MANAGE PORTFOLIO VOLATILITY THROUGH DYNAMIC ASSET ALLOCATION

Transcription

1 QS Legg Mason Dynamic Multi-Strategy VIT Portfolio Share class (Symbols): Class I (QDMSIX/52467M793), Class II (QDMSTX/52467M785) MANAGE PORTFOLIO VOLATILITY THROUGH DYNAMIC ASSET ALLOCATION A portfolio for investors seeking diversification while reducing the effects of market volatility on their investment. This Portfolio is available as an investment option under a variable annuity or variable life contract. Shares of the Portfolio are offered only to insurance company separate accounts that fund certain variable annuity or life contracts. This Portfolio may not be available in all states and may only be offered in certain variable products. Please refer to the variable product prospectus for other important information about the insurance contract and the underlying Portfolio. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 1/2 are subject to a 10% IRS penalty charge and/or surrender charges. Investments in a variable annuity are subject to market risks, including loss of principal. Guarantees are based on the claims-paying ability of the insurer. INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

2 MARKET VOLATILITY IS HERE TO STAY Wide daily swings in market performance are becoming more commonplace, causing a fundamental shift in investor sentiment. Today, many investors are more sensitive to extreme losses. Investors may want to consider reducing their exposure to risk. Increase diversification across asset classes as a way to help mitigate downside risk during a market crisis. Consider investment products that have a systematic investment process that dynamically adjusts to increases in volatility, with the goal of mitigating risk. That s why QS Investors developed the QS Legg Mason Dynamic Multi-Strategy VIT Portfolio. The chart below shows spikes in the VIX index marked by major economic or geopolitical crises. The VIX is a trademarked ticker symbol for the CBOE Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge," it represents one measure of the market s expectation of stock market volatility over the next 30-day period Russian Financial Crisis and Oil Sell-Off Global Growth Concerns and Ebola China Sell-Off Italian Elections Reignite Eurozone Crisis Fears Taper Tantrum U.S. Government Debt Ceiling Sluggish U.S. Economic Data Spurs Sell-off SNB Abandons CHF/EUR Cap Greek Default Global Recession Concerns Brexit U.S. Election Geopolitics in Europe and elsewhere 10 0 JAN 13 JUN 13 JAN 14 JUN 14 JAN 15 JUN 15 JAN 16 JUN 16 JAN 17 JUN 17 Source: Chicago Board Options Exchange, CBOE Volatility Index: VIX [VIXCLS], retrieved from FRED, Federal Reserve Bank of St. Louis; June 2, VIX values greater than 30 are generally associated with a large amount of volatility as a result of investor fear or uncertainty, while values below 20 generally correspond to less stressful times in the markets. Diversification does not guarantee a profit or protect against investment loss. Please see last page for complete discussion of Portfolio risks. Past performance is no guarantee of future results. All investments include risks, including loss of principal. 2

3 QS Legg Mason Dynamic Multi-Strategy VIT Portfolio Guided by the strategic allocation expertise of QS Investors, the Portfolio offers diversification across Legg Mason s specialized investment managers including the dedicated event-risk management capabilities of Western Asset. This Portfolio is an investment option in a variable annuity or variable life contract. Variable annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. The Portfolio offers multiple levels of risk management to help reduce the effects of market volatility while seeking to provide investors with the highest total return possible, consistent for such a strategy. Three levels of risk management DIVERSIFICATION DYNAMIC REBALANCING MANAGEMENT Systematically increases and decreases risk exposure in response to market conditions 1 2 EVENT RISK Across asset classes, styles and investment managers 1 Seeks to help reduce the impact of sudden and dramatic market drops 3 1 These shifts attempt to limit losses, with a smaller and disproportionate reduction in Portfolio total return. There is no guarantee of the value of the Portfolio s NAV. 3

4 DIVERSIFICATION The Portfolio provides a level of diversification that may help reduce volatility. Legg Mason s unique multi-manager structure means that investors can access a wealth of independent ideas within one fund family, offering the potential for alpha that diversification by asset class/investment style alone may not. Target allocation of 70% equities and 30% fixed income Invests across asset classes, styles and Legg Mason independent investment managers Strategic allocation will be reviewed at least annually and may be adjusted based on prevailing economic and market conditions Target allocations may range from 60% in equity strategies and 40% in long-term fixed-income 1strategies to 75% in equity strategies and 25% in long-term fixed-income strategies QS Legg Mason Dynamic Multi-Strategy VIT Portfolio Legg Mason affiliated investment manager About the manager Asset class Brandywine Global Committed to pursuing value investing in equity and fixed-income markets, in the U.S. and globally, and combines the agility of a boutique asset manager with the stability and resources of an industry leader. Strategic allocation targets 2 Global Fixed Income 14% U.S. Large Cap Value 12% ClearBridge Investments Global investment manager with over 50 years of experience and long-tenured portfolio managers who seek to build income, high active share or low-volatility portfolios. U.S. Large Cap Core 9% International Equities 3% U.S. Multi Cap Growth 8% U.S. Small Cap 1% QS Investors A global equity and multi-asset manager. Applies complementary behavioral and fundamental market insights to manage portfolios with a repeatable, risk-aware process. U.S. Large Cap Core 18% International Equity 7% Small Cap Core 4% Royce & Associates Western Asset Known for its disciplined, value-oriented approach to managing smallcaps. An asset class pioneer, the firm s founder is one of the longesttenured active managers. Morningstar 2014 U.S. Fixed-Income Fund Manager of the Year. 3 Western Asset is a global fixed-income asset manager with over 40 years in the business. Driven by a team-based approach, all investment decisions are thoroughly debated by Western s deep pool of investment professionals. U.S. Mid Value 4% Taxable Fixed Income 14% 2 Target allocations are subject to change. Target allocations are as of June 1, % of the Portfolio consists of ETFs in various asset classes. 3 Awarded to Ken Leech, Carl Eichstaedt, and Mark Lindbloom for Western Asset Core Bond Fund (WACSX) and Western Asset Core Plus Bond Fund (WAPSX) named Morningstar 2014 U.S. Fixed-Income Manager of the Year, United States of America. Morningstar Awards 2015 Morningstar, Inc. Diversification does not guarantee a profit or protect against investment loss. Please see last page for a complete discussion of Portfolio risks. 4

5 DYNAMIC REBALANCING 2The past few years have shown that as the markets get tough, investors are likely to get going out of stocks and into risk-averse assets like cash. While this behavior does lower downside exposure, investors are also typically reluctant to return to riskier assets when the market improves meaning they often lose out on market rebounds. QS Legg Mason Dynamic Multi-Strategy VIT Portfolio attempts to correct this flawed investor behavior by: Systematically reducing exposure to risky assets in response to certain market conditions Moving back to its target allocation as market conditions improve to allow for participation in market upside Dynamic Rebalancing: How it works Dynamic Rebalancing essentially functions like brakes on an elevator. When market declines lower the Portfolio s NAV, systematic controls are triggered that can help mitigate the negative effects of extreme market volatility. Dynamic Rebalancing is based on a preset formula determined by the portfolio managers, and takes into account the Portfolio s current NAV, macroeconomic conditions and underlying volatility. Hypothetical Portfolio NAV Hypothetical Portfolio floor Dynamic Rebalancing cushion If the market starts to decline, QS Investors systematically (as often as daily) reduces the Portfolio s exposure to risky assets based on a predetermined floor, or the maximum drawdown QS Investors is willing to tolerate. The floor is always based on the Portfolio s maximum net asset value. If the Portfolio reaches new highs, the floor is likewise raised. Even in the event of a prolonged market slump, a minimum of 5% will remain invested in stocks and bonds, to ensure the Portfolio maintains some exposure to market movements. In rapidly declining markets, Dynamic Rebalancing is unlikely to prevent significant losses. Conversely, when markets are rapidly accelerating, market appreciation may not be fully realized due to the Portfolio s more conservative allocation. All investments involve risk, including loss of principal. Declining markets. Allocations are shifted to cash and cash equivalents. Rising markets. Assets are moved back to stocks and bonds. 5

6 EVENT RISK MANAGEMENT 3The final piece of the Portfolio s risk management strategy works in tandem with Dynamic Rebalancing in an effort to guard against certain market occurrences that Dynamic Rebalancing alone cannot, such as flash crash types of events that cause extremely large losses in a short period of time. Uses a small portion of Portfolio assets to continually invest in exchange-traded options, typically highly liquid, widely traded put options. Provides a constant, underlying hedge to the overall Portfolio. Historically, put options have generally increased in value during market declines, positively benefiting the Portfolio s NAV. A put option is a contract in which the buyer has the right, but not the obligation, to sell a predetermined asset at a specified price to the seller of the contract. The buyer of a put option can profit from a decrease in the asset price. In rapidly appreciating markets, gains may not be fully realized due to the Portfolio s investments in put options. Options can be illiquid, may disproportionately increase losses, and have a potentially large impact on Portfolio performance. The Portfolio remains more fully invested in equities and fixed income than would be possible through Dynamic Rebalancing alone. Increases the chances of participating in a market rebound, helping to reduce the so-called gap risk that often results from traditional capital preservation strategies. Actively managed to help mitigate the cost of purchasing options. Managed by Legg Mason investment manager Western Asset, a leader in fixed-income investing. The goal: Minimize losses to increase potential long-term return QS Investors believes that, individually, Diversification, Dynamic Rebalancing and Event Risk Management are powerful tools that can help investors manage risk. With QS Legg Mason Dynamic Multi-Strategy VIT Portfolio, these tools are combined to potentially forge an even stronger defense against the damaging effects of market volatility and may help to provide competitive long-term returns. DIVERSIFICATION DYNAMIC REBALANCING EVENT RISK MANAGEMENT 6

7 MEET THE MANAGERS Guided by the strategic allocation expertise of QS Investors, the Portfolio offers diversification across Legg Mason s specialized investment managers including the dedicated event-risk management capabilities of Western Asset. Takes a consultative approach to global asset management, partnering with clients to create innovative solutions within a quantitative framework Applies complementary behavioral and fundamental market insights to manage portfolios with a repeatable, risk-aware process Strategies include global equities, liquid alternatives, multi-asset and customized solutions One of the world s leading fixed-income managers, focused on long-term, top-down and bottom-up fundamental value investing Founded in 1971, the firm has nine offices around the globe and deep experience across the range of fixed-income sectors An investment approach emphasizing team management and intensive proprietary research, supported by robust risk management 7

8 Brandywine Global Clarion Partners Legg Mason is a leading global investment company committed to helping clients reach their financial goals through long-term, actively managed investment strategies. ClearBridge Investments EnTrustPermal Martin Currie QS Investors RARE Infrastructure Over $728 billion* in assets invested worldwide in a broad mix of equities, fixedincome, alternatives and cash strategies A diverse family of specialized investment managers, each with its own independent approach to research and analysis Over a century of experience in identifying opportunities and delivering astute investment solutions to clients Royce & Associates Western Asset LeggMason.com What should I know before investing? Equity securities are subject to price fluctuation and possible loss of principal. International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. In addition to the Fund s operating expenses, you will indirectly bear the operating expenses of the underlying Portfolios. Each underlying Portfolio may engage in active and frequent trading, resulting in higher Portfolio turnover and transaction costs. Certain of the underlying Portfolios may engage in short selling, which is a speculative strategy that involves special risks. Unlike the possible loss on a security that is purchased, there is no limit on the amount of loss on an appreciating security that is sold short. The model used to manage a Portfolio s assets provides no assurance that the recommended allocation will either maximize returns or minimize risks. Derivatives, such as options and futures, can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. Please see the prospectus for more information. Keep in mind, however, that because the Portfolio invests in underlying Portfolios, the managers may not be able to shift allocations in time to capture an immediate or sudden spike in the market. * As of March 31, Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, a forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC and all entities mentioned are subsidiaries of Legg Mason, Inc LMFX /17 AN INVESTOR SHOULD CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES OF THE VARIABLE ANNUITY OR VARIABLE LIFE CONTRACT AND ITS UNDERLYING INVESTMENT OPTIONS CAREFULLY BEFORE INVESTING. PROSPECTUSES CONTAIN THIS AND OTHER IMPORTANT INFORMATION ABOUT THE INSURANCE CONTRACT AND THE UNDERLYING PORTFOLIO. FOR A FREE PROSPECTUS ON THE UNDERLYING PORTFOLIO, PLEASE VISIT TO OBTAIN A FREE PROSPECTUS FOR A VARIABLE ANNUITY OR A VARIABLE LIFE CONTRACT, PLEASE CONTACT YOUR FINANCIAL PROFESSIONAL. AN INVESTOR SHOULD READ THE PROSPECTUSES CAREFULLY BEFORE INVESTING.