2017 WESTERN ASSET CORE PLUS PORTFOLIOS - · PDF file4 q 2017 s eparately managed accounts...

1Q 2018 Separately Managed Accounts

WESTERN ASSETCORE PLUSPORTFOLIOS

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

Introduction | Legg Mason

Meet our investment managers

Having honed their expertiseover many decades and marketcycles, our global asset managersoffer specialized capabilitiesacross a scope of asset classesand strategies. Each skilled teamoperates with independentvision to help deliver powerfulfinancial solutions for bothindividuals and institutions.

Global alternative investments One of the world’s largest hedge fund investors, recognized as a global leader in structuring comprehensive alternative investment strategies for institutional and high net worth clients.

Active equity specialists An active equity specialist that builds global, stock-driven portfolios based on fundamental research, devoting all of its resources to delivering optimum investment outcomes and superior client relationships.

Quality-focused equity Global investment manager with over 50 years of experience and long-tenured portfolio managers who seek to build income, high active share or low volatility portfolios.

Investing with conviction Acting with conviction and discipline, we look beyond short-term, conventional thinking to rigorously pursue long-term value across differentiated fixed income, equity, and alternative solutions.

Systematic investment solutions QS Investors is a quantitative asset manager that provides multi-asset class and global equity solutions. Their approach unites intellectual and academic precision with the power of data and technology in their quest to elevate the certainty of outcomes they deliver.

Small-cap equityKnown for its disciplined, value-oriented approach to managing small-caps. An asset class pioneer, the firm’s founder is one of the longest-tenured active managers.

Global listed infrastructure investing RARE is a dedicated infrastructure investment manager focused on global listed infrastructure investments. Established in 2006, RARE has grown to become one of the largest listed infrastructure managers globally.

Fixed incomeOne of the world’s leading global fixed income managers. Founded in 1971, the firm is known for team management, proprietary research and a long-term fundamental value approach.

Real estate investment specialists Clarion Partners is a leading private equity and debt real estate investment manager established in 1982. Clarion invests in the Americas across a broad range of property types and risk profiles, with the goal of consistently creating value for its clients.

Active share is a measure of the percentage of stock holdings in a manager’s portfolio that differs from the benchmark index.

.

2

Introduction | Western Asset

Western Asset Management Approach and Philosophy

Western Asset is a global investment management firm committed to understanding the needs of each client,identifying investment solutions, and delivering superior long-term investment results.

Team-managed approach• Team unites groups of

specialists dedicated todifferent market sectors

• Each group of sectorspecialists utilizes itsexpertise in bottom-upanalysis of each portfoliosector

Investment PhilosophyLong-term, fundamentalvalue discipline• Bottom-up

• Top-down Diversified strategies• Depth of resources

• Global Integrated analytics and riskmanagement• Relative value analysis

• Transparency andcommunication

Objective-Driven InvestingSeeks to:Preserve Principal§• Money Markets

• Limited Duration Protect From Rising Rates§• Adjustable Rate

• Bank Loans Protect From Inflation§• U.S. TIPS§

• Global Inflation-Linked§

• Active Currency Diversify Globally§• Global Sovereign

• Global Infrastructure Debt§

• Global Core/Core FullDiscretion

• Global Credit

Core Fixed Income§• Intermediate

• Core

• Core Full Discretion

• Investment-Grade Credit

• Agency Mortgage-Backed Generate Total Return§• Total Return Unconstrained

• Global Total Return

• Global Multi-Sector

• Dynamic Fixed Income

• Credit Opportunities

• MBS Opportunities

• Emerging MarketOpportunities

Enhance Income§• Short-Duration High Income

• Emerging Markets Debt

• High Yield

• Diversified High Income

• Structured Products/REIT/CLO

Increase Alpha§• Global Credit Absolute

Return§

• Macro Opportunities§

Hedge Liabilities§• Long Duration§

• Long Credit§

• Liability-Driven Investing

• Tail Risk Protection§

.

3

Your investment portfolio | Core Plus

Western Asset Core Plus Portfolios

OverviewThe Western Asset Core Plus Portfolios offer investors access tothese flagship strategies in a separately managed account. Theseseparately managed accounts consist of investments in individualsecurities and shares of no-fee mutual funds advised by WesternAsset and its affiliates. The no-fee funds are used by Western Assetto achieve appropriate levels of diversification, as well as provideclients with exposure to sectors that are normally difficult to includein a separately managed account with low minimum investmentrequirements.

Key differentiators• Team-managed approach Team unites groups of specialists dedicated to different market

sectors

Each group of sector specialists utilizes its expertise in bottom-up analysis of each portfolio sector

• Unique structure Utilizes an institutional-style hybrid approach for the strategy that

combines individual securities and no-fee funds into one account

Provides access within the fixed-income market to a greaternumber of sectors, with more diversification in each sector thana traditional separately managed account with a similar minimumaccount size

Increases the diversification within each sector, which mayachieve lower volatility and higher returns than a traditionalmanaged account with this minimum account size

• Leverage Western Asset Management resources Institutional-caliber buying power and trading expertise

Access to proprietary credit research team

Exclusive focus on fixed-income management

Shares of the no-fee funds may only be purchased by or on behalf of separately managed accounts by Legg Mason affiliates, including Western Asset. Managed account clients will pay fees to program sponsors or to their account managers, and such fees will becalculated taking into account assets invested in shares of no-fee funds. Unless reimbursed by the fund’s manager or its affiliates, ordinary and extraordinary fund-level operating expenses are borne by shareholders. The manager of the no-fee funds has entered intoan expense reimbursement agreement with the funds pursuant to which the manager has agreed to reimburse 100% of each fund’s ordinary operating expenses through December 31, 2018. The expense reimbursement agreement does not cover brokerage, taxes andextraordinary expenses.

.

4



Philosophy• Long-term Seek out the greatest long-term value by thoroughly analyzing a

wide range of sectors of the fixed-income market

• Value oriented We seek to identify and favor sectors and issuers that are

undervalued or out of favor in the market

• Diversified strategies Results do not depend on only one or two opportunities; multiple

themes are employed in portfolios. Diversification seeks to limitthe impact of a single adverse market event

Strive to add incremental value over time and potentially reducevolatility

• Sector rotation The Core Plus Portfolios predominantly focus on investment-

grade securities across all market sectors and maturities, as wellas other alternatives such as high-yield bonds, emerging marketdebt, non-dollar bonds and non- U.S. sovereign and corporatebonds

Objectives• The strategy seeks to maximize total return consistent with

prudent portfolio management

Risks: All investments involve risk, including loss of principal and there is no guarantee that investment objectives will be met.Fixed income securities may be subject to extension risk, which is the risk that the issuer will repay their obligations more slowly than the market anticipates in the event market interest rates rise. Issuers also have the right to pay their payment obligations ahead ofschedule in the event market interest rates fall, subjecting to prepayment risk.Fixed income securities are subject to interest rate and credit risk, which is a possibility that the issuer of a security will be unable to make interest payments and repay the principal on its debt. As interest rates rise, the price of fixed income securities falls.Foreign securities, where permitted, are subject to the additional risks of fluctuations in foreign exchange rates, changes in political and economic conditions, foreign taxation, and differences in auditing and financial standards. These risks are magnified in the case ofinvestments in emerging markets.U.S. Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasurysecurities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments onsecurities, this guarantee does not apply to losses resulting from declines in the market value of these securities.Investments may also be made in mortgage-backed, asset-backed securities and taxable municipal securities. Asset-backed securities generally decrease in value as a result of interest rate increases, but may benefit less than other fixed-income securities fromdeclining interest rates, principally because of prepayments. Mortgage-backed securities involve additional risk over more traditional fixed-income investments, including: interest rate risk, implied call and extension risks; and the possibility of premature return ofprincipal due to mortgage prepayment, which can reduce expected yield and lead to price volatility.Investments may also be made in taxable municipal securities.Tapering of the Federal Reserve Board’s quantitative easing program and a general rise in interest rates may lead to increased portfolio volatility.

.

5



Western Asset portfolios will normally maintain a minimum of 50% of the portfolio in individual securities. Typically, 25-30 individual bonds are heldin the account. These securities will consist primarily of bonds in the Treasury, Agency and investment-grade corporate bond sectors. These bonds arean integral part of the overall portfolio construction and are actively managed in concert with the no-fee funds.

No-fee fund (Investment-grade corporates)

• Investment-grade corporates• Municipals• U.S. Treasuries• Cash and cash equivalents

Individual securities

• U.S. Treasuries• Agencies• Investment-grade corporates• U.S. Treasury inflation protected securities (TIPS)• Mortgage-backed securities (MBS)• Cash and cash equivalents

No-fee fund (Extended credit)

• Emerging markets debt• Non-dollar• U.S. high yield• Non-U.S. high yield• Cash and cash equivalents

No-fee fund (Mainly mortgages)

• Agency and non-agency mortgage-backed securities• Mortgage pools• Asset-backed securities• U.S. Treasury and agencies• Commercial mortgage-backed securities (CMBS)• Mortgage dollar rolls• Cash and cash equivalents

Portfolio composition

For illustrative purposes only.Allocations are subject to change.Important Information: The Core Plus Portfolios are available as separately managed accounts that utilize both individual securities and no-fee mutual funds. These mutual funds were created specifically for, and are made available exclusively through, theseseparately managed accounts. The funds prospectus is available from your financial professional and includes information on fund investment objectives, strategies and risks, including the heightened risks associated with investments in high-yield securities, alsoknown as “junk bonds.” High-yield bonds are subject to increased risk of default and greater volatility due to the lower credit quality of the issues.

.

6


Western Asset Core Plus Portfolios investment process

Interest Rate Exposure/Duration Weighting

Western’s investmentteam comprehensivelyanalyzes a variety ofdomestic andinternationalmacroeconomic factorsto establish a durationtarget

Term StructureWeightingThe Firm carefullyemploys strategies in anattempt to takeadvantage of changes inthe yield curve’s shapeand shifts in therelationship betweenshort-, intermediate-, andlong-maturity securities.

Sector AllocationWestern Asset believesthat the value can beadded to a portfolio byactively rotating among,and within, differentsectors of the bondmarket. The investmentteam studies thefundamental factors thatinfluence sector spreadrelationships.

Issue Selection

Using a bottom-upprocess, the Firm seeksto identify companieswith changing creditcharacteristics andsecurities that areundervalued and out offavor due to unusualcircumstances.

The investment process may change over time. The characteristics set forth are intended as a general illustration of some of the criteria the strategy team considers in selecting securities for client portfolios. There is no guarantee investment objectives will beachieved.

.

7


Western Asset Core Plus Portfolios investment process

By implementing the process illustrated, Western seeks to provide investors with diversified, value-oriented, tightlycontrolled portfolios that exceed benchmark returns while approximating the benchmark’s risk. Of course, there is noguarantee that investment objectives will be achieved.

Sub-sector & Security Selection

Strategic Portfolio

Client Portfolio

Term Structure Weighting

IMPLEMENTATION

MONITORING & CONTROLSSector

Allocation

Investment Outlook

Portfolio Guidelines

Interest Rate Exposure

The investment process may change over time. The characteristics set forth are intended as a general illustration of some of the criteria the strategy team considers in selecting securities for client portfolios. There is no guarantee investment objectives will beachieved.

.

8

Strategy characteristics & performance | Fixed Income Portfolio characteristics

Fixed Income Portfolio characteristics as of March 31, 2018

Maturity (%)

2.12

7.83

19.40

18.42

28.02

24.2110+

7 - 10

5 - 7

3 - 5

1 - 3

0 - 1

0 5 10 15 20 25 30 35

Yea

rs (%

)

Sector weightings (%)

Mortgage-Backed Securities 32.89

Credit 24.03

Treasury 12.72

Agency 8.37

Emerging-Market 6.35

Bank Loan 5.59

TIPS 2.49

Asset-Backed Securities 1.71

High Yield 1.46

Other 0.82

Cash 3.58

Source: Legg Mason. Portfolio characteristics and sector weightings are based on a representative account within the composite. Portfolio characteristics and sector weightings of individual client portfolios in the program may differ, sometimes significantly, fromthose shown above. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the sectors listed and should not be used as a sole basis to make any investment decisions. Effective Duration is aduration calculation for bonds with embedded options. Effective duration takes into account that expected cash flows will fluctuate as interest rates change. Average Maturity is the average length of maturity for all fixed-rate debt instruments held in a portfolio. TheCoupon Rate is the annual coupon payments paid by the issuer relative to a bond’s face or par value. Yield to Worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting.

.

9

Strategy characteristics & performance | Fixed Income Portfolio characteristics

Fixed Income Portfolio characteristics as of March 31, 2018

Quality Breakdown (%)

AAA 58.02AA 2.69A 18.88BBB 8.0Below BBB 11.04Not Rated 1.38Other 0.0

AAA 58.02

AA 2.69

A 18.88

BBB 8.0

Below BBB 11.04

Not Rated 1.38

Other 0.0

Characteristics

Effective Duration (Years) 6.96

Average Maturity (Years) 10.47

Average Coupon Rate (%) 3.75

Yield to Worst (%) 3.98

Detail of mortgage-backed security allocation (%)

FHLMC 11.92

FNMA 9.17

Non-Agency MBS 7.60

CMBS 2.44

GNMA 1.76

Agency Hybrids 0.00

Source: Legg Mason. Portfolio characteristics and sector weightings are based on a representative account within the composite. Portfolio characteristics and sector weightings of individual client portfolios in the program may differ, sometimes significantly, fromthose shown above. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the sectors listed and should not be used as a sole basis to make any investment decisions. Effective Duration is aduration calculation for bonds with embedded options. Effective duration takes into account that expected cash flows will fluctuate as interest rates change. Average Maturity is the average length of maturity for all fixed-rate debt instruments held in a portfolio. TheCoupon Rate is the annual coupon payments paid by the issuer relative to a bond’s face or par value. Yield to Worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting.Credit quality is a measure of a bond issuer’s ability to repay interest and principal in a timely manner. The credit ratings shown are based on each portfolio security’s rating as provided by the following Nationally Recognized Statistical Rating Organizations(“NRSRO”): Standard and Poor’s (“S&P”), Moody’s Investors Service (“Moody’s”), Fitch Ratings, Ltd. In the event a portfolio security is rated by more than one NRSRO, the higher rating is shown. In the case where a security is not rated by an NRSRO, these are listedas “Non Rated”. The credit quality of the investments in the Portfolio does not apply to the stability or safety of the Portfolio. These ratings may change over time. The Portfolio itself has not been rated by an NRSRO.

.

10

Strategy characteristics & performance | Performance

Performance

Calendar-year total returns – gross and net of fees (%) ending December 31

2017 2016 2015 2014 2013 2012 2011 2010 2009 2008

Core Plus (gross) 5.87 4.94 1.18 7.94 -0.97 7.81 7.26 9.71 16.73 -1.25

Core Plus (net) 4.31 3.39 -0.31 6.35 -2.44 6.23 5.68 8.10 15.02 -2.72

Bloomberg Barclays U.S. Aggregate Index 3.54 2.65 0.55 5.97 -2.02 4.21 7.84 6.54 5.93 5.24

FTSE 3-Month U.S. Treasury Bill Index 0.84 0.27 0.03 0.03 0.05 0.07 0.08 0.13 0.16 1.80

Annualized rates of return – gross and net of fees (%) as of March 31, 2018 – PRELIMINARY

Mar ‘18 Q1 ‘18 YTD 1-year 3-year 5-year 7-year 10-year 15-year 20-year

Core Plus (gross) 0.97 -1.10 -1.10 3.13 2.91 3.42 4.48 5.54 5.71 6.34

Core Plus (net) 0.85 -1.47 -1.47 1.61 1.39 1.90 2.94 3.99 4.15 4.78

Bloomberg Barclays U.S. Aggregate Index 0.64 -1.46 -1.46 1.20 1.20 1.82 2.92 3.63 3.95 4.83

FTSE 3-Month U.S. Treasury Bill Index 0.13 0.35 0.35 1.07 0.49 0.31 0.24 0.31 1.21 1.92

The strategy returns shown are preliminary composite returns, subject to future revision (downward or upward). Please visit www.leggmason.com for the latest performance figures. YTD numbers are not annualized. Investors cannotinvest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.For periods from January 1, 2007 to the present, Western Asset (WA) Core Plus performance is for a composite of one or more retail WA Core Plus separately managed accounts (SMAs). Performance for periods prior to 1/1/07 is for a composite of institutional WACore Plus managed accounts. WA follows substantially the same investment philosophy, strategies and processes in managing the SMA accounts as it does in managing the institutional accounts. WA invests portions of the SMA accounts in certain fixed-incomesectors by investing in shares of one or more no-fee mutual funds managed by WA while investing the institutional accounts solely in individual fixed-income securities.Past performance is no guarantee of future results. YTD numbers are not annualized. Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance. Netperformance includes the deduction of a 1.5% annual wrap fee, which is the maximum anticipated wrap fee for fixed income portfolios. Actual fees may vary. For fee schedules, contact your financial professional, or if you enter into an agreement directly with LeggMason Private Portfolio Group, LLC (“LMPPG”), refer to LMPPG’s Form ADV disclosure document. Returns reflect the reinvestment of dividends and other earnings. Please see GIPS® Endnotes for additional important information regarding the portfolio’sperformance shown and for effects of fees. Management and performance of individual accounts may vary for reasons that include the existence of different implementation and model requirements in different investment programs.

.

11


Risk/return profile (%)

Gross of fees (based on 10-year period ending March 31, 2018)

-2 0 2 4 6 80

1

2

3

4

5

6

Core Plus Bloomberg Barclays U.S. Aggregate Index FTSE 3-Month U.S. Treasury Bill Index

Ann

ualiz

ed r

ate

of r

etur

n (%

)

Risk (% annualized standard deviation)

Modern portfolio statistics as of March 31, 2018

Core Plus

BloombergBarclays U.S.

AggregateIndex

FTSE 3-Month U.S.Treasury Bill

Index

Annualized return (%) 5.54 3.63 0.31

Annualized standard deviation (%) 4.10 3.27 0.13

Sharpe ratio 1.26 1.01 0.00

Beta 1.10 N/A N/A

Alpha 1.55 N/A N/A

R-squared 0.77 N/A N/A

The strategy returns shown are preliminary composite returns, subject to future revision (downward or upward). Please visit www.leggmason.com for the latest performance figures. YTD numbers are not annualized. Investors cannotinvest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.Alpha, Beta, and R-squared are shown versus the Bloomberg Barclays U.S. Aggregate Bond Index. Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. Please see appendix for termdefinitions.Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance. Actual fees may vary. For fee schedules, contact your financial professional, or if you enter into anagreement directly with Legg Mason Private Portfolio Group, LLC (“LMPPG”), refer to LMPPG’s Form ADV disclosure document. Please see GIPS® Endnotes for additional important information regarding the portfolio’s performance and for effects offees. Management and performance of individual accounts may vary for reasons that include the existence of different implementation and model requirements in different investment programs.

.

12


Up/Down market capture ratios (%)


1.32

1.01

1.00

1.00

2

1

0

1

2

Core Plus Bloomberg Barclays U.S. Aggregate Index

Up77 positive months

Down43 negative months

The strategy returns shown are preliminary composite returns, subject to future revision (downward or upward). Please visit www.leggmason.com for the latest performance figures. YTD numbers are not annualized. Investors cannotinvest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance. Actual fees may vary. For fee schedules, contact your financial professional, or if you enter into anagreement directly with Legg Mason Private Portfolio Group, LLC (“LMPPG”), refer to LMPPG’s Form ADV disclosure document. Please see appendix for term definitions.Please see GIPS® Endnotes for additional important information regarding the portfolio’s performance and for effects of fees. Management and performance of individual accounts may vary for reasons that include the existence ofdifferent implementation and model requirements in different investment programs. Past performance is no guarantee of future results.

.

13


Growth of $150,000


2008 2010 2012 2014 2016 2018$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000Core Plus Bloomberg Barclays U.S. Aggregate

Index $257,304 $214,267

For illustrative purposes only. Assumes no withdrawals or contributions. These statistics are based on gross-of-fees quarterly composite returns, were calculated assuming reinvestment of dividends and income, and take into account both realized and unrealizedcapital gains and losses. Past performance is no guarantee of future results. All investments involve risk, including the loss of principal.Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance. Actual fees may vary. For fee schedules, contact your financial professional, or if you enter into anagreement directly with Legg Mason Private Portfolio Group, LLC (“LMPPG”), refer to LMPPG’s Form ADV disclosure document. Please see GIPS® Endnotes for additional important information regarding the portfolio’s performance and for effects of fees.Management and performance of individual accounts may vary for reasons that include the existence of different implementation and model requirements in different investment programs.

.

14

Appendix | Investment Management Team

Investment management team

Western Asset, one of the world’s leading fixed income managers, was founded in 1971. With a focus on long-termfundamental value investing that employs a top-down, bottom-up approach, the firm has nine offices around the globeand deep experience across the range of fixed income sectors. Western Asset has been recognized for its emphasis onteam management and intensive proprietary research, supported by robust risk management.

.

15

Appendix | Performance Endnotes

GIPS® Endnotes

Western Asset Core Plus - GIPS® Endnotes Schedule of Investment Performance Results – December 31

Year Net return(%)“Pure”1 gross

return (%)Benchmark total

return (%)Gross total

3 Yr St Dev (%)Benchmark total3 Yr St Dev (%)

Number ofportfolios

% of bundled feeportfolios in the

compositeInternal

dispersion (%)Composite assets

($ millions) % of firm assets

2008 -2.72 -1.25 5.24 -n/a- -n/a- 268 100 0.15 252 0.05

2009 15.02 16.73 5.93 -n/a- -n/a- 307 100 0.14 225 0.05

2010 8.10 9.71 6.54 -n/a- -n/a- 250 100 0.11 270 0.06

2011 5.68 7.26 7.84 3.51 2.82 267 100 0.10 298 0.07

2012 6.23 7.81 4.21 2.68 2.42 417 100 0.12 357 0.08

2013 -2.44 -0.97 -2.02 3.16 2.75 233 100 0.08 377 0.08

2014 6.35 7.94 5.97 3.16 2.67 605 100 0.06 612 0.13

2015 -0.31 1.18 0.55 3.33 2.92 1,262 100 0.10 1,392 0.32

2016 3.39 4.94 2.65 3.13 3.02 2,127 100 0.24 1,678 0.40

2017 4.31 5.87 3.54 2.90 2.81 3,162 100 0.37 2,758 0.63

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 toDecember 31, 2016. The verification report is available upon request.Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with theGIPS 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., WesternAsset 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 ManagementCompany 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.Western Asset – Core Plus portfolios are discretionary fixed-income portfolios that offer – to individual and taxable institutional investors – tailored bond management which seeks to maximize total return and has the flexibility to invest across a range of fixed-incomesectors, including the U.S. government, federal agency, domestic corporate, mortgage, non-U.S. sovereign and corporate (both U.S. dollar-denominated and non-U.S. dollar-denominated), emerging market debt, high yield and money market/cash equivalent sectors.Exposure to certain fixed income sectors represented in the strategy are achieved by investing in shares of one or more mutual funds managed by Western Asset. The composite is comprised of accounts that are separately managed accounts (SMAs), managed inaccordance with the strategy with an account minimum of US $150,000 (prior to 11/1/2014, the composite minimum was US $250,000). As of January 1, 2007, the composite employs a 10% significant cash flow policy. The composite was created on January 1, 2007.Effective January 1, 2013, the number of portfolios reflects a change from prior periods due to an aggregation of accounts as reported by one sponsor. For periods prior to 2013, the firm excluded accounts designated by the sponsor as client-restricted.For comparison purposes, composite returns are shown against returns of the Bloomberg Barclays U.S. Aggregate Bond Index. An investor cannot invest directly in an index.1“Pure” gross returns are presented as supplemental information to the net returns. The current fee schedule is 1.50% on all assets. Net returns are calculated by deducting the anticipated maximum annual bundled fee applied on a monthly basis from the “pure” grossmonthly return. The bundled fee includes all charges for trading costs, portfolio management, custody, and other administrative fees. Bundled fees may vary across different financial firms and across different accounts based upon account size and other factors.Returns and market values are expressed in USD.Dispersion is calculated using the asset-weighted standard deviation of annual returns of those portfolios that were included in the composite for the entire year (equal-weighted prior to 2014). Periods with five or fewer accounts are not statistically representative andare not presented. The three-year annualized ex-post standard deviation measures the variability of the composite and the benchmark returns over the preceding 36-month period. Standard deviation is not presented for periods where 36 monthly returns are notavailable for the composite or the benchmark.Past investment results are not indicative of future investment results.Western Asset’s list of composite descriptions and policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Please contact Ellen Cammer at 212-601-6064 or [email protected].

.

16

Appendix | Index Definitions

Definitions

Index DefinitionsThe Bloomberg Barclays 1-3 Year Government Bond Index is a broad measure of theperformance of short-term government bonds. Please note an investor cannot invest directlyin an index.

The Bloomberg Barclays 1-Year Municipal Bond Index is an unmanaged index composedof national municipal bond issues with a maturity range of 1-2 years.

The Bloomberg Barclays 5-Year Municipal Bond Index is a market-value-weighted indexrepresentative of the medium term (4 to 6 years) tax-exempt bond market.

The Bloomberg Barclays Asset-Backed Securities Index is composed of debt securitiesbacked by credit card, auto and home equity loans that are rated investment grade or higherby Moody’s Investors Service, Standard & Poor’s Ratings Service or Fitch Investor’s Service,in that order. Issues must have at least one year to maturity and an outstanding par value ofat least $50 million. Price, coupon and total return are reported on a month-end to month-endbasis. All returns are market value-weighted inclusive of accrued interest but do not includeadjustments for advisory fees or other expenses.

The Bloomberg Barclays Fixed-Rate Mortgage-Backed Securities Index is composed ofabout 600 15- year to 30-year fixed-rate mortgage-backed pools of Government NationalMortgage Association, Federal National Mortgage Association and Federal Home LoanCorporation.

The Bloomberg Barclays U.S. Agencies Index is the U.S. Agency component of the U.S.Government/Credit index, consisting of publicly issued debt of U.S. Government agencies,quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. Government(such as USAID securities). The largest issues are Fannie Mae, the Resolution Trust FundingCorporation (REFCORP), and the Federal Home Loan Bank System (FHLB). The indexincludes both callable and non-callable agency securities.

The Bloomberg Barclays U.S. Aggregate Bond Index includes the Government/Credit andthe Mortgage-Backed indexes. The return comprised price appreciation/depreciation andincome as a percent of the original investment. Indexes are rebalanced monthly by marketcapitalization.

The Bloomberg Barclays U.S. Credit Index is the U.S. Credit component of the U.S.Government/Credit Index consisting of publicly issued U.S. corporate and specified foreigndebentures and secured notes that meet the specified maturity, liquidity, and qualityrequirements. To qualify, bonds must be SEC-registered. The U.S. Credit Index is the sameas the former U.S. Corporate Investment Grade Index, which has been renamed the U.S.Credit Index. The name change is effective as of 6/1/00 (for statistics) and as of 7/1/00 (forreturns).

The Bloomberg Barclays U.S. Government/Credit Bond Index includes the BloombergBarclays U.S. Government bond Index and the Barclays Credit Bond Index. The GovernmentIndex includes all public U.S. Treasury obligations and the debt of U.S. Government agenciesand quasi-federal corporations. The Credit Index includes corporates (industrial, utility andfinance including both U.S. and non-U.S. corporations) and noncorporates (sovereign,supernational, foreign agencies and foreign local governments).

The Bloomberg Barclays U.S. Intermediate Government/Credit Bond Index is a marketvalue weighted performance benchmark for government and corporate fixed-rate debtissues (rated Baa/BBB or higher) with maturities between one and ten years.

The Bloomberg Barclays U.S. Intermediate Treasury Bond Index is composed of allpublic obligations of the U.S. Treasury. This index has an average current maturity of 3.69years (average maturity may vary over time).

The Bloomberg Barclays U.S. Treasury Index is a measure of the public obligations of theU.S. Treasury.

The FTSE 3-Month U.S. Treasury Bill Index is an index based upon the average monthlyyield of the 90-day Treasury bills. Treasury bills are secured by the full faith and credit of theU.S. Government and offer a fixed rate of return.

The Merrill Lynch 1-3 Year Treasury Bond Index is a market capitalization-weighted indexincluding all U.S. Treasury notes and bonds with maturities greater than or equal to one yearand less than three years.

Investors cannot invest directly in an index and unmanaged index returns do not reflect anyfees, expenses or sales charges.

.

17

Appendix | Market terms

Definitions

Market termsAsset-Backed Security-(ABS) - A financial security backed by a loan, lease orreceivables against assets other than real estate and mortgage-backed securities. Forinvestors, asset-backed securities arean alternative to investing incorporate debt.

Commercial Mortgage-Backed Securities-(CMBS) - are a type of mortgage-backedsecurity that is secured by the loan on a commercial property. A CMBS can provideliquidity to real estate investors and to commercial lenders.

Collateralized Mortgage Obligations-(CMO) - are securities backed by a pool ofpass-through securities, which consists of several classes of bondholders with varyingmaturities. The principal payments from the underlying pool of pass-through securitiesare used to retire the bonds on a priority basis as specified in the prospectus.

Mortgage-Backed Securities-(MBS) - A type of asset-backed security that is securedby amortgage, or a collection of mortgages. These securities must also begroupedinone of thetop tworatings as determined by an accredited credit rating agency,andusually pay periodic payments that are similar to coupon payments.Furthermore,the mortgage must have originated from a regulated and authorized financialinstitution.

Mortgage Pool - Group of related financial instruments, such as mortgages, combinedfor resale to investors on a secondary market.

Mortgage Dollar Roll - A special type of repurchase agreement in which the security,transferred to the investor as collateral, is a mortgage-backed security. The investorwho sells the security gives up the cash flows during the roll period, buthas use of theproceeds.

Treasury Inflation Protected Securities-(TIPS) - A special type of Treasury note orbond that offers protection from inflation. Like other Treasuries, an inflation-indexedsecurity pays interestevery six months and pays the principal when the securitymatures. The difference is that the coupon payments and underlying principal areautomatically increased to compensate for inflation as measured by the consumerprice index (CPI). Also referred to as “Treasury inflation-indexed securities.”

.

18

Appendix | Term Definitions

Definitions

Term definitionsMaturity is the date at which a debt instrument is due and payable.A bond due to mature on January 1, 2010, will return thebondholder’s principal and final interest payment when it reachesmaturity on that date. Bond yields are frequently calculated on ayield-to-maturity basis.

Duration (Modified Duration) is the measure of the price sensitivityof a fixed income security to an interest rate change of 100 basispoints. Calculation is based on the weighted average of the presentvalues for all cash flows.

Yield to Worst (YTW) is based on a portfolio’s current holdings onone specific day, is gross of all portfolio expenses, and is calculatedbased on assumptions that prepayment occurs if the bond has call orput provisions and the issuer can offer a lower coupon rate based oncurrent market rates. If market rates are higher than the current yieldof a bond, the YTW calculation will assume no prepayments aremade, and YTW will equal the yield to maturity. The YTW will be thelowest of yield to maturity or yield to call (if the bond has prepaymentprovisions). The YTW of a bond portfolio is the market-weightedaverage of the YTWs of all the bonds in the portfolio.

Insured municipal bonds are ones where scheduled interest andprincipal payments are guaranteed by AAA-rated municipal bondinsurers.

General Obligation municipal bonds are backed by the credit andtaxing power of the issuing jurisdiction rather than the revenue of agiven project.§

Revenue bonds are municipal bonds supported by the revenue froma specific project.

Pre-refunded bonds are municipal bonds that are generally backedor secured by U.S. Treasury bonds.

Effective Duration is a duration calculation for bonds withembedded options. Effective duration takes into account thatexpected cash flows will fluctuate as interest rates change.

Average Maturity is the average length of maturity for all fixed-ratedebt instruments held in a portfolio.

Average Coupon based on the portfolio’s underlying holdings,which may differ and are subject to change. Coupon rate is theannual coupon payments paid by the issuer relative to a bond’s faceor par value.

Yield to Maturity - The rate of return anticipated on a bond if it isheld until the maturity date. The calculation of YTM takes intoaccount the current market price, par value, coupon interest rate andtime to maturity.

The Sharpe Ratio is a risk-adjusted measure that is calculated usingstandard deviation and excess return to determine reward per unit ofrisk. The higher the Sharpe Ratio, the better the portfolio’s historicaladjusted performance.§

Alpha is a measure of the difference between actual returns andexpected performance, given the level of risk as measured by Beta,where Beta measures sensitivity to benchmark movements.

R-Squared measures the strength of the linear relationship betweenthe portfolio and its benchmark. R-squared at 1.0 implies perfectlinear relationship and zero implies no relationship exists. Standarddeviation is based on quarterly data.

Standard Deviation is a measure of the variability of returns; thehigher the standard deviation, the greater the range of performance(i.e., volatility).

The Capture Ratios measure a manager’s composite performancerelative to the benchmark, considering only those quarters that areeither positive (Up) or negative (Down) for the benchmark.

An Up Market Capture Ratio greater than 1.0 indicates a managerwho has outperformed the benchmark in the benchmark’s positivequarters.

A Down Market Capture Ratio of less than 1.0 indicates a managerwho has outperformed the relative benchmark in the benchmark’snegative quarters.

.

19

Brandywine Global

Clarion Partners

ClearBridge Investments

EnTrustPermal

Martin Currie

QS Investors

RARE Infrastructure

Royce & Associates

Western Asset leggmason.com

Legg Mason is a leading global investment company committed to helping clients reach their financial goals through long-term, actively managed investment strategies.

• A broad mix of equities, fixed-income, alternatives and cash strategies invested worldwide

• A diverse family of specialized investment managers, each with its own independent approach to research and analysis

• Over a century of experience in identifying opportunities and delivering astute investment solutions to clients

Separately Managed Accounts (SMAs) are investment services provided by Legg Mason Private Portfolio Group, LLC (LMPPG), a federally registered investment adviser. Client portfolios are managed based oninvestment instructions or advice provided by one or more of the following Legg Mason-affiliated sub-advisers: ClearBridge Investments, LLC. and Western Asset Management Company. Management isimplemented by LMPPG, the designated subadviser or, in the case of certain programs, the program sponsor or its designee.Investments for the program(s) discussed herein are traded primarily in U.S. markets and unless otherwise noted, equity and fixed-income investments for such program(s) are primarily of U.S. issuers. In addition,unless otherwise noted, indexes referred to herein represent groups of securities that are issued primarily by U.S. issuers.IMPORTANT TAX INFORMATION: Legg Mason, Inc., its affiliates, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are notintended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, ifany, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seekadvice based on the taxpayer’s particular circumstances from an independent tax advisor.Gross of fees performance results shown herein do not reflect deduction for investment management fees and transaction costs. The performance of individual client accounts will vary and will be reduced by suchfees and costs. Please review the effect of fees and transaction costs on account performance with your financial professional.Investments are not obligations of, and are not guaranteed by, LMPPG or any other Legg Mason Inc affiliate or subsidiary; are not FDIC or government insured; and are subject to risks,including possible loss of the principal amount invested. Professional money management may not be suitable for all investors.Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute,and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategyor type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financialprofessional.©2018 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC and Western Asset Management Company are subsidiaries of Legg Mason, Inc.FN1414262 SMA0017 PPG-Q118-V1§

2017 WESTERN ASSET CORE PLUS PORTFOLIOS - · PDF file4 q 2017 s eparately managed accounts...

Documents

Transcript of 2017 WESTERN ASSET CORE PLUS PORTFOLIOS - · PDF file4 q 2017 s eparately managed accounts...