Health Care Holds Promise

Last year was a strong year for health care investing, as the sector was a top performer in a number of indices. Even after such a strong run, we believe the sector will continue to provide a shot in the arm for equity portfolios.

In our opinion, we have reached a key inflection point for the health care sector. A confluence of events including scientific advances, demographic changes and wealth effects offer promise for a number of health care companies, and offset the ongoing pressure to reduce health care costs. In all sectors, the greatest value creation comes when innovation meets rising demand. In health care, we believe the pieces are in place to drive value creation — and potentially investor returns — for many years to come.

The first piece comes from the laboratory. The next generation of medicines and treatments will be targeted and potentially more effective than ever, benefiting from the success of mapping the human genome. After years of effort and billions of dollars invested, scientific advancements allow a lab today to map a person's genome in just a few days for a few thousand dollars. This breakthrough in genetic sequencing allows for a greater understanding of diseases and medicines that are tailored to specific aspects of a person's DNA.

The targeted approach means that biopharmaceutical companies can boost the efficacy and safety of their medicines. At the same time, testing new medicines in smaller, more appropriate patient populations reduces the cost of development and speeds time to market. As biotech and pharmaceutical companies have developed more targeted therapies, the regulatory environment has become much more favorable.

The second piece driving value creation for the sector is the rising demand for health care globally. In developed markets, an aging population drives the need. Due to advancing chronic diseases, a person typically spends three times as much on health care after the age of 65 than before. Across many developed markets, we see this population segment moving into the higher-spending age bracket.

In emerging markets, the wealth effect is the key driver as rising living standards help close the gap with more developed markets. Increased insurance coverage, broader application of health care services and more preventative care leads to greater overall spending. In both developed and emerging markets, health care spending growth typically outpaces GDP growth.

While innovation and increased demand are long-term positives for the sector, there will also be an increased emphasis on mitigating rising health care costs in the coming years. Governments saddled with rising debts understand the dangers of runaway health care expenses. Although its effectiveness remains uncertain, the Affordable Care Act in the U.S. has some provisions designed to control costs, while at the same time increasing overall demand for services.

The impact of cost-controlling efforts for a number of health care companies is well understood, however, and will not change the trajectory of earnings. For example, taxes and fees stemming from the Affordable Care Act kicked in for pharmaceutical companies in 2010 and for medical device companies in 2013.

For the managed care industry, new taxes begin in 2014 and will be more of a burden, exacerbated by glitches in setting up health care exchanges that resulted in fewer new customers signing up than initially expected. We do believe these new patients will eventually enroll, but the timing gap could be problematic in the near term.

Efforts to control costs are shaking out other investment opportunities within the sector, from health care IT companies that make the health care system more efficient, to pharmacy benefit managers, which save employers money by helping drive greater utilization of generic drugs.

Given the innovation at work in the health care sector, the greater demand for health care services and opportunities with companies driving greater efficiencies, we believe the sector is on the cusp of a multiyear trend of value creation.

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 Read it carefully before you invest or send money.

Investing involves market risk. Investment return and value will fluctuate, and it is possible to lose money by investing.

The health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.

The views expressed are those of Janus research analysts. They do not necessarily reflect the views of Janus portfolio managers or other persons in Janus’ organization. These views are subject to change at any time based on market and other conditions, and Janus 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 Janus fund.

In preparing this document, Janus has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources.

Statements in this piece that reflect projections or expectations of future financial or economic performance of the markets in general are forward-looking statements. Actual results or events may differ materially from those projected, estimated, assumed or anticipated in any such forward-looking statements. Important factors that could result in such differences, in addition to the other factors noted with such forward-looking statements, include general economic conditions such as inflation, recession and interest rates.

Investment products offered are: NOT FDIC-INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.

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