverage and funding model risks, including ongoing

deposit flight from the periphery; and 3) euro-zone political union

and common euro currency risks, which present ramifications for

capital flows and contract law in the event of a disorderly

disintegration. Each of these issues raises significant questions

and presents tremendous downside risk, leading us to avoid

European financials in general.

It is easier to grasp the sovereign government and bank linkage

problem by understanding bank size relative to each country

(see Exhibit 1). In the U.S., there’s the concept of “too big to

fail.” For context, JPMorgan’s total assets are currently 15% of

U.S GDP. That seems pretty big until considering that total

assets for BNP Paribas are roughly 70% of French GDP. While

total U.S. banking assets to GDP are about 82%, in France the

ratio is around 400% according to some estimates, though

probably closer to 300% after normalizing accounting

approaches between the two countries. This sheer size

Exhibit 1: Significantly Higher Bank Asset-to-Country GDP Ratios across Europe European banks comprise a substantially larger percentage of their countries' GDP than their U.S. counterparts, making it much more difficult for their governments to provide adequate funding in a crisis environment .

Source: Morgan Stanley

4

difference creates significant problems. The U.S. government

bailed out its financial system in 2008 with the TARP program,

which represented about 5% of overall banking assets, and

other programs that provided significant asset guarantees and

liquidity provisions. Markets trusted these actions in part

because the U.S. government’s debt burden was not oversized

at the time. In contrast, if France needs to bail out its banks, a

5% TARP-like bailout would equal 15% of French GDP, and if

funded with government debt would take France’s debt-to-GDP

ratio from the current 90% level to 105%. At that point, it is

questionable whether markets would deem the French

government stable enough to backstop liquidity in its system or

whether a 5% capital infusion would even be enough to plug

balance sheet holes in a wholesale-funded model. In short, it is

not clear whether all the European countries have the strength

to support their relatively large banking sectors.

In terms of leverage and funding risk, the European banking

system is still scarred by the 2011 crisis, and markets remain

hesitant to provide funding. Adequate funding is of paramount

importance given the leverage in the system. According to the

International Monetary Fund (IMF), euro-zone banks are running

an average 25x assets-to-equity compared to 15x for U.S. banks

(see Exhibit 2). That type of leverage requires deep liquidity.

The European Central Bank (ECB) has stepped in to provide

more than 1.4 trillion euros of funding to the region’s banking

system in an effort to help take up market slack, but that type of

support can’t be maintained forever.

Q: How does the banking business differ in the U.S.

compared to Europe?

Tom Reynolds: Two of the main differences are size and

regulatory environment. We’ve touched on size already, noting

that banks in Europe are substantially bigger than their U.S.

counterparts on a relative country-level GDP basis. This is partly

because capital markets play a significant role in lending in the

U.S., while the dominant providers of credit in Europe are

banks. Industry research shows that approximately 70% of

corporations obtain funding in the U.S. directly from the bond

markets, while nearly 75% of mortgage funding derives from

government-sponsored enterprises and securitization markets.

In Europe, banks provide roughly 80% to 85% of corporate and

mortgage funding. Additionally, many European banks tend to

be more global in scope and conduct significant business

outside of their home countries. According to the Financial

Source: SNL Financial; and International Monetary Fund staff estimates.

Note: Tangible assets are adjusted by subtracting derivatives liabilities from tangible assets of European banks. However, some accounting differences may remain. Based on large banks in each economy.

Exhibit 2: Elevated European Bank Leverage Leverage exposure generally has been declining, but it remains significantly higher in euro-zone banks compared to the U.S., as measured by adjusted tangible assets to Tier 1 common capital.

5

Stability Board, approximately 55% of the global systemically

important financial institutions are based in Europe, even though

the European Union represents only about one-quarter of the

world’s GDP. European banks also tend to be more

interconnected to peers with more risk exposure to manage in

their funding structures.

The eurozone’s regulatory environment is also much more

complicated. During the 2008 U.S. crisis, there were two primary

people – Federal Reserve (Fed) Chairman Ben Bernanke and

then U.S. Treasury Secretary Hank Paulson – who quickly

worked together to forge a comprehensive crisis response,

which helped to secure a floor under the crash that developed

after the Lehman bankruptcy. In contrast, the eurozone is a 17-

member currency union, each with its own finance minister and

head of government. Although the ECB has a powerful figure in

its President, Mario Draghi, each country still has its own central

bank. The convoluted oversight structure in the eurozone makes

the ability to move promptly and decisively far more difficult

relative to the U.S.

Q: How should recent Fed and ECB announcements

regarding further quantitative easing (QE) affect banks?

Tom Reynolds: Right now, the Fed is playing offense, and the

ECB is playing defense. The Fed has focused its most recent

quantitative easing program on MBS buying in an effort to drive

mortgage rates lower. The desired effect is to encourage

mortgage lending, boost housing and stock prices, and create a

wealth effect which could drive increases in consumption. With

these efforts, the Fed has moved from its liquidity-providing

operations during the credit crisis to attempting to stimulate the

economy and decrease unemployment. This policy has

significant impact on bank profitability. Interest rates are low and

expected to remain that way for some time, which makes it

difficult for banks to make money. Large mortgage refinancing

waves can help offset this by generating additional fee streams,

while also potentially helping to strengthen consumer balance

sheets and cash flow, which in turn can possibly lead to better

credit quality and higher loan demand especially if the housing

market continues to improve with Fed support. It remains to be

seen how effective the Fed’s policies will ultimately be.

The ECB, in contrast, is still in liquidity-providing mode, having

spent the past year trying to gain market credibility that it is a

reliable lender of last resort, despite its many constituents with

differing economic and political views. Achieving this recognition

is critical to protecting the European banking system. The ECB’s

long-term refinancing operation (LTRO) programs, while initially

appearing to achieve only short-lived success, have in

combination with the more recent promise of outright monetary

transactions (i.e., purchases of government bonds) succeeded

in relieving funding pressure for now. However, we don’t believe

the problems in Europe, at their core, are about liquidity. It is

really a solvency issue in the sense that there are real questions

around whether the involved governments can sustain their debt

loads over time and effectively manage their budget deficits to

close current gaps with more realistic, ongoing operation levels

that can be financed in the private capital markets. In addition,

European banks still clearly have credit issues that have yet to

be marked down on their balance sheets. There are thin layers

of tangible equity capital that in all likelihood need to be greatly

bolstered to get through the credit losses that have built up in

the system. We believe both governments and banks need to be

operating without this sort of government-assisted liquidity

before the situation can truly normalize.

Q: What about value opportunities in U.S. banks?

Greg Kolb: We’re actively finding value in U.S. banks, unlike in

Europe where we generally avoid any bank positions. As we

look at the industry we focus intently on the balance sheet risks

involved, given the highly levered nature of the business model.

Despite some recent signs of economic slowdown, we believe

the housing-driven credit crisis is largely behind the U.S., and

we’re finding a number of banks with minimal credit-quality risks,

solid tangible capital levels, stable sources of financing and

attractive valuations relative to earnings and book value. We

have been underweighting larger money center and investment

banks during the past several years, relative to U.S. regional

branch banks that are healthier and more "plain vanilla" in our

view. Many of these regional banks are simpler businesses, less

connected to Europe, offer stronger core deposit-funded

balance sheets and are subject to lower regulatory burdens. We

are also looking for investment opportunities that involve

improving credit quality in housing-challenged states.

************************************************************************

6

About the Featured Investment Professionals

Tom Reynolds

Tom Reynolds is a research analyst covering the financial services sector, a position he has held since joining Perkins in August 2009.

Prior to joining Perkins, Mr. Reynolds served as a research analyst with Continental Advisors for a period of three years, also covering

financial services. Prior to that, he worked at Lehman Brothers in the financial institutions investment banking group and fixed income

sales and trading from 2004-2006 and 1999-2003, respectively. Mr. Reynolds received his bachelor of arts degree in anthropology from

Dartmouth College and an MBA from the University of Chicago Booth School of Business, where he graduated with honors. Mr. Reynolds

has 13 years of financial industry experience.

Greg Kolb, CFA

Gregory Kolb is Portfolio Manager of the Perkins Global Value strategy. Mr. Kolb transitioned to the Perkins investment team from Janus

in July 2010. He joined the Janus investment team as an equity research analyst in August 2001, became Co-Portfolio Manager of the

strategy in 2005 and was named sole Portfolio Manager in April 2009. His previous work experience includes serving as an associate

director in UBS Warburg’s Financial Institutions Investment Banking Group and as an analyst for Lehman Brothers’ Global Mergers &

Acquisitions Group. Mr. Kolb received his bachelor of science degree in business administration from Miami University where he

graduated with honors and magna cum laude. Mr. Kolb holds the Chartered Financial Analyst designation and has 14 years of financial

industry experience.

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 877.335.2687 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.

The financials industries can be significantly affected by extensive government regulation, can be subject to relatively rapid change due to increasingly blurred distinctions between service segments, and can be significantly affected by availability and cost of capital funds, changes in interest rates, the rate of corporate and consumer debt defaults, and price competition.

Foreign securities have risks including exchange rate changes, political and economic upheaval, the relative lack of information, relatively low market liquidity and the potential lack of strict financial and accounting controls and standards. These risks are magnified in emerging markets.

There is no assurance that the investment process will consistently lead to successful investing.

The views expressed are as of November 2012. They do not necessarily reflect the views of other Perkins portfolio managers or other persons in Perkins’ organization. These views are subject to change at any time based on market and other conditions, and Perkins disclaims any responsibility to update such views. No forecasts can be guaranteed. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of any Perkins portfolio.

Perkins makes no representation as to whether any illustration/example mentioned in this document is now or was ever held in any Perkins portfolio. Illustrations are only for the limited purpose of analyzing general market or economic conditions and demonstrating the Perkins research process. They are not recommendations to buy or sell a security, or an indication of holdings.

Perkins Investment Management LLC is an indirect subsidiary of Janus Capital Group Inc. and serves as the sub-adviser on certain products.

Investment Products: NOT FDIC INSURED. NO BANK GUARANTEE. MAY LOSE VALUE.

Janus Distributors LLC 151 Detroit St. Denver, CO 80206 (11/12)

C-1112-25532 11-30-13 188-15-22912 11-12