uncovering global alpha and decoding bias in esg ratings€¦ · a copy of the recording,...
TRANSCRIPT
November 2019
Uncovering Global Alpha and Decoding Bias in ESG Ratings
Michael LaBellaHead of Global Equity Strategy, QS Investors
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Important Information
The information in this presentation is of a general nature only and is not intended to be, and is not, acomplete or definitive statement of the matters described in it.
Individual securities mentioned are intended as examples of portfolio holdings and are not intended asbuy or sell recommendations.
Before making an investment decision you should read the relevant Product Disclosure Statement(PDS) carefully and you need to consider, with or without the assistance of a financial adviser,whether such an investment is appropriate in light of your particular investment needs, objectives andfinancial circumstances.
Past performance is not an indicator of future performance.
Legg Mason Australia nor any of its related parties, guarantee the repayment of capital orperformance of any of the Funds mentioned in this presentation.
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Our Speakers Today
Michael LaBellaHead of Global Equity StrategyQS Investors
Tony PattisonDirector of SalesLegg Mason
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Agenda
1. About Legg Mason and QS Investors
2. QS Investors Investment Philosophy
3. Global Equity Strategy
4. Global Responsible Investment Strategy
5. Decoding Bias in ESG Ratings
6. Q&A with the Experts
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About Legg Mason
*As at 30 September 2019.
Global• Over A$1.1 trillion* in funds under management • Nine independent investment affiliates spanning all major
asset classes• Active, pure-play asset manager
Local• Over 100 staff in Australia • A$60.2 billion* - locally managed and sourced - assets
under management• Highly rated; including Money Management / Lonsec Fund
Manager of the Year in 2015, 2017 and 2018
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About QS Investors
• Global Quantitative asset manager established in 1999
• Wholly-owned subsidiary of Legg Mason since 2014
• A$26.6 billion global funds under management
• 78 Employees
• 51 Investment Professionals
• Based in New York and Boston
• UN-supported Principles for Responsible Investment (PRI) Signatory
Global Equity Multi-Asset Solutions
Income Generation
STRATEGIES BRIDGE CRITICAL INVESTMENT OUTCOMES
Wealth Creation
RiskMitigation
Quantitative, risk-managed solutions. Driven to elevate the certainty of outcomes.
As of 30 September 2019. Note: Total firm AUM will be lower than the combined Equity and Multi-Asset AUM. Assets managed under both the equity and multi-asset business are not counted twice in total firm AUM.
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Active Managers Benefit from Breadth of Global Opportunity Set
As of December 31, 2018 over 10 year trailing returns. Source: S&P 500 Index, MSCI ACWI Index. Based on Global Large Cap Core eVestment Peer Group and US Large Cap Core eVestment Peer group. ¹Median fee 49bps based on eVestment Large Cap Core Peer Median Group for SMA assuming $100M mandate. ²Median fee 59bps based on eVestment Global Large Cap Core Peer Median Group for SMA assuming $100M mandate.
-50
0
50
100
150
200
Exce
ss R
etur
n (b
ps)
US Global
Median Fee² Median Fee¹
Active Peer Median
Active Top Quartile
Active Top Quartile Active Peer
Median-29 bpsAlpha
51 bps Alpha
104 bps Alpha
186 bps Alpha
Active Manager 10 Year Returns
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Fundamental and Behavioural MeasuresBuilds a complete picture of an attractive stock
Sales/Earnings
Price/Book
Accruals
Free Cash Flow
EarningsSurprise
OpinionChange
EPSGrowth
SalesMomentum
Momentum
ShortInterest
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Process Look-Through – Nike Identify securities with attractive valuations and positive sentiment
*Ranked 1 to 100, where 100 is best. Source: Thomson Financial’s I/B/E/S, Thomson Reuters, QS Investors, as of 30 June 2018. For illustrative purposes only. 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. No representation is being made that the security is a holding in the strategy. Please refer to Important Information page at the end of this presentation.
NIKE
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Process Look-Through – CME GroupIdentify securities with attractive valuations and positive sentiment
* Ranked 1 to 100, where 100 is best. Source: Thomson Financial’s I/B/E/S, Thomson Reuters, QS Investors, as of 30 June 2018. For illustrative purposes only. Individual securities mentioned are intended as examples onlyand are not to be taken as advice nor are they intended as a recommendation to buy or sell any investment or interest. No representation is being made that the security is a holding in the strategy. Please refer to ImportantInformation page at the end of this presentation.
CME GROUP
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Legg Mason QS Investors Global Equity Fund
As of September 30, 2019. Inception date: January 1, 2006. Source: QS Investors and Morningstar Direct. Past performance is not necessarily indicative of future results.
Bridge fundamental and behavioural factors to capture consistent excess return
• Identify stocks with attractive valuations and improving sentiment
• Analyse securities through multiple geographic and industry perspectives
• Deploy material factors based on efficacy, opportunity and diversification
Favorable Risk/Return BalanceExcess Return vs MSCI World Index
Attractive Valuations with Strong Growth Prospects Information Ratio vs MSCI World Index
0.79% 1.05%
-1.59% -1.41%5-Years 10-Years
Legg Mason QS Investors Global Equity FundMorningstar World Large Blend
0.52 0.43
-1.26-0.96
5-Years 10-Years
13.96
2.12 1.26
16.83
2.431.06
Price/Earnings Price/Book EarningsGrowth to PE
Legg Mason QS Investors Global Equity Fund
MSCI World ex Australia
Price/Book
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Legg Mason QS Investors Global Equity Fund
Aims to earn an after-fee return in excess of the MSCI World ex Australia Index, net dividends reinvested, in Australian dollars over rolling three-year periods.
Past performance is not indicative of future performance *Refer to Fund and Rating disclaimer at back. Source: Morningstar Direct. The Legg Mason QS Investors Global Equity Fund received an overall rating of 4 stars out of 246 Equity World Large Blend funds as of 30 September 2019.
Lonsec Investment Grade
Zenith Recommended
Morningstar 5 stars
Ratings*
Performance % as at 30 September 2019
1 yr p.a 3 yr p.a. 5 yr p.a 10 yr p.a
Fund (net) 4.09 14.56 13.72 13.11
Fund (gross) 4.67 15.18 14.39 13.82
Benchmark 9.13 15.01 13.01 12.11
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Legg Mason QS Investors Global Responsible Investment Fund
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Integrates environmental, social, and governance (ESG) practices along with strong company fundamentals to achieve long-term growth
Engagement
Data Materiality
Fundamental Integration
Promote sustainable business practices and preserve economic viability through proxy voting
Alleviate lack of industry standardization by assessing materiality of data across multiple vendors
Balance high ESG ratings and attractive investment opportunities by evaluating stock favorability across both ESG and fundamental measures
QS Investors Global Responsible Investment
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0
20
40
60
80
100
0 10 20 30 40 50 60 70 80 90 100
ESG
Rat
ings
-Ra
ting
Agen
cy 1
ESG Ratings - Rating Agency 2
Like Beauty, ESG Ratings are in the Eye of the BeholderLack of standardization across ESG rating agencies leads to high dispersion
ESG Ratings Across Global Universe of Securities
As of December 31, 2018. Universe: MSCI World. Source: Thomson Reuters and MSCI and QS Investors Research. Rating Agency 1 represents MSCI ESG ratings. Rating Agency 2 represents Thomson Reuters ESG ratings.
Represents each security within global universe- ESG RATING +
-ES
G R
ATIN
G
+
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US
Varying Resources and Regulatory Environments Drive Data Biases
Company Size Bias:
Resource intensive disclosure requirements result in larger companies generally having greater transparency and higher absolute ESG ratings
Company Size Bias:
Regulatory reporting requirements vary widely by region and jurisdiction causing companies domiciled in Europe to receive higher ESG ratings
ESG Rating Agency Biases Examples
DM
0%
20%
40%
60%
80%
100%
1 2 3 4 5 6 7 8 9 10
COM
POST
ION
1 2 3 4 5 6 7 8 9 10
RATING AGENCY 1 RATING AGENCY 2
0%
20%
40%
60%
80%
100%
1 2 3 4 5 6 7 8 9 10
COM
POSI
TIO
N
1 2 3 4 5 6 7 8 9 10
RATING AGENCY 1 RATING AGENCY 2
- ESG RATING + - ESG RATING +
Large Small
- ESG RATING + - ESG RATING +
EM
As of December 31, 2018. Source: MSCI, Refinitiv and QS Investor. Universe is MSCI ACWI IMI. Data is average for December 2012-2018 period. Global universe is ranked by ESG and divided into deciles, where decile 10 is comprised of the stocks with highest ESG rating. Rating Agency 1 represents MSCI ESG ratings; Rating Agency 2 represents Thomson Reuters ESG ratings.
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ESG EvaluationLook beyond aggregate ESG ratings to uncover ESG factors most relevant to company returns and risks
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• Environmental stewardship
• Employ non-discriminatory and fair labor practices
• Advance principals of prudent corporate governance
EngagementPromote sustainable business practices and preserve economic viability through proxy voting
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Investment Process Integrates ESG and Fundamental Measures
INTEGRATE MULTIPLE DATA SOURCES
BROAD UNIVERSE
Balance high ESG ratings and attractive investment opportunities
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Portfolio Comprised of Highest-Ranked Stocks Across Fundamental and ESG Factors
Breakdown of ESG Ratings vs Fundamental Scores
FUN
DAM
ENTA
L AT
TRAC
TIVE
NES
S
ESG ATTRACTIVENESS
Core Holdings
No Holdings
High
Neutral
Low
Low Neutral High
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ESG Peer Measurement – What it Does, Not What it Says
Past performance is not a guide to future returns. Source: Morningstar Direct. See Fund and Rating disclaimers at end. ^Historical Sustainability Score as of 30 September 2019. Sustainability Ratings as of 30 September 2019. Sustainalytics provides company-level analysis used in the calculation of Morningstar’s Historical Sustainability Score. Out of 183 Global Equity Large Cap funds as of 30 September 2019. Based on 98.89 of AUM. Data is based on long positions only. * ESG Percentile ranking out of 182 Global Equity Large Cap funds as of 30 September 2019.
The Morningstar® Sustainability Rating™ is intended to measure how well the issuing companies of the securities within a fund’s portfolio holdings are managing their environmental, social and governance, or ESG, risks and opportunities relative to the fund’s Morningstar Global Category peers.
Environmental CategoryScore
Social Impact CategoryScore
Governance CategoryScore
Legg Mason QS Investors Global Responsible Investment FundPeer Group
Ranked in top 22nd percentile
out of 182 funds*
Ranked in top 11th percentile
out of 182 funds*
Ranked in top 14th percentile
out of 182 funds*
Morningstar Sustainability Score
Legg Mason QS Investors Global ResponsibleInvestment FundPeer Group
Ranked in top 3rd
percentile out of 183 funds^
QS Investors Global Responsible Investment Fund – ESG Fund Percentile vs Peer Group
Legg Mason QS Investors Global Responsible Investment Fund received a HIGH Morningstar Sustainability Rating™
E S G
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Additional Ethical Investment Restrictions
Companies directly involved in the production, development or operation of:
• extraction or power generation from thermal coal; • tobacco;• gambling; and• controversial weapons and small arms.
Companies with revenues related to the production, development or operation of the below activities generating more than 5% of the company’s total revenue:
• alcohol;• adult entertainment;• defence and weapons;• fur;• genetically modified crops; • nuclear power; and• oil sands.
Companies with revenues related to the distribution of the below activities generating more than 5% of the company’s total revenue:
• adult entertainment;• defence and weapons;• gambling;• genetically modified crops; and • nuclear power.
Companies with revenues related to the distribution of the below activities generating more than 10% of the company’s total revenue:
• alcohol;• fur; and• tobacco.
An ethical portfolio that negatively screens securities from the investable universe
In addition to assessing companies on stringent investment criteria, QS Investors actively screens out companies that do not meet the Fund’s ethical investment criteria. A company will be excluded from the investable universe where they exhibit any of the following characteristics.
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Calendar Year returns ($)*Annualised returns (%)*
As of 30 September 2019. Net of 0.75%p.a. management fee. Source: QS Investors, Legg Mason Australia, Morningstar Direct, MSCI Indices, Zephyr StyleAdvisor. * Hypothetical portfolio inception date 31 December 2011. ^The Hypothetical performance data shown includes Hypothetical simulated returns from 1 January 2012 – 31 May 2019 and actual performance data from the Legg Mason QS Investors Global Responsible Investment Fund from 1 June 2019 to 30 September 2019. Hypothetical performance results are inherentlylimited and should not be relied upon as indicators of future performance. The hypothetical returns benefit from the use of hindsight, do not represent actual recommendations or trading, and may not reflect material economic and market factors. The results presented should not be considered a substitute for the investment performance of an actual portfolio. No representation is made that any account will or is likely to achieve returns similar to those presented. The hypothetical returns are unaudited. Current hypothetical performance may differ from that shown in this presentation. Please refer to the Hypothetical Global ESG Negative Screen Portfolio Disclosure at the end of this presentation for additional information. Legg Mason QS Investors Global ESG Composite has been converted to AUD. Past performance is not necessarily indicative of future results. Please see the Global Environmental Social and Governance Equity Composite disclosure at the end of this presentation for additional information. Legg Mason QS Investors Global Responsible –Hypothetical inception date is 31 December 2011 Legg Mason QS Investors Global ESG inception is 01 January 2012. Legg Mason QS Investors Global Equity Fund inception date is September 1998.
Hypothetical Legg Mason QS Investors Global Responsible Investment Fund back tested performance^ and risk statistics
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2018 2017 2016 2015 2014 2013 2012
Legg Mason QS Investors Global Responsible - Hypothetical
Legg Mason QS Investors Global Equity Fund
Legg Mason QS Investors Global ESG Composite
MSCI World ESG Leaders NR USD
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Sept quarter 1 Years 3 Years 5 Years 7 Years SinceInception
(1/01/2012)Legg Mason QS Investors Global Responsible - Hypothetical
Legg Mason QS Investors Global ESG Composite
Legg Mason QS Investors Global Equity Fund
MSCI World ESG Leaders NR USD
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Max drawdown (%)5–year risk return*Legg Mason QS Investors Global Responsible -Hypothetical
Legg Mason QS Investors Global
Equity Fund
Legg Mason QS Investors Global ESG CompositeMSCI World ESG
Leaders NR
10.0
11.0
12.0
13.0
14.0
15.0
16.0
9.0 9.5 10.0 10.5 11.0 11.5 12.0
Rew
ard
(Ann
ualiz
ed R
etur
n %
)
Risk (Annualized Standard Deviation %)
-10.41
-11.57-12.06
-9.68
-14.0
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
Legg Mason QSInvestors GlobalResponsible -Hypothetical
Legg Mason QSInvestors Global
Equity A
Legg Mason QSInvestors Global
ESGMSCI World ESG
Leaders NR
As at 30 September 2019. Net of 0.75%p.a. management fee. Source: QS Investors, Legg Mason Australia, Morningstar Direct, MSCI Indices, Zephyr StyleAdvisor. Hypothetical portfolio inception date 31 December 2011. ^The Hypothetical performance data shown includes Hypothetical simulated returns from 1 January 2012 – 31 May 2019 and actual performance data from the Legg Mason QS Investors Global Responsible Investment Fund from 1 June 2019 to 30 September 2019. Hypothetical performance results are inherentlylimited and should not be relied upon as indicators of future performance. The hypothetical returns benefit from the use of hindsight, do not represent actual recommendations or trading, and may not reflect material economic and market factors. The results presented should not be considered a substitute for the investment performance of an actual portfolio. No representation is made that any account will or is likely to achieve returns similar to those presented. The hypothetical returns are unaudited. Current hypothetical performance may differ from that shown in this presentation. Please refer to the Hypothetical Global ESG Negative Screen Portfolio Disclosure at the end of this presentation for additional information. Legg Mason QS Investors Global ESG Composite has been converted to AUD. Past performance is not necessarily indicative of future results. Please see the Global Environmental Social and Governance Equity Composite disclosure at the end of this presentation for additional information. Legg Mason QS Investors Global Responsible –Hypothetical inception date is 31 December 2011 Legg Mason QS Investors Global ESG inception is 01 January 2012. Legg Mason QS Investors Global Equity Fund inception date is September 1998.
Hypothetical Legg Mason QS Investors Global Responsible Investment Fund back tested performance^ and risk statistics
Legg Mason QS Investors Global Equity
Fund
Legg Mason QS Investors Global ESG Composite
MSCI World ESG Leaders NR
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LEGG MASON QS INVESTORSGLOBAL RESPONSIBLE INVESTMENT FUND
As of 30 September 2019. Annualised for periods greater than one year. Source: QS Investors, Legg Mason Australia, Morningstar Direct, MSCI Indices, Zephyr StyleAdvisor. Hypothetical portfolio inception date 31 December 2011. ^The Hypothetical performance data shown includes Hypothetical simulated returns from 1 January 2012 – 31 May 2019 and actual performance data from the Legg Mason QS Investors Global Responsible Investment Fund from 1 June 2019 to 30 September 2019. Hypothetical performance results are inherently limited and should not be relied upon as indicators of future performance. The hypothetical returns benefit from the use of hindsight, do not represent actual recommendations or trading, and may not reflect material economic and market factors. The results presented should not be considered a substitute for the investment performance of an actual portfolio. No representation is made that any account will or is likely to achieve returns similar to those presented. The hypothetical returns are unaudited. Current hypothetical performance may differ from that shown in this presentation. Please refer to the Hypothetical Global ESG Negative Screen Portfolio Disclosure at the end of this presentation for additional information. Legg Mason QS Investors Global ESG Composite has been converted to AUD. Past performance is not necessarily indicative of future results. Please see the Global Environmental Social and Governance Equity Composite disclosure at the end of this presentation for additional information. Legg Mason QS Investors Global Responsible – Hypothetical inception date is 31 December 2011 Legg Mason QS Investors Global ESG inception is 01 January 2012. Legg Mason QS Investors Global Equity Fund inception date is September 1998.
Performance (%) as at 30 September 2019 – Legg Mason QS Investors Product Suite
Key benefits • Combines the outputs of the QS Investors Active Factor Equity model
• Best-in-class ESG stock selection from the QS Investors ESG Stock Selection model – merges a traditional fundamental model with new and growing ESG data and positively identifies best-in class companies that incorporate ESG principles
• Ethical investment criteria – does not invest in companies that fail to meet key ethical investment criteria
Aims to outperform the MSCI World ESG Leaders Index over rolling three to five year periods.
Net ReturnsPeriods Ending 30 September 2019 Sept Qtr 1yr 3yr 5yr 7yrs
Sinceinception 1/1/2012
Legg Mason QS Investors Global Responsible- Hypothetical^ 9.50 11.96 17.01 15.03 18.86 18.64
Legg Mason QS Investors Global ESG Composite 5.72 7.57 14.85 13.74 17.52 17.25
Legg Mason QS Investors Global Equity Fund 3.95 4.11 14.58 13.80 18.43 17.97
Benchmark - MSCI World ESG Leaders NR 5.56 11.52 14.87 12.90 16.89 16.47
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Key Benefits Legg Mason QS Investors Global Equity Fund
• Systematic construct, fundamentally driven
• Research central to investment ethos
• Experienced, stable and proven team
• Competitive pricing structure
• Compelling long-term performance record^
Past performance is not indicative of future performance. See Fund and Ratings disclaimer at back. ^ As at 30 September 2019, based on 10 year performance track record. Refer to page 13.
Legg Mason QS Investors Global Responsible Investment Fund
• Combines the outputs of the QS Investors Active Factor Equity model
• Best-in-class ESG stock selection from QS Investors ESG Stock Selection model
• Ethical Investment Criteria
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Q&A WITH THE EXPERTS
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For More Information – Please Contact Us
Scott BradleyPhone +61 (3) 9017 8650Mobile +61 422 125 726Email [email protected]
Adam MustonPhone +61 (2) 8211 2759Mobile +61 401 625 388Email [email protected]
Tony PattisonPhone +61 (3) 9017 8644Mobile +61 448 277 060Email [email protected]
Melbourne
Sydney
Matt StovoldPhone +61 (2) 8211 2760Mobile +61 438 076 500Email [email protected]
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APPENDIX
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Fund Characteristics
*Other fees may apply please see the relevant disclosure document for further information.
Fund Name Legg Mason QS Investors Global Equity Fund
Investment Objective To earn an after-fee return in excess of the MSCI World ex Australia Index, net dividends reinvested, in Australian dollars over rolling three-year periods.
Strategy Overview
• Rigorous quantitative stock selection process, based on fundamental principles and integrated risk controls
• Quantitative process to rank the attractiveness of stocks based on factors such as cash flow, earnings growth, expectations, value and technical factors
• Stocks are also ranked across multiple peer groups (including region, sector, size, style) rather than from a single perspective, allowing the development of a more robust stock rank that takes account multiple factor and style perspectives
Portfolio Size Typically 100 – 200 holdings
Target weights Security target weights: +1.5% vs. benchmark
Regional target weights: +/-1% vs. benchmark
Sector target weights: +/-2% vs. benchmark
ESG No tobacco or controversial weapon stocks
Hedging Unhedged
Performance Benchmark MSCI World Index (ex Australia) in AUD
Share class/fees*A Class – Management costs 0.75% p.a.
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Fund Characteristics
*Other fees may apply please see the relevant disclosure document for further information. ** 29 November 2019.
Fund Name Legg Mason QS Investors Global Responsible Investment Fund
Investment Objective To outperform the MSCI World ESG Leaders Index over rolling three to five yearperiods
Strategy Overview
• Accesses the long standing QS Investors global active factor equitycapability
• Merged with proven proprietary ESG analytical framework
• Portfolio restrictions in place to exclude companies that do not meet the Fund’s ethical criteria
Ethical Investment Criteria
In addition to assessing companies on stringent investment criteria, QS Investors actively screens out companies that do not meet the Fund’s ethical investment criteria. A company will be excluded from the investable universe where they fail to meet the ethical invest criteria listed on slide 9.
Hedging Unhedged
Performance Benchmark MSCI World ESG Leaders Index
Share class/fees*A Class – Management costs 0.75% p.a. (capped)F Class – Management costs 0.50% p.a. (capped) for first $75m/available or up to 6 months from launch**
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Biographies: Investment TeamMichael LaBella, CFAHead of Global Equity Strategy Responsible for equity strategy
including product design, thought leadership and advocacy. Member of equity management team which is responsible for overall business strategy and execution.
Formerly at Deutsche Bank from 2005-2010. Serving as a portfolio manager for the Quantitative Strategies Group, and as an institutional sales trader in the Corporate and Investment Bank.
Education: BS in Financial Economics from Binghamton University.
Dmitry Novikov, PhDHead of Global Equity Research Responsible for all equity research.
Formerly Director of Quantitative Investment Strategies at Credit Suisse from 2010 – 2017. Prior to this, he was Vice President at JPMorgan from 2008 – 2010; and Vice President at Goldman Sachs from 2004 – 2008.
Education: MS in Mathematics from Moscow State University; MA in Economics from New Economic School (Moscow); PhD in Finance from Kellogg School of Management at Northwestern University.
Russell Shtern, CFAHead of Global Equity Portfolio Management Responsible for equity portfolio
management.
Formerly portfolio manager for Diversification Based Investing Equity and Tax Managed Equity for Deutsche Asset Management’s Quantitative Strategies Group, from 2003 to 2010. Prior to this he spent three years at Deutsche Bank Securities supporting equity derivatives and global program trading desks.
Education: BBA from Pace University.
Joseph S. GirouxPortfolio Manager Member of the Portfolio Management
group.
Formerly a developed markets Portfolio Manager at Batterymarch Financial Management from 2012 to 2014. Prior to joining Batterymarch, he managed both US and non-US assets for 5 years at several firms—Golden Capital Management, Wells Capital Management and Evergreen Investments—that were affiliated with or acquired by Wells Fargo. He also served as a Portfolio Manager at TriPoint Asset Management and The Boston Company Asset Management.
Education: BS in Computer Science from New England Institute of Technology.
Stephen A. Lanzendorf, CFAPortfolio Manager Member of the Portfolio Management group.
Formerly Deputy Chief Investment Officer and head of the Developed Markets investment team at Batterymarch Financial Management from 2012 to 2014. At Batterymarch, he also served as co-head of the Developed Markets team from 2010 to 2012 and head of the US investment team from 2006 to 2010. Prior to joining Batterymarch, he spent six years as the Director of Quantitative Strategies at Independence Investments, where he also managed the equity trading desk. He was also a Portfolio Manager and Quantitative Analyst at The Colonial Group for 10 years.
Education: BS and MS in Nuclear Engineering from Massachusetts Institute of Technology.
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Legg Mason DisclaimerLegg Mason Asset Management Australia Ltd (ABN 76 004 835 849 AFSL 240827) (Legg Mason) is part of the Legg Mason Inc. group. Legg Mason has appointed QS Investors as investment manager for the Legg Mason QS InvestorsGlobal Equity Fund (ARSN 088 669 827) and Legg Mason QS Investors Global Responsible Investment Fund (ARSN 631 941 172). Before making an investment decision you should read the relevant Product Disclosure Statement(PDS) carefully and you need to consider, with or without the assistance of a financial advisor, whether such an investment is appropriate in light of your particular investment needs, objectives and financial circumstances. The PDS isavailable and can be obtained by contacting Legg Mason Australia on 1800 679 541 or at www.leggmason.com.au. The information in this presentation is of a general nature only and is not intended to be, and is not, a complete ordefinitive statement of the matters described in it. The information does not constitute specific investment advice and does not include recommendations on any particular securities. Legg Mason Australia nor any of its related parties,guarantee the repayment of capital or performance of any of the Legg Mason trusts referred to in this document. Although statements of fact in this presentation have been obtained from and are based upon sources Legg MasonAsset Management Australia Limited ABN 76 004 835 849 believe to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions and estimates included in thiscommunication constitute our judgement as of the date of this communication and are subject to change without notice. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for anycontract to purchase or sell any security or other instrument, or for QS Investors to enter into or arrange any type of transaction as a consequence of any information contained herein. QS Investors does not give any warranty as to theaccuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of QS Investors, or any officer, employee or associate accepts anyliability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of thisdocument or any other person. This document is only for professional investors. No further distribution is allowed without prior written consent of QS Investors. Past performance or any prediction or forecast is not indicative of futureresults. No representation or warranty is made as to the efficacy of any particular strategy or the actual returns that may be achieved. The value of shares/units and their derived income may fall as well as rise. An investment is not adeposit and is not ensured by the Federal Deposit Insurance Corporation or any other government agency or by QS Investors or any of its affiliates, and is subject to risks, including possible loss of principal amount invested. As stated inthe tables, the performance shown is gross of fees. In the event that such investment management fees and other fees were deducted, the performance of an account would be lower. For example, if an account appreciated by 10% ayear for five years, the total annualised return for five years prior to deducting fees at the end of the five-year period would be 10%. If total account fees were 0.10% for each of the five years, the total annualized return of the account forfive years at the end of the five-year period would be 9.89%. Fees are described in Part 2A of QS Investors’ Form ADV.
Any forecasts provided herein are based upon our opinion of the market as of this date and are subject to change, dependent on future changes in the market. In preparing this presentation, we have relied upon and assumed withoutindependent verification, the accuracy and completeness of all information available from public sources. We consider the information in this update to be accurate, but we do not represent that it is complete or should be relied upon asthe sole source of composite performance or suitability for investment. Our investment strategies utilize proprietary research and quantitative tools to analyze securities and help us make investment decisions. While we maintain controlsreasonably designed to protect the integrity and efficacy of the quantitative models and data used to formulate investment decisions, we can make no guarantee that the models and data will remain accurate and/or produce the desiredor intended results over time. Index providers (e.g., S&P, Russell Investments, MSCI Barra and FTSE) are the sources and owners of any index data contained or reflected in this document and all trademarks and copyrights relatedthereto. The material may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. Unless otherwise indicated, this is QS Investors’ presentation of the underlyingindex data. Such data may include a redefinition of index sector and regional groupings in accordance with QS Investors’ unique classifications. The index providers are not responsible for the formatting or configuration of this material orfor any inaccuracy in presentation thereof. Please note an investor cannot directly invest in an index and unmanaged index returns do not reflect fees, expenses, or sales charges.
The Lonsec Rating assigned as follows (Legg Mason QS Investors Global Equity Fund – February 2019) presented in this document is published by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445. The Rating is limited to“General Advice” (as defined in the Corporations Act 2001 (Cth)) and based solely on consideration of the investment merits of the financial product(s). Past performance information is for illustrative purposes only and is not indicative offuture performance. It is not a recommendation to purchase, sell or hold Legg Mason Asset Management product(s), and you should seek independent financial advice before investing in this product(s). The Rating is subject to changewithout notice and Lonsec assumes no obligation to update the relevant document(s) following publication. Lonsec receives a fee from the Fund Manager for researching the product(s) using comprehensive and objective criteria. Forfurther information regarding Lonsec’s Ratings methodology, please refer to our website at: http://www.lonsecresearch.com.au/research-solutions/our-ratings.The Zenith Investment Partners (“Zenith”) Australian Financial Services License No. 226872 rating (Legg Mason QS Investors Global Equity Fund – November 2018) referred to in this document is limited to “General Advice” (s766BCorporations Act 2001) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual and is subject to change at any time without prior notice. It is not aspecific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of theirown objectives, financial situation and needs. Investors should obtain a copy of, and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Pastperformance is not an indication of future performance. Zenith usually charges the product issuer, fund manager or related party to conduct Product Assessments. Full details regarding Zenith’s methodology, ratings definitions andregulatory compliance are available on our Product Assessments and at www.zenithpartners.com.au/regulatory-guidelines-funds-research.© 2019 Morningstar, Inc. The Morningstar Rating is an assessment of a fund’s past performance – based on both return and risk – which shows how similar investments compare with their competitors. A high rating alone is insufficientbasis for an investment decision. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use ordistribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to yourobjectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant ProductDisclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as yoursole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is copyright andpublished under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The Legg Mason QS Investors Global Equity Fund received an overall rating of 4 stars out of 246 Equity World Large Blend funds as of 30 September2019.
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Global Environmental Social &Governance Equity CompositeSchedule of Investment Performance for Period: December 31, 2018 Benchmark: MSCI World Standard (Net) Index
Notes:a) If applicable, partial reporting periods are a result of the inception or termination of the composite as further described below. Partial period returns of less than a year are not annualized.b) Due to differences in sources for benchmark performance, there may be slight variances between benchmark returns noted above and those from other published sources.c)3-year annualised ex-post standard deviation; 3-year annualized ex-post standard deviation is not applicable because it does not have a 3-year history.d) Asset-weighted standard deviation; calculated for gross returns for composites with more than five portfolios active over the full year.
See Accompanying Notes below
1.Basis of Presentation
QS Investors, LLC (“QS Investors” or “the Firm”), is a registered investment adviser with the Securities and Exchange Commission, providing investment and advisory services to a diverse array of institutional, retail and sub- advisoryclients worldwide. Registration as an investment adviser does not imply any level of skill or training. The Firm is headquartered in New York City with an additional office in Boston, Massachusetts. The Firm provides discretionary andnon-discretionary advice and investment management to domestic and international clients based on their investment objectives, guidelines, and risk tolerance, each of which may be customized to address specific client needs. QSInvestors, LLC launched in August 2010 and became a wholly-owned, independently managed affiliate of Legg Mason, Inc. on May 31, 2014. As part of this transaction, Legg Mason merged QS Batterymarch Financial Management,Inc. (“QS Batterymarch”) and QS Legg Mason Global Asset Allocation, LLC (“QS LMGAA”), two other affiliates, into QS Investors.
Effective October 1, 2014, the firm was redefined for GIPS purposes to include all three firms as one combined entity. Historical assets under management for QS Batterymarch and QS LMGAA are not included under Firm Assets inthe table above for periods before 2014 since these firms were not part of the GIPS defined firm until October 1, 2014. Prior to October 1, 2014, performance results for this composite were attained at QS Batterymarch (which wasnot part of the GIPS defined firm during such period).
QS Investors claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. QS Investors has been independently verified for theperiods August 1, 2010 through December 31, 2016. QS Batterymarch has been independently verified for the periods January 1, 1993 through September 30, 2014. The verification reports are 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 presentperformance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.
This presentation of investment performance sets forth the time-weighted gross and net rates of return for the Global Environmental Social and Governance Equity Composite (the "Composite") for the period shown. Pastperformance is no guarantee of future results and may differ in future time periods. As of April 1, 2016, the composite’s name was changed from QS Batterymarch - Global Environmental Social and Governance Equity Composite toGlobal Environmental Social and Governance Equity Composite to remove the legal entity name.
Period Ending (a)
Gross Composite Returns (%)
Net Composite Returns (%)
Benchmark (%) (b) Gross Composite 3 -Year Standard Deviation (c)
Benchmark 3 - Year Standard Deviation
Number of Accounts
Composite Assets (US$m)
Firm Assets (US$m)
Composite Dispersion (d)
2018 -9.92 -10.50 -8.71 10.77 10.38 ≤5 3 17,946 N/A2017 24.57 23.77 22.40 10.27 10.23 ≤5 3 22,774 N/A2016 12.02 11.30 7.51 11.14 10.92 ≤5 2 22,789 N/A2015 2.03 1.37 -0.87 10.89 10.80 ≤5 3 23,725 N/A2014 6.07 5.39 4.94 10.70 10.23 ≤5 3 19,388 N/A2013 29.36 28.58 26.68 N/A N/A ≤5 3 N/A N/A2012 15.37 14.65 15.83 N/A N/A ≤5 2 N/A N/A
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Schedule of Investment Performance for the Period: December 31, 2018 Benchmark: MSCI World Standard (Net) Index2. Composite DescriptionThe composite uses a bottom-up, core investment strategy. It includes all discretionary, 100% non-fee paying (seeded product) Global Environmental, Social and Governance Equity accounts managed against the MSCI WorldStandard Index (MSCI World Standard) or a similar client-directed benchmark, and whose investment strategy and guidelines do not differ materially from the standard guidelines that have been established for GlobalEnvironmental, Social and Governance Equity accounts. Currency hedging has been used selectively on certain of the composite’s portfolios since inception; with client approval, the Firm may hedge a portfolio’s exposure to certaincurrencies into US dollars. Currency exposure will never exceed a portfolio’s underlying security exposure and typically will not exceed 25% of the total value of the portfolio.Eligible new portfolios are added to the Composite at the start of the first performance measurement period following the date that the portfolio is fully invested as defined by the Composite strategy. Securities listed on anynational exchange are valued at their last trade price. Securities that are not listed are valued at the most recent publicly quoted bid price. Securities transactions are recorded on a trade date basis. If applicable, dividend income isrecorded as of the ex-dividend date. Returns reflect the reinvestment of dividends and other earnings. The composite inception date is January 1, 2012, with a creation date of January 31, 2012.
3. Calculation of Rates of ReturnComposite returns are expressed in US dollars. For each portfolio within the Composite, the total rate of return for the time period is equal to the change in the market value of the portfolio, including capital appreciation, depreciationandincome, as a percentage of the beginning market value of the portfolio, adjusted for the net of all contributions and withdrawals (the "cash flows"). Rates of return are calculated on a daily “time- weighted" basis and are net ofwithholdingtaxes, where applicable, for all portfolios which comprise the Composite. Daily time-weighted rates of return minimize the effect of cash flows on the investment performance of the portfolio. There are no known material differencesbetween the Firm’s source of foreign exchange rates and that of the benchmark.Monthly Composite rates of return are computed by taking an asset weighted average of each portfolio's monthly rate of return within the Composite, utilizing their respective beginning market values for the period. AnnualComposite rates of return are derived by geometrically linking monthly Composite rates of return. Gross returns are presented net of transaction and commission costs and gross of investment management fees. EffectiveOctober 1, 2014, net of fee performance is calculated on a monthly basis. Prior to October 1, 2014, net of fee performance is calculated on a quarterly basis. Net of fee performance is calculated at the composite level by deductingfees from the gross composite returns. The fees deducted were based on the highest management fees payable, without the benefit of breakpoints. Effective July 1, 2016, the standard management fee schedule for GlobalEnvironmental, Social and Governance Equity per annum is as follows: 0.65% on the first $25 million; 0.50% on the next $75 million; 0.45% on the balance. Advisory fees are described in QS Investors, LLC’s Form ADV, Part 2Abrochure. Actual management fees may vary depending upon, among other things, the account type, the applicable management fee schedule and the portfolio size.The standard deviation of comparable performance over time is a measure of dispersion. This calculation measures the fluctuation of the rates of return of portfolios with the Composite in relation to the average return. Dispersion isnot shown for composites with 5 or less portfolios for a full year as it is not meaningful.
4. Composite BenchmarkComposite returns are benchmarked to the MSCI World Standard (Total Return-Net). The MSCI World Standard is designed to measure global developed market equity performance and includes approximately 23 developedmarket indices. MSCI’s net index series approximates the minimum possible reinvestment of regular cash distributions as a result of the deduction of withholdings taxes. Effective December 1, 2009, the regular cash dividendis reinvested after deduction of withholding tax by applying the maximum rate of the company’s country of incorporation applicable to non-resident institutional investors who do not benefit from double taxation treaties. Prior toDecember 1, 2009, withholdings tax was based on the country of classification of the company. The Firm’s portfolios are subject to withholdings taxes on dividend, interest income, and capital gains that vary according to theircountry of domicile andtherefore will differ from the benchmark. The benchmark is used for comparative purposes only and generally reflects the risk or investment style of the investments reported on the schedule of investment performance. Investmentsmade by the Firm for the portfolios it manages according to the Composite strategy may differ from those of the benchmark. Accordingly, investment results will differ from those of the benchmark.
The Firm’s portfolios are actively managed, while the index is unmanaged and may contain securities different from those included in the Firm’s portfolios. MSCI Inc. is the source and owner of the MSCI index data contained orreflected in this material and all trademarks and copyrights related thereto. The material may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is theFirm’s presentation of the data. MSCI Inc. is not responsible for the formatting or configuration of this material or for any inaccuracy in presentation thereof. The index provider is the source and owner of the index data contained orreflected in this material and all trademarks and copyrights related thereto.
5. Additional Information and Information Available upon RequestIn addition to the Composite, the Firm provides investment management services utilizing different strategies. The following information is available upon request: policies for valuing portfolios, calculating performance, and preparingcompliant presentations; a complete list and description of the Firm's composites; QS Investors, LLC’s Form ADV, Part 2A brochure; a list of other Legg Mason affiliates.
Global Environmental Social &Governance Equity Composite
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Hypothetical Global ESG Negative Screen Portfolio Performance DisclosureThe Hypothetical Global ESG Negative Screen Portfolio was created and is presented for purposes of product development. The hypothetical portfolio inception date is 12/31/11, with a creation date of 11/07/18. The hypothetical portfoliobenchmark is the MSCI World ND Standard Index. The MSCI World ND Standard Index is designed to measure global developed market equity performance and includes approximately 23 developed market indices. The benchmarkshown is not intended to, and does not, parallel the risk or investment style of the investment strategy. This product is managed with ESG restrictions that can deviate widely from the benchmark.For the purposes of this hypothetical portfolio, the investment process followed the same process as the live Global Environmental Social and Governance Equity strategy. However, the hypothetical portfolio incorporated negative screensin filtering the investable universe, in addition to the liquidity and data quality screens that are used in the live strategy. Stocks were screened from the investable universe if more than 5% of the company’s total revenue was earnedthrough any of the following activities, as defined by MSCI, or if revenues from a combination of any of the following activities (“Excluded Activities”) represent more than 10% of the company’s total revenue: alcohol, adult entertainment,defense and weapons, fur, gambling, genetically modified crops, nuclear power or tobacco.Performance for the hypothetical portfolio is shown with estimated transaction costs. An average estimated per share transaction cost of 10 basis points, which includes estimates of market impact costs, has been applied to alltransactions. Actual per share and total transaction costs may be higher or lower than this estimate.The hypothetical results reflect monthly rebalancing and do not include intra-month transactions. All returns and statistical measures in this hypothetical portfolio are calculated using monthly periodicity. Rebalancing of an actual portfoliowould be conducted more frequently (as often as daily).These hypothetical/back-tested returns are being provided for the purpose of product development. Hypothetical performance results are inherently limited and should not be relied upon as indicators of futureperformance. Different hypothetical or back-tested scenarios will provide different results. The hypothetical returns benefit from the use of hindsight, do not represent actual recommendations or trading, and may notreflect material economic and market factors. These and other factors related to the markets and specific trading strategies cannot be fully captured in hypothetical returns. For example, different buy/hold/sell criteria,rebalancing methodology, risk controls, trade implementation and transaction costs in an actual portfolio may result in materially different performance results than those of this hypothetical portfolio. The resultspresented for Hypothetical Global ESG Negative Screen Portfolio should not be considered a substitute for the investment performance of an actual portfolio. The hypothetical returns presented are unaudited. Pastperformance is not indicative of future results; current hypothetical performance may differ from that shown in this presentation. No representation is made that any account will or is likely to achieve returns similar to those presented.Hypothetical performance is expressed in US dollars and returns are calculated after the deduction of estimated brokerage commissions and include the reinvestment of dividends and income, but exclude non- redeemable withholdingtaxes. Hypothetical performance returns are presented before the deduction of management and custodial fees. Actual performance returns will be reduced by management fees and other expenses that may be incurred in themanagement of an account. For example, assume that $10 million is invested in an account that achieves a 10.00% annualized compounded quarterly return, gross of fees, for 10 years. If an advisory fee of 1.00% per annum werecharged each quarter for the 10-year period, the annual return would be 8.93%, and the ending dollar value would be $23,521,670, net of fees, versus $25,937,425, gross of fees. Actual management fees may vary depending upon,among other things, the account type, applicable management fee schedule and portfolio size. Advisory fees are described in QS Investors’ Form ADV, Part 2A brochure, which is available upon request.NOTE: MSCI Inc. is the source and owner of the MSCI index data contained or reflected in this material and all trademarks and copyrights related thereto. The material may contain confidential information and unauthorized use,disclosure, copying, dissemination or redistribution is strictly prohibited. This is QS Investors’ presentation of the data. MSCI is not responsible for the formatting or configuration of this material or for any inaccuracy in presentationthereof.This material is provided on the basis that you are a wholesale client within the definition of ASIC Class Order CO 03/1100.This material was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It is intended for informational purposes only and it is not intended that it be relied on to makeany investment decision. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or for QS Investors to enter into orarrange any type of transaction as a consequence of any information contained herein. QS Investors does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document.Except insofar as liability under any statute cannot be excluded, no member of QS Investors, or any officer, employee or associate accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error oromission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person.This document is only for professional investors. No further distribution is allowed without prior written consent of QS Investors.Past performance or any prediction or forecast is not indicative of future results. No representation or warranty is made as to the efficacy of any particular strategy or the actual returns that may be achieved. The value of shares/units andtheir derived income may fall as well as rise. An investment is not a deposit and is not ensured by the Federal Deposit Insurance Corporation or any other government agency or by QS Investors or any of its affiliates, and is subject torisks, including possible loss of principal amount invested.For performance shown gross of fees, investment management and other fees were not deducted. In the event that such fees were deducted, the performance of an account would be lower. For example, if an account appreciated by10% a year for five years, the total annualized return for five years prior to deducting fees at the end of the five-year period would be 10%. If total account fees were 0.10% for each of the five years, the total annualized return of theaccount for five years at the end of the five-year period would be 9.89%. Fees are described in Part 2A of QS Investors’ Form ADV.Any forecasts provided herein are based upon our opinion of the market as of this date and are subject to change, dependent on future changes in the market. In preparing this presentation, we have relied upon and assumed withoutindependent verification, the accuracy and completeness of all information available from public sources. We consider the information in this update to be accurate, but we do not represent that it is complete or should be relied upon asthe sole source of composite performance or suitability for investment.Our investment strategies utilize proprietary research and quantitative tools to analyze securities and help us make investment decisions. While we maintain controls reasonably designed to protect the integrity and efficacy of thequantitative models and data used to formulate investment decisions, we can make no guarantee that the models and data will remain accurate and/or produce the desired or intended results over time.Index providers (e.g., S&P, Russell Investments, MSCI Barra and FTSE) are the sources and owners of any index data contained or reflected in this document and all trademarks and copyrights related thereto. Unless otherwiseindicated, this is QS Investors’ presentation of the underlying index data. Such data may include a redefinition of index sector and regional groupings in accordance with QS Investors’ unique classifications. The index providers are notresponsible for the formatting or configuration of this material or for any inaccuracy in presentation thereof. Please note an investor cannot directly invest in an index, and unmanaged index returns do not reflect fees, expenses, or salescharges.