CLEARBRIDGE LARGE CAP GROWTH PORTFOLIOS

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1 4Q 2017 Separately Managed Accounts Product Commentary CLEARBRIDGE LARGE CAP GROWTH PORTFOLIOS Peter Bourbeau and Margaret Vitrano Portfolio Managers Large Cap Growth Portfolios Annualized returns net and gross of fees - PRELIMINARY (%) as of December 31, mo QTR YTD 1-yr 3-yr 5-yr 7-yr 10-yr Net of fees "Pure" gross of fees Russell 1000 Growth Index The strategy returns are preliminary composite returns, subject to future revision (downward or upward). Please visit for the latest performance figures. YTD numbers are not annualized. Monthly, quarterly and YTD numbers are not annualized. Past performance is no guarantee of future results. Please see the GIPS endnotes for important additional information regarding the portfolio performance and for effects of fees. Management and performance of individual accounts may vary for reasons that include the existence of different implementation and model requirements in different investment programs. Fees: Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance. Net performance includes the deduction of a 3.0% annual wrap fee, which is the maximum anticipated wrap fee for equity and balanced portfolios. Actual fees may vary. For fee schedules, contact your financial professional, or if you enter into an agreement directly with Legg Mason Private Portfolio Group, LLC (LMPPG), refer to LMPPG s Form ADV disclosure document. Returns reflect the reinvestment of dividends and other earnings. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges. The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. (A priceto-book ratio is the price of a stock compared with the difference between a company s assets and liabilities.) Key takeaways Strong performance from cyclical stocks in the fourth quarter marked a broadening of the market that we view as encouraging. Technology stocks were the primary driver of portfolio returns, led by solid results from software names. We are positioning for continued strength in the economy, but we remain mindful of consumer spending patterns. Market overview and outlook Stocks capped off a strong year with a flourish as large growth stocks continued to dominate market performance. The S&P 500 Index gained 6.64% for the quarter, the Russell 1000 Index advanced 6.59%, and the Russell Midcap Index added 6.07%. The benchmark Russell 1000 Growth Index gained 7.86% for the quarter to finish 30.21% higher for the year. The information technology (IT) sector gained 41.50% for the year, but it was not the top performer in a fourth quarter that saw a broadening of contributions across the market. The Portfolio seeks to thrive in such an environment by owning a diversified set of growth companies that provide exposure not only to mega-cap IT and Internet names but also leading consumer, health care and financial stocks. While Amazon.com, one of our largest holdings, was the top individual performer during the quarter, we also received notable contributions from less widely owned names including INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

2 software makers Akamai Technologies, Adobe Systems and Splunk. Health care, meanwhile, was a headwind during the quarter, as several of our biotechnology holdings sold off on disappointing clinical trial results and sluggish product launches. Celgene was hurt by weak sales of its Otezla treatment for psoriasis and the clinical failure of a treatment for Crohn s disease. We added to our position, as we believe Celgene is an inexpensive stock with a path to replenish the cash flows from the Revlimid patent expiration in the middle of the next decade. The company should have 19 late-stage clinical readouts in 2019, and cash continues to build, which we expect will lead to new business development opportunities or acquisitions to further bolster its clinical pipeline. Alexion Pharmaceuticals traded lower on a potential competitive threat to Soliris, a treatment for several ultra-rare genetic diseases, but we believe that a real competitor is still several years away and we were encouraged that Alexion received additional approvals for its lead compound. Alexion recently installed new management, which we believe will refocus its research and development profile. The Portfolio s biotechnology holdings fall into our select bucket of growth companies, which have the potential to deliver above-average earnings and revenue growth but also carry higher risk. We balance our select bucket by holding a core group of industry-leading growers in our stable bucket. These are companies that compound earnings and cash flows at or slightly above the market, maintain healthy balance sheets, and have wide moats around their businesses that promote consistent results. UnitedHealth Group, Microsoft and Home Depot are three stable growth companies that were major contributors during the fourth quarter and throughout Companies in the stable bucket also tend to be less reliant on broad macro trends to support their growth. That said, the U.S. economy again did its part to support equities in the fourth quarter. Economic activity was consistently strong, with GDP growth likely to exceed 3%, unemployment sustainable in the low 4% range, and industrial production expanding. The U.S. consumer is doing well in terms of confidence measures and spending, while housing showed steady gains throughout the year. Improvement in the emerging market economies that are a major source of demand for many of the multinational companies in the Portfolio, like Coca-Cola and Visa, has also been encouraging. Cyclical stocks in the consumer discretionary and industrials sectors were the best-performing sectors in the benchmark in the fourth quarter, lifted by recently passed tax legislation that will lower corporate tax rates to 21% and allow companies to accelerate expensing of capital expenditures. The Portfolio was hurt slightly in the fourth quarter by its under to industrials, but we have been taking advantage of price opportunities to increase our cyclical exposure. During the quarter, we initiated a new position in industrial gas producer Praxair, which provides a good link to industrial activity in a recovering global economy. Praxair is the largest player in a gas production and delivery business with high barriers to entry and long-term contracts that feature attractive margins and promote stable returns on invested capital. Its proposed acquisition of Linde also has the potential to improve earnings more than currently forecast. Slow but steady improvement in the energy sector is also encouraging. Crude oil prices continue to rebound from their mid-year lows, with WTI up 15.7% in the fourth quarter; however, energy stock prices have lagged. We expect the valuations of energy companies, like Schlumberger, to catch up to commodity prices in 2018 as rising prices lead to increased spending on oil production internationally, where Schlumberger s business activity remains depressed. Schlumberger is by far the largest global oil services company in a consolidating industry with many wounded competitors. After four years of giving price to integrated oil and national oil companies, service companies are reversing that trend and raising prices. Schlumberger currently generates incremental margins of 60% plus (the highest in its history) and is the only global service company that is using its balance sheet to invest alongside its customers. We are keeping an eye on oil and gas prices and how that could impact the consumer going into GDP growth is likely to continue on its positive uptrend for the first half of the year, and consumer spending will be an important component. While more optimistic on the economy than we were a year ago, we remain cognizant of the risks faced by the Trump administration in pushing forward with its remaining fiscal agenda, as well as the extended valuations now present in parts of the large-cap market. Against this backdrop, we will continue to take a diversified, opportunistic approach to owning quality growth companies. Portfolios highlights For the fourth quarter, the ClearBridge Large Growth Portfolios gained 7.18% (gross of fees), while the benchmark Russell 1000 Growth Index gained 7.86% for the same period. Over the longer term, the Portfolios have outperformed the benchmark for the 3-, 5-, 7- and 10-year periods ended December 31, 2017 (gross of fees). 2

3 On an absolute basis, the Portfolios had gains in six of the sectors in which they were invested (out of eight sectors total). The primary contributors to performance were the information technology (IT) and consumer discretionary sectors. On a relative basis, overall stock selection and sector allocation detracted from performance. Stock selection in the health care and consumer staples sectors, as well as an over to health care, negatively impacted relative returns. On the positive side, stock selection in the IT sector was the largest contributor to relative results. Stock selection in both the consumer discretionary and financials sectors helped relative performance. On an individual stock basis, the biggest detractors from absolute returns in the fourth quarter included positions in Celgene, Alexion Pharmaceuticals, Regeneron Pharmaceuticals, CVS Health and Anheuser-Busch InBev. Amazon.com, Microsoft, Akamai Technologies, Alphabet and W.W. Grainger were the largest contributors to absolute performance. During the fourth quarter, we initiated positions in Costco Wholesale, in the consumer staples sector, Oracle, in the IT sector, and Praxair, in the materials sector, and we closed positions in Nasdaq, in the financials sector, and Twenty-First Century Fox, in the consumer discretionary sector. Costco possesses unique attributes stable, high renewal membership model; narrow assortment that supports high productivity; growing services revenues that provide a level of protection against online competition and the risk of an economic downturn. The retailer is attracting millennials as members, and it s eyeing expansion into higher-margin international markets. The main risk to our thesis is the need for additional investment to maintain market share. Oracle has underperformed its large-cap software peers over the last several years, presenting an attractive value as its core database offering reaches an inflection point. Database is a wide-moat business that provides predictable revenues. The company is also establishing a significant presence in the highmargin, fast-growing market for hybrid cloud infrastructure where we believe its software will appeal to customers with complex data needs. Nasdaq was held in the portfolio for nearly 11 years, and we exited after a strong run that drove shares to what we viewed as fair value. We closed our position in Twenty-First Century Fox after portfolio holding Walt Disney announced it was purchasing most of Fox s entertainment assets. Top contributors 1 Contribution to equity return % Amazon.com, Inc Microsoft Corporation 0.58 Akamai Technologies, Inc Alphabet Inc W.W. Grainger, Inc In terms of individual stocks, the top contributors to portfolio performance for the quarter included: Amazon.com (AMZN), in the consumer discretionary sector, is a leading retail e-commerce site and provider of web hosting and related cloud services that continues to benefit from the migration of commerce from offline to online. The company continued to execute strongly, with Prime sales leading to a 34% revenue increase in the third quarter, while its AWS cloud business also topped expectations. Microsoft (MSFT), in the IT sector, develops software including the Windows family of products, the Microsoft Office system, the Azure cloud platform and the Bing search engine. A blowout quarter across all divisions lifted shares of the burgeoning leader in cloud services. Akamai Technologies (AKAM), in the IT sector, makes solutions to accelerate delivery and improve security of content and applications over the Internet. Shares rebounded after a mostly weak year as an activist investor announced a stake in the company. Alphabet, in the IT sector, operates the dominant Web search engine in Google, and video channel YouTube, as well as other online media, advertising, technology and tools. Solid results across most of its businesses, especially cloud, GooglePlay and hardware, drove the stock to another solid quarter. W.W. Grainger (GWW), in the industrials sector, distributes maintenance, repair and operating supplies and related products and services for commercial and institutional 1 Portfolio characteristics are based on a model portfolio, not an actual client account. The model portfolio is a hypothetical portfolio whereby the portfolio characteristics are based on simulated trading and account activity of a client account invested in this strategy. The model portfolio assumes no withdrawals, contributions or client-imposed restrictions. Portfolio characteristics of individual client accounts may differ from those of the model portfolio as a result of account size, client-imposed restrictions, the timing of client investments, market conditions, contributions, withdrawals and other factors. Please see Endnotes for additional information. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the sectors and securities listed, and it should not be used as the sole basis for any investment decision. Past performance is no guarantee of future results. 3

4 applications. Solid earnings that topped forecasts, highlighted by better gross margins, and the strengthening economic backdrop supported the stock. Bottom contributors 2 Contribution to equity return % Celgene Corporation Alexion Pharmaceuticals, Inc Regeneron Pharmaceuticals, Inc CVS Health Corporation Anheuser-Busch InBev SA/NV through about 200 brands such as Budweiser, Stella Artois and Beck's. The company reported terrific profits in the quarter, with massive acceleration in many of its emerging geographies, but it couldn t offset continued foreign exchange headlines and weak U.S. sales for many of its leading brands. The bottom contributors to portfolio performance for the quarter included: Celgene (CELG), in the health care sector, is a biotechnology company developing therapies for cancer and immuneinflammatory diseases. The stock again re-rated lower on weak sales for its Otezla treatment and a failed clinical trial of a compound to treat Crohn s disease. Alexion Pharmaceuticals (ALXN), in the health care sector, is a biotechnology company focused on developing treatments for severe and ultra-rare disorders. Shares were lower on the potential for competition to its Soliris franchise. Regeneron Pharmaceuticals (REGN), in the health care sector, is a biotechnology company that discovers, manufactures and commercializes medicines for the treatment of serious medical conditions. The stock traded down in sympathy with general weakness among biotechnology companies. CVS Health (CVS), in the consumer staples sector, is a leading pharmacy services company that also operates retail drugstores and in-store medical clinics. Fears that Amazon will enter the pharmacy market pressured shares of CVS and its drugstore peers, along with a complicated vertical merger announcement with health care payer Aetna. Anheuser-Busch InBev (BUD), in the consumer staples sector, is a beverage company that brews and sells beer globally 2 Portfolio characteristics are based on a model portfolio, not an actual client account. The model portfolio is a hypothetical portfolio whereby the portfolio characteristics are based on simulated trading and account activity of a client account invested in this strategy. The model portfolio assumes no withdrawals, contributions or client-imposed restrictions. Portfolio characteristics of individual client accounts may differ from those of the model portfolio as a result of account size, client-imposed restrictions, the timing of client investments, market conditions, contributions, withdrawals and other factors. Please see Endnotes for additional information. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the sectors and securities listed, and it should not be used as the sole basis for any investment decision. Past performance is no guarantee of future results. 4

5 Market capitalization 3 Market cap breakdown ($) Portfolio Benchmark Above 50 billion billion billion billion billion Weighted average market cap ($bil) Top 10 equity holdings 3 Percent of equity Alphabet Inc 5.74 Amazon.com Inc 5.12 Microsoft Corp 3.95 Visa Inc 3.28 UnitedHealth Group Inc 2.94 Home Depot Inc/The 2.87 Celgene Corp 2.76 Adobe Systems Inc 2.48 BlackRock Inc 2.47 Comcast Corp 2.38 Total number of holdings 48 Sector highlights 3 Average sector ings and performance (%) Gross of fees from 09/30/17 to 12/31/17 Sector Port. Port. return Benchmark* Benchmark* return Weight diff. Active contrib. Information Technology Health Care Consumer Discretionary Industrials Consumer Staples Financials Materials Energy Telecomm Service Utilities Real Estate Cash *Benchmark: Russell 1000 Growth Index. 3 Portfolio characteristics are based on a model portfolio, not an actual client account. The model portfolio is a hypothetical portfolio whereby the portfolio characteristics are based on simulated trading and account activity of a client account invested in this strategy. The model portfolio assumes no withdrawals, contributions or client-imposed restrictions. Portfolio characteristics of individual client accounts may differ from those of the model portfolio as a result of account size, client-imposed restrictions, the timing of client investments, market conditions, contributions, withdrawals and other factors. Please see Endnotes for additional information. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the sectors and securities listed, and it should not be used as the sole basis for any investment decision. Past performance is no guarantee of future results. 5

6 Important information 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. Please refer to for more information about the Portfolio, including objective, risks and investment process. The information presented does not constitute and should not be construed as investment advice with respect to any investment discussed. There is no guarantee that investment objectives will be met. An investor cannot invest directly in an index. Investments are not FDIC insured or guaranteed by any government agency. Values may fluctuate due to market conditions and other factors. Definitions and additional information Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges. Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time. The Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index. The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. (A priceto-book ratio is the price of a stock compared with the difference between a company s assets and liabilities.) The Russell Midcap Index is a complete subset of both the Russell 1000 and the Russell The Russell Midcap Index is used by institutional portfolio managers. The range of market caps covered in this 800-member index goes from about $1 billion on the low end to approximately $20 billion. The S&P 500 Index is an unmanaged index of common stock performance. West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. It is the underlying commodity of Chicago Mercantile Exchange's oil futures contracts. Separately managed accounts (SMAs) are investment services provided by Legg Mason Private Portfolio Group, LLC (LMPPG), a federally registered investment advisor. Client portfolios are managed based on investment instructions or advice provided by one or more of the following Legg Masonaffiliated subadvisors: ClearBridge Investments, LLC and Western Asset Management Company. Management is implemented by LMPPG, the designated subadvisor or, in the case of certain programs, the program sponsor or its designee. Past performance is no guarantee of future results. Risks All investments involve risk, including loss of principal, and there is no guarantee that investment objectives will be met. While most investments are in U.S. companies, investments may also be made in ADRs and other securities of non-u.s. companies in developed and emerging markets which involve risks in addition to those ordinarily associated with investing in domestic securities, including the potentially negative effects of currency fluctuation, political and economic developments, foreign taxation, and differences in auditing and other financial standards. These risks are magnified in emerging markets. 6

7 ClearBridge Large Cap Growth SMA GIPS endnotes ($USD) Ending December 31 Inception date: January 2006; Composite creation date: June 2008 Period Total return (net) Total return (*pure gross) Russell 1000 Growth Index return Number of portfolios % of bundled fee portfolios in Composite the composite dispersion Composite 3 Yr. Standard Deviation Benchmark 3 Yr. Standard Deviation Total composite assets at end of period (USD million) % of firm assets Total firm assets at end of period (USD million) % 8.37% 7.08% 1, % 11.26% 11.31% 1, % 100, % 10.53% 5.67% % 11.17% 10.85% % 92, % 14.59% 13.05% % 10.25% 9.73% % 100, % 38.83% 33.48% % 12.61% 12.35% % 85, % 21.27% 15.26% 2, % 16.28% 15.88% % 54, % 1.12% 2.64% 2, % 18.66% 18.01% % 50, % 10.49% 16.71% 3, % n/a n/a % 55, % 36.37% 37.21% 4, % n/a n/a % 53, % % % 4, % n/a n/a % 50, % 4.00% 11.81% 6, % n/a n/a 1, % 47,112.0 *Pure gross of fee returns do not reflect the deduction of any expenses, including transaction costs, and are presented as supplemental to the net of fee returns. COMPLIANCE STATEMENT: ClearBridge Investments, LLC claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. ClearBridge Investments, LLC has been independently verified for the periods January 1, December 31, The verification reports are available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. FIRM INFORMATION: ClearBridge Investments, LLC ("ClearBridge") is a wholly owned subsidiary of Legg Mason, Inc. ("Legg Mason"). The investment advisory business now known as ClearBridge was registered in September 2005 to facilitate Legg Mason's acquisition of substantially all the equity asset management businesses known as Citigroup Asset Management. These former businesses serve as the foundation of ClearBridge and its claim of GIPS compliance for institutional accounts through predecessor firms, effective as of January In June 2008, ClearBridge combined this business with its retail business to form a single GIPS firm. As of April 1, 2013 and January 1, 2016, ClearBridge's affiliates, Global Currents Investment Management, LLC, and ClearBridge, LLC, respectively, have become part of the ClearBridge GIPS firm. COMPOSITE INFORMATION: The ClearBridge Large Cap Growth SMA composite consists of discretionary wrap accounts with an account minimum of US $25,000. Accounts within the composite seek consistent growth of capital while minimizing volatility. Investments are primarily made in U.S. companies, with an objective of outperforming the Russell 1000 Growth Index. The main risks of this strategy are General Investment Risk and Non- U.S. Investment Risk. Prior to June 2008, the minimum was $5,000. INPUT AND CALCULATION DATA: The fee schedule currently in effect is 3.00% on all assets. Net of fee composite returns are calculated by reducing each monthly composite pure gross rate of return by the highest "bundled" fee charged (3.00%) annually, prorated to a monthly ratio. The "bundled" fee includes transaction costs, investment management, custodial, and other administrative fees. The pure gross return reflects the deduction of transaction costs for some accounts in the composite. Effective January 1, 2013, the number of portfolios reflects a change from prior periods due to an aggregation of accounts as reported by one sponsor. As of January 2014, the internal dispersion of annual returns is measured by the asset-ed standard deviation of portfolio returns included in the composite for the entire year. For prior years, the equal-ed standard deviation was used. Total firm assets for 2007 represents the CBI-Retail firm. The composite employed a 10% significant cash flow policy which was discontinued in January A list of composite descriptions is available upon request. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Past performance is not necessarily indicative of future results. BENCHMARK INFORMATION: The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC and ClearBridge Investments are subsidiaries of Legg Mason, Inc AMXX D6890 7