Citi 2017 Asset Management, Broker Dealer & Market Structure Conference March 1, 2017 Joseph A. Sullivan Chairman & Chief Executive Officer Brandywine Global Clarion Partners ClearBridge Investments EnTrustPermal Martin Currie QS Investors RARE Infrastructure Royce & Associates Western Asset For internal use only. Not for distribution to the public. For internal use only. Not for distribution to the public.
Important Disclosures Forward-Looking Statements This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of facts or guarantees of future performance, and are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those discussed in the statements. For a discussion of these risks and uncertainties, please see Risk Factors and Management s Discussion and Analysis of Financial Condition and Results of Operations in the Company s Annual Report on Form 10-K for the fiscal year ended March 31, 2016 and in the Company s quarterly reports on Form 10-Q. Non-GAAP Financial Measures This presentation includes non-gaap financial information. This non-gaap information is in addition to, not a substitute for or superior to, measures of financial performance or liquidity determined in accordance with GAAP. The company undertakes no obligation to update the information contained in this presentation to reflect subsequently occurring events or circumstances. Page 1
Company Highlights Fiscal Third Quarter Net Income $51.4M or $0.50 per diluted share. Results include: Non-cash impairment charges of $35.0M or $0.25 per diluted share Acquisition and transition-related costs of $3.0M or $0.02 per diluted share Contingent consideration credits of $14.5M or $0.10 per diluted share Gain on sale of Legg Mason Poland of $4.0M or $0.03 per diluted share Assets Under Management $710B Long-term net outflows $4.0B Alternative outflows of $0.8B Equity outflows of $3.7B Fixed Income inflows of $0.5B Global Distribution quarterly gross and net sales of $19.5B and $1.1B, respectively Retired 3.0M shares for approximately $90M Recent Developments Launched Legg Mason Global Infrastructure ETF in December 2016 Shanda Group s Chairman & CEO and President appointed to Legg Mason s Board of Directors, effective February 1, 2017 Page 2
Legg Mason: Long-term Value Creation Model Enables Organic Growth Through Client Choice Thoughtful Capital Allocation Consistent share repurchases Seven years of dividend increases Capital to seed new products M&A activity enhance product and service offerings Page 3 1. Minority investment (with an option to purchase a majority position) 2. Minority investment
Remaking Legg Mason Strategic Transactions 2013-2016 Three Priorites Strategic Activity Description Year Focus on Strengthening Core Capabilities Portfolio Rationalization Add Capabilities in High Growth Areas Permal MEP Management Equity Plan 2013 ClearBridge MEP Management Equity Plan 2014 LM Global Distribution Invested in Growth of LMGD 2015 ETF Team Hired Vanguard Team 2015 Royce MEP Management Equity Plan 2016 LMCM Combined w/clearbridge 2013 Esemplia Closed/Wind Down 2013 PCM Divestiture 2013 LM Australian Equities Combined w/ Martin Currie 2014 LMIC Divestiture 2014 LM Poland Divestiture 2016 Fauchier Partners Acquisition - Bolt-on for Permal 2013 QS Investors Acquisition - Combination w/ LMGAA and Batterymarch 2014 Martin Currie Acquisition 2014 RARE Infrastructure Acquisition 2015 EZ-IRA Strategic Minority Investment 2015 PKIM Acquisition - Bolt-on for Martin Currie 2015 Precidian Strategic Minority Investment 2016 Clarion Partners Acquisition 2016 EnTrust Acquisition - Merge w/ Permal 2016 Financial Guard Acquisition 2016 Page 4
Legg Mason's Strategic M&A: Choice Through Diversification Client Choice Key Drivers Asset Classes and Investment Strategies Needs Identified Multi-Asset Solutions International Equity Strategic Transactions Investment Products and Vehicles Liquid Alternatives Alternative Solutions Illiquid Alternatives Distribution and Client Access Specialized ETFs Strategic Distribution Initiatives Page 5
Expansion of Legg Mason s Investment Capabilities Legg Mason Investment Capabilities Worldwide Product Opportunities 2012 Present Domestic Equity + + Domestic Fixed Income + + Global Fixed Income + + Emerging Market Debt + + Fund of Hedge Funds + + Global/International Equity +/ + Emerging Market Equity +/ + Liquid Alternatives +/ + Solutions/Multi-Asset Class +/ + Smart Beta ETFs + Active ETFs + Other Illiquid Alternatives +/ + Passive + LM Capability +/ LM Capability, but Sub-Scale No LM Capability Page 6
Acquisition-Related Charges and Saves on Plan Charges Related to: MEP Actual F1Q17 Actual F2Q17 Actual F3Q17 Estimated F4Q17 Estimated FY17 Charges Clarion Partners $15M $15M EnTrustPermal Combination 1 Severance and related charges $15M $7M $4M $2M to $3M $28M to $29M Real estate related/other $9M $5M ($1M) $1M $14M Subtotal EnTrustPermal $24M $12M $3M $3M to $4M $42M to $43M Charges related to acquisitions Bankers fees and accounting/legal costs $18M $1M $19M Total $57M $13M $3M $3M to $4M $76M to $77M Expected saves related to the EnTrustPermal combination approximates $35M 2 in FY18 Page 7 1 F4Q16 charges for EnTrustPermal combination $43M, FY18 and FY19 include charges of $5M and $2M, respectively 2 Current quarter saves approximately $7M, annualized saves $28M. Expect full $35M run rated saves F1Q18
Third Quarter Overview 1 ($ billions) Page 8 1 Data as of December 31, 2016 Affiliates ordered by contribution to FYTD pre-tax earnings less non-controlling interest Legg Mason ending AUM and Net LT Flows include other entities not shown with AUM totaling $5.1B and long-term net outflows of $0.2B
Asset & Revenue Diversification AUM by Domicile: Fixed Income Equity Alternatives Liquidity Total AUM Operating Revenues US 64% 85% 77% 43% 68% 71% Non US 36% 15% 23% 57% 32% 29% AUM by Client Type: Institutional 88% 45% 92% 75% 76% 62% Retail 12% 55% 8% 25% 24% 38% Total AUM 54% 24% 10% 12% 100% Operating Revenues 38% 39% 19% 4% 100% Page 9 Asset data as of December 31, 2016 and operating revenue data for the quarter ended December 31, 2016
Affiliate Overview Affiliate Description Global Value Investing Pursuing value across fixed income and equity, globally and in the U.S. Historically institutionally focused, the firm has both a boutique s agility and an industry leader s stability and resources since 1986. Private Equity Real Estate A leading real estate investment manager, investing exclusively in real estate strategies across the Americas, providing a wide-range of products and strategies for institutional and individual investors. Quality-focused Equity Global investment manager with over 50 years of experience and long-tenured portfolio managers who build income, high active share, and low volatility portfolios. AUM 1 $65.4B $44.0B $101.8B Business Mix 16% 8% 1% 75% Assets by Strategy (%) Fixed Income Diversity Equity Large Cap Equity Small/Mid Cap Equity 1% 30% 12% 57% Assets by Strategy (%) Core Core Plus Opportunistic Value 25% 12% 63% Assets by Product Type(%) High Active Share Income Solutions Low Volatility Page 10 Note: AUM as of December 31, 2016
Affiliate Overview Affiliate Description Active Equity Specialists An active equity specialist that builds global, stockdriven portfolios based on fundamental research, devoting all of its resources to delivering optimum investment outcomes and superior client relationships. Global Alternative Funds-of-funds A leading global alternative asset manager specializing in providing investment solutions to public, corporate and multi-employer pension funds, foundations, endowments, sovereign wealth funds, insurance companies, private banks, family offices and high net worth individuals. Quantitative Equity and Multi-asset Manager Applies a diversified, systematic and adaptive approach to its investment discipline to provide consistent, repeatable and risk-managed returns across multiple market environments. AUM $14.2B $19.9B $17.0B* Business Mix 15% 52% 33% Assets by Strategy(%) High Active Share Equity Income Absolute Return 45% 52% Assets by Strategy (%) Commigled Funds Liquid Alternatives Strategic Partnerships 33% 14% 19% 34% Assets by Strategy (%) Customized Solutions Global Equities US Equities Liquid Alternatives 3% *Excludes assets subadvised by LM Affiliate managers Page 11 Note: AUM as of December 31, 2016
Affiliate Overview Affiliate Description Specialist in Global Listed Infrastructure Investing One of the largest alternative asset managers in the listed infrastructure asset class category. Small-cap Equity Known for its disciplined, value-oriented 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. Western is a globally integrated fixed income manager sourcing ideas and investment solutions across regions, with 120 investment professionals on 5 continents AUM $5.3B $17.7B $420.0B Business Mix 7% Assets by Strategy % Value TPS Yield EM 88% 1% 5% Assets by Strategy % US Equity Rest of World Equity Cash/Equivalents 94% 27% 22% 5% 46% Assets by Strategy % Specialized Taxable Liquidity/Enhanced Cash Broad Portfolio Municipals Page 12 Note: AUM as of December 31, 2016
Legg Mason Global Distribution Model Global Market Retail/Quasi Institutional (Serviced by LMGD) Institutional (Serviced by Affiliates) Intermediated Indirect client access (sub advisory) Examples: broker/dealers, insurance companies, funds-of-funds, discretionary managers Consultant driven Direct client access Examples: sovereign wealth funds, pension funds, corporations Page 13
Legg Mason s Global Distribution Footprint 17 distribution offices in six regions Servicing over 100,000 intermediary clients globally Over 250 client-facing team members Zurich Page 14 As of December 31, 2016
Global Distribution Total Long-Term Assets 1 : $285B Distribution Highlights Gross sales of $19.5B for F3Q17 Unchanged from F2Q17 Up 7% from F3Q16 Net sales of $1.1B vs $3.9B in F2Q17 Positive net sales for last 12 of 13 quarters Quarterly global redemption rate at 26% US redemption rate 25% ($ Billions) F3Q17 F2Q17 F3Q16 Gross Sales 1 : US $13.7 $13.7 $10.9 Int l 5.8 5.8 7.3 Total $19.5 $19.5 $18.2 Net Sales 1 : US $ (0.9) $ 1.3 $(3.1) Int l 2.0 2.6 3.2 Total $ 1.1 $ 3.9 $ 0.1 Quarterly Gross and Net Sales Trends ($B) Top Funds Driving Gross Sales F3Q17 30.0 25.0 20.0 15.0 10.0 5.0 0.0 (5.0) Gross Sales Net Sales 24.2 22.1 19.0 18.1 18.2 19.3 19.5 19.5 15.1 6.9 5.3 2.4 3.9 1.1 0.5 0.1 1.1 (3.1) Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 15 Jun 16 Sep 16 Dec 16 Western Asset Core Plus Bond Fund Martin Currie Australian High Dividend Equity Fund ClearBridge Large Cap Growth Fund Western Asset Core Bond Fund ClearBridge Aggressive Growth Fund Western Asset Managed Municipals Fund Western Asset Macro Opportunities Bond Fund Royce US Small Cap Opportunity Fund Western Asset Core Plus VIT Fund Brandywine Global Opportunities Bond Fund Page 15 1 For LMGD, Assets Under Advisement are included in long-term assets, gross sales and net sales. Net sales equals gross sales less redemptions. As of December 31, 2016 long-term assets include $14.0B of AUA. Quarterly AUA gross and net sales for F3Q17 are $1.7B and $0.9B, respectively, for F2Q17 are $1.3B and $0.8B, respectively
Investment Performance % of Strategy AUM beating Benchmark 1 % of Long-Term U.S. Fund Assets beating Lipper Category Average 2 68% 3 Year 84% 5 3 Year Year 65% 72% 5 Year 100% 100% 80% 76% 68% 84% 82% 80% 68% 65% 72% 71% 60% 60% 40% 40% 20% 20% 0% 1 Year 3 Year 5 Year 10 Year 0% 1 Year 3 Year 5 Year 10 Year 1 See appendix for details regarding strategy performance 2 Includes open-end, closed-end, and variable annuity funds. Source: Lipper Inc. Page 16 Past performance is no guarantee of future results. The information shown above does not reflect the performance of any specific fund. Individual fund performance will differ. As of December 31, 2016
Assets Under Management by Asset Class ($ billions) 800 600 400 200 0 Total Ending AUM % Mix Dec 15 % Mix Sep 16 $24 4% $23 $73 $72 10% 10% $71 $71 $167 25% $162 $161 $168 23% $169 24% $173 $365 54% $372 $387 $397 54% $381 54% $385 $115 17% $113 $121 $96 13% $89 12% $85 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Jan 17 $671 $670 $742 $733 $710 $714 Liquidity Fixed Income Equity Alternative % Mix Dec 16 % Mix Jan 17 10% 24% 54% 12% Page 17 AUM increased $3.4B or 0.5% in Jan-17 Liquidity outflows of $4.0B Long-term outflows of $2.5B Alternative outflows of $0.7B Equity outflows of $0.8B Fixed income outflows of $1.0B Positive FX impact of $8.4B and market depreciation of $2.3B
Net Flows Quarterly Fixed Income Equity Alternative ($ Billions) 6 4 2 0-2 -4-6 -8-10 3.9 2.8 2.3 0.5 (7.8) Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 ($ Billions) 6 4 2 0-2 -4-6 -8-10 (1.5) (3.0) (4.3) (3.7) (4.4) Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 ($ Billions) 6 4 2 0-2 -4-6 -8-10 (0.4) (1.0) (0.8) (2.0) (1.6) Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Long-Term Flows by Asset Class - December Quarter Key Drivers Core Bond $1.1B Core Plus $0.6B Global Income ($1.2B) Large Cap ($1.9B) Small Cap ($1.3B) All Cap ($1.2B) Equity International $0.7B Infrastructure ($0.7B) Hedge Fund ($0.5B) Absolute Return $0.2B Real Estate $0.2B Total Long-Term Liquidity Total Flows ($ Billions) 10 5 0-5 -10-15 -20-25 -30 (2.4) (1.1) (0.3) (4.0) (13.2) Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 ($ Billions) 10 5 0-5 -10-15 -20-25 -30 8.0 (3.3) (6.9) (10.9) (25.4) Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 ($ Billions) 10 5 0-5 -10-15 -20-25 -30 6.9 (10.9) (13.3) (16.5) (25.7) Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Page 18
Financial Highlights Third Quarter FY 2017 Net income $51.4M, or $0.50 per diluted share Non-cash impairment charges of $35.0M or $0.25 per diluted share Acquisition and transition-related costs of $3.0M or $0.02 per diluted share Contingent consideration credits of $14.5M or $0.10 per diluted share Gain on sale of Legg Mason Poland of $4.0M or $0.03 per diluted share Average AUM $716.7B, down $25.4B Decrease largely driven by decline in liquidity Long-term average AUM decreased $6.1B compared to prior quarter Operating revenues $715.2M, down $33.2M or 4% from the prior quarter Decrease is largely due to lower pass through performance fees at Clarion this quarter and lower average AUM, partially offset by higher non-pass through performance fees Operating expenses $604.1M, down $16.6M or 3% from the prior quarter Decrease largely driven by lower compensation on pass through performance fees at Clarion this quarter, lower acquisition and transition-related costs, and higher contingent consideration fair value adjustments compared to last quarter, partially offset by intangible asset impairment charges Operating income $111.2M, operating margin 15.5% Operating income, as adjusted 1 $140.8M, operating margin, as adjusted 1 23.9% Page 19 1 See Appendix for GAAP reconciliation
Operating Results Third Quarter FY 2017 $ Change vs. ($ millions, except per share amounts) Dec 16 Qtr Sep 16 Qtr Dec 15 Qtr Sep 16 Qtr Dec 15 Qtr Operating Revenues 1 $715.2 $748.4 $659.6 $ (33.2) $ 55.6 Operating Expenses 604.1 620.7 900.2 (16.6) (296.1) Operating Income (Loss) 111.2 127.6 (240.6) (16.4) 351.8 Net Income (Loss) 51.4 66.4 (138.6) (15.0) 190.0 Diluted EPS 0.50 0.63 (1.31) (0.13) 1.81 Operating Margin, as adjusted 2 23.9% 22.7% 20.6% Effective Tax Rate GAAP 3 29.1% 25.7% 42.8% Page 20 1 December 2016 quarter Operating Revenues exclude $14.1M of EnTrustPermal performance fees subject to clawback 2 See Appendix for GAAP reconciliation 3 Includes the impact of Consolidated Investment Vehicles (CIVs) of 0.0%, (1.3%), and (0.2%) in Dec 16, Sep 16, and Dec 15, respectively
Operating Revenue Yield 1 and Average AUM Average AUM ($B) $800 $600 $400 $200 Total Average AUM $- 3% 26% 38.5 bps 51% 3% 10% 25% 22% 37.8 bps 37.8 bps 54% 53% 54% 20% 18% 15% 13% $711 $707 $704 $687 $683 $662 $709 $742 $717 10% 23% 38.3 bps Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Liquidity Fixed Income Equity Alternative Operating Revenue Yield 42.5 40.0 37.5 35.0 Operating Revenue Yield (bps) Total average AUM down $25.4B or 3% from prior quarter Liquidity average AUM down $19.3B Fixed Income and Alternative average AUM down $5.9B and $0.8B, respectively Equity average AUM up $0.6B Operating revenue yield up 0.5 bps largely due to the reduction of lower yielding average liquidity AUM Page 21 1 Operating revenue yield = total operating revenues less performance fees divided by average AUM
Operating Expenses $650 $621 ($40) $ in Millions $600 $550 ($6) ($7) ($8) $35 $9 $604 $500 Sep Qtr Comp & Benefits D&S Expense Occupancy Contingent Consideration Adjs Intangible Impairment Other Dec Qtr Total Operating expenses includes: Lower compensation on pass-through performance fees at Clarion Contingent consideration credit adjustments Non-cash impairment of intangible assets D&S expense decreased largely due to lower average liquidity AUM Occupancy expense decreased due to lower transition-related real estate charges in the current quarter Other expenses increased primarily due to marketing, T&E, and professional fees Page 22
Compensation and Benefits ($ millions) % of % of $ Dec Qtr Net Rev. 1 Sep Qtr Net Rev. 1 Change Salary and incentives $ 264.0 45% $ 266.6 46% $ (2.6) Benefits and payroll taxes 52.9 9% 53.0 9% (0.1) Subtotal Compensation and benefits 316.9 54% 319.6 55% (2.7) Transition-related and severance costs 4.6 1% 7.5 1% (2.9) Incentives on performance fees subject to clawback 2 2.6 1% - 0% 2.6 Clarion pass-through performance fees 2.3 0% 35.8 6% (33.5) MTM deferred comp. and seed investments 1.5 0% 5.4 1% (3.9) Total Compensation and benefits $ 327.9 56% $ 368.3 63% $ (40.4) Salary and incentives decreased $2.6M due to lower incentives on decreased revenues and increased non-compensation expenses at revenue share affiliates Page 23 1 Net Revenue is equal to Operating Revenues, as Adjusted. See appendix for GAAP reconciliation 2 Estimated by multiplying the $14.1M of performance fees subject to clawback by the ratio of EnTrustPermal s incentive compensation to total revenue (including performance fees subject to clawback) for the period. Incentives are not subject to clawback
Operating Margin, as Adjusted $800 21.4% 23.8% 22.6% 24.0% 20.6% 22.7% 23.9% 25% Average AUM ($B) $700 $600 $500 5.9% 11.3% 20% 15% 10% 5% Op Margin, as Adj $400 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 0% Avg AUM Operating Margin, as adjusted December quarter impact of acquisition and transition-related costs and incentive compensation on performance fees subject to clawback 1 totals 1.0% September quarter impact of acquisition and transition-related costs totals 2.3% Page 24 1 See page 14 for description of calculation Note: See Appendix for GAAP reconciliation
Third Quarter Earnings Per Share Roll Forward $0.80 $0.70 $0.60 $0.63 $0.01 $0.01 ($0.01) ($0.14) $0.50 $0.50 EPS $0.40 $0.30 $0.20 $0.10 $0.00 Sep Qtr EPS Q2 Items Higher Op Earnings 1 Lower MTM, Lower Taxes & Share Repurchase Q3 Items Dec Qtr EPS Operating earnings increased due to higher performance fees and lower noncontrolling interests this quarter, partially offset by lower average AUM and higher operating expenses Q3 items include intangible asset impairment charges $0.25 and acquisition and transitionrelated costs $0.02, partially offset by contingent consideration credits $0.10 and gain on sale of Legg Mason Poland $0.03 Page 25 1 Q2 items include acquisition and transition-related costs $0.09 and interest rate swap termination charge $0.03, partially offset by contingent consideration credit $0.05 and discrete tax credits $0.06
Third Quarter Adjusted EBITDA Roll Forward Cash Provided By Operating Activities, GAAP Sep 16 Qtr $303.8M Dec 16 Qtr 1 $209.1M $200.0 $ in Millions $175.0 $150.0 $143.0 $16.9 ($0.5) $0.9 $160.3 $125.0 $100.0 Sep 16 Qtr Q2 Items 2 Net Change in Adjusted EBITDA Q3 Items Dec 16 Qtr Q3 items include acquisition and transition-related costs and gain on sale of Legg Mason Poland Page 26 1 Decrease in Cash Provided By Operating Activities, GAAP driven by the change in assets and liabilities of consolidated investment vehicles of $141M, which is completely offset in Cash Flows from Financing Activities 2 Q2 items include acquisition and transition-related costs and interest rate swap termination charge Note: See Appendix for GAAP reconciliation
Significant Tax Benefit $3.4B of Future Income Sheltered FY17 Projected Tax Rates $5 Projected Tax Benefit 50% 40% $4 $3.4B 30% 20% 27% $ in Billions $3 $2 $2.0 $1.4B 10% 7% $1 $1.4 $0.9 0% FY17 $0 Tax Shield $0.5 Tax Benefit GAAP Tax Rate Cash Tax Rate NOL/FTC Purchased Goodwill and intangibles FY17 GAAP tax rate reflects exclusion of taxes attributable to noncontrolling interests and benefits from reserve adjustments and U.K. statutory tax rate reductions Shield increased by approximately $850M as a result of tax amortizable intangibles acquired in the EnTrust and Clarion Partners transactions, providing $57M per annum of additional tax shield through FY32 Page 27
An Industry Leader in the Rate of Returning Capital Returned $2.9 Billion since March 2010 Shares Outstanding (M) Annualized Quarterly Dividend Declared (Per Share) 175 150 125 100 75 163 150 140 125 117 40% reduction since March 2010 111 107 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Dec 16 98 $1.00 $0.75 $0.50 $0.25 $0.00 $0.12 Dividend increased 7x from March 2010 rate $0.24 $0.32 $0.44 $0.52 $0.64 $0.80 $0.88 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Dec 16 $800 Quarterly Cash Position ($M) Seed Investments of $345M 2 $600 $400 563 1 628 491 571 690 46% 40% $200 14% $0 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Equity Fixed Income Alternative Page 28 1 Excludes $700M of cash raised for acquisitions 2 Market value as of December 31, 2016
Debt Levels and Cumulative Capital Deployment Total capital returned to shareholders beginning in FY2011 to present, through buybacks and dividends, is over $3B and for the same time period we have made investments in our business of over $1.5B 1 2 3 Page 29 Note: $ in millions 1 Consists of strategic transactions 2 FY17 dividend is F3Q17 dividend annualized 3 FY17 uses actual F1Q17, F2Q17 & F3Q17 repurchases and assumes $90M repurchased in the remaining quarters of the FY
Providing Global Investors an Expanding Amount of Choice Products & Vehicles Distribution & Client Access Investment Capabilities A tapestry is not formed from a single thread. It is formed by combining many threads, uniquely and distinctly, into something greater than its parts. Page 30 For internal use only. Not for distribution to the public.
Appendix
Appendix Investment Performance % of Strategy AUM beating Benchmark 1 % of Long-Term U.S. Fund Assets beating Lipper Category Average 2 10 Yr 88% 83% 82% 10 Yr 60% 70% 71% 5 Yr 83% 82% 84% 5 Yr 72% 72% 72% 3 Yr 68% 68% 80% 3 Yr 59% 63% 65% 1 Yr 60% 73% 76% 1 Yr 43% 67% 68% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Dec 15 Sep 16 Dec 16 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Dec 15 Sep 16 Dec 16 1 See appendix for details regarding strategy performance 2 Includes open-end, closed-end, and variable annuity funds. Source: Lipper Inc. Past performance is no guarantee of future results. The information shown above does not reflect the performance of any specific fund. Individual fund performance will differ. Page 32
Appendix Additional Investment Performance Detail % of Strategy AUM Beating Benchmark 1 December 31, 2016 September 30, 2016 December 31, 2015 1-Year 3-Year 5-Year 1-Year 3-Year 5-Year 1-Year 3-Year 5-Year Total (includes liquidity) 76% 68% 84% 73% 68% 82% 60% 80% 83% Equity: Large cap 53% 14% 60% 48% 13% 56% 32% 67% 64% Small cap 59% 19% 38% 52% 17% 34% 18% 16% 27% Total Equity (includes other equity) 53% 25% 62% 48% 24% 59% 38% 62% 62% Fixed Income: US taxable 88% 79% 91% 87% 79% 86% 72% 86% 86% US tax-exempt 100% 100% 100% 100% 100% 100% 100% 100% 100% Global taxable 75% 75% 82% 62% 76% 83% 21% 76% 86% Total Fixed Income 85% 79% 89% 80% 79% 86% 57% 83% 87% Total Alternative 2 43% 84% 89% 56% 84% 87% 34% 44% 83% 1 See appendix for details regarding strategy performance. Past performance is no guarantee of future results. The information shown above does not reflect the performance of any specific iiifund. Individual fund performance will differ 2 Alternative assets includes AUM managed by Clarion Partners, EnTrustPermal and RARE Infrastructure Page 33
Appendix Additional Investment Performance Detail % of Long-Term U.S. Fund Assets beating Lipper Category Average 1 December 31, 2016 September 30, 2016 December 31, 2015 1-Year 3-Year 5-Year 1-Year 3-Year 5-Year 1-Year 3-Year 5-Year Total (excludes liquidity) 68% 65% 72% 67% 59% 72% 43% 63% 72% Equity: Large cap 71% 87% 80% 86% 68% 81% 31% 79% 87% Small cap 69% 11% 36% 73% 10% 37% 12% 23% 18% Total Equity (includes other equity) 62% 58% 67% 71% 46% 69% 33% 61% 66% Fixed Income: US taxable 88% 86% 88% 84% 84% 84% 81% 84% 84% US tax-exempt 63% 61% 60% 7% 54% 58% 23% 50% 72% Global taxable 59% 45% 87% 74% 69% 72% 33% 36% 81% Total Fixed Income 76% 73% 79% 63% 74% 75% 58% 67% 80% Total Alternative 2 92% 100% 100% 91% 100% 100% 100% 100% 100% 1 Includes open-end, closed-end, and variable annuity funds. Source: Lipper Inc. Past performance is no guarantee of future results. The information shown above does not reflect the iiiiperformance of any specific fund. Individual fund performance will differ 2 Alternative assets includes AUM managed by EnTrustPermal and RARE Infrastructure Page 34
Appendix GAAP Reconciliation Operating Margin, as adjusted 1 Quarters Ended ($ millions) Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Operating Revenues, GAAP basis $ 719.0 $ 702.3 $ 708.6 $ 673.1 $ 659.6 $ 619.5 $ 700.2 $ 748.4 $ 715.2 Plus (less): Pass-through performance fees - - - - - - (14.6) (35.8) (2.3) Operating revenues eliminated upon consolidation of investment vehicles 0.2 0.2 0.1 0.1 0.1 0.1 - - 0.4 Distribution and servicing expense excluding consolidated investment vehicles (147.5) (143.5) (149.3) (138.9) (132.9) (124.6) (124.6) (128.9) (123.3) Operating Revenues, as Adjusted $ 571.7 $ 559.0 $ 559.4 $ 534.3 $ 526.8 $ 495.0 $ 561.0 $ 583.7 $ 590.0 Operating Income (Loss), GAAP basis $ 119.4 $ 128.9 $ 124.5 $ 133.0 $ (240.6) $ 33.9 $ 73.6 $ 127.6 $ 111.2 Plus (less): Gains (losses) on deferred compensation and seed investments, net 2.1 3.1 1.2 (5.5) 2.7 0.3 2.1 5.4 1.5 Amortization of intangible assets 0.7 0.6 0.7 0.7 1.6 2.1 5.7 6.3 7.3 Impairment of intangible assets - - - - 371.0 - - - 35.0 Contingent consideration fair value adjustments - - - - (26.4) (7.0) (18.0) (7.0) (14.5) Operating income of consolidated investment vehicles, net 0.2 0.3 0.1 0.1 0.1 0.1 0.1 0.2 0.3 Operating Income, as Adjusted $ 122.4 $ 132.9 $ 126.5 $ 128.3 $ 108.4 $ 29.4 $ 63.5 $ 132.5 $ 140.8 Operating Margin, GAAP basis 16.6% 18.4% 17.6% 19.8% (36.5%) 5.5% 10.5% 17.1% 15.5% Operating Margin, as Adjusted 21.4% 23.8% 22.6% 24.0% 20.6% 5.9% 11.3% 22.7% 23.9% 1 See explanations for Use of Supplemental Data as Non-GAAP Financial Information in earnings release Page 35
Appendix - GAAP Reconciliation, Adjusted EBITDA 1 Quarters Ended December September December 2015 2016 2016 ($ millions) Cash provided by operating activities, GAAP basis $ 154.7 $ 303.8 $ 209.1 Plus (less): Net gains (losses) on consolidated investment vehicles (1.5) 5.2 1.5 Net change in assets and liabilities of consolidated investment vehicles 3.3 (97.3) 43.7 Interest expense, net of accretion and amortization of debt discounts and premiums 6.3 26.5 28.5 Current tax expense (benefit) (0.7) 15.7 (3.0) Net gains (losses) and earnings on investments (7.6) 1.1 2.4 Net change in assets and liabilities (12.1) (92.8) (108.2) Net income (loss) attributable to noncontrolling interests - (20.1) (13.1) Other (1.3) 0.9 (0.6) Adjusted EBITDA $ 141.1 $ 143.0 $ 160.3 1 See explanations for Use of Supplemental Data as Non-GAAP Financial Information in earnings release. Page 36
Appendix Strategy Performance For purposes of investment performance comparisons, strategies are an aggregation of discretionary portfolios (separate accounts, investment funds, and other products) into a single group that represents a particular investment objective. In the case of separate accounts, the investment performance of the account is based upon the performance of the strategy to which the account has been assigned. Each of our asset managers has its own specific guidelines for including portfolios in their strategies. For those managers which manage both separate accounts and investment funds in the same strategy, the performance comparison for all of the assets is based upon the performance of the separate account. Approximately eighty-eight percent of total AUM is included in strategy AUM as of December 31, 2016, although not all strategies have three, five, and ten year histories. Total strategy AUM includes liquidity assets. Certain assets are not included in reported performance comparisons. These include: accounts that are not managed in accordance with the guidelines outlined above; accounts in strategies not marketed to potential clients; accounts that have not yet been assigned to a strategy; and certain smaller products at some of our affiliates. Past performance is not indicative of future results. For AUM included in institutional and retail separate accounts and investment funds managed in the same strategy as separate accounts, performance comparisons are based on gross-of-fee performance. For investment funds which are not managed in a separate account format, performance comparisons are based on net-of-fee performance. Funds-of-hedge funds generally do not have specified benchmarks. For purposes of this comparison, performance of those products is net-of-fees, and is compared to the relevant HFRX index. These performance comparisons do not reflect the actual performance of any specific separate account or investment fund; individual separate account and investment fund performance may differ. The information in this presentation is provided solely for use in connection with this presentation, and is not directed toward existing or potential clients of Legg Mason. Page 37
Appendix - Important Notes The foregoing information about Legg Mason, Inc. is part of a presentation about the company to financial professionals and other market participants. This information is designed to enhance these persons understanding of the company, which offers investment management products and services only through its various subsidiaries. Any information about these products and services is not intended to be an offer or solicitation to investors. All investment products or services are managed by one or more of the company s subsidiaries only, and only such subsidiaries or other authorized persons may make offers or solicitations to investors regarding such products or services in accordance with applicable policies and requirements, including eligibility and other criteria. Past investment performance does not guarantee future results and the investment return and principal value of an investment will fluctuate so that, when an investment is sold, it may be worth more or less than original cost. Current performance may be lower or higher than the performance information noted above. Information about current performance may be obtained from the company s subsidiaries or other authorized persons. Investors should read the relevant disclosure documents carefully before investing. Page 38