CLEARBRIDGE MID CAP PORTFOLIOS

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1 1Q 2018 Separately Managed Accounts Product Commentary CLEARBRIDGE MID CAP PORTFOLIOS Brian Angerame and Derek Deutsch, CFA Portfolio Managers Mid Cap Portfolios Annualized returns net and gross of fees - PRELIMINARY (%) as of March 31, mo QTR YTD 1-yr 3-yr 5-yr 7-yr 10-yr Net of fees "Pure" gross of fees Russell Midcap 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 shown 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. Key takeaways The return of volatility should benefit active managers by providing more opportunities to own quality companies at compelling prices. We made significant changes to the portfolio, primarily in the consumer discretionary sector, which we believe position us well as quality becomes recognized again by the market. Solid results from our real estate and software companies have driven recent performance. Market overview and outlook Equity markets became reacquainted with volatility in the first quarter, with rising interest rates and global trade tensions leading to broad losses. The Russell Midcap Index declined -0.46%, while the S&P 500 fell 0.76% and the small-cap Russell 2000 Index lost 0.08%. Growth stocks fared better than value stocks, with the Russell Midcap Growth Index gaining 2.17%, compared with a loss of 2.50% for the Russell Midcap Value Index. The Strategy seeks to own high-quality mid-cap companies that include stocks with both growth and value characteristics. The quality distinction, which we measure through returns on invested capital, balance sheet strength and the capital allocation discipline of management teams, has not provided a meaningful performance advantage through much of the postfinancial crisis period characterized by low interest rates and INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

2 abundant liquidity. This accommodative macro backdrop has occurred concurrently with rising investor complacency and robust inflows into passive strategies. We have discussed in past commentaries the risks of investing in an index that may hold many unprofitable or debt-burdened companies. Rising volatility and the tightening of financial conditions by the U.S. Federal Reserve, which raised its short-term interest rate target 25 basis points during the quarter and plans at least two more increases in 2018, should remove the safety net that has lifted many of these low-quality companies. We also believe this changing backdrop should give active managers with a focus on quality a greater opportunity to deliver excess returns. As a high active share manager, we generate performance through bottom-up stock selection. While disappointed with our recent stock selection results, we have been energetically repositioning the portfolio into companies that give us the best opportunities for long-term success. These moves have involved exiting five positions where our reasons for owning a company were no longer compelling in an absolute sense or compared to other positions with a more compelling risk/reward profile. We eliminated Signet Jewelers, for example, a longtime holding that has seen its competitive advantage erode due to execution issues and concerns over its credit portfolio. We also reduced a position in Blue Buffalo Pet Products at a premium after it became the target of an acquisition by General Mills, closing the position completely in April. The takeout highlights the solid organic growth provided by quality mid-caps, a characteristic becoming more in demand among larger companies seeking new sources of growth. At the same time, we leveraged the volatility in the market to add four new positions at what we consider to be very attractive entry points. While many mid-cap stocks moved sideways during the quarter, a spike in earnings has made valuations that much more appealing. For a mid-cap asset class that generates more of its business domestically than large-cap companies, we expect corporate tax reform to add meaningfully to 2018 earnings results and beyond. Expedia, the online travel provider, is one of the latest additions to the portfolio that gives us good exposure to discretionary spending. The U.S. consumer is in the best shape in years, with unemployment at post-recession lows, wages picking up, financing rates still low, and the benefits of recently passed tax cuts just starting to be felt by the middle to upper middle-income families that are Expedia s main market. Consumer spending is also improving in the international markets Expedia is now targeting and where it is seeing solid growth. The company is investing in cloud technology and increasing its supply of hotel rooms to better compete in the online travel market, moves that we expect will begin to deliver results in the second half of the year. The consumer discretionary sector was the biggest drag on results during the quarter, but we expect our recent moves in the sector to help turn around performance. Health care was another detractor, hurt by what we believe are short-term, integration-related issues at dental supplier Dentsply Sirona and negative sentiment around several of our biotechnology holdings and the contract research organizations (CROs) that handle their clinical trials. We believe the outlook for CROs is strong, and we plan to add to our positions in Icon and Syneos Health opportunistically. We continue to stick with an approach that has done well for shareholders over the long term, to seek out fundamentally sound companies across the mid-cap market. Real estate is one area that has done well for us recently, and it was a solid contributor during the first quarter on strength in Jones Lang LaSalle, a global manager of office properties with a significant business in the U.K. that continues to rebound from the overhang of Brexit. The portfolio also benefited from the strong performance of several software companies that are thriving through innovative products or business models: Aspen Technology, Palo Alto Networks and Autodesk. As managers of the portfolio for more than a dozen years, we have invested through a variety of different market environments. After facing headwinds to our quality approach in the form of easy financial conditions, we believe the return of volatility should help us going forward. Our experience tells us that good companies do not stay cheap forever, and we expect that a combination of successful products, pricing power and the involvement of activist investors and strategic acquirers will lead to the value of our portfolio holdings being recognized. Portfolios highlights For the first quarter, the ClearBridge Mid Cap Portfolios declined -2.56% (gross of fees), while the benchmark Russell Midcap Index declined -0.46% for the same period. Over the longer term, the Portfolios have outperformed (gross of fees) the benchmark for the 10-year period ended March 31,

3 On an absolute basis, the Portfolios had gains in two of the 10 sectors in which it was invested for the first quarter (out of 11 sectors total). The leading contributor to returns was the information technology (IT) sector, while detractors from returns were the consumer discretionary, industrials and health care sectors. In relative terms, the Portfolios underperformed their benchmark primarily due to stock selection decisions, while sector allocation supported overall returns during the quarter. Stock selection in the consumer discretionary, health care, industrials and financials sectors hurt relative performance the most. Conversely, strong stock selection in the consumer staples and real estate sectors and an underweight allocation in real estate most helped relative performance during the period. On an individual stock basis, Dentsply Sirona, Signet Jewelers, Goodyear Tire & Rubber, Acuity Brands and Alaska Air Group were the greatest detractors from absolute returns during the first quarter. The largest contributors to absolute returns included Blue Buffalo Pet Products, Autodesk, Aspen Technology, Palo Alto Networks and Jones Lang LaSalle. During the first quarter, we added new positions in Expedia, in the consumer discretionary sector, WABCO Holdings, in the industrials sector, Bio-Rad Laboratories, in the health care sector, and DTE Energy, in the utilities sector. We also closed positions in Adient, Core-Mark Holding, Signet Jewelers and Sinclair Broadcast Group, in the consumer discretionary sector, Blue Buffalo Pet Products, in the consumer staples sector, Portland General Electric, in the utilities sector, and Crown Holdings, in the materials sector. Top contributors 1 Contribution to equity return % Blue Buffalo Pet Products, Inc Autodesk, Inc Aspen Technology, Inc Palo Alto Networks, Inc Jones Lang LaSalle Incorporated 0.23 The leading individual contributors for the quarter included: Blue Buffalo Pet Products (BUFF), in the consumer staples sector, offers pet food for dogs and cats that is made from natural ingredients. The stock rose significantly following news that the company was being acquired by General Mills. Autodesk (ADSK), in the IT sector, is a design software and services company with customers in the architecture, engineering and construction, and manufacturing industries. The company s successful transition to a new subscriptionbased model should result in a recurring revenue stream and rising earnings and cash flow. Aspen Technology (AZPN), in the IT sector, develops software to optimize operations and supply chain functions for industrial, engineering and chemical companies. Shares rallied on strong results that beat forecasts on both the top and bottom line due to strong new product launches that continue a trend of innovation driving performance. Bottom contributors 1 Contribution to equity return % DENTSPLY SIRONA Inc Signet Jewelers Limited Goodyear Tire & Rubber Company Acuity Brands, Inc Alaska Air Group, Inc Dentsply Sirona (XRAY), in the health care sector, is a global provider of dental supplies and technologies, including instruments, appliances and software. The company was formed by the 2016 merger of Dentsply International and Sirona Dental Systems. The stock sold off on lingering integration issues that have led to management turnover. We 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 continue to hold the stock, as it is trading at a valuation that we believe does not properly represent the value of its underlying business. Signet Jewelers (SIG), in the consumer discretionary sector, is a specialty retailer with jewelry stores operating under several brand names, including Kay Jewelers, Jared and Zales. The company continued to lose share in an increasingly competitive jewelry market, and we decided to sell the position. Goodyear Tire and Rubber (GT), in the consumer discretionary sector, is a multinational tire manufacturing company. Weakness in tire demand and profits challenged by higher raw material and manufacturing costs weighed on the stock. 4

5 Market capitalization 2 Market cap breakdown ($) Portfolio weight Benchmark weight Above 50 billion billion billion billion billion Weighted average market cap ($bil) Top 10 equity holdings 2 Percent of equity Parsley Energy Inc 2.25 Autodesk Inc 2.20 Lazard Ltd 2.13 Progressive Corp/The 2.08 CDW Corp/DE 2.07 Alexandria Real Estate Equities Inc 1.99 Western Alliance Bancorp 1.97 Starwood Property Trust Inc 1.95 Aspen Technology Inc 1.93 Xilinx Inc 1.89 Total number of holdings 65 Sector highlights 2 Average sector weightings and performance (%) Gross of fees from 12/31/17 to 03/31/18 Benchmark* weight Benchmark* return Port. Port. Weight Active Sector weight return diff. contrib. Financials Information Technology Consumer Discretionary Industrials Health Care Real Estate Consumer Staples Materials Energy Utilities Telecomm Service Cash *Benchmark: Russell Midcap Index. 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. 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. All investments involve risk, including possible loss of principal amount invested. 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. Professional money management may not be suitable for all investors. 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 both 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. developments, foreign taxation and differences in auditing and other financial standards. These risks are magnified in emerging markets. The managers may hold significant portions of portfolio assets in cash equivalents while waiting for buying opportunities. Definitions and additional information Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges. Active share is a measure of the percentage of stock holdings in a manager's portfolio that differ from the benchmark index. A basis point (bp, or bps) is equal to 1/100th of 1%, or 0.01%. Brexit is an abbreviation of "British exit," which refers to the June 23, 2016 referendum by British voters to exit the European Union. The Federal Reserve Board ("Fed") is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments. Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time. Russell 2000 Index is an unmanaged list of common stocks that is frequently used as a general performance measure of U.S. stocks of small and/or midsize companies. Russell Midcap Growth Index is an unmanaged index of those companies in the Russell Midcap Index chosen for their growth orientation. 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. Russell Midcap Value Index is an unmanaged index of those companies in the Russell Midcap Index chosen for their value orientation. S&P 500 Index is an unmanaged index of common stock performance. 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. Investments may be made in mid-cap companies, which involve a higher degree of risk and volatility than investments in larger, more established companies. 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 6

7 ClearBridge Mid Cap 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 Midcap 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) % 14.06% 18.52% % 11.57% 10.51% % 119, % 10.50% 13.80% % 13.04% 11.72% % 100, % 3.44% -2.44% % 11.64% 11.00% % 92, % 9.26% 13.22% % 11.82% 10.29% % 100, % 37.00% 34.76% % 16.69% 14.23% % 85, % 19.98% 17.28% % 19.35% 17.44% % 54, % -0.84% -1.55% % 21.49% 21.86% % 50, % 24.28% 25.48% % n/a n/a % 55, % 38.26% 40.48% % n/a n/a % 53, % % % % n/a n/a % 50,614.9 *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 Mid Cap SMA composite consists of discretionary wrap accounts with an account minimum of US $25,000. Accounts within the composite seek long-term growth of capital and consistently superior returns relative to the Russell Mid Cap Index. Portfolios are diversified across several economic sectors, investing primarily in companies having market capitalizations within the capitalization range of the Russell Midcap Index. The main risks of this strategy are General Investment Risk, Mid Cap Risk and Non-U.S. Investment Risk. Prior to June 2008, the minimum was $5,000. In November 2015 the word "Core" was dropped from the composite name. 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. 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-weighted standard deviation of portfolio returns included in the composite for the entire year. For prior years, the equal-weighted standard deviation was used. 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 Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC and ClearBridge Investments are subsidiaries of Legg Mason, Inc AMXX D6841 7