LEGG MASON HOW TO GENERATE ALPHA IN THE US MARKET

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1 LEGG MASON HOW TO GENERATE ALPHA IN THE US MARKET Tristan Camp, Investment Specialist Brussels, February 2014 This document is for Qualified Investors. Not for use by Private Individuals.

2 Contents CLICK TO EDIT MASTER TITLE STYLE US Market Outlook Legg Mason ClearBridge US Aggressive Growth Fund Legg Mason Royce US Small Cap Opportunity Fund 1

3 dec '03 jun '04 dec '04 jun '05 dec '05 jun '06 dec '06 jun '07 dec '07 jun '08 dec '08 jun '09 dec '09 jun '10 dec '10 jun '11 dec '11 jun '12 dec '12 jun '13 dec '13 US EQUITY VALUATIONS REMAIN REASONABLE S&P 500 EPS and P/E Ratio 110 TTM EPS (left axis) TTM P/E (right axis) Source Bloomberg. Data uses trailing-12-month bottom-up operating earnings per share, as at 31 December 2013 TTM= Trailing twelve months. From JP Morgan Asset Management Guide to the Markets Q114. 2

4 EQUITY RETURNS AND RISING RATES: HIGHER YIELDS NOT ALWAYS A HEADWIND Source: Standard & Poor s, US Treasury, FactSet, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. Data as at 31 December From JP Morgan Asset Management Guide to the Markets Q114. 3

5 LOWER CORRELATIONS FAVOR STOCKPICKERS Source: Empirical Research Partners LLC, Standard & Poor s, J.P. Morgan Asset Management. Capitalization weighted correlation of top 750 stocks by market capitalization, daily returns, 1926 Dec. 31, From JP Morgan Asset Management Guide to the Markets Q114. 4

6 jan '94 mrt '95 mei '96 jul '97 sep '98 nov '99 jan '01 mrt '02 mei '03 jul '04 sep '05 nov '06 jan '08 mrt '09 mei '10 jul '11 sep '12 nov '13 REBOUND OF AUTO SALES DEMONSTRATES RESILIENCE OF US CONSUMER 24 Light Weight Vehicle Sales: Autos & Light Trucks Source: US Department of Commerce: Bureau of Economic Analysis, as at 31 December From JP Morgan Asset Management Guide to the Markets Q114. 5

7 HOUSING STARTS REBOUNDED SHARPLY AFTER THE LAST TWO COLLAPSES Source: Census Bureau, Zelman and Associates analysis, as at 30 September This information is provided for illustrative purposes only and does not reflect the performance of an investment. Forecasts are inherently limited and should not be relied upon as indicators of future performance, or forecast of actual future events, or a guarantee of future results. From JP Morgan Asset Management Guide to the Markets Q114. 6

8 FUNDAMENTALS OF THE HOUSING MARKET ARE HEALTHY Sources: (Left) Census Bureau, J.P. Morgan Asset Management. Monthly mortgage payment assumes the prevailing 30-year fixed-rate mortgage rates and average new home prices excluding a 20% down payment. (Right)Census Bureau, National Association of Realtors, J.P. Morgan Asset Management. From JP Morgan Asset Management Guide to the Markets Q114. 7

9 US ENJOYS THE LOWEST-COST NATURAL GAS PRICES IN THE LAST 6 YEARS Natural gas prices in the UK and Europe are nearly three times as high as in the US, and LNG prices in Japan and Northeast Asia are nearly four to five times as high as the US US 1M nat gas futures EU 1M nat gas futures UK 1M nat gas futures Japan LNG Asia 1M LNG swap Source: Bloomberg, using month-end prices as at 31 December Japan LNG import price index updates on a two-month lag basis. From JP Morgan Asset Management Guide to the Markets Q114. 8

10 FUND FLOWS HAVE JUST BEGUN TO REACT TO POSITIVE EQUITY RETURNS Source: Investment Company Institute, J.P. Morgan Asset Management. Data include flows through November 2013 and exclude ETFs except for the bottom left chart. ICI data are subject to periodic revisions. World equity flows are inclusive of emerging market, global equity and regional equity flows. Hybrid flows include asset allocation, balanced fund, flexible portfolio and mixed income flows. Data is as at 31 December From JP Morgan Asset Management Guide to the Markets Q114. 9

11 LEGG MASON: BROAD INVESTMENT CAPABILITIES Multi solutions Global fixed income Global quantitative equity Global value investing Small-cap equities: US, Europe, Global Global alternative fund-of-funds Quality-focused Japanese US equities equities Broad sector capabilities Multi-Asset solutions Global sovereign Global credit High yield Emerging market debt Absolute return Portable alpha Enhanced cash UK equity European equity Emerging market equity Global equity Global sovereign Global credit Global high yield Global absolute return SRI Micro-cap US Small-cap US Small-cap Europe Small-cap global Global macro Event driven Relative value Small-cap US Mid-cap US Large-cap US Global equities ESG Energy MLP Legg Mason delivers investment expertise through a selection of specialist, independent managers, each with a focus on active management. Together they cover a broad range of global equity, fixed income and alternative investment strategies. 10

12 TWO DIFFERENT APPROACHES TO THE US MARKET Legg Mason ClearBridge US Aggressive Growth Fund Legg Mason Royce US Small Cap Opportunity Fund Portfolio Managers Richard Freeman & Evan Bauman Bill Hench & Buzz Zaino Investment philosophy Sustainable Growth Turnaround situations Inception date 20 May November 2002 Style Valuation sensitive Deep Value/Relative Value Portfolio construction Concentrated (50 70 stocks) Diversified ( stocks) Market Cap profile Multi cap Small/micro cap (up to $2.5 b) Risk profile High Beta ( ) High Beta ( ) Investment horizon Very Long term (low turnover) Long term (low turnover) Benchmark Russell 3000 Growth Index Russell 2000 Index Stock selection Bottom up Bottom up % in top-ten holdings 49.6% 7.1% Fund size $1,501 $1,153 b No. Holdings Weighted average market cap $40.3b $1.36b Domicile Dublin Dublin Will do best in A lower growth environment Accelerating economic growth environment Source: Legg Mason, as at 31 December

13 12 LEGG MASON CLEARBRIDGE US AGGRESSIVE GROWTH FUND: A FUND POSITIONED FOR A LOWER GROWTH ENVIRONMENT

14 LEGG MASON CLEARBRIDGE US AGGRESSIVE GROWTH FUND: SNAPSHOT About ClearBridge Investments Approximately $80 billion* in assets under management for institutional and retail clients Managed over many market cycles with a legacy that dates back over 45 years Co-ownership of products: management and investment professionals are shareholders in proprietary products Offices in New York and San Francisco Key fund features: All cap growth portfolio of stocks Looks for names with secular growth characteristics Concentrated portfolio high conviction, low turnover * As at 31 December Portfolio Managers: Richard Freeman and Evan Bauman First quartile in its sector over all time periods Strong Track-record of the 30 year Strategy: 37 years of investment industry experience Joined a predecessor firm in 1983 BS from Brooklyn College; MBA from New York University 17 years of investment industry experience Joined a predecessor firm in 1997 BS in Mathematics from Duke University As at 31 December 2013.There are differences between the US Domiciled Mutual Fund and the Legg Mason ClearBridge US Aggressive Growth Fund including differences in the amount of assets under management, cash flows, fees and expenses, and applicable regulatory requirements, including investment and borrowing restrictions. The past performance of the US domiciled Fund is, therefore, not indicative of the future performance of the Legg Mason ClearBridge US Aggressive Growth Fund. The US Domiciled Mutual Fund has been used to demonstrate the longer term track record of the investment manager. This is a US domiciled and is therefore unavailable for investment outside of the US. Base 0 in October

15 WHAT DIFFERENTIATES THIS FUND FROM THE COMPETITION? An original positioning Provides exposure to a different type of growth stock, complementary to other growth propositions An impressive long term track record* The fund is 1 st Quartile across all time periods. The attention paid to valuation The price you pay is critical to creating value for investors The tenure of the management team Richie Freeman has been running the strategy since inception, joined by Evan Bauman in 1996 A long term investment horizon The fund boasts one of the lowest turnovers of its category *Source: Morningstar as at 31 December Copyright 2012, Morningstar, In. All Rights Reserved. NAV to NAV with gross income reinvested without initial charges, but reflecting annual management fees, based in USD for Class A Distributing SharesPast performance is no guide to future returns and may not be repeated. Page 14 The North America Fund Manager of the year award was won by ClearBridge Investments for performance of the Legg Mason ClearBridge US Aggressive Growth Fund during It is a sub-fund of Legg Mason Global Funds plc (LMGF). It qualifies, and is authorised in Ireland by the Central Bank of Ireland as an undertaking for collective investments in transferable securities.

16 SECTOR EXPOSURE RELATIVE TO RUSSELL 3000 GROWTH INDEX- LEGG MASON CLEARBRIDGE US AGGRESSIVE GROWTH FUND Fund Index Underweight Overweight Health Care 33.33% 13.73% Energy 12.00% 4.38% 7.62 Utilities 0.00% 0.24% Materials 2.81% 4.49% Telecommunication Services 0.00% 1.88% Information Technology 22.80% 27.11% Consumer Discretionary 14.20% 19.12% Financials 0.35% 5.47% Industrials 4.41% 12.57% Consumer Staples 0.00% 11.00% Cash & Cash Equivalents 10.10% 0.00% Source: Legg Mason, as at 31 January

17 STOCK EXAMPLE: BIOGEN IDEC (BIIB) The oldest independent biotech firm: founded in $67bn market cap*. $7bn revenues*. No net debt. 300 $ Biogen Idec S&P 500 Dominant franchise: Biogen has a large number of products in late stages of development (phase III), including products for the treatment of MS and haemophilia. Leading-edge innovation: During the third quarter of 2013, sales of Tecfidera an oral MS treatment reached $286million, dwarfing analyst estimates. Growth in any environment: a great balance sheet, with $3 billion of cash, no debt, and significant cash flows to continue to invest in research and development Bought as IDEC Pharmaceuticals on IPO in 1991; merged with Biogen in dec 91 dec 94 dec 97 dec 00 dec 03 dec 06 dec 09 dec 12 Source: Bloomberg, as at 31 December S&P 500 rebased to price of Biogen as at 31 December 1991 ($13). *Source: Bloomberg, as at 11 December For illustrative purposes only, not intended as a buy or sell recommendation. Page 16

18 STOCK EXAMPLE: FACEBOOK Facebook is a unique franchise with high barriers to entry and is only just beginning to monetise its mobile base and its billion-strong user base in general The stock was probably the most hated newly public company in history yet in the team s view it arguably has the most opportunity for growth of any technology company they have looked at Facebook was initially priced at $38 but the team started to get interested at around $20. The stock is now up at $ Facebook S&P 500 Position initiated $ mei 12 aug 12 nov 12 feb 13 mei 13 aug 13 nov 13 Source: Bloomberg, as at 16 January S&P 500 rebased to price of Facebook as at launch on 17 May 2012 ($38). For illustrative purposes only, not a recommendation to buy or sell a security. Page 17

19 FUND ANNUALISED PERFORMANCE LEGG MASON CLEARBRIDGE US AGGRESSIVE GROWTH FUND Performance in USD 18 1 month 1 Year 3 years 5 Years 10 Years Since Inception (25/05/00) Morningstar Quartiles* Source: Legg Mason, as at 31 January NAV to NAV with gross income reinvested without initial charges, but reflecting annual management fees, based in USD for Class A Distributing Shares. Please refer to Important Information for additional details. Past performance is no guide to future returns and may not be repeated. *Sector: US Large Cap Growth Equity. Source for quartile performance: Copyright , Morningstar Inc. as at 31 December All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. For more information, visit

20 19 LEGG MASON ROYCE US SMALL CAP OPPORTUNITY FUND: A PURE EXPOSURE TO A RECOVERING US ECONOMY

21 LEGG MASON ROYCE US SMALL CAP OPPORTUNITY FUND: SNAPSHOT About Royce & Associates Primary focus on smaller-cap companies Over 40 years small-cap and micro-cap value investment experience Seasoned staff of 33 Professionals Approximately $39 billion in total assets under management as at 31 December 2013 Wholly owned, independent subsidiary of Legg Mason, Inc. since 1 October 2001 Key fund features: Diversified portfolio of small and micro-cap stocks. Focus on stocks with the potential to rebound from temporary difficulties Seeks to purchase companies trading at discounts of at least 30% and preferably 50% to their estimated value Provides exposure to an under-researched and inefficient asset class Portfolio Manager: Bill Hench and Buzz Zaino Cumulative 5 years fund performance: 20 years investment experience BA from Adelphi University 41 years investment experience BA from Fordham University; MBA from Columbia University Source: Morningstar, USD, as at 31 January NAV to NAV with gross income reinvested without initial charges but reflecting annual management fees. Past performance is no guarantee of future results and may not be repeated. Class A Distr. (A) USD shares. 20

22 SECTOR EXPOSURE RELATIVE TO RUSSELL 2000 LEGG MASON ROYCE US SMALL CAP OPPORTUNITY FUND Fund Index Underweight Overweight Information Technology 25.42% 17.98% 7.44 Industrials 19.41% 14.38% 5.03 Materials 7.88% 4.84% 3.03 Energy 6.59% 5.37% 1.22 Consumer Discretionary 13.05% 13.12% Telecommunication Services 0.39% 0.80% Consumer Staples 0.79% 3.57% Utilities 0.00% 3.09% Health Care 5.27% 14.11% Financials 12.48% 22.75% Cash & Cash Equivalents 8.72% 0.00% Source: Legg Mason, as at 31 January

23 EXAMPLE OF CURRENT THEMES LEGG MASON ROYCE US SMALL CAP OPPORTUNITY FUND Information Technology: Tech stocks are a major theme in the portfolio currently accounting for approximately 25% of the holdings. The fund owns mostly capital goods and semiconductor stocks which have underperformed in the last few years. Financials: the Fund has increased its allocation to regional banking and mortgage finance related stocks over the last two years. Exposure to these stocks has however been pared back more recently as these stocks have generally performed well on the back of rising long term interest rates. Allocation to financials still makes up approximately15% of the portfolio vs. less than 11% 3 years ago. Housing / Construction: The Fund has exposure to housing related names although this has been trimmed in recent months and currently makes up a little more than 10% of the portfolio: Home builders, building materials, decking providers, roofing names, REITs etc. More recently, the team have added back to homebuilders as the price of many of these stocks have sold off. The fund has more recently invested in non-residential construction stocks which is only in the early stages of a recovery. Consumer Discretionary: Consumer related names including apparel and retail stocks make up approximately 14% of the portfolio. Energy: Positions in this sector are poised to benefit from the shale energy boom in the US, representing over 6% of the portfolio. This category also includes some industrial companies and some materials stocks. Industrials: The Fund is invested in several aerospace names, for example, which have benefited from a strong commercial aviation cycle. Source: Royce & Associates, LLC as of 31 January All stocks mentioned are for illustrative purposes only and are not a recommendation to buy or sell. These are the views of Royce and are subject to change at any time without prior notice. Page 22

24 PERFORMANCE LEGG MASON ROYCE US SMALL CAP OPPORTUNITY FUND Annualised Returns (USD) Source: Legg Mason as at 31 December Based in USD for Class A Shares. For sector figures: Copyright 2014, Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. For more information, visit Performance has been calculated on a NAV to NAV basis. Performance calculations assume gross dividends are reinvested. Return information presented is stated in U.S. Dollars and is calculated using the share class indicated above, after all Fund operating expenses but before sales charges. Past performance is not a guide for future results and may not be repeated. Page 23

25 24 APPENDIX

26 Active Share ACTIVE SHARE/TRACKING ERROR POSITIONING LEGG MASON CLEARBRIDGE US AGGRESSIVE GROWTH FUND Active share of a fund is a measure of the percentage of stock holdings in a manager's portfolio that differ from the benchmark index. In other words, it s a way to estimate how different a fund is from its benchmark.* 100% Current Active Share - Tracking Error Positioning 90% Fund 80% 70% Diversified Stock Picks Concentrated Stock Picks 60% 50% 40% Closet Indexing Factor Bets 30% 20% 0,0% 2,0% 4,0% 6,0% 8,0% 10,0% 12,0% Tracking Error (Three-Year Annualized) Source: Legg Mason, as at 31 January *Active Share and Mutual Fund Performance (Antti Petajisto 2010). Active share is calculated by taking the sum of the absolute value of the differences of the weight of each holding in the portfolio versus the weight of each holding in the benchmark index and dividing by two. 25

27 PORTFOLIO CHARACTERISTICS LEGG MASON CLEARBRIDGE US AGGRESSIVE GROWTH FUND Portfolio Characteristics Fund Index Value Factors Harmonic P/E Ratio (Forecasted 12M) Price/Book (Weighted Interquartile Average) Price/Sales Ratio Quality Factors % EPS Growth Next 3-5 Years 18.89% 15.05% Debt to Equity Risk Factors over 3 Years Standard Deviation 14.93% 12.87% Tracking Error 4.65% 0.00% Information Ratio Beta Market Cap Weighted Median Market Cap ($bn) Weighted Average Cap ($bn) Source: Legg Mason/Factset, as at 31 January Portfolio characteristics may change without notice. Index Russell 3000 Growth. 26

28 TOP 10 FUND HOLDINGS LEGG MASON CLEARBRIDGE US AGGRESSIVE GROWTH FUND Security Market Cap ($bn) % of Total Fund Biogen Idec Inc Unitedhealth Group Inc Comcast Corp Amgen Inc Anadarko Petroleum Corporation Forest Laboratories, Inc Facebook Inc Sandisk Corp Cree, Inc Vertex Pharmaceutical Total Total Number of Holdings 61 Source: Legg Mason, as at 31 January

29 Active Share ACTIVE SHARE/TRACKING ERROR POSITIONING LEGG MASON ROYCE US SMALL CAP OPPORTUNITY FUND Active share of a fund is a measure of the percentage of stock holdings in a manager's portfolio that differ from the benchmark index. In other words, it s a way to estimate how different a fund is from its benchmark.* 100% Current Active Share - Tracking Error Positioning 90% 80% 70% Diversified Stock Picks Fund Concentrated Stock Picks 60% 50% 40% Closet Indexing Factor Bets 30% 20% 0,0% 2,0% 4,0% 6,0% 8,0% 10,0% 12,0% Tracking Error (Three-Year Annualized) Source: Legg Mason, as at 31 January *Active Share and Mutual Fund Performance (Antti Petajisto 2010). Active share is calculated by taking the sum of the absolute value of the differences of the weight of each holding in the portfolio versus the weight of each holding in the benchmark index and dividing by two. 28

30 PORTFOLIO CHARACTERISTICS LEGG MASON ROYCE US SMALL CAP OPPORTUNITY FUND Portfolio Characteristics Fund Index Harmonic P/E Ratio (Forecasted 12 M) 18.46* 20.48* Price/Book (Weighted Interquartile Average) Price/Sales Ratio Standard Deviation 20.27% 16.83% Tracking Error 4.80% 0.00% Weighted Median Market Cap ($bn) Weighted Average Cap ($bn) Source: Legg Mason, FactSet, as at 31 January * Source: Royce as at 31 December Portfolio characteristics may change without notice. 29

31 IMPORTANT INFORMATION These are sub-funds of Legg Mason Global Funds plc, an umbrella fund with segregated liability between sub-funds, established as an open-ended investment company with variable capital, authorised in Ireland by the Central Bank of Ireland as an undertaking for collective investment in transferable securities. All investments involve risk, including the possible loss of principal. Past performance is no guide to future returns and may not be repeated. This information has been prepared from sources believed reliable but is not guaranteed by Legg Mason and is not a complete summary or statement of all available data. Individual securities mentioned are intended as examples of portfolio holdings and are not intended as buy or sell recommendations. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. The value of investments and the income from them can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Both funds invest primarily in one region or country, which means that they are more sensitive to local economic, market, political or regulatory events than other funds that invest in a broader range of regions. Legg Mason ClearBridge US Aggressive Growth Fund: The fund invests in fewer companies than other funds which invest in shares usually do. This means that the fund does not spread its risk as widely as other funds and will therefore be affected more if an individual company has significant losses. Legg Mason Royce US Small Cap Opportunity Fund: The fund buys shares in smaller companies. It may be difficult to sell these shares, in which case the fund may not be able to minimise a loss on such shares. Before investing you should read the key investor information document and the prospectus, which describe the sub-fund's full objective and risk factors. These and other relevant documents may be obtained in a number of languages at BNY Mellon Investment Servicing (International) Limited, Riverside Two, Sir John Rogerson s Quay, Grand Canal Dock, Dublin 2, Ireland, and the registered office. For Belgium Investors the paying agent is JP Morgan Chase Bank, Brussels Branch, Boulevard de Roi Albert II, 1210, Brussels, RC Brussels 626,253. Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London, EC2M 3AB. Registered in England and Wales, Company No Authorised and regulated by the Financial Conduct Authority. This information is for use by Professional Clients and Eligible Counterparties. It is not aimed at, or for use by, Retail Clients. February 2014 This document is for Asset Managers, Fund Distributors and Authorised Intermediaries. Not for use by Private Individuals. 30