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Legg Mason and BMO Harris Partnership
Tyler Porterfield 20th November 2018
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Agenda Introduction Legg Mason Strategies Brandywine Global Overview
Royce & Associates Overview ClearBridge Investments Overview Conclusion
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SMA Minimum Investment
Legg Mason Strategies Brandywine Global Brandywine Global Opportunity Bond IS (GOBSX) Royce & Associates Royce International Premier Investment (RIPNX) – Foreign Small/Mid Growth Royce Special Equity Investment (RYSEX) – Small Value ClearBridge Investments Fund SMA SMA Minimum Investment ClearBridge Large Cap Growth (LSITX) √ $40K ClearBridge Large Cap Growth ESG ClearBridge Large Cap Value (LMLSX) $60K ClearBridge Mid Cap (LSIRX) ClearBridge Small Cap Growth (LMOIX) ClearBridge International Growth (LMGNX) For broker/dealer and home office use only. Not for use with the public.
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Brandywine Global
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Investment Process Overview
Systematic and Disciplined Macro Economic Research Valuation Process Macro Process Where is the valuation opportunity? Where is the price risk? What is the intrinsic value? Where is the information opportunity? Where is the risk? Bonds: We analyze high real yield, inflation expectations, default risk, and our internal valuation models. Currencies: We analyze PPP, REER, real rates, and our internal valuation models. Analyzing macro factors such as: Each country’s business and liquidity cycle Secular and political factors Environmental, Social and Goverance factors Establish Investment Themes Country Decision Currency Decision Duration Decision Credit Decision Portfolio Construction and Market Risk Analysis BrandywineGLOBAL - Global Opportunities Bond Fund The views expressed above are those of Brandywine Global Investment Management, LLC, and are not intended as a recommendation, investment advice, forecast or guarantee of future results. It should not be assumed that investment in the regions or currencies listed and account quality ratings or duration ranges were or will prove profitable, or that investment decisions we make in the future will be profitable. International securities and ADRs may be subject to market/currency fluctuations, investment risks, and other risks involving foreign economic, political, monetary, taxation, auditing and/or legal factors. There may be additional risks associated with international investments. International investing may not be suitable for everyone. There is no guarantee that the investment strategy will meet its objective. Past performance is no guarantee of future results. For broker/dealer and home office use only. Not for use with the public.
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Investment Process Portfolio Construction
Investment Guidelines: BrandywineGLOBAL – Global Opportunities Bond Fund The portfolio managers intend to: Invest a minimum of 80% of net assets in debt securities of issuers located in developed market countries Invest up to 25% of net assets in convertible debt securities Invest less than 35% of net assets in below investment grade fixed income securities (commonly known as “high yield debt” or “junk bonds”) For broker/dealer and home office use only. Not for use with the public.
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Royce
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Royce & Associates Small-cap specialist with unparalleled knowledge and experience, offering distinct investment approaches to meet a variety of investors’ goals. Founded 1972 30+ Years Average PM Industry Experience Pioneers of small-cap investing with more than 40 years of investment success Micro-cap, small-cap, and small/mid-cap portfolios that use value, core or growth investment strategies Portfolio managers have significant investments in the strategies they manage An affiliate of Legg Mason, Inc. $16.9B AUM 98% Assets with PM Investment ≥$1M1 As of 6/30/18 Source: Morningstar 1 The percentage of mutual fund assets with manager investment of more than $1 million shows the portion on an investment adviser’s open-end mutual fund assets where at least one fund manager has invested more than $1 million in fund shares. For broker/dealer and home office use only. Not for use with the public.
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Royce & Associates: Hallmarks of Our Investment Approach
Risk managers Bottom-up approach Long-term investment horizon Benchmark agnostic Independent thinking “We bring a formidable amount of knowledge and experience to a part of the stock market that is not always well understood or e"ectively followed.” —Chuck Royce For broker/dealer and home office use only. Not for use with the public.
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International Small-Caps vs Emerging Markets: Risk/Return Comparison
Comparable Return and Less Volatility than Emerging Markets1 Average of Monthly Rolling 5-Year Periods 7/31/96–9/30/18 15 Sharpe Ratio Average of Monthly Rolling 5-Year Periods from 7/31/96 through 9/30/18 0.47 0.39 0.32 10 International Small-Cap Total Return (%) Emerging Markets 5 International Large-Cap 15 20 Standard Deviation (%) 25 30 International Small-Cap Emerging Markets International Large-Cap 1Past Performance is no guarantee of future results. “International Large-Cap” is represented by the Russell Global ex U.S. Large-Cap Index, “International Small-Cap” by the Russell Global ex U.S. Small-Cap Index, and “Emerging Markets” by the Russell Emerging Markets Index. The Sharpe Ratio is calculated for a specified period by dividing a fund’s annualized excess returns by its annualized standard deviation. The higher the Sharpe ratio, the better the fund’s historical risk-adjusted performance. For broker/dealer and home office use only. Not for use with the public.
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Royce International Premier: Portfolio Construction
Four Business Model Categories: Maintain Diversification Perennial – Typical Range 30-40% Business model contains characteristics leading to revenues that are recurring and non-cyclical Differentiator – Typical Range 20-30% Offers products or services that we believe are sustainably better than what the competition offers Market structure – Typical Range 20-30% Operating in markets in which inherent structures subdue competitive pressures Cost leader – Typical Range 10-20% Focus on cost management or scale economies to provide products or services that we believe are sustainably cheaper than what the competition offers For broker/dealer and home office use only. Not for use with the public.
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Royce International Premier: Performance and Expenses
Service Class Performance (%) Average Annual Total Return Through 9/30/18 RIP RUSSELL GLO X US SC Third Quarter 2018¹ 2.84 -1.86 Year-to-Date¹ -0.32 -5.57 One-Year 5.77 1.10 Three-Year 14.38 10.80 Five-Year 8.98 5.46 Since Inception (12/31/10) 7.79 4.63 ¹ Not Annualized Royce International Premier Fund (RIP) Rolling Returns Since Inception Through 9/30/18 On a monthly rolling basis, the Fund outperformed the Russell Glo x US SC in 100% of all 5- year periods; 90% of all 3-year periods; and 73% of all 1-year periods. PERIODS BEATING THE INDEX FUND AVG (%)* INDEX AVG (%)* 5-year 34/34 100% 3-year 52/58 90% 8.8 6.1 1-year 60/82 73% 9.9 7.3 *Average of monthly rolling average annual total returns over the specified periods. Annual Expense Ratios (%) INVESTMENT CLASS Gross Operating Expenses 1.37 Net Operating Expenses 1.19 SERVICE CLASS 1.65 1.44 INSTITUTIONAL CLASS 1.40 1.04 Calendar Year Total Returns (%) YEAR RIP RUSSELL GLO X US SC 2017 39.81 30.49 2016 -1.06 5.04 2015 16.22 0.50 2014 -8.22 -3.63 2013 18.31 17.21 2012 23.40 18.84 2011 -16.75 -18.68 Value of $10,000 Invested on 12/31/10 as of 9/30/18 ($) RYIPX Russell Glo x US SC 20,000 18,000 16,000 14,000 12,000 10,000 8,000 $17,877 $14,199 2011 2013 2015 2017 Important Performance and Expense Information All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 30 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at All performance and risk information reflects results of the Service Class (its oldest class). Gross operating expenses for the Investment or Service Class reflect the Fund’s total gross annual operating expenses and include management fees and other expenses for the Investment and Institutional Classes and include management fees, 12b-1 distribution and service fees, and other expenses for the Service Class. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund’s most current prospectus. Royce & Associates has contractually agreed to waive fees and/or reimburse operating expenses to the extent necessary to maintain the Investment, Service, and Institutional Classes’ net annual operating expenses, (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business), at or below 1.19%, 1.44%, and 1.04%, respectively through April 30, 2019. For broker/dealer and home office use only. Not for use with the public.
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Royce Special Equity: Portfolio Construction
Portfolio Distillation Process Investable Universe Primarily companies below $3 Billion in Market Cap Approximately 3,669 U.S. Companies¹ Run screens looking for companies with: Low Leverage • High ROIC • High Cap Rates High Free Cash Flow Conversion Identify Companies that meet criteria Start deep dive into business, financial statements, talk to management Portfolio Approximately stocks ¹ Source: FactSet as of 6/30/18. Excludes companies with market caps below $10 million. For broker/dealer and home office use only. Not for use with the public.
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Royce Special Equity: Risk Measures
Long-Term Risk Return Profile Fund’s First Full Month (5/31/98) to 6/30/18 (%) The Fund had a higher return than the Russell 2000 with lower volatility. Risk/Return Comparison Periods Ended 6/30/18 FIVE YEAR AVERAGE ANNUAL TOTAL RETURN (%) STANDARD DEVIATION SHARPE RATIO RSE 7.71 13.44 0.59 Russell 2000 12.46 13.91 0.88 SINCE THE FUND’S FIRST FULL MONTH (5/31/98) 9.33 13.97 0.57 8.01 19.73 0.39 16 Higher Returns Average Annual Total Return 12 RSE Less Volatile More Volatile Upside/Downside Capture Ratios (%) Periods Ended 6/30/18 UPSIDE CAPTURE RATIO DOWNSIDE CAPTURE RATIO Five Year 69 87 From 6/30/98 (Start of Fund’s First Full Quarter) 73 50 8 Russell 2000 4 3-Month U.S. Treasury Bill Below Average Volatility1 5-Year Relative Standard Deviation vs. all Small-Cap Funds tracked by Morningstar as of 6/30/18 LOW BELOW AVERAGE AVERAGE ABOVE AVERAGE Lower Returns 18 27 Average Annual Standard Deviation 9 36 HIGH Russell 2000 RSE 1 The Fund was in the second-lowest volatility quintile compared with all funds in Morningstar’s Small Growth, Small Blend, and Small Value Categories with at least five years of history, a total of 524 funds as of 6/30/18. The universe consists of each fund's oldest share class only. Volatility quintiles are based on the average five-year standard deviation for each of the last four calendar quarters. Higher volatility is usually associated with higher risk. The Sharpe Ratio is calculated for a specified period by dividing a fund’s annualized excess returns by its annualized standard deviation. The higher the Sharpe Ratio, the better the fund’s historical risk-adjusted performance. Standard deviation is a statistical measure within which a fund’s total returns have varied over time. The greater the standard deviation, the greater a fund’s volatility. Upside Capture Ratio measures a manager’s performance in up markets relative to the Fund’s benchmark (Russell 2000). It is calculated by measuring the Fund’s performance in quarters when the benchmark goes up and dividing it by the benchmark’s return in those quarters. Downside Capture Ratio measures a manager’s performance in down markets relative to the Fund’s benchmark (Russell 2000). It is calculated by measuring the Fund’s performance in quarters when the benchmark goes down and dividing it by the benchmark’s return in those quarters. For broker/dealer and home office use only. Not for use with the public.
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Royce Special Equity: Performance & Expenses
Relative Risk Adjusted Returns: Monthly Rolling Sharpe Ratios 20 Years Through 6/30/18 On a monthly rolling risk-adjusted basis, the Fund outperformed the Russell 2000 in 100% of all 10-year periods and 69% of all 5-year periods. Performance (%) Average Annual Total Return Through 6/30/18 RSE RUSSELL RUSSELL 2000 VALUE Second Quarter 2018¹ 4.93 7.75 8.30 Year-to-Date¹ -0.32 7.66 5.44 PERIODS BEATING THE INDEX FUND AVG (%)* INDEX AVG (%)* One-Year 7.92 17.57 13.10 Three-Year 7.79 10.96 11.22 Five-Year 7.71 12.46 11.18 10-Year 9.67 10.60 9.88 15-Year 9.13 10.50 9.93 Monthly Rolling Average Annual Return Periods 20-Year 9.33 8.03 8.67 20 Years Through 6/30/18 Since Inception (5/1/98) 9.20 7.66 8.34 83% of all 10-year periods; 58% of all 5-year periods; and 41% of all 1 Not Annualized 1-year periods. 10-year 121/121 100% 0.55 0.35 5-year 125/181 69% 0.69 0.49 *Average of monthly rolling Sharpe Ratios over the specified periods. On a monthly rolling basis, the Fund outperformed the Russell 2000 in Annual Expense Ratios (%) INSTITUTIONAL CLASS Operating Expenses 1.09 SERVICE CLASS Gross Operating Expenses 1.50 Net Operating Expenses 1.39 INVESTMENT CLASS 1.17 PERIODS BEATING THE INDEX FUND AVG (%)* INDEX AVG (%)* 10-year 100/121 83% 5-year 105/181 58% 1-year 95/229 41% *Average of monthly rolling average annual total returns over the specified periods. Important Performance and Expense Information All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 30 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. (Institutional Class shares are not subject to the redemption fee.) Current month-end performance may be higher or lower than performance quoted and may be obtained at All performance and risk information reflects results of the Investment Class (its oldest class). Operating expenses for the Investment or Institutional Classes reflect the Fund’s total annual operating expenses and include management fees and other expenses. Gross operating expenses for the Service Class reflect the Fund’s gross total annual operating expenses and include management fees, 12b-1 distribution and service fees, and other expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund's most current prospectus. Royce & Associates has contractually agreed to waive fees and/or reimburse operating expenses to the extent necessary to maintain the Service Class’s net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) at or below 1.39% through April 30, The Sharpe Ratio is calculated for a specified period by dividing a fund’s annualized excess returns by its annualized standard deviation. The higher the Sharpe Ratio, the better the fund’s historical risk-adjusted performance. For broker/dealer and home office use only. Not for use with the public.
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ClearBridge Investments
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ClearBridge Investments
A Distinguished History in Equity Investing Asset Growth Over Time About Us Well-established global investment manager with a legacy dating back more than 50 years Headquartered in New York and operating from Baltimore, London, San Francisco and Wilmington Operating with investment independence, wholly-owned subsidiary of Legg Mason 160 140 120 100 80 60 40 20 $147.9 $137.0 $114.6 $107.5 $112.4 $89.9 $ Billion $57.2 2012 2013 2014 2015 2016 2017 2018 Culture of Longevity and Consistency Portfolio management team averages 27 years of investment industry experience and 19 years with the Firm Investment continuity ensured through team management and a commitment to internal promotion Assets by Client Type Institutional $ 46.2 Client Focus Alignment of interests with our clients across every aspect of our business, from generating consistent investment performance to promoting sustainable business practices and delivering exceptional client service Ongoing centrally deployed research and risk management functions ensure constant diligence Intermediaries $ 96.7 Offshore $5.1 B1 Data as of September 30, 2018. 1Represents funds only – Institutional includes offshore AUM of approximately $1.2 billion. For broker/dealer and home office use only. Not for use with the public.
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Fundamental Research Team
A Specialized Team Serving as a Crucial Shared Resource Name Sector(s) Covered Years of Experience Chuck Harris (Director of Research) Industrials/Basic Materials 34 Neal Austria Consumer Discretionary 16 Robert Buesing, Jr. Consumer Staples/Durables 7 Dimitry Dayen, CFA Energy/Utilities 13 Tatiana Eades 19 Hilary Frisch, CFA IT & Communications 25 Marshall Gordon Health Care 18 David Hochstim, CFA Financials 32 Deepon Nag Technology-Hardware 9 Humphrey Oleng Basic Materials Stephen Rigo, CFA Amanda Tedesco, CFA 12 Nick Wu, PhD Average: As of September 30, 2018. For broker/dealer and home office use only. Not for use with the public.
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Fundamental Analysis Research Process Drives Decision Making
Identify Category Leaders with Characteristics to Sustain that Position Business Model Evaluation Competitors Cyclicality Recurring Revenues Cost Factors Reinvestment Needs Product Cycle Financial Structure Self-funding financial model High Incremental Margins Maximizing Returns Through: Reinvestment Inorganic Activity Share Buyback Management Analysis Clarity of Company’s Vision Consistency of Reported Results Capital Use Incentives/Stock Ownership Valuation Size of addressable market Free Cash Flow Yield P/E, EV/Sales, PEG Ratio Risk Identify key risks & potential downside in stock before investing Action/No Action For broker/dealer and home office use only. Not for use with the public.
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Portfolio Construction Diversification Across the Spectrum of Growth
Sustainable SELECT Adobe Amazon STABLE Anheuser-Busch InBev Microsoft Growth CYCLICAL Schlumberger W.W. Grainger We will pay a premium for companies with sustainable growth characteristics and a superior ROIC Cyclica l Low Normalized ROIC High For broker/dealer and home office use only. Not for use with the public.
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Why Look to SMAs at a Solution?
With an array of investment products and services available, financial advisors diligently look for optimal ways to handle client accounts, often turning to mutual funds, exchange-traded funds (ETFs) and Separately Managed Accounts (SMAs). However, not all vehicles provide the same benefits that SMAs offer: Mutual Funds Fortunately, when it comes to meeting clients’ needs, advisors have a variety of vehicles from which to choose, including mutual funds, exchange traded funds (ETFs) and Separately Managed Accounts (SMAs). Yet, not all solutions are created equal. And it’s important to recognize the distinct benefits of each. Separately Managed Accounts (SMAs) provide investors greater access to customization, tax efficiency, transparency and personalized service — inherent advantages stem from SMAs’ unique structural benefits. SMAs Individual security ownership Customization Tax efficiency Transparency Personalized approach ETFs For broker/dealer and home office use only. Not for use with the public.
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Consider the options Let’s review the differences. SMA MUTUAL FUND ETF
Definition Professionally managed investment portfolio of securities directly owned by the individual investor and managed according to a specific style or discipline Professionally managed investment vehicle that pools money from many investors for the purpose of investing in securities according to a specific style or discipline A security that typically tracks an index, commodity or a basket of assets like an index fund, but trades like a stock on an exchange Ownership Investors directly own the individual securities in their portfolio Investors own shares in a fund, which in turn owns the individual portfolio securities Investors own shares in an ETF, which in turn owns the individual portfolio securities Typical Investment Minimum $50K-300K $1,000 Investors pay the price of an ETF share Funding Portfolios may be funded with existing securities and/or cash Shares in mutual funds are purchased with cash Shares of ETFs are purchased with cash Customization Portfolio can be tailored to address each investor's specific needs None Tax Efficiency Investors have the ability to manage taxation because securities can be sold to harvest gains/losses Limited. While in-kind transactions could limit the possibility of involuntary capital gain distributions, this is operationally challenging and rarely used in mutual funds. ETFs have the ability to minimize portfolio capital gain payments. The in-kind redemptions allow fund to mitigate tax impacts. Fees Investors typically pay one asset-based fee based on assets under management (either billed quarterly in advance or arrears) Shareholder costs can include sales charges on the purchase and/or redemption of a fund, including any ongoing operating expenses (i.e., expense ratio) Fees will vary by ETF but are typically less than those of mutual funds due to lower administrative costs – also, transaction costs are reduced due to in-kind subscriptions and redemptions Let’s review the differences. For broker/dealer and home office use only. Not for use with the public.
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Key Differences Here are some key differences. SMA MUTUAL FUND ETF
Strengths Customization Potential tax efficiency at security level Cost savings over mutual funds Transparency Ease of executing complex strategies End-of-day liquidity at NAV Potential tax efficiency at portfolio level Intraday liquidity Weaknesses High account minimums Limited strategy availability Limited tax efficiency Generally higher administrative costs Bid/Ask spreads Commissions Here are some key differences. For broker/dealer and home office use only. Not for use with the public.
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SMAs Offer a Distinct Range of Benefits
Customization Tax Efficiency Transparency Personalization Accounts can be tailored to exclude securities, harvest tax losses and reflect investors’ values Investors are only taxed on the realized gains in their accounts (unlike mutual funds) The advantages of SMAs include: Customization –Accounts can be tailored to exclude securities, harvest losses and reflect investors’ core beliefs Tax Efficiency – Because an SMA investor owns individual securities, he or she will only be taxed on realized gains in their account (unlike capital gains treatment of mutual funds) Transparency – SMAs offer comprehensive reporting that details all of the securities owned Personalization – In some highly customized portfolios, investors might have greater access to the portfolio managers who are overseeing a particular strategy on their behalf Comprehensive reporting: one account, one report, with details of all the securities owned Investors may gain greater access to the professional money managers overseeing their account Access to portfolio managers may vary by Investment Manager and level of customization offered to a portfolio For broker/dealer and home office use only. Not for use with the public.
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Thank You
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Disclosures 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. 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. BEFORE INVESTING, CAREFULLY CONSIDER A FUND’S INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. YOU CAN FIND THIS AND OTHER INFORMATION IN EACH PROSPECTUS, OR SUMMARY PROSPECTUS, IF AVAILABLE, AT PLEASE READ THE PROSPECTUS CAREFULLY. Legg Mason Investor Services, LLC and all entities mentioned are subsidiaries of Legg Mason, Inc. Copyright © 2018 Legg Mason Investor Services, LLC. Member FINRA, SIPC.
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