LEGG MASON DIVIDEND STRATEGY BALANCED PORTFOLIOS

Transcription

1 2Q 2018 Separately Managed Accounts LEGG MASON DIVIDEND STRATEGY BALANCED PORTFOLIOS INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

2 Introduction Legg Mason Meet our investment managers Having honed their expertise over many decades and market cycles, our global asset managers offer specialized capabilities across a scope of asset classes and strategies Each skilled team operates with independent vision to help deliver powerful financial solutions for both individuals and institutions Investing with conviction Acting with conviction and discipline, we look beyond short-term, conventional thinking to rigorously pursue long-term value across differentiated fixed income, equity, and alternative solutions Real estate investment specialists Clarion Partners is a leading private equity and debt real estate investment manager established in 1982 Clarion invests in the Americas across a broad range of property types and risk profiles, with the goal of consistently creating value for its clients Quality-focused equity 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 Global alternative investments One of the world s largest hedge fund investors, recognized as a global leader in structuring comprehensive alternative investment strategies for institutional and high net worth clients Active equity specialists An active equity specialist that builds global, stock-driven portfolios based on fundamental research, devoting all of its resources to delivering optimum investment outcomes and superior client relationships Systematic investment solutions QS Investors is a quantitative asset manager that provides multi-asset class and global equity solutions Their approach unites intellectual and academic precision with the power of data and technology in their quest to elevate the certainty of outcomes they deliver Global listed infrastructure investing RARE is a dedicated infrastructure investment manager focused on global listed infrastructure investments Established in 2006, RARE has grown to become one of the largest listed infrastructure managers globally Small-cap equity Known for its disciplined, valueoriented approach to managing small-caps An asset class pioneer, the firm s founder is one of the longest-tenured active managers Fixed income One of the world s leading global fixed income managers Founded in 1971, the firm is known for team management, proprietary research and a long-term fundamental value approach Active share is a measure of the percentage of stock holdings in a manager s portfolio that differs from the benchmark index 2

3 Your investment portfolio Dividend Strategy Balanced Legg Mason Dividend Strategy Balanced Portfolios Overview Legg Mason Dividend Strategy Balanced Portfolios aim to meet long-term financial goals with dividend income, dividend income growth and long-term capital appreciation, while utilizing high-quality bonds to manage portfolio volatility Philosophy We believe that: A total return portfolio with exposure to companies that either pay an existing dividend or have the potential to pay and/or significantly grow their dividends combined with the potential added stability of bonds has the potential to outperform over the long term Competitive risk-adjusted returns may be achieved by investing in select large- and mid-cap companies and by seeking to limit portfolio turnover to capitalize on potential for long-term growth Objectives The strategy seeks to: dividend income achieve growth of dividend income achieve long-term capital appreciation utilize fixed income as an anchor to manage volatility in the overall portfolio, as well as to provide income and total return Risks: All investments involve risk, including the loss of principal, and there is no guarantee that investment objectives will be met Investments may be made in small-cap and mid-cap companies which involve a higher degree of risk and volatility than investments in larger, more established companies While most investments are in US companies, investments may be made in ADRs and US-traded ordinary shares of non-us 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 fluctuations, political and economic developments, foreign taxation and differences in auditing and other financial standards These risks are magnified in emerging markets Managers seek to keep portfolio turnover low to allow for the positive compounding effect of dividends over time, although market, security and other investment considerations may cause turnover to be higher from time to time Also, all capitalization ranges will not necessarily be represented in an individual account The managers may sometimes hold significant portions of portfolio assets in cash equivalents while waiting for buying opportunities Tapering of the Federal Reserve Board s quantitative easing program and a general rise in interest rates may lead to increased portfolio volatility Limited investments also may be made in non-dividend paying stocks that are not expected to pay a dividend in the near future 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 3

4 Your investment portfolio Dividend Strategy Balanced Legg Mason Dividend Strategy Balanced Portfolios investment process Portfolio implementation Fixed Income Equity Portfolio Implementation Dividend Strategy Balanced Portfolios Two strategies are managed independently by the Dividend Strategy Team and the Taxable Fixed Income Team Allocation to fixed income will vary depending upon portfolio managers discretion and market conditions For Illustrative Purposes Only Asset allocations are approximate and subject to change Limited investments also may be made in non-dividend paying stocks that are not expected to pay a dividend in the near future The investment process may change over time The characteristics set forth are intended as a general illustration of some of the criteria the strategy team considers in selecting securities for client portfolios There is no guarantee investment objectives will be achieved 4

5 Your investment portfolio Dividend Strategy Balanced Legg Mason Dividend Strategy Balanced Portfolios Equity investment process Define the investment universe Emphasize domestic large-capitalization stocks, but also consider mid- and smallcapitalization companies and ADR s of foreign companies opportunistically Evaluate stocks using proprietary discipline Screen for companies across all market sectors with either an attractive dividend yield, a history of (or prospects for) dividend growth, strong balance sheets, dominant positions and/or reasonable valuations Select securities and construct portfolio Conduct fundamental research and dividend analysis to identify companies with attractive growth characteristics relative to their valuation levels Review process Re-examine a current holding when valuation is realized, fundamentals deteriorate, and/or cyclical shifts alter industry s attractiveness The investment process may change over time The characteristics set forth are intended as a general illustration of some of the criteria the strategy team considers in selecting securities for client portfolios There is no guarantee investment objectives will be achieved 5

6 Your investment portfolio Dividend Strategy Balanced Legg Mason Dividend Strategy Balanced Portfolios Fixed Income investment process Interest Rate Exposure/ Duration Weighting Western Asset s investment team comprehensively analyzes a variety of domestic and international macroeconomic factors to establish a duration target Term Structure Weighting The Firm carefully employs strategies in an attempt to take advantage of changes in the yield curve s shape and shifts in the relationship between short-, intermediate-, and long-maturity securities Sector Allocation Western Asset seeks to add value to a portfolio by actively rotating between the Treasury and Agency sectors The investment process may change over time The characteristics set forth are intended as a general illustration of some of the criteria the strategy team considers in selecting securities for client portfolios There is no guarantee investment objectives will be achieved 6

7 Strategy characteristics & performance Performance Equity Portfolio characteristics as of June 30, 2018 Market capitalization (%) Characteristics 100 Portfolio BM Portfolio Number of Holdings BM Dividend Yield Forecasted P/E Ratio -1 Year Price/Book Ratio Long-Term EPS Growth Weighted Median Market Capitalization Above $50B $25 - $50B $10 - $25B $3 - $10B 0 - $3B Weighted Average Market Capitalization Source: FactSet Portfolio characteristics and composition are currently inaccessible at the representative account level for the Dividend Strategy Balanced portfolio In lieu of this, the following pages show portfolio characteristics for a representative account of Dividend Strategy portfolio for the equity portion and for a model portfolio of GSM 5-Year for the fixed income portion Portfolio characteristics are subject to change at any time Portfolio characteristics of individual client portfolios in the program may differ, sometimes significantly, from those shown above Please see Endnotes for additional information Please see appendix for term definitions P/E ratio Year 1 and Long-term EPS growth are provided by I/B/E/S, are inherently limited and should not be used as an indication of future performance Yields and dividends represent past performance and there is no guarantee they will continue to be paid 7

8 Strategy characteristics & performance Performance Equity Portfolio Composition As of June 30, 2018 Sector weightings (%) Portfolio BM Consumer Staples Information Technology Financials Energy Consumer Discretionary Health Care Materials Industrials Real Estate Utilities Top equity holdings (%) Microsoft Corp 304 Home Depot Inc/The 296 Texas Instruments Inc 279 Bank of America Corp 265 BlackRock Inc 238 Mastercard Inc 236 Sysco Corp 233 Apple Inc 230 Enbridge Inc 229 International Paper Co 227 Total 2537 Telecommunication Services Cash Source: FactSet 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 8

9 Strategy characteristics & performance Performance Fixed income Portfolio characteristics as of June 30, 2018 Sector weightings (%) Treasury 7701 Agency 2299 Asset-Backed Securities 00 CMO 00 Characteristics Average Maturity (Years) 390 Average Coupon Rate (%) 192 Effective Duration (Years) 364 Yield to Maturity (%) 266 Yield to Worst (%) 266 Corporate 00 Mortgage-Backed Securities 00 Other 00 Cash 00 Source: BondEdge Portfolio sector weightings and characteristics are for a model portfolio, are for illustrative purposes only and are subject to change The Model Portfolio represents the Investment Manager s general advice at the date stated above to GSM 5-Year clients without restrictions on their accounts For actual GSM 5- Year client accounts, composition and other data shown varied from those shown for Model Portfolio because of factors such as client-imposed restrictions and the timing of actions and withdrawals of funds to and from individual client accounts Sector weightings and characteristics of individual client portfolios may differ, sometimes significantly, from the weightings shown above Yields will fluctuate and are not guaranteed Please see appendix for term definitions 9

10 Strategy characteristics & performance Performance Performance Calendar-year total returns gross and net of fees (%) ending December Dividend Strategy Bal (70/30) (gross) Dividend Strategy Bal (70/30) (net) Index Mix (70/30) S&P 500 Index Annualized rates of return gross and net of fees (%) as of June 30, 2018 PRELIMINARY Jun 18 Q2 18 YTD 1-year 3-year 5-year 7-year 10-year Dividend Strategy Bal (70/30) (gross) Dividend Strategy Bal (70/30) (net) Index Mix (70/30) S&P 500 Index The strategy returns shown are preliminary composite returns, subject to future revision (downward or upward) Please visit wwwleggmasoncom for the latest performance figures YTD numbers are not annualized Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges 70/30 Index Mix consists of the following: 70% S&P 500 Index and 30% Bloomberg Barclays Intermediate Treasury Bond Index (rebalanced monthly) Past performance is no guarantee of future results YTD numbers are not annualized 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 30% 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 Please see Performance Endnotes for additional important information regarding the portfolio s 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 10

11 Strategy characteristics & performance Performance Risk/return profile (%) Gross of fees (based on 10-year period ending June 30, 2018) Modern portfolio statistics as of June 30, Dividend Strategy Bal (70/30) Index Mix (70/30) S&P 500 Index Dividend Strategy Balanced Taxable (70/30) Index Mix (70/30) S&P 500 Index Annualized rate of return (%) 10 5 Annualized return (%) Annualized standard deviation (%) Sharpe ratio Beta 073 N/A N/A Alpha 280 N/A N/A R-squared 089 N/A N/A Risk (% annualized standard deviation) The strategy returns shown are preliminary composite returns, subject to future revision (downward or upward) Please visit wwwleggmasoncom for the latest performance figures YTD numbers are not annualized Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges Past performance is no guarantee of future results Investments involve risk of loss Alpha, Beta, and R-squared are shown versus the Index Mix Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges Please see appendix for term definitions 70/30 Index Mix consists of the following: 70% S&P 500 Index and 30% Bloomberg Barclays Intermediate Treasury Bond Index (rebalanced monthly) Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance 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 Please see Performance Endnotes for additional important information regarding the portfolio s 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 11

12 Strategy characteristics & performance Performance Up/Down market capture ratios (%) Gross of fees (based on 10-year period ending June 30, 2018) 2 Dividend Strategy Bal (70/30) Index Mix (70/30) Up 82 positive months Down 38 negative months The strategy returns shown are preliminary composite returns, subject to future revision (downward or upward) Please visit wwwleggmasoncom for the latest performance figures YTD numbers are not annualized Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance 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 Please see appendix for term definitions Please see Performance Endnotes for additional important information regarding the portfolio s 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 Past performance is no guarantee of future results 12

13 Strategy characteristics & performance Performance Growth of $100,000 Gross of fees (based on 10-year period ending June 30, 2018) $250,000 Dividend Strategy Bal (70/30) Index Mix (70/30) $217,457 $235,654 $200,000 $150,000 $100,000 $50,000 $ For illustrative purposes only Assumes no withdrawals or contributions These statistics are based on gross-of-fees quarterly composite returns, were calculated assuming reinvestment of dividends and income, and take into account both realized and unrealized capital gains and losses Past performance is no guarantee of future results All investments involve risk, including the loss of principal Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance 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 Please see Performance Endnotes for additional important information regarding the portfolio s 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 13

14 Strategy characteristics & performance Performance Performance Calendar-year total returns gross and net of fees (%) ending December Dividend Strategy Bal (60/40) (gross) Dividend Strategy Bal (60/40) (net) Index Mix (60/40) S&P 500 Index Annualized rates of return gross and net of fees (%) as of June 30, 2018 PRELIMINARY Jun 18 Q2 18 YTD 1-year 3-year 5-year 7-year 10-year Dividend Strategy Bal (60/40) (gross) Dividend Strategy Bal (60/40) (net) Index Mix (60/40) S&P 500 Index The strategy returns shown are preliminary composite returns, subject to future revision (downward or upward) Please visit wwwleggmasoncom for the latest performance figures YTD numbers are not annualized Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges 60/40 Index Mix consists of the following: 60% S&P 500 Index and 40% Bloomberg Barclays US Intermediate Treasury Bond Index (rebalanced monthly) Past performance is no guarantee of future results YTD numbers are not annualized 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 30% 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 Please see Performance Endnotes for additional important information regarding the portfolio s 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 14

15 Strategy characteristics & performance Performance Risk/return profile (%) Gross of fees (based on 10-year period ending June 30, 2018) Modern portfolio statistics as of June 30, Dividend Strategy Bal (60/40) Index Mix (60/40) S&P 500 Index Dividend Strategy Balanced Taxable (60/40) Index Mix (60/40) S&P 500 Index Annualized rate of return (%) 10 5 Annualized return (%) Annualized standard deviation (%) Sharpe ratio Beta 073 N/A N/A Alpha 252 N/A N/A R-squared 089 N/A N/A Risk (% annualized standard deviation) The strategy returns shown are preliminary composite returns, subject to future revision (downward or upward) Please visit wwwleggmasoncom for the latest performance figures YTD numbers are not annualized Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges Past performance is no guarantee of future results Investments involve risk of loss Alpha, Beta, and R-squared are shown versus the Index Mix Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges Please see appendix for term definitions 60/40 Index Mix consists of the following: 60% S&P 500 Index and 40% Bloomberg Barclays US Intermediate Treasury Bond Index (rebalanced monthly) Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance 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 Please see Performance Endnotes for additional important information regarding the portfolio s 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 15

16 Strategy characteristics & performance Performance Up/Down market capture ratios (%) Gross of fees (based on 10-year period ending June 30, 2018) 2 Dividend Strategy Bal (60/40) Index Mix (60/40) Up 81 positive months Down 39 negative months The strategy returns shown are preliminary composite returns, subject to future revision (downward or upward) Please visit wwwleggmasoncom for the latest performance figures YTD numbers are not annualized Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance 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 Please see appendix for term definitions Please see Performance Endnotes for additional important information regarding the portfolio s 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 Past performance is no guarantee of future results 16

17 Strategy characteristics & performance Performance Growth of $100,000 Gross of fees (based on 10-year period ending June 30, 2018) $250,000 Dividend Strategy Bal (60/40) Index Mix (60/40) $202,951 $217,758 $200,000 $150,000 $100,000 $50,000 $ For illustrative purposes only Assumes no withdrawals or contributions These statistics are based on gross-of-fees quarterly composite returns, were calculated assuming reinvestment of dividends and income, and take into account both realized and unrealized capital gains and losses Past performance is no guarantee of future results All investments involve risk, including the loss of principal Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance 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 Please see Performance Endnotes for additional important information regarding the portfolio s 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 17

18 Appendix Investment Management Team Investment management team Scott Glasser, Managing Director, Portfolio Manager Co-Chief Investment Officer Industry since 1991 Firm since 1993 Pennsylvania State University MBA Middlebury College BA Member of the ClearBridge Investments Management Committee Shearson Lehman Brothers -- Portfolio Manager, Consumer Analyst Bear Stearns & Co -- Credit Analyst CIS Marketing -- Account Representative Michael Clarfeld, CFA Managing Director, Portfolio Manager Industry since 2000 Firm since 2006 Duke University BA in History Member of the CFA Institute Member of the New York Society of Securities Analysts Hygrove Partners, LLC -- Equity Analyst Goldman Sachs -- Equity Research, Financial Analyst Diane Keady Director, Portfolio Manager Industry since 2000 Firm since 1994 New York University, Leonard N Stern School of Business MBA Rutgers University BS Citigroup Asset Management -- US Sales and Distribution, Vice President Salomon Smith Barney -- GAAP Reporting, Vice President Smith Barney Shearson -- Technology Finance, Expense Analyst Peter Vanderlee, CFA Managing Director, Portfolio Manager Industry since 1999 Firm since 1999 New York University, Leonard N Stern School of Business MBA University of Technology, Eindhoven, Holland MS in Math/ Computer Science Member of the CFA Institute Predecessor organization First Vice President Booz&Co Program Director/Senior Associate Cap Gemini America Senior Consultant 18

19 Appendix Investment Management Team Investment management team Western Asset, one of the world s leading fixed income managers, was founded in 1971 With a focus on long-term fundamental value investing that employs a top-down, bottom-up approach, the firm has nine offices around the globe and deep experience across the range of fixed income sectors Western Asset has been recognized for its emphasis on team management and intensive proprietary research, supported by robust risk management 19

20 Appendix Performance Endnotes Performance Endnotes (70/30) Performance calculation Legg Mason Dividend Strategy Balanced Portfolios composite performance has the approximate target allocation of: 70% equity and 30% fixed income components The Index Mix is comprised of 70% S&P 500 Index and 30% Bloomberg Barclays Intermediate Treasury Bond indices, rebalanced monthly Unlike the indices included in the Index Mix, investment styles included in balanced portfolios are not automatically rebalanced each month Performance returns for periods prior to January 2006 are based on the performance of a composite of accounts from a formerlyaffiliated sponsor channel, which represented an overwhelming majority of the strategy s retail assets under management during such periods Such pre-2006 returns were calculated on an equalweighted basis where each portfolio contributed an equal weight to the resulting composite return regardless of its asset size Performance returns for periods subsequent to January 2006 are based on the composite performance of all discretionary retail managed accounts in the strategy Such post-2005 returns were calculated on an asset-weighted basis where each portfolio contributed to the resulting composite return proportionately based on asset size 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 30% 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 may enter into an agreement directly with Legg Mason Private Portfolio Group, LLC ( LMPPG ), refer to LMPPG s Form ADV disclosure document Index Definitions The S&P 500 Index is a capitalization-weighted, composite index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries The Bloomberg Barclays US Intermediate Treasury Bond Index is composed of all public obligations of the US Treasury This index has an average current maturity of 369 years (average maturity may vary over time) The portfolio composition typically varies from that of the abovenoted, unmanaged indices Past performance is no guarantee of future results 20

21 Appendix Performance Endnotes Performance Endnotes (60/40) Performance calculation Legg Mason Dividend Strategy Balanced Portfolios composite performance has the approximate target allocation of: 60% equity and 40% fixed income components The Index Mix is comprised of 60% S&P 500 Index and 40% Bloomberg Barclays US Intermediate Treasury Bond indices, rebalanced monthly Unlike the indices included in the Index Mix, investment styles included in balanced portfolios are not automatically rebalanced each month Performance returns for periods prior to January 2006 are based on the performance of a composite of accounts from a formerlyaffiliated sponsor channel, which represented an overwhelming majority of the strategy s retail assets under management during such periods Such pre-2006 returns were calculated on an equalweighted basis where each portfolio contributed an equal weight to the resulting composite return regardless of its asset size Performance returns for periods subsequent to January 2006 are based on the composite performance of all discretionary retail managed accounts in the strategy Such post-2005 returns were calculated on an asset-weighted basis where each portfolio contributed to the resulting composite return proportionately based on asset size 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 30% 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 may enter into an agreement directly with Legg Mason Private Portfolio Group, LLC ( LMPPG ), refer to LMPPG s Form ADV disclosure document Index Definitions The S&P 500 Index is a capitalization-weighted, composite index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries The Bloomberg Barclays US Intermediate Treasury Bond Index is composed of all public obligations of the US Treasury This index has an average current maturity of 369 years (average maturity may vary over time) The portfolio composition typically varies from that of the abovenoted, unmanaged indices Past performance is no guarantee of future results 21

22 Appendix Index Definitions Definitions Index Definitions The Bloomberg Barclays US Government/Credit Bond Index tracks the performance of the overall bond market and is a broad measure of the performance of government and corporate fixed-rate debt issues The FTSE 3-Month US Treasury Bill Index is an index based upon the average monthly yield of the 90-Day Treasury Bills Treasury bills are secured by the full faith and credit of the US Government and offer a fixed rate of return The MSCI EAFE Index (Europe, Australasia, Far East) is an unmanaged index of common stocks of companies located in Europe, Australasia and the Far East The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets The MSCI World ex US Index consists of the following 22 developed market country indexes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and, the United Kingdom The Russell 1000 Index consists of the 1000 largest securities in the Russell 3000 Index, and this large cap (market-oriented) index is highly correlated with the S&P 500 Index The Russell 1000 Growth Index measures the performance of those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values (A priceto-book ratio is the price of a stock compared to the difference between a company s assets and liabilities) The Russell 1000 Value Index measures the performance of those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values The Russell 2000 Index is comprised of the 2,000 smallest companies in the Russell 3000 Index The Russell 2000 Growth Index measures the performance of those Russell 2000 Index companies with higher price-to-book ratios and higher forecasted growth values The Russell 2000 Value Index measures the performance of those Russell 2000 Index companies with lower price-to-book ratios and lower forecasted growth values The Russell 3000 Index is comprised of the 3,000 largest US companies based on total market capitalization, and represents the vast majority of the investable US market The Russell 3000 Growth Index measures the performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values The Russell MidCap Index consists of the 800 smallest companies in the Russell 1000 Index as ranked by total market capitalization The Russell MidCap Growth Index measures the performance of those Russell MidCap companies with higher price-to-book ratios and higher forecasted growth values The Russell MidCap Value Index measures the performance of those Russell MidCap companies with lower price-to-book ratios and lower forecasted growth values The stock are also members of the Russell 1000 Value Index The S&P 500 Index is a capitalization weighted, composite index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges 22

23 Appendix Term Definitions Definitions Term definitions Market Capitalization measures the number of outstanding common shares of a given corporation multiplied by the latest price per share Weighted Median Market Capitalization represents the value at which half the portfolio s market capitalization weight falls above and half falls below Weighted Average Market Capitalization represents the average value of the companies held in the portfolio When that figure is weighted, the impact of each company s capitalization on the overall average is proportional to the total market value of its shares Dividend Yield is determined by dividing a stock s annual dividends per share by the current market price per share Dividend yield is a financial ratio that shows how much a company pays out in dividends P/E (Year 1) is the previous day s closing price of the stock divided by the consensus earnings per share (EPS) of fiscal year 1 (FY1) provided by I/B/E/S Forecasts are inherently limited and should not be relied upon as indicators of future performance The Price-to-Book ratio (P/B) is a stock s price divided by the stock s per share book value Earnings Per Share (EPS) is the portion of a company s profit allocated to each outstanding share of a common stock The Sharpe Ratio is a risk-adjusted measure, calculated using standard deviation and excess return to determine reward per unit of risk The higher the Sharpe Ratio, the better the portfolio s historical adjusted performance Alpha is a measure of the difference between actual returns and expected performance, given the level of risk as measured by Beta, where Beta measures sensitivity to benchmark movements R-Squared measures the strength of the linear relationship between the portfolio and its benchmark R-squared at 10 implies perfect linear relationship and zero implies no relationship exists Standard Deviation is based on quarterly data Standard deviation is a measure of the variability of returns; the higher the standard deviation, the greater the range of performance (ie, volatility) The Capture Ratios measure a manager s composite performance relative to the benchmark, considering only those quarters that are either positive (Up) or negative (Down) for the benchmark An Up Market Capture Ratio greater than 10 indicates a manager who has outperformed the benchmark in the benchmark s positive quarters A Down Market Capture Ratio of less than 10 indicates a manager who has outperformed the relative benchmark in the benchmark s negative quarters Maturity is the date at which a debt instrument is due and payable A bond due to mature on January 1, 2010, will return the bondholder s principal and final interest payment when it reaches maturity on that date Bond yields are frequently calculated on a yield-to-maturity basis Duration (Modified Duration) is the measure of the price sensitivity of a fixed income security to an interest rate change of 100 basis points Calculation is based on the weighted average of the present values for all cash flows Yield to Worst (YTW) is based on a portfolio s current holdings on one specific day, is gross of all portfolio expenses, and is calculated based on assumptions that prepayment occurs if the bond has call or put provisions and the issuer can offer a lower coupon rate based on current market rates If market rates are higher than the current yield of a bond, the YTW calculation will assume no prepayments are made, and YTW will equal the yield to maturity The YTW will be the lowest of yield to maturity or yield to call (if the bond has prepayment provisions) The YTW of a bond portfolio is the market-weighted average of the YTWs of all the bonds in the portfolio Insured municipal bonds are ones where scheduled interest and principal payments are guaranteed by AAA-rated municipal bond insurers General Obligation municipal bonds are backed by the credit and taxing power of the issuing jurisdiction rather than the revenue of a given project Revenue bonds are municipal bonds supported by the revenue from a specific project Pre-refunded bonds are municipal bonds that are generally backed or secured by US Treasury bonds Effective Duration is a duration calculation for bonds with embedded options Effective duration takes into account that expected cash flows will fluctuate as interest rates change Average Maturity is the average length of maturity for all fixed-rate debt instruments held in a portfolio Average Coupon based on the portfolio s underlying holdings, which may differ and are subject to change Coupon rate is the annual coupon payments paid by the issuer relative to a bond s face or par value Yield to Maturity - The rate of return anticipated on a bond if it is held until the maturity date The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity The Sharpe Ratio is a risk-adjusted measure that is calculated using standard deviation and excess return to determine reward per unit of risk The higher the Sharpe Ratio, the better the portfolio s historical adjusted performance 23

24 Brandywine Global Clarion Partners ClearBridge Investments EnTrustPermal Martin Currie QS Investors RARE Infrastructure Royce & Associates Western Asset 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, fixedincome, alternatives and cash strategies invested worldwide leggmasoncom 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 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 Mason-affiliated sub-advisors: ClearBridge Investments, LLC and Western Asset Management Company Management is implemented by LMPPG, the designated sub-advisor or, in the case of certain programs, the program sponsor or its designee Investments for the program(s) discussed herein are traded primarily in US markets and unless otherwise noted, equity and fixed income investments for such program(s) are primarily of US issuers In addition, unless otherwise noted, indexes referred to herein represent groups of securities that are issued primarily by US issuers 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 Tax-related 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 Gross-of-fees performance results shown herein do not reflect deduction for investment management fees and transaction costs The performance of individual client accounts will vary and will be reduced by such fees and costs Please review the effect of fees and transaction costs on account performance with your financial professional Investments are not obligations of, and are not guaranteed by, LMPPG or any other Legg Mason, Inc affiliate or subsidiary; are not FDIC or government insured; and are subject to risks, including possible loss of the principal amount invested Professional money management may not be suitable for all investors 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, 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 2018 Legg Mason Investor Services, LLC, member FINRA, SIPC Legg Mason Investor Services, LLC, ClearBridge Investments, LLC, and Western Asset Management Company, LLC are subsidiaries of Legg Mason, Inc FN SMA0045 PPG-Q118-V1