CLEARBRIDGE INTERNATIONAL GROWTH FUND

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1 4Q 2017 Product Commentary CLEARBRIDGE INTERNATIONAL GROWTH FUND Elisa Mazen, Michael Testorf, CFA, Pawel Wroblewski, CFA, and Thor Olsson Portfolio Managers Average annual total returns and fund expenses (%) as of December 31, 2017 Class C 3-mo 1-yr 5-yr 10-yr Excluding sales charges Since Incept. (04/17/95) Gross Net Including effects of maximum sales charges MSCI EAFE N/A - - Index Performance shown represents past performance and is no guarantee of future results. Current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate, so shares, when redeemed, may be worth more or less than the original cost. Class C shares have a one-year contingent deferred sales charge (CDSC) of 1.0%. If sales charges were included, performance shown would be lower. Total returns assume the reinvestment of all distributions at net asset value and the deduction of all Fund expenses. Total return figures are based on the NAV per share applied to shareholder subscriptions and redemptions, which may differ from the NAV per share disclosed in Fund shareholder reports. Performance would have been lower if fees had not been waived and/or reimbursed in various periods. Returns for less than one year are cumulative. Performance for other share classes will vary. For the most recent month-end information, please visit Gross expenses are the Fund's total annual operating expenses for the share class(es) shown. Net expenses are the Fund's total annual operating expenses for the share classes indicated and would reflect contractual fee waivers and/or reimbursements, where these reductions reduce the Fund's gross expenses. These arrangements cannot be terminated prior to December 31, 2018 without the Board s consent. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the numbers shown in the table above. The MSCI EAFE Index is a free float-adjusted market-capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. Key takeaways The portfolio s allocation to small- and mid-cap companies proved beneficial during the fourth quarter. An improving economy and a greater focus on corporate governance makes Japan an attractive market for future growth. China and India exemplify the potential of emerging markets equities, which we expect to be a significant contributor going forward. Market overview Another strong quarter of performance in international developed and emerging markets was led by small- and midcap stocks. The MSCI All Country World Ex-U.S. Index was up 5.00% for the fourth quarter and 27.19% for the year, while the MSCI All Country World Ex-U.S. Small Cap Index did even better, up 6.61% for the quarter and 32.12% for Meanwhile, developed market growth stocks maintained their consistent outperformance over value stocks for the year, with INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

2 the MSCI EAFE Growth Index gaining 5.24% in the fourth quarter and 28.86% for the year, outperforming its value counterpart by 200 basis points for the quarter and 742 bps for the year. This is interesting because the MSCI EAFE Index is underweight traditional growth sectors, such as information technology (IT) with just a 6% weight. Health care also traditionally a growth sector underperformed for the second year in a row. While not having a large weight in the index, small- and mid-cap stocks have had outsize returns within EAFE. One catalyst has been mergers and acquisitions (M&A) activity, as very large companies looking for growth are often buying it. Flows into international equities and fixed income also continue to be very strong. Given the outperformance of smaller companies, our portfolio s overweight in the $3 billion to $10 billion range and underweight in mega-caps above $50 billion has served us well. Our proprietary model is invaluable in helping us find these undiscovered, under-researched ideas that meet both our valuation and growth focus. When we look back at the year, we are certainly pleased with the degree of outperformance, primarily because it was not confined to a handful of ideas but came from many sectors and nearly all regions. Good participation from our top holdings, as well as smaller, riskier names in our emerging growth bucket that were acquired by bigger competitors (Mobileye by Intel and Advanced Accelerator Applications by Novartis), validates why this area of growth is so important, even though valuations may seem high. Participation from stocks in the secular growth and structural growth buckets also was important. Secular growth encompasses firms like Temenos Group, a developer of software for banks, with established, superior business models, underappreciated growth prospects, margin expansion, and long-term compounding of capital returns. Structural growth stocks, such as London Stock Exchange, generally have misunderstood earnings, may be trading at discounts to historical performance, or may be engaging in self-help stories that can accelerate earnings. We emphasize stock selection as the key metric to focus on when it comes to understanding the sources of our performance. Unintended factor risk bets are well-monitored and controlled to ensure that stock selection is the principal driver of alpha generation. Regionally, the portfolio is well-balanced, with an overweight in Europe Ex U.K., while Asia (including our emerging markets exposure there) and the U.K. are approximately neutral with our benchmark. Although slightly underweight Japan, this is not a true reflection of our exposure, as Aflac, a 2017 purchase, generates more than 70% of its revenue from its Japanese third-party cancer insurance business. Japan, in fact, is experiencing something of a resurgence. Illustrative of these trends, merchandise trade exports have grown for 12 consecutive months, unemployment is at a 24-year-low of 2.7%, and the Nikkei 225 is at a 25-year high. It s also worth noting that Japanese government debt is also at multi-decade highs. Will these trends persist or might this be another false dawn for the Japanese market? At the center of these trends and a driving force for change are two individuals with bold plans and policies that have spurred dramatic change: Shinzo Abe, the Prime Minister of Japan and head of the Liberal Democratic Party, and Haruhiko Kuroda, Governor of the Bank of Japan (BOJ) and architect of the massive quantitative and qualitative easing (QQE) policy to end deflation. In October, Abe, in a bold and politically shrewd move, called for and won a snap general election. Abe s coalition won a supermajority (greater than two-thirds) of seats, securing a strong mandate for his policies, and likely keeping him in control until 2021, which would make him the longest-serving prime minister in Japanese history. Abe s victory also indicates that Kuroda will sign on for another five-year term at the helm of the BOJ. Kuroda s second term will provide continuity to his signature stimulus and massive monetary easing policies which have been positively received in the market. Although achieving the BOJ s stated QQE goal of 2% inflation has remained elusive, we have seen movement in the right direction. Japan is no longer in deflation, the economy is virtually at full employment, and wage growth is poised to accelerate. Wages are a key metric to watch, relative to Abe s economic reflation strategy, as he is calling for a 3% increase in pay. While this call has been largely ignored by Japanese corporates previously, given the current severity of labor shortages, upward pressure on pay could materialize in While we are bottom-up stock pickers, improvement in the economic environment is healthy and good for growth. Japan s domestically-oriented companies have typically lagged their export-driven brethren, but there are signs that consolidation is at long last taking effect. Within Japan, we are overweight consumer staples, which will benefit both from company-level efficiency improvements as well as an improving domestic market, with potential for better volumes and pricing as consumer wages slowly adjust upward. 2

3 Governance reform is also under way in Japan, which we see as another catalyst for stocks. A Stewardship Code was launched in 2014, followed by a Corporate Governance Code in The Stewardship Code primarily targets institutional investors and their responsibilities as asset owners to promote sustainable growth of the companies in which they invest. This has led to a number of changes, including an increase in the percentage of independent directors on boards. By year-end 2017, 78% of Japanese companies have at least two independent directors, a material improvement from only 18% of companies in Japan has a long road ahead to reach board independence levels seen in other developed markets. Japanese companies have also significantly improved in linking executive compensation to performance, while return on equity, dividend payouts and share buybacks have all broadly increased. Emerging Markets Hold Promise We are increasingly positive on emerging markets (EM), but taking a selective approach across markets and companies. We view India and China as the top markets in the EM asset class. Both had a good year, but we believe there is more to come in the years ahead. India is benefiting from positive demographics, with a young population that will be larger than the same cohort in China by The country maintains relatively low consumer debt, with relatively stable leadership and improving corporate governance. Prime Minister Narendra Modi was reconfirmed in 2017 elections, and his reforms are slowly coming through. India has missed out on the upswing experienced by other EM markets as it works its way through deleveraging. Asset quality review, the recognition of bad debt, and demonetization of its currency have been shocks to the Indian economy. Private sector credit growth slowed precipitously in 2017 from the double-digit growth levels of the previous decade due to the lagged effect of bad loans. However, bank recapitalization has been successfully addressed and bank balance sheets are mostly cleaned up. Loan growth has bottomed and will likely increase the closer we get to Manufacturing PMI and Service PMI are just over 50 and signaling the early signs of real recovery. Supply-side reforms are working and even governance has improved, positioning India as an interesting opportunity in 2018 and In China, meanwhile, the Party Congress held in October established a clear pathway centered on quality of growth. President Xi Jinping wants to move China forward through research, education, improving the environment, and derisking the financial system. Certain sectors have been declared as critical, including electric vehicles and artificial intelligence, two areas where China has good chances to beat the West in the medium term. The likelihood that China gets higher exposure in global equity and bond indexes should also be salutary. The bond market could be partly opened via the bond connect scheme, similar to what has successfully occurred with stocks for some years. Index inclusion means international investors can no longer avoid China in their portfolios. From limited exposure to Internet stocks like Tencent and Alibaba, China s state-owned enterprises will now get more attention. Outlook From a value rally in 2016 to the growth rally in 2017, what s next? The biggest issue the markets are facing today are low interest rates and the gradual withdrawal of stimulus by central banks around the world. The U.S. is ahead of the rest of the world in its tightening regime, with more rate hikes forecast for 2018, and a new head of the Federal Reserve. The good news for investors in international equities is that we do not expect to see much movement on rates from Europe or Japan in Inflation is starting to appear, but there is still considerable slack in the system, particularly in Europe. Japan s inflation is still barely breaking 1%, but labor markets are tight. In addition to low government rates, yield spreads are equally tight, so there is a certain fear that higher rates will lead to a dislocation in credit markets. For growth investors, we have been grappling with low discount rates and high valuations. Rising interest rates mean higher discount rates, all things being equal. Equity risk premiums have also been high, but a normalization of rates will likely lead to a lowering of premiums. Combined with better growth from a better macro environment, these factors should allow non-u.s. growth stocks to continue to perform. Fund highlights During the fourth quarter, the ClearBridge International Growth Fund Class C shares generated a return of 3.46%, excluding the effects of sales charges. In comparison, the Fund s unmanaged benchmark, the MSCI EAFE Index, returned 4.23% and the Lipper International Multi-Cap Growth Funds category average returned 4.34% for the same period. On a relative basis, overall stock selection detracted from performance. In particular, stock selection in the consumer discretionary, utilities and industrials sectors, as well as an underweight to the energy sector, hurt relative results. On the 3

4 positive side, stock selection in the consumer staples and IT sectors and an overweight to IT were the primary contributors to results. On a regional basis, stock selection effects across emerging markets and North America contributed the most to relative returns for the fourth quarter, but they were offset by the negative impacts of an overweight to North America and stock selection in Europe ex U.K. On an individual stock basis, the largest contributors to absolute returns in the fourth quarter included Shiseido, Temenos Group, Fanuc Corp., Ping An Insurance, and Tencent Holdings. The greatest detractors from absolute returns included positions in Direct Energie, Munters Group, Hoya Corp., Aumann GmbH and Adient. During the quarter, we added a number of new positions, including Nidec Corp., in the industrials sector, Keyence Corp., in the IT sector, Kao Corp., in the consumer staples sector, Nitori Holdings, in the consumer discretionary sector, and Terveystalo Oy, in the health care sector. The Fund also closed several positions, including UniCredit, in the financials sector, Advanced Accelerator Applications, in the health care sector, TechnoPro Holdings and Vestas Wind Systems, in the industrials sector, and Gestamp Automocion, in the consumer discretionary sector. 4

5 Top 10 equity holdings (%) Shiseido Co Ltd 4.0 SAP SE 3.0 Temenos Group AG 3.0 ASML Holding NV 3.0 Rentokil Initial PLC 2.8 Diageo PLC 2.8 FANUC Corp 2.8 Erste Group Bank AG 2.7 ICON PLC 2.5 Nestle SA 2.5 Sector allocation (%) Information Technology 18.5 Financials 16.3 Industrials 15.7 Consumer Staples 14.2 Consumer Discretionary 10.7 Health Care 8.8 Materials 6.0 Energy 2.0 Utilities 1.5 Telecommunication Services 0.0 Real Estate 0.0 Cash/Other 6.3 Definitions and additional terms: Please note that an investor cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges. Category Average Returns Source: Lipper Inc. Past performance is no guarantee of future results. Lipper returns are based on the three-month period ended December 31, 2017, and they are calculated among 514 funds in the Lipper International Multi-Cap Growth peer group, including reinvestment of dividends and capital gains, if any, and excluding sales charges. A basis point (bp, or bps) is equal to 1/100th of 1%, or 0.01%. Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time. MSCI is an investment research firm that provides indices, portfolio risk and performance analytics and governance tools to institutional investors and hedge funds. The MSCI All Country World Index Ex-U.S. Index includes both developed and emerging markets. The MSCI All Country World Ex-U.S. Small Cap Index captures small-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States). MSCI EAFE Index is a free float-adjusted market-capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI EAFE Index consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. MSCI EAFE Growth Index captures large- and mid-cap securities exhibiting overall growth style characteristics across Developed Markets countries around the world, excluding the U.S. and Canada. The Nikkei-225 Stock Average is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. An estimate of the Manufacturing Purchasing Managers' Index (PMI) for a country, is based on about 85% of total PMI survey responses each month. It is intended to provide an accurate advance indication of the final PMI data. Quantitative and qualitative easing (QQE) refers to a monetary policy with yield curve control and inflation overshooting commitment. Percentages are based on total portfolio as of quarter end and are subject to change at any time. For informational purposes only and not to be considered a recommendation to purchase or sell any security. 5

6 Brandywine Global Clarion Partners ClearBridge Investments EnTrustPermal Martin Currie QS Investors RARE Infrastructure Royce & Associates Western Asset leggmasonfunds.com Youtube.com/leggmason Legg Mason is a leading global investment company committed to helping clients reach their financial goals through long-term, actively managed investment strategies. A broad mix of equities, fixed income, alternatives and cash strategies invested worldwide A diverse family of specialized investment managers, each with its own independent approach to research and analysis What should I know before investing? Over a century of experience in identifying opportunities and delivering astute investment solutions to clients Equity securities are subject to price fluctuation and possible loss of principal. Smalland mid-cap stocks involve greater risks and volatility than large-cap stocks. The manager s investment style may become out of favor and/or the manager s selection process may prove incorrect, which may have a negative impact on the Fund s performance. As a non-diversified Fund, it is permitted to invest a higher percentage of its assets in any one issuer than a diversified fund, which may magnify the Fund s losses from events affecting a particular issuer. The Fund may focus its investments in certain regions or industries, increasing its vulnerability to market volatility. 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. 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. Portfolio holdings and sector allocations may not be representative of the portfolio manager's current or future investment and are subject to change at any time. ClearBridge Investments, LLC and Legg Mason Investor Services, LLC are subsidiaries of Legg Mason, Inc Legg Mason Investor Services, LLC. Member FINRA, SIPC CBAX D7586 1/18 BEFORE INVESTING, CAREFULLY CONSIDER A FUND S INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. YOU CAN FIND THIS AND OTHER INFORMATION IN EACH PROSPECTUS, AND SUMMARY PROSPECTUS, IF AVAILABLE, AT PLEASE READ THE PROSPECTUS CAREFULLY. 6