WESTERN ASSET CURRENT MARKET MUNI PORTFOLIOS

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1 1Q 2018 Separately Managed Accounts Product Commentary WESTERN ASSET CURRENT MARKET MUNI PORTFOLIOS Executive summary The municipal ("muni") bond market posted a negative return but outperformed its taxable counterpart during the first quarter. As was the case with the taxable bond market, munis were dragged down by rising interest rates. The Portfolio s yield curve position in 6-12 year maturities detracted from performance. The Portfolio s position in 0-4 year maturities and an underweight to state general obligation bonds were beneficial for performance. In Western Asset Management s ("Western s ) view, municipal balance sheets look better today than they have in the past few years, although fiscal discipline varies from region to region. Western says investors should expect bouts of elevated spread and rate volatility during the upcoming months. However, they believe this can be viewed as an opportunity, not an indication of calamity. Market overview The overall U.S. bond market posted a negative return during the first quarter, and most spread sectors (non-u.s. Treasuries) underperformed their equal-duration Treasuries. The U.S. Treasury yield curve flattened during the period, as short-term yields rose more than their longer-term counterparts (yields and prices move in the opposite direction). Looking at the U.S. economy, the Commerce Department reported that fourth-quarter 2017 gross domestic product (GDP) 1 annualized growth was 2.9%. In contrast, the economy expanded 3.2% during the third quarter. The modest deceleration in growth during the fourth quarter was largely attributed to a downturn in private inventory investment. This was partially offset by accelerations in personal consumption expenditures, exports, state and local government spending, nonresidential fixed investment and federal government spending, and an upturn in residential fixed investment. The preliminary estimate for first-quarter 2018 GDP will be released on April 27, After holding steady at its meeting in January 2018, the Federal Reserve Board ( Fed ) 3 raised rates 0.25% at its meeting in March the first increase under new Chairman Jerome Powell. This pushed The Fed s target rate to a range between 1.50% and 1.75%. The increase marked the Fed s sixth rate hike since December 2015, and the Fed currently anticipates raising rates two more times during the year. In a statement following its March meeting, the Fed said it expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal 1 Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time. 2 Source of data in this paragraph: Bloomberg, 4/18. 3 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. INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

2 funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. The municipal ("muni") market posted a negative return but outperformed the overall taxable bond market during the first quarter. As was the case with taxable bond market, munis were dragged down by rising interest rates. All told, the Bloomberg Barclays Municipal Bond Index (the Index ) 4 fell 1.11% during the first quarter, whereas the overall taxable bond market, as measured by the Bloomberg Barclays U.S. Aggregate Index, 5 declined 1.46%. 6 Current Market Muni Annualized returns net and gross of fees - PRELIMINARY (%) as of March 31, 2018 QTR YTD 1-yr 3-yr 5-yr 7-yr 10-yr Net of fees "Pure" gross of fees Bloomberg Barclays Municipal 5 Year (4-6) 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. 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 shown. Net performance includes the deduction of a 1.5% annual wrap fee, which is the maximum anticipated wrap fee for fixed income 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. 4 The Bloomberg Barclays Municipal Bond Index is a market value-weighted index of investment-grade municipal bonds with maturities of one year or more. 5 The Bloomberg Barclays U.S. Aggregate Index is a broad-based bond index composed of government, corporate, mortgage- and asset-backed issues rated investment grade or higher and having at least one year to maturity. 6 Source of data in this paragraph: Bloomberg, 3/18. Contributors and detractors The Portfolio underperformed the Bloomberg Barclays Municipal 5 Year Index 7 (gross of fees) during the first quarter. The Portfolio s yield curve position in 6-12 year maturities detracted from results during the quarter. Maturities longer than 6 years underperformed as the yield curve steepened. On the upside, the Portfolio s position in 0-4 year maturities was beneficial for performance. Elsewhere, an underweight to state general obligation bonds was additive for returns. Outlook Looking ahead, an important element to consider in the outlook for the muni market is valuations. Given weak results during the first quarter, muni valuations are compelling, in our view. Munis continue to provide a yield in excess of equalduration Treasuries when taking into account their taxadvantaged status. More broadly, the economy continues to expand at a modest pace and inflation remains under control. The underwhelming performance so far this year has only improved the attractiveness of muni bonds. Another point to consider is fundamentals. Municipal balance sheets look better today than they have in the past few years, although fiscal discipline varies from region to region. Importantly, our investment posture is unchanged since the start of the year. Not only has our positioning worked well thus far, we believe it will continue to perform well during the upcoming months. We continue to favor revenue bonds especially essential service revenue bonds over general obligation bonds. The municipal market will evolve in response to changing economic realities and, while investors should expect bouts of elevated spread and rate volatility during the upcoming months, it can be viewed as an opportunity, not an indication of calamity. 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 7 The Bloomberg Barclays 5 Year Municipal Bond Index is a capitalization-weighted bond index intended to be representative of major municipal bonds of all quality ratings with an average maturity of approximately five years. 2

3 investing in any securities or investment strategies should consult their financial professional. Past performance is no guarantee of future results. There is no guarantee that investment objectives will be met. Risks All investments involve risk, including the loss of principal, and there is no guarantee that investment objectives will be met. All fixed income securities are subject to interest rate and credit risk, which is a possibility that the issuer of a security will be unable to make interest payments and repay the principal on its debt. As interest rates rise, the price of fixed income securities falls. Fixed income securities are subject to illiquidity risk, which is the risk that securities may be difficult to sell at certain prices when no market participants are willing to purchase the securities at such prices. State-specific and state-biased portfolios within the Western Asset Current Market Muni Portfolios focus on individual states and are more vulnerable to losses caused by adverse developments in those states than are national portfolios, which diversify investments across multiple states. For tax-exempt securities, certain investors may be subject to the federal Alternative Minimum Tax, and state and local taxes may apply. Capital gains, if any, are fully taxable. Please see "Important tax information." Credit quality is a measure of a bond issuer's ability to repay interest and principal in a timely manner. The credit ratings shown are based on each portfolio security's rating as provided by the following Nationally Recognized Statistical Rating Organizations (NRSROs): Standard and Poor's ("S&P"), Moody's Investors Service ("Moody's"), Fitch Ratings, Ltd. In the event a portfolio security is rated by more than one NRSRO, the higher rating is shown. In the case where a security is not rated by an NRSRO, these are listed as "Non Rated". The credit quality of the investments in the Portfolio does not apply to the stability or safety of the Portfolio. These ratings may change over time. The Portfolio itself has not been rated by an NRSRO. Important tax information Legg Mason, Inc., its affiliates, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Taxrelated statements, if any, may have been written in connection with the promotion or marketing of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor. Investments are not FDIC insured or guaranteed by any government agency. Values may fluctuate due to market conditions and other factors. 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. Where LMPPG implements, Western Asset selects broker/dealers to execute trades; and certain Western Asset employees, acting as dual employees of LMPPG, may perform all or some of LMPPG's implementation services. LMPPG and Western Asset are subsidiaries of Legg Mason, Inc. Tapering of the Federal Reserve Board's quantitative easing program and a general rise in interest rates may lead to increased portfolio volatility. 3

4 Definitions and additional information Investors cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. U.S. Treasuries are direct debt obligations issued by the U.S. government and backed by its full faith and credit. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasuries, debt securities issued by the federal agencies and instrumentalities, and related investments, may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities. The yield curve shows the relationship between yields and maturity dates for a similar class of bonds. 4

5 Western Asset Current Market Muni SMA GIPS endnotes ($USD) Schedule of investment performance results December 31, 2017 Year Net total return Pure 1 gross total return Benchmark total return Gross total 3 Yr. Standard Deviation Benchmark total 3 Yr. Standard Deviation Number of portfolios % of bundled fee portfolios in the composite Internal dispersion Composite assets ($mm) % of firm assets % 5.25% 5.78% -n/a- -n/a- 1, % 1, % % 6.37% 7.40% -n/a- -n/a- 2, % 2, % % 2.66% 3.40% -n/a- -n/a- 2, % 2, % % 6.31% 6.93% 3.18% 3.33% 2, % 2, % % 2.38% 2.96% 2.28% 2.42% 2, % 2, % % 0.43% 0.81% 2.13% 2.38% 1, % 2, % % 2.31% 3.19% 1.77% 2.14% 1, % 1, % % 2.06% 2.43% 1.76% 2.13% 1, % 1, % % -0.14% -0.39% 2.20% 2.47% 1, % 1, % % 2.81% 3.14% 2.32% 2.63% 1, % 1, % Western Asset claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. Western Asset has been independently verified for the periods from January 1, 1993 to December 31, The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firmwide basis and (2) the firm s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The verification does not ensure the accuracy of any specific composite presentation. For GIPS purposes, the Firm is defined as Western Asset, a primarily fixed-income investment manager comprised of Western Asset Management Company, Western Asset Management Company Limited, Western Asset Management Company Pte. Ltd., Western Asset Management Company Ltd, Western Asset Management Company Pty Ltd, and Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários (DTVM) Limitada, with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Dubai. Each Western Asset company is a wholly owned subsidiary of Legg Mason, Inc. ( Legg Mason ) but operates autonomously, and Western Asset, as a firm, is held out to the public as a separate entity. Western Asset Management Company was founded in The Firm is comprised of several entities as a result of various historical acquisitions made by Western Asset and their respective performance has been integrated into the Firm in line with the portability requirements set forth by GIPS. Western Asset Current Market Muni portfolios are discretionary fixedincome portfolios that seek total return over a market cycle, consisting of capital gain (taxable) and income that is exempt from regular U.S. income tax. Western Asset selects municipal securities for portfolios with a focus on diversification within sectors, regions and high credit quality. Western Asset seeks to enhance returns and reduce risks by taking advantage of shifts in the municipal yield curve, credit quality spreads and variations in market sectors. The composite is comprised of accounts that are separately managed accounts (SMAs) managed in accordance with the strategy. The composite employs a 10% significant cash flow policy. The composite was created on January 1, Effective January 1, 2012, the WA Intermediate Term Muni Composite merged with the WA Current Market Muni Composite as they are the same strategy. For comparison purposes, composite returns are shown against returns of the Bloomberg Barclays U.S. Municipal Bond Index, 5-Year. An investor cannot invest directly in an index. 1 Pure gross returns are presented as supplemental information to the net returns. The current fee schedule is 1.50% on all assets. Net returns are calculated by deducting the anticipated maximum annual bundled fee applied on a monthly basis from the "pure" gross monthly return. The bundled fee includes all charges for trading costs, portfolio management, custody, and other administrative fees. Bundled fees may vary across different financial firms and across different accounts based upon account size and other factors. Returns and market values are expressed in USD. Dispersion is calculated using the asset-weighted standard deviation of annual returns of those portfolios that were included in the composite for the entire year (equal-weighted prior to 2014). Periods with five or fewer accounts are not statistically representative and are not presented. The three-year annualized ex-post standard deviation measures the variability of the composite and the benchmark returns over the preceding 36- month period. Standard deviation is not presented for periods where 36 monthly returns are not available for the composite or the benchmark. Past investment results are not indicative of future investment results. Western Asset s list of composite descriptions and policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Please contact Ellen Cammer at or Ellen.Cammer@westernasset.com Legg Mason Investor Services, LLC, member FINRA, SIPC AMXX D4032 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. For periods prior to 2013, the firm excluded accounts designated by the sponsor as client-restricted. 5