OPPORTUNITIES IN ABSOLUTE RETURN FIXED INCOME AND ... · May invest in cash bonds, futures, options and other derivatives, e.g., CDX and single-name credit default swaps and options

This information is only for use by professional clients, eligible counterparties or qualified investors. It is not aimed at, or for use by, retail clients.

OPPORTUNITIES IN ABSOLUTE RETURN FIXED INCOME AND STRUCTURED CREDIT

Amanda Stitt,

Head of Fixed Income,

Product Specialist Group,

Legg Mason

November 2017

MEET THE SEASONED TEAM

S. Kenneth Leech40 Years’ Experience

▪ Western Asset Management Company –

Chief Investment Officer, 1990-Present

Education

▪ The Wharton School, University of

Pennsylvania, M.B.A., B.S., 1972-1976

Joseph A. Filicetti31 Years’ Experience


Product Manager, 2010-Present

Education

▪ Columbia University, M.B.A.

▪ Niagara University, B.A.

Source: Western Asset as at 31 December 2016.

2

Product Managers

Portfolio Managers

Michael B. Zelouf32 Years’ Experience


Director of EMEA Business, 1989 - Present

Education

▪ Imperial College, London, B.Sc.

▪ Chartered Financial Analyst

Prashant Chandran 18 Years’ Experience


Portfolio Manager, 2007-Present

Education

▪ University of Chicago, Graduate School of

Business, M.B.A.

▪ University of Toledo, M.Sc.

▪ Indian Institute of Technology, Bombay, B.Sc.

▪ Chartered Financial Analyst

LEGG MASON WESTERN ASSET MACRO

OPPORTUNITIES BOND FUND: OVERVIEWInvestment Aim

▪ The investment aim is to maximise total return within a volatility budget of 10%

Fund Description

▪ Global macro strategy providing concentrated and opportunistic exposures to Western Asset’s key themes

▪ Long-term fundamental value investing with active management of duration, yield curve and volatility

▪ Portfolio composition typically driven by credit valuations, changes in interest rates and volatility conditions

Guidelines

▪ No financial leverage

▪ Up to 100% fixed-income securities

▪ Up to 50% below investment grade

▪ Up to 50% in non-US dollar currency exposure (unhedged non-US

investments and/or foreign exchange)

▪ Up to 50% emerging markets

▪ Portfolio duration may range from negative 5 years to positive 10 years

▪ May invest in cash bonds, futures, options and other derivatives,

e.g., CDX and single-name credit default swaps and options on both

3 Source: Legg Mason, as at 30 September 2017.

Fund Structure: Irish UCITS Fund

Inception Date: 29 November 2013

Fund AUM: $7.4bn as at 30 September 2017

Class A Accumulating USD

ISIN: IE00BC9S3Z47

Class P Accumulating USD

ISIN: IE00BC9S3W16

PORTFOLIO CONSTRUCTION

VALUE AND RISK MANAGEMENT

Provide stability during

periods of stressInitiate positions in undervalued

credit with a long-term perspective

to realise value

Objective is to enable credit to add

value if view is correct and protect

equity during times of extreme stress

Macro

StrategiesRisk Assets

Correlation

During Stress

•Long-Term Strategies

•Medium-Term Tactical

•Duration

•Curve

•Volatility Management

Short-Term Opportunistic

•Credit

•Foreign Exchange

•Emerging Markets

•Un-Hedged Non-US

Dollar Bonds

4

TRADE EXAMPLE –

MACRO STRATEGIES: SHORT TERM OPPORTUNISTIC

5

95

100

105

110

115

120

125

-20%

-16%

-12%

-8%

-4%

0%

4%

Jul 20

14

Oct

20

14

Jan

20

15

Ap

r 20

15

Jul 20

15

Oct

20

15

Jan

20

16

Ap

r 20

16

Jul 20

16

Oct

20

16

Jan

20

17

Ap

r 20

17

Jul 20

17

US

DJP

Y

JP

Y E

xp

osu

re

JPY Exposure versus USDJPY

JPY USDJPY

50

70

90

110

130

150

-4

-1

2

5

8Jul 20

14

Oct

20

14

Jan

20

15

Ap

r 20

15

Jul 20

15

Oct

20

15

Jan

20

16

Ap

r 20

16

Jul 20

16

Oct

20

16

Jan

20

17

Ap

r 20

17

Jul 20

17

US

5/3

0s S

pre

ad

(b

ps)

Key R

ate

Du

rati

on

(yrs

)

US 5/30s Flattener

5 Year US 30 Year US US 5/30 curve

Past performance is not indicative of future results..

TRADE EXAMPLE RISK ASSETS: LONG TERM FUNDAMENTAL VALUE

6

0

100

200

300

400

500

600

700

800

-10%

-5%

0%

5%

10%

15%

20%

25%

Jul 2

01

4

Oct

20

14

Jan

20

15

Ap

r 2

01

5

Jul 2

01

5

Oct

20

15

Jan

20

16

Ap

r 2

01

6

Jul 2

01

6

Oct

20

16

Jan

20

17

Ap

r 2

01

7

Jul 2

01

7

Glo

bal

HY

OA

S (b

ps)

Fun

d H

Y Ex

po

sure

High Yield Exposure versus HY OAS

FinancialsHY IndustrialsHY UtilitiesHY CDXHY GHY OAS (RHS)

0

50

100

150

200

-20%-15%-10%

-5%0%5%

10%15%20%25%

Jul 2

01

4

Oct

20

14

Jan

20

15

Ap

r 2

01

5

Jul 2

01

5

Oct

20

15

Jan

20

16

Ap

r 2

01

6

Jul 2

01

6

Oct

20

16

Jan

20

17

Ap

r 2

01

7

Jul 2

01

7

Ital

y/G

erm

any

Spre

ad (

bp

s)

Fun

d E

xpo

sure

(%

)

Italy/Germany Position

Italy EUR ITL/GER Spread

Past performance is not indicative of future results..

MACRO OPPORTUNITIES STRATEGY EXPOSURES¹

OPPORTUNISTIC AND TACTICAL

Source: Western Asset as at 30 September 2017. The information provided is supplemental to the Macro Opportunities Composite.

¹Note: Exposure and attribution data up to 30 November 2013 pertains to the Representative Account, after which the data pertains to the Legg Mason Western Asset Macro Opportunities Bond Fund.

²Peripheral European and Emerging Markets exposures are denominated in both USD and local currency. Local currency exposure is reflected in FX as well as in the Peripheral Europe and EMD sectors. ³Represents gross currency exposure.

There are differences between the Representative Account and the Legg Mason Western Asset Macro Opportunities Bond Fund, including differences in the number of holdings, the amount of assets under management, cash flows, fees and expenses, and applicable regulatory requirements, including investment and borrowing restrictions. The past performance of the above Representative Account is, therefore, not indicative of the future performance of the Legg Mason Western Asset Macro Opportunities Bond Fund. Inception date: 21 March 2012. The Western Asset Macro Opportunities Strategy is not measured against a benchmark. There is no benchmark available which appropriately reflects the strategy. Past performance is not indicative of future results. The information provided is supplemental to the Macro Opportunities Composite. Please see the composite disclosure in the appendix.

7

-5

0

5

10

15

20

-50%

0%

50%

100%

150%

200%

Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Sep 17

Effective Duration (Years)N

otio

nal M

arke

t Exp

osur

e¹Historical Notional Exposure and Duration

IG Credit HY Credit Peripheral Europe² EMD²

FX³ MBS/ABS Munis Eff. Duration (years)

0.7 0.3

2.2 2.31.1 0.9 0.7

-0.2

0.90.1 0.4 0.1

-1.5

0.1

3.2

0.2 0.0 0.2

-1.8

1.4

-1.2-1.8

2.7

-0.2-0.9

-2.3-1.8

6.2

2.8

-0.8

1.32.1

1.3

-0.5

0.5

-3.5

2.1 1.5 1.11.9

1.2 1.43.0

0.9 0.9 0.5

2.3

13.112.0

6.97.9

-6

-2

2

6

10

14

18

22

26

30

34

-6

-2

2

6

10

14

18

22

26

30

34

De

c-1

3Ja

n-1

4F

eb

-14

Ma

r-1

4A

pr-

14

Ma

y-1

4Ju

n-1

4Ju

l-1

4A

ug-1

4S

ep-1

4O

ct-

14

No

v-1

4D

ec-1

4Ja

n-1

5F

eb

-15

Ma

r-1

5A

pr-

15

Ma

y-1

5Ju

n-1

5Ju

l-1

5A

ug-1

5S

ep-1

5O

ct-

15

No

v-1

5D

ec-1

5Jan-1

6F

eb

-16

Ma

r-1

6A

pr-

16

Ma

y-1

6Ju

n-1

6Ju

l-1

6A

ug-1

6S

ep-1

6O

ct-

16

No

v-1

6D

ec-1

6Ja

n-1

7F

eb

-17

Ma

r-1

7A

pr-

17

Ma

y-1

7Ju

n-1

7Ju

l-1

7A

ug-1

7S

ep-1

7 .3

Mo

nth

sY

ea

r-to

-Da

te1

Ye

ar

3 Y

ears

S.I. A

nn.*

Monthly Performance (LHS) Percentage Growth (RHS)

LEGG MASON WESTERN ASSET

MACRO OPPORTUNITIES BOND FUND

Source: Legg Mason, as at 30 September 2017. Performance is calculated NAV to NAV with gross income reinvested without initial charges but reflecting annual management fees, based in USD for

class P shares. Performance for periods under one year are not annualised. *Fund Inception Date: 29 November 2013. Past performance is not an indicator of future results and may not be

repeated.

8

Class P Accumulation - Performance to 30 September 2017 in USD

+33.71% %



Source: Western Asset, as at 30 Septemeber 2017. The Legg Mason Western Asset Macro Opportunities Bond Fund is not measured against a benchmark. There is no benchmark available which appropriately reflects the strategy. Past performance is not indicative of future results. Fund Inception date is 29 November 2013. Western Asset believes that performance contribution is not a hard science, but rather a means of evaluating strategies to determine their relative impact on overall portfolio performance. The intent of the manager, therefore, is critical in the evaluation of different strategies, and the return attribution for any sector or strategy could be over or understated due to its inclusion in another component. Data may not sum to total due to rounding. Emerging Markets and Peripheral Europe exposures are denominated in both USD and local currency. January 2015, calculation attributes duration/curve effects for all non-government sectors to Government/Duration. *Commencing February 2016 Western Asset’s new Risk Management Attribution System will reflect a "residual" bucket to reflect the difference between the third party returns and Western Asset's returns for the fund.

9

Quarterly Performance Contribution – Since Inception

Q3 2017Q2 2017Q1 2017Q4 2016Q3 2016Q2 2016Q1 2016Q4 2015Q3 2015Q2 2015Q1 2015Q4 2014Q3 2014Q2 2014Q1 2014

-6

-4

-2

0

2

4

6

8

Per

form

ance

co

ntr

ibu

tio

n (

%)

Government/Duration Investment Grade Credit High Yield Credit Peripheral Europe

Emerging Markets Debt FX Mortgage Backed Securities (MBS) Municipals

Residuals* Total

78.26.86.54.63.73.32.32.01.61.01.00.50.30.3

-0.5-0.7-0.8-0.9-1.3-1.4-2.2-4.1

US dollarMexican pesoRussian rubleIndian rupee

Canadian dollarArgentine peso

Indonesian rupiahColombian peso

Polish zlotySouth african rand

Turkish liraBrazilian real

Australian dollarUruguayan peso

EuroPound sterlingChinese yuan

Philippine pesoTaiwan dollar

Korean wonChinese offshore yuan

Japanese yen

-1.20

0.60

1.10

1.00

4.10

3.20

-0.70

-6.30

6-Months US

2-Year US

5-Year US

10-Year US

20-Year US

30-Year US

Japan Government

German Government

13.9

0.4

5.0

8.4

6.1

0.4

11.7

3.5

3.6

-5.4

0.9

3.9

2.1

41.1

Peripheral Europe

Municipals

MBS/ABS

IG Financials

IG Industrials

IG Utilities

IG CDX

HY Financial

HY Industrial

US HY CDS

EUR HY CDS

USD EM Sovereign

USD EM Corporate

Local EM Sovereign



Source: Western Asset, as at 30 September 2017. *Yield to worst measures the lowest potential yield that can be achieved on a bond without the issuer’s defaulting. Yield to worst is based on the underlying portfolio and not on the dividends paid by the fund, which may differ. Yields are not guaranteed and are subject to change. **Higher of WAM Average Quality. Nationally Recognized Statistical Rating Organization’s (NRSRO’s) assess the likelihood of bond issuers defaulting on a bond’s coupon and principal payments. The weighted average credit quality by Western Asset Management assigns each security the higher rating from three NRSRO’s (Standard & Poor’s, Moody’s Investor Services and Fitch Ratings, Ltd.). If only one NRSRO assigns a rating, that rating will be used. Securities that are not rated by all three NRSRO’s are reflected as such. The lower the overall credit rating, the riskier the portfolio. The credit rating is expressed as a regular letter rating (from high to low quality): AAA, AA, A, BBB, BB, ...D.

*** US dollar share class. This data is preliminary and is subject to change.

10

Sector (%) Currency (%) ***Key Rate Duration Contribution (years)

CDS

Statistics

Yield* 5.5 %

Effective Duration 5.3 years

Credit Spread Duration 3.4 years

Other Spread Duration -6.6 years

Average Rating** A

BOTH THE HEIGHT OF THE FED CHAIR AND RATES HAVE FALLEN OVER

TIME, COULD A TALLER FED CHAIR MEAN RATES RISE?

Source: LPL Research, Bloomberg, as at 22 October 2017.

11

CONCLUSION – WHY LEGG MASON WESTERN

ASSET MACRO OPPORTUNITIES BOND FUND

Source: Legg Mason, as at 30 September 2017.

12

DAILY DEALING, LIQUID ALTERNATIVE

• Absolute return-focused

• Daily liquidity UCITS Fund

• No performance fee

WHY

DIVERSIFICATION BENEFITS

• Designed to have low or negative correlation against equity and traditional fixed-income asset classes

• Aim to mitigate volatility and provides diversification using macro strategies

EXPERIENCED INVESTMENT TEAM

• Led by seasoned portfolio managers – CIO Kenneth Leech (40 years’ experience) and Prashant Chandran (18 years’ experience)

• “Best ideas” value-focused team approach

GLOBAL UNCONSTRAINED

• Broad duration range of -5 to +10 years

• Benchmark-agnostic strategy with flexible guidelines

• Ability to take long / short positions to capture opportunities and risk management

• Maximum 10% p.a.** volatility budget


STRUCTURED OPPORTUNITIES FUND

13

WHY STRUCTURED CREDIT?

▪ Provides attractive yield, investing in securities backed by residential, commercial and consumer

loans

▪ Focus on adjustable rate securities and active management of duration provides some immunity in

a rate rising environment

▪ Good diversifier in broader portfolio. Relatively low correlation to other fixed income sectors

▪ Sector to benefit from strong consumer and real estate fundamentals

▪ More dependent on US domestic growth and more sheltered from global economic developments

than other fixed income sectors

▪ Sector has evolved since financial crisis with better underwriting and loan quality leading to a

higher quality asset class over recent years

▪ Underappreciated asset class that we believe is significantly undervalued

Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situations or needs of investors.

14

WHY STRUCTURED CREDIT?CONSTRUCTIVE FUNDAMENTALS & GOOD LENDING STANDARDS

15

Price-to-Rent

10.24%Price-to-Income

-0.98%

-20

-10

0

10

20

30

40

1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Home Prices on a Relative Basis

Source: Case-Shiller, BEA, BLS, Morgan Stanley Research. As of 30 Apr 17

Per

cent

Monthly Payment as Percent of Income

10

15

20

25

30

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Mortgage Payment-to-Income

Source: Case-Shiller, Census, Freddie Mac, NAR, Morgan Stanley Research. As of 30 Apr 17

Per

cent Long-Run Average

0

2

4

6

8

10

1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

Seriously Delinquent Mortgages¹

Per

cent

Source: Bloomberg. As of 31 Mar 17¹A seriously delinquent mortgage is any loan that is more than 3 months past due and includes all loans in foreclosure.

Pre-Crisis: 715

Post-Crisis: 755

700

710

720

730

740

750

760

770

2000 2002 2004 2006 2008 2010 2012 2014 2016

Average FICO Score at Origination of GSE Loans

FIC

O S

core

Source: Deutsche Bank, FICO, GSE. As of 30 Jun 17

PRE 2007 VS NOW

▪ Loans from pre 2007 RMBS that have defaulted has cleaned out low quality/fraudulent loans and

what remains is seasoned loans with lower loan-to-value levels with more stable cash flows.

16

Loans originated with no assets, no income and no job verification

Appraisal fraud

Loan officer compensation

No risk retention policy on behalf of issuers

Issuer(s) driving origination via reverse inquiry

Weak representation, warranty and enforcement constructs

Funding decisions directed by securitisers

Regulatory changes has reduced ability of banks to lend

Dodd Frank has increased regulation on lending and risk retention by

issuers

Loan underwriting process has improved significantly since the

global financial crisis

Consumer and real estate fundamentals are at historically

attractive levels

Selective process focused on quality borrowers and loans with low loan to

values

Cause(s) of CrisisRegulatory & Rating Agency

Environment Post-Crisis

SUB-SECTOR YIELDS

Source: Western Asset, as at 30 September 2017. Past performance is not a reliable indicator of future results.17

3.0%

5.0%

2.5%

4%

2.5%

4%

2.5%

5.0%

0%

2%

4%

6%

8%

10%

12%

IG Non-IG IG Non-IG IG Non-IG IG Non-IG

6.0%

10.0%

4.5%

6%

3.5%

7%

5%

9%

Commercial Mortgages Pre ‘07 Residential

Mortgages

Post ‘07 Residential

Mortgages

Consumer Loans

90

95

100

105

110

115

120

125

130

Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17Mar 17 Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep 17

Structured Opps UST 10 (Rebased to 100) US HY (Rebased to 100)

LOW CORRELATION TO TRADITIONAL FIXED

INCOME, LESS VOLATILE THAN HIGH YIELD

18Source: Legg Mason, Bloomberg, as at 30 September 2017. Rebased to 100 on 13 January 2016.

127.2

119.9

98.1

Rising UST rate environment

COMPOSITE PERFORMANCE

Source: Western Asset, as at 30 September 2017.

*Information provided is supplemental to the Structured Product Levered Composite as provided in the appendix. ¹Information provided is supplemental to the Structured Product

Composite as provided in the appendix. ²Information provided is supplemental to the Agency MBS Plus Aggregate Composite as provided in the appendix.

³Information provided is supplemental to the Agency MBS Composite as provided in the appendix.

US MBS = US Mortgage Backed Securities Index, US Broad Fixed-Income = Barclays U.S. Aggregate Index, US Treasury = US Treasury 10-Year Bellwether Index,

Hedge Fund Universe = DJ/CS Hedge Fund Index, Emerging Markets =JPM EMBI Global, US High-Yield = US HY 2% Issuer Capped Index, US Equity = S&P 500 TR19

US MBS

US Broad Fixed-Income US Treasury

Hedge Fund UniverseEmerging Markets

US High-Yield

US Equity

WA STRUCTURED PRODUCT¹

WA US AGENCY MBS PLUS AGGREGATE²

WA US AGENCY MBS³

-5

0

5

10

15

20

-4 -2 0 2 4 6 8 10 12 14

Rew

ard

(ann

ualiz

ed re

turn

, %)

Risk (standard deviation, %)

5 Years Ending 30 Sep 17

US

Treasury

US

MBS

US Broad

Fixed-Income

US

High-Yield

Emerging

Markets

US

Equity

Hedge Fund

Universe

WA Structured Product¹ 2.35 -0.32 -0.26 -0.09 0.46 0.13 0.38 0.48

WA US Agency MBS Plus Aggregate² 1.42 0.24 0.48 0.53 0.51 0.51 0.25 0.45

WA US Agency MBS³ 0.67 0.79 0.98 0.84 0.00 0.40 -0.13 -0.12

Sharpe Ratio 0.09 0.67 0.55 1.13 0.58 1.45 1.19

CorrelationsSharpe

RatioProduct

WHAT ARE THE RISKS?HOW THE TEAM MANAGE THEM

Source: Legg Mason, as at 31 March 2017.20

Interest rate risk extensive floating rates and implicit duration actively

managed to be minimal (ie duration < 1)

Prepayment riskmacro analysis with active management and interest

only security usage

Liquidity risk limited exposure to less liquid sectors. Weekly dealing

Credit riskextensive macro, collateral, structural analysis

with conservative scenario testing

2017 GLOBAL INVESTMENT OUTLOOK

Source: Western Asset, as at 18 September 2017. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situations or

needs of investors.

21

Our base case is for steady but unspectacular growth, where spread sectors are likely to outperform.

▪ Global growth and inflation continue to improve from low levels

▪ Moderate US growth persists with subdued inflation backdrop

▪ Central banks signal path toward normalization

▪ Government bonds remain underpinned by low policy rates

▪ Spread sectors expected to outperform

▪ Emerging markets should continue to provide superior performance

WHERE ARE THE OPPORTUNITIES?NON-AGENCY RESIDENTIAL

22

Legacy securitization

▪ Collateral originated and securitized prior to 2007

▪ Securities have continued to show improving credit

performance as well as positive price appreciation

allowing investors to participate up and down the capital

structure

Credit risk transfer

▪ Fannie Mae and Freddie Mac originated collateral from

2013

to present. Offered securities represent the credit risk

that both agencies have been mandated to transfer away

from balance sheets

▪ Consistent issuance and increasing investor participation

allow increasing market depth

Re-performing loans

▪ Legacy loans originated pre 2007. Loans are highly

seasoned for 10+ years and have been performing at

least 2 years consecutively (no missed payments)

▪ Targeted borrowers have a credit score on average of

680 and at least 10% of equity in their loan

Sector View: Positive

Outstanding (USD Bn): 477

2017 Estimated (USD Bn): 0

Outstanding (USD Bn): 31


Outstanding (USD Bn): 17.4


Prime jumbo

▪ Recently originated loans during low interest rate

environments

▪ Loans made to high net worth borrowers, average loan

balance > $1 million with a large down payment and

below market interest rate

Non-performing loans

▪ Legacy loans originated pre 2007. Loans currently in

various stages of delinquency, foreclosure or bankruptcy

▪ Loans require increasing costs to service and varying

timelines

for estimated recovery

Single-family rentals

▪ Loans originated for the purposes of single-family rental

properties

▪ Typically backed by a single corporate issuer

Sector View: Negative

Total UPB (USD Bn): 31


Total UPB (USD Bn): 23.6


Total UPB (USD Bn): 17


Source: Wells Fargo, Western Asset. As of 29 Mar 17

WHERE ARE THE OPPORTUNITIES?NON-AGENCY COMMERCIAL

23

CMBS 2.0/3.0

Pre-risk retention conduit

▪ Collateral originated and securitized between 2012-2016

▪ Attractive risk/reward profile benefitted from seasoning

as price of underlying collateral has continued to

increase and delinquencies remain low

Floating rate single-

asset single-borrower

▪ CMBS backed by a portfolio of similar assets from one

sponsor

▪ Loans are generally a two-year initial term with three

one-year extension options

▪ Underwriting standards are generally conservative due to

concentration to one asset or one property type

Legacy conduit

▪ Collateral originated and securitized between 1993-2008,

known as CMBS 1.0

▪ The positive lending environment and fundamentals have

contributed to strong performance of more levered bonds

CMBS 3.0

Post-risk retention conduit

▪ Collateral originated and securitized since 2017. Deals

are risk retention compliant

Fixed rate single-

asset single-borrower

▪ CMBS backed by a single property which is typically

"trophy" assets

▪ Loans are typically fixed-rate and have 10-year terms

▪ Underwriting matrix is generally conservative due to

concentration to one asset or one property type

CRE-CLO

▪ Loans are typically backed by properties in transition

and expected to refinance after properties are stabilized

▪ Deal structures have been getting less conservative and

spreads have been getting tighter







Source: Bank of America, Western Asset. As of 31 Jul 17

Sector View: Positive Sector View: Negative

1974:First

investment in Agency

RMBS

1987:

First investment

in Non-Agency RMBS

1990: First

investment in ABS

1991:Invested in Resolution

Trust Corporation

(RTC) programs

1991:First

investment in CMBS

2009: Launched

US Treasury

PPIP

Jan 2016: Launched

UCITS Structured

Opportunities Fund

WESTERN ASSET’S MBS/STRUCTURED PRODUCT

EXPERIENCE

Assets Under Management*: Dedicated MBS/Structured Product mandates $9.4 billion*Firm wide Structured Products assets under management of $59.3 billion

Source: Legg Mason. *As at 30 June 2017. **Included in the Firm wide AUM. 24

Anup Agarwal

20 Years’ Experience▪ Western Asset Management

Company – Head of MBS/ABS,

2013-

Education▪ Temple University, M.B.A. Finance

Elliott Neumayer


Company – Product Specialist, 2004-▪

Education▪ Loyola Marymount University,

M.B.A., B.A

Product SpecialistPortfolio Managers

A History of Structured Product Experience and Innovation

2005:

Bought protection

on subordinate

RMBS– first large

protection trade

2007:

Launched Structured

Products Fund

2014

First Commercial

Real Estate

Mezzanine

opportunity

Greg E. Handler, CFA


Company – Portfolio Manager

/Research Analyst, 2002-

Education▪ Pomona College, Claremont, B.S.

THE INVESTMENT TEAM

As at 31 August 2017. The above includes both investment and non-investment professionals (analysts and product specialists).

*10 data management professionals have been recently moved to Enterprise Solutions.

25

Anup Agarwal (20 years)Head of MBS/ABS

Elliott R. Neumayer (14 years)Product Specialist

Razmik Kirakosyan, CFA (8 years)Product Analyst

Alba Abourjeili, CFA (15 years)

Andre Ashook, CFA (8 years)

Benjamin Birnbaum (11 years)

Greg E. Handler, CFA (17 years)

Sean O. Johnson, CFA (28 years)

Ian Justice (19 years)

Mortgage and Asset-Backed Product

Liam P. Lynch (16 years)

Jenny Park, CFA (12 years)

Sudibyo Pradono (14 years)

David F. Shriver, CFA (10 years)

Harris A. Trifon (17 years)

Bonnie M. Wongtrakool, CFA (18 years)

Western Asset Investment Team

Investment Management Professionals• Chief Investment Officer: S. Kenneth Leech

• Deputy CIO Michael C. Buchanan

• 127 Investment Professionals on 5 continents and

7 offices, as at 30 June 2017

• 22 years of average experience

Major Investment Committees• Global Investment Strategy Committee

• Global Credit Committee

• US Broad Market Strategy Committee

• Global Emerging Markets Strategy Committee

• Unconstrained Asset Allocation Committee

Sector and Regional Teams

• Global credit

• Investment grade

• High-yield

• Emerging markets

• MBS/ABS

• Long duration

• US municipal

• Liquidity

• Insurance

• US

• Europe

• UK

• Japan

• Asia

• Brazil

• Australia / New

Zealand

Independent Risk Management Function• Chief Risk Officer Kenneth J. Winston, PhD

• Independent evaluation of strategies and risks in

portfolios

• Market and Credit Risk Committee

• 33* investment risk professionals of which 11 are

PhDs, across four offices, as at 30 June 2017

Mortgage and Asset-Backed Investment Team

Risk ManagementLegal &

ComplianceInvestment

Support


STRUCTURED OPPORTUNITIES FUNDInception date: 13 January 2016

Fund Size: USD 552.52m

Portfolio Targets▪ Investment aim: To maximise total return.

▪ Target volatility range: 5-7%

▪ Targeted return: 6% to 8%*

▪ Expected duration: <1 year

Fund description▪ Aims to exploit investment opportunities across residential & commercial mortgages and asset-backed securities

▪ Focus on more liquid areas of non-agency mortgage backed securities and asset-backed securities sectors (investment grade and

high yield, various tranches and classes)

▪ Significant floating rate exposure resulting in low sensitivity to interest rate changes

▪ Opportunistic use of interest rate and credit hedges to minimise downside risks

▪ Portfolio seeks to perform well as US economy improves and rates rise

▪ Allocations allowed to cash/cash equivalents, agency MBS/ABS and government debt

Investment guidelines▪ No financial leverage

▪ Min 65% in MBS and ABS (not issued or guaranteed by Government-sponsored entities or agencies of the U.S. Government)

▪ Max 35% (in aggregate) in agency MBS/ABS, government debt and cash/cash equivalents

▪ Max 50% in non-USD securities (typically less than 5% non-USD exposure).

▪ Invests in cash bonds, futures, options and other derivatives (max 20% in derivatives on equity indices)

Source: Legg Mason, as at 30 September 2017. Please refer to the LMGF Plc Prospectus for further details of the Fund hard limits. *Yield levels described are

targets and there is no guarantee that they will be met.26

Portfolio

Change*

(Monthly)

Weight

(%)Sector

Yield**

(%)

34.7 Legacy Residential Mortgages 5.5

23.2 New-Issue Residential Mortgages 6.5

0.4 Agency RMBS IO 7.2

12.0 GSE Risk Transfer 7.1

7.9 Restructured Legacy Bonds 5.6

1.3 U.K. Mortgages 4.2

1.7 Re-performing Loans 7.8

22.5 CMBS 8.2

1.8 Agency CMBS IO 4.9

7.1 Conduit Credit 9.7

8.5 Large Loan Credit 9.1

5.2 Legacy AJ/AM 5.5

7.4 Opportunistic ABS 4.8

0.0 Treasury Derivative 2.1

-0.03 Foreign Exchange 0.0

12.2 Cash 0.7

100.0 Total 5.0

LEGG MASON WESTERN ASSET STRUCTURED

OPPORTUNITIES FUND POSITIONS

Source: Western Asset, as at 30 September 2017. Fund inception:13 January 2016. Portfolio characteristics may change without notice.

*Portfolio weighting changes could occur due to market movements. **Loss Adjusted Yield. ^Empirical duration is calculated by regressing actual historical daily

market value changes of the bond vs. the changes of US 10-Year Treasury yields over the last 30 days.

27

63%

37%

Floating vs Fixed exposure

Floating Fixed

▪ Empirical duration of -1.3 years^

▪ Spread duration of 5.5 years

▪ Portfolio is currently 77% non-investment grade

▪ If bonds have interest rate duration, then Western Asset

hedges the duration to zero. The Fund may have some

duration, generally not more than a year, as a hedge for credit

spreads based on economic environment.

3.1%

0.7%

4.7%

-0.8

-1.6

0.7

2.0

0.4 0.7

2.5

0.51.7

-0.1 -0.2

0.5

1.71.0 1.0 1.0

1.5 1.6 1.32.1

0.7

4.2

8.4

12.5 12.7

11.1

-4

-2

0

2

4

6

8

10

12

14

16

18

20

22

-4

-2

0

2

4

6

8

10

12

14

16

18

20

22

Ja

n-1

6

Fe

b-1

6

Ma

r-16

Apr-

16

Ma

y-1

6

Ju

n-1

6

Ju

l-1

6

Aug

-16

Sep

-16

Oct-

16

Nov-1

6

Dec-1

6

Ja

n-1

7

Fe

b-1

7

Ma

r-17

Apr-

17

Ma

y-1

7

Ju

n-1

7

Ju

l-1

7

Aug

-17

Sep

-17 .

3 M

on

ths

6 M

on

ths

Yea

r-to

-Da

te

1 Y

ear

S.I.

Ann

.*

Monthly Performance (net) Percentage Growth


STRUCTURED OPPORTUNITIES FUND

Source: Legg Mason as at 30 September 2017. NAV to NAV with gross income reinvested without initial charges but reflecting annual management fees, based in USD for class LM shares. The LM

Class is an internal seed share class with no annual charge, it is not available to purchase and is shown for representative reasons only due to being the oldest share class. Past

performance is not an indicator of future results and may not be repeated. *Since inception: 13 January 2016. Past performance is not an indicator of future results and may not be repeated.

28

LM Class Accumulation – Net performance to 30 September 2017 in USD

+19.89

% %Trailing Periods

STRUCTURED PRODUCT COMPOSITE:

INVESTMENT RESULTS: 30 SEPTEMBER 2017

Source: Western Asset. Returns as at 30 September 2017, in US dollars. Returns for periods greater than one year are annualised. Effective 1 October 2014 fee schedule: 1.0% flat fee on all

amounts; the minimum separate account size is US$200 million. There are differences between the above composite and the Legg Mason Western Asset Structured Opportunities Fund, including

differences in the number of holdings, the amount of assets under management, cash flows, fees and expenses, and applicable regulatory requirements, including investment and borrowing

restrictions.

29

0.7

3.2

10.711.5

6.2

7.27.9

6.8

0.7

3.0

10.110.7

5.4

6.57.2

6.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1 Month 3 Months Year-to-Date 1 Year 3 Years 5 Years 7 Years Since Inception1 Aug 2007

%

Structured Product Composite (Gross)* Structured Product Composite (Net)*

Annualised Returns (USD)

The past performance of the above composite is, therefore, not indicative of the future performance of the Legg Mason Western Asset Structured Opportunities

Fund. *The Western Asset Structured Product Strategy is not measured against a benchmark. There is no benchmark available which appropriately reflects the

strategy. Past performance is not indicative of future results..

Risk Statistics 1-Year 3-Year 5-Year Since Inception

Standard Deviation (%) 1.7 2.4 2.9 7.9

Sharpe Ratio 6.2 2.4 2.4 0.8

WHY THE LEGG MASON WESTERN ASSET

STRUCTURED OPPORTUNITIES FUND?

▪ Loss adjusted yield target of 5%-7%* seeking to deliver attractive risk-adjusted total returns

▪ Volatility target of 5% to 7%

▪ Low correlation to other fixed income sectors – good portfolio diversifier

▪ Significant floating rate exposure with low total duration

▪ Sector should benefit from strong US consumer and housing market fundamentals

▪ Higher dependence on US domestic growth helps insulate against global macro shocks

▪ Investment team has extensive track record in managing structured credit, backed by Western

Asset’s experience within MBS which dates back over 40 years

*Yield levels described are targets and there is no guarantee that they will be met. Please refer to the LMGF Plc Prospectus for further details of the Fund hard limits.

30

APPENDIX

31

FUND CHARACTERISTICSLEGG MASON WESTERN ASSET STRUCTURED OPPORTUNITIES FUND

Source: Western Asset, as at 30 June 2017. *In the event that the New York Stock Exchange is not open for business on Wednesday, the next following business

day will be a dealing day, with at least two dealing days per month. **Premier Class US$ Acc is the only class available in Spain ***Premier Class Euro Acc is the

only class available in Sweden.

32

Legg Mason Western Asset Structured Opportunities Fund

Portfolio manager(s) Anup Agarwal, Greg E. Handler, Kenneth Leech

Inception date (fund) 13/01/2016

Inception date (composite) 01/08/2007

Benchmark Not managed to a benchmark

Volatility target Expected volatility range: 5–7%

Investment aim Maximise total return

Fund target

Sources of alpha Sector allocation, Issue selection

Duration range Typically less than 1 year

Allocation limits:

▪ Governments

Max aggregate 35% (incl agency MBS/ABS)▪ Investment Grade Credit

▪ High Yield Credit

▪ Mortgage and Asset Backed Min 65% non-Agency and Max 35% Agency MBS/ABS

▪ Below Investment Grade –

▪ Total Credit –

Emerging Markets –

CurrenciesMax 50% in non-USD assets which will be hedged back to USD

such that non-USD exposure not expected to exceed 5%

Derivatives Use of derivatives for alpha and hedging. Max 20% in derivatives on equity indices

Fund class ISIN code CUSIP code Dealing frequency Valuation

LM Class US$ Acc. IE00BYQP5H80 G5S470791 Weekly (Wednesday*) Daily

Premier Class US$ Acc.** IE00BYQP5B29 G5S470759 Weekly (Wednesday*) Daily

Premier Class Euro Acc. (H)*** IE00BYQP5894 G5S470734 Weekly (Wednesday*) Daily

MORTGAGE AND ASSET-BACKED TEAM

SECTOR VIEW

Source: Western Asset, as at 30 September 2017.

33

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

31/0

3/1

0

31/0

5/1

0

31/0

7/1

0

30/0

9/1

0

30/1

1/1

0

31/0

1/1

1

31/0

3/1

1

31/0

5/1

1

31/0

7/1

1

30/0

9/1

1

30/1

1/1

1

31/0

1/1

2

31/0

3/1

2

31/0

5/1

2

31/0

7/1

2

30/0

9/1

2

30/1

1/1

2

31/0

1/1

3

31/0

3/1

3

31/0

5/1

3

31/0

7/1

3

30/0

9/1

3

30/1

1/1

3

31/0

1/1

4

31/0

3/1

4

31/0

5/1

4

31/0

7/1

4

30/0

9/1

4

30/1

1/1

4

31/0

1/1

5

31/0

3/1

5

31/0

5/1

5

31/0

7/1

5

30/0

9/1

5

30/1

1/1

5

31/0

1/1

6

31/0

3/1

6

31/0

5/1

6

31/0

7/1

6

30/0

9/1

6

Asset Backed Cash & Cash Equivalents Commercial Mortgage Backed

Credit Government Other

Residential Mortgage Backed Structured Product

STRUCTURED PRODUCT REPRESENTATIVE

ACCOUNT: HISTORICAL SECTOR ALLOCATION

Source: Western Asset, as at 30 September 2017. *The representative account of the strategy changed on 30 September 2016. There are differences between the representative account

and the Legg Mason Western Asset Structured Opportunities Fund, including differences in the number of holdings, the amount of assets under management, cash flows, fees and

expenses, and applicable regulatory requirements, including investment and borrowing restrictions. The past performance of the above Representative Account is, therefore, not indicative of

the future performance of the Legg Mason Western Asset Structured Opportunities Fund. For more information on the strategy composite see the composite disclosure in the appendix.

34

Former representative account* Fund since launch (13 January 2016)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ma

r 1

0Ju

n 1

0S

ep

10

Dec 1

0M

ar

11

Ju

n 1

1S

ep

11

Dec 1

1M

ar

12

Ju

n 1

2S

ep

12

Dec 1

2M

ar

13

Ju

n 1

3S

ep

13

Dec 1

3M

ar

14

Ju

n 1

4S

ep

14

Dec 1

4M

ar

15

Ju

n 1

5S

ep

15

De

c 1

5M

ar

16

Ju

n 1

6S

ep

16

Sub-Fund Allocation

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17

Sec

tor

Allo

catio

n (%

)

GLOSSARY

Agencies:

Fannie Mae – A government sponsored enterprise (GSE) that was created to provide a secondary mortgage market in the US. Its goal is to expand

availability and affordability of homeownership for middle- to low-income Americans

Freddie Mac: A government sponsored enterprise (GSE) that purchases, guarantees and securitizes mortgages. Its goal is to keep money flowing to

mortgage lenders in support of homeownership for middle income Americans.

Ginnie Mae: A US government corporation created to ensure liquidity for government-insured mortgages. Ginnie Mae guarantees the timely

payment of principal and interest of qualifying loans.

Alt –A – A classification of borrowers (that are contained in a non-agency residential mortgage-backed security pool) that have higher credit scores

than subprime borrowers, but are inferior to prime borrowers. This classification would also include borrowers with prime credit scores that are missing

some documentation requirements, which excludes them from prime collateral pools.

CMO – Collateralised Mortgage Obligations are created by pooling mortgage or mortgage pass-throughs and splitting their cash flows into a number

of ‘tranches’. The mortgages serve as collateral, and are organised into classes based on their risk profile. Income received from the mortgages is

passed to investors based on a predetermined set of rules, and investors receive money based on the specific CMO segment they are invested in

(called a tranche).

Commercial Real Estate Loan (CRE) – Loans on commercial properties that are income-producing and used for business purposes, for example

shopping malls, offices, hotels.

Conduit deals – Are a type of commercial mortgage-backed security (CMBS) that is backed by multiple loans and properties. These offer

diversification across borrowers, property types and regions.

GSEs – Government-sponsored enterprises (GSEs) are financing entities created by the US Congress to fund loans to certain groups of borrowers

such as homeowners, farmers and students. GSEs are also sometimes referred to as Federal Agencies.

35

http://www.investopedia.com/terms/c/collateral.asp

http://www.investopedia.com/terms/r/risk-profile.asp

GLOSSARY

Empirical duration - Calculated by regressing actual historical daily market value changes of the bond vs. the changes of US 10-Year Treasury

yields over the last 30 days.

Legacy bonds/securities – Securities that were issued prior to 2008-2010. These securities were issued when lending standards were less stringent,

but are now backed by seasoned loan pools with many of the defaulted borrowers having left the collateral pools during the Global Financial Crisis.

Mezzanine tranche – Tranches that are superior to equity tranches, which take the first loss from asset pools, but are subordinated to senior tranches,

which are the last to take a loss.

Non- Agency MBS – Mortgage-backed securities that are issued by private label, non-government sponsored entities.

Prime – A classification of borrowers (that are contained in a non-agency residential mortgage-backed security pool) that are considered to be of high

quality and would typically conform to agency standards, in terms of credit history, but with loan amounts that exceed the agency limits. Also referred

to as Traditional jumbos.

RMBS – Residential mortgage backed securities are securities backed by a pool of residential, non-commercial mortgage loans (i.e. single family

properties)

Sub-Prime – A classification of borrowers (that are contained in a non-agency residential mortgage-backed security pool) that have weaker credit

scores that do not meet agency credit standards

36

BIOGRAPHIES

Note: Western Asset experience reflects current position title and hire date.

37

ANUP AGARWAL

20 Years’ Experience

– Western Asset Management Company – Head of MBS/ABS, 2013-

– Stark Investments – Portfolio Manager and Head of Consumer Credit, 2007-2013

– Invesco Fixed Income – Senior Manager, Head of Credit and Research, 2003-2007

– Prudential Insurance/Questech Financial – Principal, Senior Vice President, Capital Markets, 2001-2002

– Copelco Capital, Inc./Citicorp Vendor Finance, Inc. – Managing Director, Structured Finance 1998-2001

– Moody's Investor Service – Assistant Vice President, Credit Analyst, 1997-1998

– Temple University, M.B.A. Finance

– Indian Institute of Technology, B. Tech.

GREG E. HANDLER


– Western Asset Management Company – Portfolio Manager/Research Analyst, 2002–

– Gould Asset Management – Financial Consulting Intern, 2001–2002

– National Economics Research Associates – Economic Consulting/Research Intern, 2001

– Pomona College, Claremont, B.S.

– Universidad de Salamanca, Spain

– CFA charterholder

ELLIOTT R. NEUMAYER


– Western Asset Management Company – Product Specialist, 2004-

– Marshall & Stevens – Senior Associate, 2003-2004

– Loyola Marymount University, M.B.A., B.A.

COMPOSITE DISCLOSURE

38

Verification assesses whether (1) the Firm has complied with all the composite construction

requirements of the GIPS standards on a firm-wide basis and (2) the Firm's policies and

procedures are designed to calculate and present performance in compliance with the GIPS

standards. 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 1971.

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.

The Composite is valued monthly. The Composite returns are the asset-weighted average of

the performance results of all the accounts in the Composite. Gross-of-fees returns are

presented before management fees, but after all trading expenses. Net of fees results are

calculated using a model approach whereby the current highest tier of the appropriate

strategy's fee schedule is used. This model fee does not reflect the deduction of

performance-based fees. The portfolios in the Composite are all actual, fee-paying and

performance fee-paying, fully discretionary accounts managed by the Firm for at least one

full month. Investment results shown are for taxable and tax-exempt accounts and include

the reinvestment of all earnings. Any possible tax liabilities incurred by the taxable accounts

have not been reflected in the net performance. Composite performance results are time-

weighted net of trading commissions and other transaction costs including non-recoverable

withholding taxes. Policies for valuing portfolios, calculating performance, and preparing

compliant presentations are available upon request.

The returns for the accounts in the Composite are calculated using a time-weighted rate of

return adjusted for weighted cash flows. The returns for the commingled funds in the

Composite are calculated daily using net asset values (NAV), adding back the funds' total

expense ratio or equivalent. Trade date accounting is used since inception and market values

include interest income accrued on securities held within the accounts. Performance is

calculated using asset values denominated in a base currency. Composite market value at

year-end presented in the schedule are translated to U.S. dollars using end of year exchange

rates.

Composite returns are measured against a benchmark. The benchmark is unmanaged and

provided to represent the investment environment in existence during the time periods shown.

For comparison purposes, its performance has been linked in the same manner as the

Composite. The benchmark presented was obtained from third party sources deemed reliable

but not guaranteed for accuracy or completeness. Benchmark returns and benchmark three-

year annualized ex-post standard deviation are not covered by the report of independent

accountants.

Internal dispersion is calculated using the asset-weighted standard deviation of annual gross

returns of those portfolios that were included in the Composite for the entire year. For each

annual period, accounts with less than 12 months of returns are not represented in the

dispersion calculation. 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.

The three-year annualized ex-post standard deviation is not presented for periods where 36

monthly returns are not available for the composite or the benchmark. Any gross total three-

year annualized ex-post standard deviation measures prior to 2011, included within the

"Examination Period" identified above, are not covered by the report of independent

accountants.

Past investment results are not indicative of future investment results.

Western Asset's list of composite descriptions is available upon request. Please contact Jan

Pieterse at 626-844-9977 or [email protected]. All returns for strategies with

inception prior to January 1, 2006 are available upon request.

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, 2015. The verification report is available upon request.

COMPOSITE DISCLOSURE:

US AGENCY MBS COMPOSITE

39

As at 31 December 2016


US AGENCY MBS PLUS AGGREGATE COMPOSITE

40



STRUCTURED PRODUCT COMPOSITE

41



MACRO OPPORTUNITIES COMPOSITE

42


COMPOSITE DISCLOSURE

31 DECEMBER 2016

43

Verification assesses whether (1) the Firm has complied with all the composite construction

requirements of the GIPS standards on a firm-wide basis and (2) the Firm's policies and

procedures are designed to calculate and present performance in compliance with the GIPS

standards. 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 1971.

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.

The Composite is valued monthly. The Composite returns are the asset-weighted average of

the performance results of all the accounts in the Composite. Gross-of-fees returns are

presented before management fees, but after all trading expenses. Net of fees results are

calculated using a model approach whereby the current highest tier of the appropriate

strategy's fee schedule is used. This model fee does not reflect the deduction of

performance-based fees. The portfolios in the Composite are all actual, fee-paying and

performance fee-paying, fully discretionary accounts managed by the Firm for at least one

full month. Investment results shown are for taxable and tax-exempt accounts and include

the reinvestment of all earnings. Any possible tax liabilities incurred by the taxable accounts

have not been reflected in the net performance. Composite performance results are time-

weighted net of trading commissions and other transaction costs including non-recoverable

withholding taxes. Policies for valuing portfolios, calculating performance, and preparing

compliant presentations are available upon request.

The returns for the accounts in the Composite are calculated using a time-weighted rate of

return adjusted for weighted cash flows. The returns for the commingled funds in the

Composite are calculated daily using net asset values (NAV), adding back the funds' total

expense ratio or equivalent. Trade date accounting is used since inception and market values

include interest income accrued on securities held within the accounts. Performance is

calculated using asset values denominated in a base currency. Composite market value at

year-end presented in the schedule are translated to U.S. dollars using end of year exchange

rates.

Composite returns are measured against a benchmark. The benchmark is unmanaged and

provided to represent the investment environment in existence during the time periods shown.

For comparison purposes, its performance has been linked in the same manner as the

Composite. The benchmark presented was obtained from third party sources deemed reliable

but not guaranteed for accuracy or completeness. Benchmark returns and benchmark three-

year annualized ex-post standard deviation are not covered by the report of independent

accountants.

Internal dispersion is calculated using the asset-weighted standard deviation of annual gross

returns of those portfolios that were included in the Composite for the entire year. For each

annual period, accounts with less than 12 months of returns are not represented in the

dispersion calculation. 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.

The three-year annualized ex-post standard deviation is not presented for periods where 36

monthly returns are not available for the composite or the benchmark. Any gross total three-

year annualized ex-post standard deviation measures prior to 2011, included within the

"Examination Period" identified above, are not covered by the report of independent

accountants.

Past investment results are not indicative of future investment results.

Western Asset's list of composite descriptions is available upon request. Please contact Jan

Pieterse at 626-844-9977 or [email protected]. All returns for strategies with

inception prior to January 1, 2006 are available upon request.

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, 2016. The verification report is available upon request.

IMPORTANT INFORMATIONThis is a sub-fund ("fund") of Legg Mason Global Funds plc (“LMGF plc”), an umbrella fund with segregated liability between sub-funds, established as an open-ended investment company with variable capital, organised as an undertaking for collective investment in transferable securities (“UCITS”) under the laws of Ireland as a public limited company pursuant to the Irish Companies Acts and UCITS regulations. LMGF plc is authorised in Ireland by the Central Bank of Ireland (the “Central Bank”).

It should be noted that the value of investments and the income from them may go down as well as up. Investing in a sub-fund involves investment risks, including the possible loss of the amount invested. Past performance is not a reliable indicator of future results. An investment in a sub-fund should not constitute a substantial proportion of an investor’s investment portfolio and may not be appropriate for all investors. Investors’ attention is drawn to the specific risk factors set out in a fund’s share class key investor information document (“KIID”) and LMGF plc’s prospectus (the “Prospectus”).

This material is not necessarily a complete summary and is not intended, for example, as a complete analysis. The information and data in this material (that may include without limitation research, forecasts, figures, opinions,statements, trends, investment techniques and strategies) has been prepared from sources believed reliable but is not guaranteed in any way by Legg Mason Investments (Europe) Limited nor any Legg Mason, Inc. company oraffiliate (together “Legg Mason”). No representation is made that the information or data is correct as of any time subsequent to its date. Further there is no guarantee or assurance that funds will achieve their investment objectives.Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situations or needs of investors.

Before investing investors should read in their entirety LMGF plc’s application form and a fund’s share class KIID and the Prospectus (which describe the investment objective and risk factors in full). These and other relevantdocuments may be obtained free of charge in English, French, German, Greek, Italian, Norwegian and Spanish from LMGF plc’s registered office at Riverside Two, Sir John Rogerson’s Quay, Grand Canal Dock, Dublin 2, Ireland,from LMGF plc’s administrator, BNY Mellon Fund Services (Ireland) Limited, at the same address or from www.leggmasonglobal.com.

This material is not intended for any person or use that would be contrary to local law or regulation. Legg Mason is not responsible and takes no liability for the onward transmission of this material. This material does not constitutean offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not lawful or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer orsolicitation.

Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London, EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorised and regulated by the UK FinancialConduct Authority.

In Switzerland, issued and approved by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.

Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai

1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information Documents and the annual and semi-annual reports of the Company may be obtained free of charge from the

representative in Switzerland.

German investors: The prospectus, Key Investor Information Document, annual report and semi-annual report are available free of charge from the German Information agent [Legg Mason Investments (Europe) Limited,Zweigniederlassung Frankfurt am Main, MesseTurm, 21. Etage, Friedrich-Ebert-Anlage 49, 60308 Frankfurt a.M., Germany] or from www.leggmasonglobal.com.


October 2017

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http://www.leggmasonglobal.com/

FUND RISKSBonds: There is a risk that issuers of bonds held by the fund may not be able to repay the bond or pay the interest due on it, leading to losses for the fund.

Liquidity: In certain circumstances it may be difficult to sell the fund’s investments because there may not be enough demand for them in the markets, in which case the fund may not be able to minimisea loss on such investments.

Low rated bonds: The fund may invest in lower rated or unrated bonds of similar quality, which carry a higher degree of risk than higher rated bonds.

Emerging markets investment: The fund may invest in the markets of countries which are smaller, less developed and regulated, and more volatile than the markets of more developed countries.

Fund currency: Changes in exchange rates between the currencies of investments held by the fund and the fund's base currency may negatively affect the value of an investment and any incomereceived from it.

Hedging: The fund may use derivatives to reduce the risk of movements in exchange rates between the currency of the investments held by the fund and base currency of the fund itself (hedging).However, hedging transactions can also expose the fund to additional risks, such as the risk that the counterparty to the transaction may not be able to make its payments, which may result in loss to thefund.

Interest rates: Changes in interest rates may negatively affect the value of the fund.

Derivatives: The Fund makes significant use of derivatives. Investment in derivatives may cause the fund to lose as much as or more than the amount invested. Use of derivatives may also result in

greater fluctuations of the value of the fund.

Fund counterparties: The fund may suffer losses if the parties that it trades with cannot meet their financial obligations.

Fund operations: The fund is subject to the risk of loss resulting from inadequate or failed internal processes, people or systems or those of third parties such as those responsible for the custody of itsassets, especially to the extent that it invests in developing countries.

Asset-backed securities: The timing and size of the cash-flow from asset-backed securities is not fully assured and could result in loss for the fund. These types of investments may also be difficult for

the fund to sell quickly.

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IMPORTANT INFORMATIONThis is a sub-fund ("fund") of Legg Mason Global Funds plc ("LMGF plc"), an umbrella fund with segregated liability between sub-funds, established as an open-ended investment company with variable capital, organised as an

undertaking for collective investment in transferable securities ("UCITS") under the laws of Ireland as a public limited company pursuant to the Irish Companies Acts and UCITS regulations. LMGF plc is authorised in Ireland by the

Central Bank of Ireland (the "Central Bank"). The information and data in this material has been prepared from sources believed reliable but is not guaranteed in any way by any Legg Mason, Inc. company or affiliate (together "Legg

Mason"). No representation is made that the information is correct as of any time subsequent to its date.

It should be noted that the value of investments and the income from them may go down as well as up. Investing in a sub-fund involves investment risks, including the possible loss of the amount invested. Past performance is not a

reliable indicator of future results. An investment in a sub-fund should not constitute a substantial proportion of an investor's investment portfolio and may not be appropriate for all investors. Investors' attention is drawn to the specific

risk factors set out in a fund's share class key investor information document ("KIID") and LMGF plc's prospectus (the "Prospectus").

Individual securities mentioned are intended as examples only and are not to be taken as advice nor are they intended as a recommendation to buy or sell any investment or interest. Opinions expressed are subject to change without

notice and do not take into account the particular investment objectives, financial situations or needs of investors.

Before investing investors should read in their entirety LMGF plc's application form and a fund's share class KIID and the Prospectus (which describe the investment objective and risk factors in full). These and other relevant

documents may be obtained free of charge in English from LMGF plc's registered office at Riverside Two, Sir John Rogerson's Quay, Grand Canal Dock, Dublin 2, Ireland, from LMGF plc's administrator, BNY Mellon Fund Services

(Ireland) Limited, at the same address or from www.leggmasonglobal.com.

This material is not intended for any person or use that would be contrary to local law or regulation. Legg Mason is not responsible and takes no liability for the onward transmission of this material. This material does not constitute an

offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not lawful or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or

solicitation.

Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London, EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorised and regulated by the UK Financial

Conduct Authority. This information is only for use by professional clients, eligible counterparties or qualified investors based in the UK (excluding Channel Islands). It is not aimed at, or for use by, retail clients.

In Switzerland, issued and approved by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.

Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information Documents and the annual and semi-annual reports of the Company may be obtained free of charge from therepresentative in Switzerland.

October 2017


46

FUND RISKS

Bonds: There is a risk that issuers of bonds held by the fund may not be able to repay the investment or pay the interest due on it, leading to losses for the fund. Bond values are affected by the market’s

view of the above risk, and by changes in interest rates and inflation.

Liquidity: In certain circumstances it may be difficult to sell the fund’s investments because there may not be enough demand for them in the markets, in which case the fund may not be able to minimise

a loss on such investments.

Low rated bonds: The fund may invest in lower rated or unrated bonds of similar quality, which carry a higher degree of risk than higher rated bonds.

Emerging markets investment: The fund may invest in the markets of countries which are smaller, less developed and regulated, and more volatile than the markets of more developed countries.

Asset-backed securities: The timing and size of the cash-flow from asset-backed securities is not fully assured and could result in loss for the fund. These types of investments may also be difficult for

the fund to sell quickly.

Hedging: The fund may use derivatives to reduce the risk of movements in exchange rates between the currency of the investments held by the fund and base currency of the fund itself (hedging).

However, hedging transactions can also expose the fund to additional risks, such as the risk that the counterparty to the transaction may not be able to make its payments, which may result in loss to the

fund.

Interest rates: Changes in interest rates may negatively affect the value of the fund. Typically as Interest rates rise, bond values fall.

Derivatives: Investment in derivatives may cause the fund to lose as much as or more than the amount invested. Use of derivatives may also result in greater fluctuations of the value of the fund.

Fund counterparties: The fund may suffer losses if the parties that it trades with cannot meet their financial obligations.

Fund operations: The fund is subject to the risk of loss resulting from inadequate or failed internal processes, people or systems or those of third parties such as those responsible for the custody of its

assets, especially to the extent that it invests in developing countries.

Hedged class currency: The value of your investment may fall due to changes in the exchange rate between the currency of your share class and the base currency of the fund. The fund manager will

try to protect the value of your investment against such changes, but it may not succeed.

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