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Legg Mason Western Asset Structured
Opportunities Fund
Fixed Income in a rising rate environment
Anup Agarwal, Head of MBS/ABS – Western Asset
October 2017
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.
WESTERN ASSET
GLOBAL BREADTH & LOCAL DEPTH
Source: Western Asset, as at 30 June 2017. Assets under management in USD (billions).
*Splits time between Hong Kong and Singapore offices.2
AUM by Sector – Total $428.8 billion (USD)
▪ 127 investment professionals on
five continents and in seven
offices
▪ 22 years of average experience
▪ 36 portfolio and quantitative
analysts in portfolio operations
▪ 168 staff dedicated to client
service
▪ Specialized teams to meet
individual client needs
▪ Independent risk management
function with 33 professionals
including 11 PhDs
▪ 396 staff dedicated to globally
integrated operations
Investment
Management
Client Service
& Marketing
Risk
Management
&
Operations
Western Asset’s Deep Global Integration Allows Us to Source Investment Ideas and Investment Solutions Across Regions
Western Asset At a Glance
▪ Founded in 1971. Independent affiliate of
Legg Mason since 1986
▪ Fixed-income value investors
▪ $428.8 billion (USD) AUM
– $361.3 billion (USD) long-term assets
– $67.5 billion (USD) cash and cash
equivalent assets
▪ 858 employees
Organizational Pillars
▪ Clients first
▪ Globally integrated
▪ Team-based
▪ Active fixed-income
▪ Integrated risk management
Global Footprint (AUM in USD billions)
SingaporeInv. Professionals: 5
Managed: $5.4
Serviced: $20.0
Total Staff: 21
New YorkInv. Professionals: 23
Managed: $123.2
Serviced: $105.1
Total Staff: 90
LondonInv. Professionals: 17
Managed: $37.0
Serviced: $27.2
Total Staff: 66 TokyoInv. Professionals: 4
Managed: $7.2
Serviced: $40.5
Total Staff: 24
São PauloInv. Professionals: 17
Managed: $12.1
Serviced: $11.3
Total Staff: 65
Pasadena (HQ)Inv. Professionals: 56
Managed: $225.0
Serviced: $188.1
Total Staff: 574
DubaiServiced: $31.6
Total Staff: 1
Hong KongTotal Staff: 1*
MelbourneInv. Professionals: 5
Managed: $18.9
Serviced: $5.0
Total Staff: 17
35
13
18
27
40
59
67
73
98
Other
Global Inflation-linked
US Municipal
Global High-Yield
Emerging Markets Debt
MBS/ABS
Cash & Cash Equivalents
Sovereign/Treasury
Global IG Corporate
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. 3
Anup Agarwal
20 Years’ Experience▪ Western Asset Management
Company – Head of MBS/ABS,
2013-
Education▪ Temple University, M.B.A. Finance
Elliott Neumayer
14 Years’ Experience▪ Western Asset Management
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
17 Years’ Experience▪ Western Asset Management
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.
4
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
LEGG MASON WESTERN ASSET
STRUCTURED OPPORTUNITIES FUNDInception date: 13 January 2016
Fund Size: USD 519.49m
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 31 August 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.5
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.
6
WHY STRUCTURED CREDIT?CONSTRUCTIVE FUNDAMENTALS & GOOD LENDING STANDARDS
7
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
WHY STRUCTURED CREDIT?ATTRACTIVE YIELD OPPORTUNITIES
Source: Western Asset, as at 31 August 2017. Past performance is not a reliable indicator of future results.8
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 17 Mar 17 Apr 17 May 17 Jun 17
Structured Opps UST 10 (Rebased to 100) US HY (Rebased to 100)
WHY STRUCTURED CREDIT?LOW CORRELATION AND LOW RATE SENSITIVITY
9Source: Legg Mason, Bloomberg, as at 31 August 2017. Rebased to 100 on 13 January 2016.
126.1
118.9
99.4
Rising UST rate environment
WHY STRUCTURED CREDIT?STRONG RISK ADJUSTED RETURNS, WITH LOW CORRELATION
Source: Western Asset, as at 31 August 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 TR10
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 r
etur
n, %
)
Risk (standard deviation, %)
5 Years Ending 31 Aug 17
US
Treasury
US
MBS
US Broad
Fixed-Income
US
High-Yield
Emerging
Markets
US
Equity
Hedge Fund
Universe
WA Structured Product¹ 2.34 -0.32 -0.26 -0.09 0.46 0.13 0.38 0.48
WA US Agency MBS Plus Aggregate² 1.56 0.23 0.48 0.53 0.51 0.51 0.25 0.45
WA US Agency MBS³ 0.76 0.79 0.98 0.84 0.00 0.40 -0.12 -0.12
Sharpe Ratio 0.13 0.73 0.61 1.15 0.63 1.46 1.22
CorrelationsSharpe
RatioProduct
WHAT ARE THE RISKS?HOW THE TEAM MANAGE THEM
Source: Legg Mason, as at 31 March 2017.11
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 11 July 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.
12
Our base case is for steady but unspectacular growth, where spread sectors are likely to
outperform.
▪ Improving global growth but weak by historical standards
▪ Global inflation is increasing slightly from a low level
▪ US growth and inflation may be moderating
▪ Central banks are signaling a path to normalization
▪ Government bonds remain underpinned by low policy rates
▪ Spread sectors expected to outperform over the longer term
WHERE ARE THE OPPORTUNITIES?NON-AGENCY RESIDENTIAL
13
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
2017 Estimated (USD Bn): 12
Outstanding (USD Bn): 17.4
2017 Estimated (USD Bn): 20
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 multi-family rental
properties
▪ Typically backed by a single corporate issuer
Sector View: Negative
Total UPB (USD Bn): 31
2017 Estimated (USD Bn): 5
Total UPB (USD Bn): 23.6
2017 Estimated (USD Bn): 10
Total UPB (USD Bn): 17
2017 Estimated (USD Bn): 3
Source: Wells Fargo, Western Asset. As of 29 Mar 17
WHERE ARE THE OPPORTUNITIES?NON-AGENCY COMMERCIAL
14
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
Outstanding (USD Bn): 281.4
Outstanding (USD Bn): 30.6
Outstanding (USD Bn): 45.5
Outstanding (USD Bn): 24.0
Outstanding (USD Bn): 75.8
Outstanding (USD Bn): 8.5
Source: Bank of America, Western Asset. As of 31 Jul 17
Sector View: Positive Sector View: Negative
Portfolio
Change*
(Monthly)
Weight
(%)Sector
Yield**
(%)
30.6 Legacy Residential Mortgages 5.3
12.9 Alt-A 4.5
14.2 Subprime 5.7
3.5 Prime 6.8
22.6 New-Issue Residential Mortgages 6.6
0.2 Agency RMBS IO 4.7
12.3 GSE Risk Transfer 7.0
7.1 Restructured Legacy Bonds 5.7
1.2 U.K. Mortgages 3.9
1.7 Re-performing Loans 8.5
23.2 CMBS 7.9
1.9 Agency CMBS IO 4.9
7.4 Conduit Credit 8.4
8.7 Large Loan Credit 10.4
5.2 Legacy AJ/AM 4.1
4.3 Opportunistic ABS 6.0
0.04 Treasury Derivative 1.9
0.02 Foreign Exchange 0.0
19.3 Cash 0.6
100.0 Total 4.7
CURRENT ALLOCATION
Source: Western Asset, as at 31 August 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.
15
67.0%
33.0%
Floating vs Fixed exposure
Floating Fixed
▪ Empirical duration of -2.3 years^
▪ Spread duration of 5.1 years
▪ Portfolio is currently 72% 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.
3.7%
0.5%
0.6%
-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
5.0
8.7
11.7
13.7
11.2
-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 .
3 M
on
ths
6 M
on
ths
Yea
r-to
-Da
te
1 Y
ear
S.I.
Ann
.*
Monthly Performance (net) Percentage Growth
FUND PERFORMANCE
Source: Legg Mason as at 31 August 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.
16
LM Class Accumulation – Net performance to 31 August 2017 in USD
+18.99
% %Trailing Periods
COMPOSITE PERFORMANCE
Source: Western Asset. Returns as at 31 August 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.
17
1.5
3.8
9.9
12.1
6.0
7.88.2
6.8
1.4
3.6
9.3
11.3
5.3
7.17.5
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)*
Prelim 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 3-Year 5-Year Since Inception
Standard Deviation (%) 2.4 3.2 7.9
Sharpe Ratio 2.3 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.
18
APPENDIX
19
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.
20
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 31 August 2017.
21
Sector Sector View Comment Positioning Yield Ranges
Legacy
Residential
Mortgages
Neutral ■ Constructive on medium-term fundamentals, relative value and net
negative issuance technical pressures
■ Expect modest home price growth over the coming years, with limited
downside risks as housing appears reasonably valued and supported
■ Maintain exposure skewed towards lower-dollar-priced floating-rate option
ARMs, seasoned subprime, and Alt-A hybrids
■ Opportunistically rotating from fully recovered/low-yielding sectors into areas
with greater recovery optionality
IG: 2.5% - 4.5%
BIG: 4% - 6%
New-Issue
Residential
Mortgages
Positive ■ Positive on credit risk of GSE and new originated non-agency loans
■ Constructive on re-performing loans and securitites
■ Negative on new-issue prime jumbo senior bonds
■ Added exposure to high-quality new-issue underwriting through GSE Risk
T ransfer bonds
■ Added exposure to RPL securitizations at attractive valuations relative to legacy
non-agency bonds
IG: 2.5% - 3.5%
BIG: 4% - 7%
Commercial
Mortgages
Positive ■ Remain constructive on the CMBS market, due to still positive CRE
fundamentals and favorable relative value
■ Liquidity of BBB & below rated conduit remains challenged, but has
improved year-to-date
■ Positive on conduit deals and favor AAA rated conduit bonds over junior rated
conduit bonds
■ Positive on short-duration large loan CMBS SASB deals and neutral on legacy
junior AAA (AJ)
AAA - A: 3% - 6%
BBB - B: 5% - 10%
Legacy AJ: 5% - 10%
Consumer
Loans
Neutral ■ Opportunity set exists in well-protected, off-the-run sectors, which offer
attractive risk/return
■ Positive on private student loans and FFELP student loan seniors
■ Reduced exposure to rental car ABS subordinates as spreads tightened
■ Opportunistically reduced marketplace consumer loan exposure at local tights
IG: 2.5% - 5%
BIG: 5% - 9%
Agency
Passthroughs
Positive ■ Mortgages have underperformed rates and corporate debt
■ Option-adjusted spreads have widened, but volitility risks remain
■ Supported by Fed backstop and yield-driven buyer base
■ Overweight TBA vs. specified pools
■ Positive on higher coupons
■ Underweight GNMA and 15-year
2.4% - 3.0%
Agency
CMOs
Neutral ■ Curve flattening has cheapened short-duration and floating rate securities
■ IO adds yield and extension protection to MBS position
■ Have reduced allocation to IOs as spreads have tightened
■ Positive on Agency CMBS IOs
0% - 3%
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 31 July 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.
22
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
Dec 1
5M
ar
16
Ju
n 1
6S
ep
16
Sub-Fund Allocation
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jan16
Mar16
May16
Jul16
Sep16
Nov16
Jan17
Mar17
May17
Jul17
Se
cto
rA
llocatio
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.
23
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
24
BIOGRAPHIES
Note: Western Asset experience reflects current position title and hire date.
25
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
17 Years’ Experience
– 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
14 Years’ Experience
– Western Asset Management Company – Product Specialist, 2004-
– Marshall & Stevens – Senior Associate, 2003-2004
– Loyola Marymount University, M.B.A., B.A.
COMPOSITE DISCLOSURE
26
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 jan.pieterse@westernasset.com. 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
27
As at 31 December 2016
COMPOSITE DISCLOSURE:
US AGENCY MBS PLUS AGGREGATE COMPOSITE
28
As at 31 December 2016
COMPOSITE DISCLOSURE:
STRUCTURED PRODUCT COMPOSITE
29
As at 31 December 2016
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").
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.
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
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.
30
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