INVESTMENT SYMPOSIUM · 1. Dollar Strength—acts as a relief valve for deflationary pressure...

INVESTMENT SYMPOSIUM 26 February 2015

Joseph A. Sullivan Chairman and Chief Executive Officer Legg Mason

Francis A. Scotland Director of Global Macro Research Brandywine Global

REPRIEVE FROM DEFLATION

5

Please refer to Appendix 2 for important disclosure information

-4 -3 -2 -1 0 1 2 3 4

TAIL RISK OF FAILURE SOME OF THE RISKS Euro-zone breaks up. Fiscal austerity. China crash landing. U.S. fiscal cliff. Debt deleveraging. Deflation.

Optimistic Outcome Pessimistic Outcome

INVESTOR EXPECTATIONS OF THE FUTURE

TAIL RISK OF SUCCESS

REASONS FOR OPTIMISM Policy might work so well that it reflates asset prices and the world economy. But that would imply an end to zero interest rates.

The Financial Crisis crushed confidence and fostered worries about tail risk

6

Macro Themes

Please refer to Appendix 2 for important disclosure information

2012 The Risk of Success Maybe all the policy stimulus might actually work and the risk is that things go right! If so the risk with the Risk of Success is that the Fed renormalizes and asset prices realign. 2013 Transition Year Extrapolation of the Risk of Success is the start of a gradual transition away from lots of liquidity and not much growth, to less liquidity and more growth. We got the transition but it was not gradual. The market was not prepared for the optimistic comments from former Fed Chairman Bernanke. 2014 The Big Shift The big shift was the anticipation of a gradual pick-up in global growth led by America supported by Chinese and European reflation. Cold weather hijacked the start but America found its mojo by the end of the year.

7

America finds its Mojo!

Data has been obtained by Thomson Reuters Datastream © 2015, Thomson Reuters) which Brandywine Global believes to be accurate and reliable. Charts created by Brandywine Global. Please refer to Appendix 2 for important disclosure information.

30,000

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70,000

75,000

30,000

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55,000

60,000

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70,000

75,000

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

U.S. DURABLE GOODS NEW ORDERS - NON-DEFENSE CAPITAL GOODS * $ (Mn) $ (Mn)

*EXCLUDING AIRCRAFT & PARTS, 3-MONTH MOVING AVERAGE As of 12/31/2014.

Brandywine Global

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58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

US CORPORATE PROFITS AFTER TAXES AS % OF GDP %GDP %GDP

As of 09/30/2014.

Brandywine Global

Average

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80

84

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100

104

108

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108

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

NFIB Small Business Optimism Recession Median LT Median

NFIB SMALL BUSINESS OPTIMISM INDEX

As of 01/31/2015.

Brandywine Global

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35

0

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

QUALITY OF LABOR POOR SALES

NFIB SMALL BUSINESS SURVEY: SINGLE MOST IMPORTANT PROBLEM % %

As of 01/31/2015.

Brandywine Global

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So why are Treasury yields at depression levels?

Europe and China did not reflate in 2014. Emerging economies raised rates! 1. Europe has been mired in a self-inflicted deflationary stagnation. Draghi’s bark louder

than his bite the balance sheet contracted in 2014.

2. China’s controlled credit bust went too far. The economy has slowed to a pace below potential.

3. The emerging world is fighting the last war. Fearful of a replay of the late 1990’s EM crisis, policy leaders raised rates to shrink external deficits.

As a result, global growth lost momentum in late 2014 and the U.S. imported a lot of deflationary pressure!

9

U.S. inflation expectations dragged lower by Europe

Data has been obtained by Bloomberg Finance LP ©2015, which Brandywine Global believes to be accurate & reliable. Please refer to Appendix 2 for important disclosure information.

0.4

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2.8

2010 2011 2012 2013 2014 2015

U.S. GERMANY

10-YEAR BREAKEVEN INFLATION RATES % %

As of 2/17/2015.

Brandywine Global

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China hits restructuring too hard

Data has been obtained by BCA Research which Brandywine Global believes to be accurate and reliable. Please refer to Appendix 2 for important disclosure information.

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1.00

0.50 0.40 0.30

0.20 0.15

0.10

0.05

1.00

0.50 0.40 0.30

0.20 0.15

0.10

0.05

G7

% %

8

7

6

5

4

8

7

6

5

4

Emerging Economies *

% %

5.0

4.5

4.0

3.5

3.0

2.5

2.0

5.0

4.5

4.0

3.5

3.0

2.5

2.0 2010 2011 2012 2013 2014 2015

Global

% %

GDP-WEIGHTED SHORT TERM INTEREST RATES

* GDP WEIGHTED, INCLUDING CHINA, BRAZIL, RUSSIA, INDIA, MEXICO, KOREA, INDONESIA, TURKEY As of 2/16/2015.

Brandywine Global

EM’s lifted policy rates enough to boost world average!

Data has been obtained by Thomson Reuters Datastream © 2015, Thomson Reuters) which Brandywine Global believes to be accurate and reliable. Charts created by Brandywine Global. Please refer to Appendix 2 for important disclosure information.

12

EM GDP growth slumping to below U.S.

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8

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

U.S. Emerging and Developing Economies

REAL GDP GROWTH

Ann %Chg Ann %Chg

As of 09/30/2014.

Brandywine Global

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Policy inertia late 2014 forced markets to act

1. Dollar Strength—acts as a relief valve for deflationary pressure outside of the U.S.

2. Falling G7 Bond Yields-act to stimulate aggregate demand and the demand for credit.

3. Oil Prices Crash $60-boost spending by freeing up disposable purchasing power.

14

Two trillion dollars in reduced outlays on oil – Consumers are the big winners

Data has been obtained by BCA Research which Brandywine Global believes to be me to accurate and reliable. Please refer to Appendix 2 for important disclosure information.

Falling Oil Prices: Who are the winners and losers?

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Data has been obtained by BCA Research which Brandywine Global believes to be me to accurate and reliable. Please refer to Appendix 2 for important disclosure information.

Market stabilization measures should lead to re-coupling in global PMIs

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60

42

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48

50

52

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58

60

2011 2012 2013 2014 2015

U.S. EUROZONE CHINA

MANUFACTURING PMI

As of 01/31/2015.

Brandywine Global

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Signs of stabilization in Europe

Data has been obtained by Thomson Reuters Datastream © 2015, Thomson Reuters which Brandywine Global believes to be accurate and reliable. Charts created by Brandywine Global. Please refer to Appendix 2 for important disclosure information.

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-2

-1

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92 94 96 98 00 02 04 06 08 10 12 14 16

EUROLAND M1 * (LS) EMU BUSINESS CLIMATE INDEX (RS)

EUROLAND MONEY SUPPLY & BUSINESS CONFIDENCE

Ann %Chg

* SHOWN ADVANCED BY 9 MONTHS. As of 01/31/2015

Brandywine Global

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LEVEL

EUR (Bn) EUR (Bn)

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2

4 3-MONTH RATE OF CHANGE

% %

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10

15

-5

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10

15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

12-MONTH RATE OF CHANGE*

% %

CONSOLIDATED BALANCE SHEET OF EURO AREA MFI'S: LOANS TO EURO AREA RESIDENTS

As of 12/31/2014.

Brandywine Global

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M1 growth and the Ke Qi Ang Index of Economic Growth

China money supply making the turn?

Data has been obtained by Bloomberg Finance LP ©2015, which Brandywine Global believes to be accurate & reliable. Please refer to Appendix 2 for important disclosure information.

18

EMs starting to cut interest rates


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10.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

INDIA INDONESIA

POLICY RATES % %

As of 02/28/2015.

Brandywine Global

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U.S. Germany U.S. Germany-14bp 70bp -45bp -19bp

1999 PEAK 2006 PEAKBond Yield Changes3 Months After Peak

Bond Yield Changes3 Months After Peak

1999 PEAK 2006 PEAK

How this spread resolves depends on the success of European reflation


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200

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120

160

200

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

U.S. 10-YEAR TREASURY MINUS GERMAN 10-YEAR BOND BPs BPs

As of 2/16/2015

20

0

2

4

6

8

10

12

14 %

NOMINAL 10-YEAR BOND YIELD (2/16/2015)

BR RS GR IN TK ID SA IC MX CL PH MY CH NZ HN TH AU KO PT PO SP US UK IT ES TW HK CN NW IR CZ FR BG SD OE JP NL FN EM BD DK SW

Nominal spreads should narrow in general in a price stable global expansion


21

As of 1/31/2015

-5%-4%-3%-2%-1%

%1%2%3%4%5%6%7%8%9%

10%11%12%13%14% REAL AND NOMINAL 10-YEAR BOND YIELDS BASED ON 12-MONTH % CHANGE OF HEADLINE CPI

Nominal Real


The search for yield could prop up EM currencies once rates are cut

Margot Cairnes Thought Leader and Change Expert

EMBRACING CHANGE & THINKING AHEAD

12 Steps For Business

24

EASTMAN KODAK – What went wrong?

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The board of Eastman Kodak: • Highly respected professional directors

• Compliant with regulation

• 2009 were cited as examples of Best

Practice in diversity and governance


26

Wicked problems

https://www.youtube.com/watch?v=qUH5XOPF8pc

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Typology of problems

28

Our world in chaos

https://www.youtube.com/watch?v=XrJjfDUzD7M

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The Stock Exchange

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Stock exchange $85 trillion $55 trillion Derivative trades (options, future, swaps) Off stock exchange $94 trillion $346.4 trillion % more 10.5% 530%

2001

2012

Is the Stock Exchange relevant?

31

AGE

Agrarian

Capitalist

Information

PROBLEM

Simple

Complex

Wicked

Evolving problems

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Eastman Kodak Board is an example of what happens when we solve wicked (information age) problems with tame (old capitalist age) thinking.


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Our brain & change

34

Levels of thinking

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Don’t be blinded by what you know

36

• The Information Age demands that leaders become experts at transforming wicked problems.

• Leaders must design and manage processes of collaboration where key stakeholders work through challenging, constantly changing issues together.

• Wise brain leaders:

– Facilitate – Brain storm – Think laterally – Have authentic conversations – Actively listen – Are empathic – Suspend judgement – Build trust

• These are not fluffy “nice to haves”. Transforming wicked problems is a leader’s job.

The leader’s job in a ‘wicked age’

37

September 2001 Greig Gailey

appointed Managing Director of Pasminco

September 2001 Pasminco – voluntary

administration DEBT $3.2 billion (owed

to 36 financiers)

April 2004 Renamed Zinifex,

company listed with modest debt - $200

million

November 2004 Zinifex announces

$53.2 million profit (400% upgrade on forecast at listing)

December 2005

AFR lists Zinifex as the #1 best performing stock on

the ASX100 in 2005

August 2006 $1.1 billion profit

announced

December 2006 Zinifex & Umicore

announce intention to merge to create a global

market leader as the world’s largest zinc smelting & refining

company

Deepening Transformation

Outstanding Performance

Survival

Crisis Intervention

Today:

Oz Minerals = $1.26b Nyrstar = $1.47b

ZINIFEX - a wicked case study

http://www.zinifex.com/Main.aspx

38

A leader’s job is to see the elephant: • Non–traditional competitors • Technology that hasn’t been invented yet • Paradigm shifting ideas • Unknown unknowns (be they opportunity

or threat)

Leaders must stay relevant to the era as it changes.

Leaders must see the elephant in the room

39

Learn to:

Live and think in wise brain – grow your

leadership & creative potential

Think at higher levels – expand your

consciousness

Create collaboration processes – expand

your capacity to relate & facilitate

Take home message

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Become masters and mistresses of transforming wicked problems into wonderful opportunities

See the elephant in the room Have the right conversation

Ask the right questions Take the right action

Take home message

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Peter Drucker: "The talk you hear... about adapting to change is not only stupid, it's... dangerous. The only way you can manage change is to create it. By the time you catch up to change, the competition is ahead of you." Today, if you wait to catch up to change, your whole industry is likely to have been made redundant by a new technology that you didn’t see coming.

Survive and thrive in a ‘wicked world’

Timothy Schuler - The Permal Group Portfolio Manager and Investment Strategist

Kim Catechis - Martin Currie Investment Director and Head of Global Emerging Markets

Anthony Kirkham - Western Asset Management Head of Investment Management Reece Birtles - Martin Currie Australia Chief Investment Officer and Portfolio Manager

Panel Discussion 1 ASSET CLASSES: CHANGING LANDSCAPES, WHAT’S AHEAD?

THE CHANGING LANDSCAPE FOR ALTERNATIVES

Timothy Schuler Portfolio Manager and Investment Strategist The Permal Group

44

Hedge fund growth – Liquidity plays key role

Liquid alternatives will be among the fastest growing asset classes among retail buyers

Note: includes the following categories: Commodities, Currency, Gold, Natural Resources, Alt-Bond, Managed Futures, Real Estate, Market Neutral, Long/Short, and Global Asset Allocation. Source: SimFund MF, Casey Quirk Analysis. Past performance is not a guide to future results. The views expressed are Permal’s as of the date given and may change as market or other conditions change. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate. See the Important Information page for risks and performance disclosures.

45

Hedge fund growth – Targeted investing

Past performance is not a guide to future results. The views expressed are Permal’s as of the date given and may change as market or other conditions change. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate. See the Important Information page for risks and performance disclosures.

A rising ‘outcome’ mindset further favours a risk conscious approach…

46

Source: Casey, Quirk Past performance is not a guide to future results. The views expressed are Permal’s as of the date given and may change as market or other conditions change. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate. See the Important Information page for risks and performance disclosures.

Hedge fund growth – One size does not fit all

Investors are increasingly building their portfolios to meet specific objectives

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Hedge fund growth – Broader scope

Source: Casey, Quirk Past performance is not a guide to future results. The views expressed are Permal’s as of the date given and may change as market or other conditions change. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate. See the Important Information page for risks and performance disclosures.

… which results in rising liquid alternative allocations

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Hedge fund growth – Idiosyncratic behaviours


Currency, Commodity Equity (long & short)

Product development must align with investors’ new allocation frameworks

49

0

5

10

15

20

25

-10% -7% -5% -3% 0% 3% 5% 8% 10%

Obs

erva

tions

Monthly Returns

HFRI Macro (Total) Index and HFRI Equity Hedge (Total) Index HFRI Macro Index (Actual)

HFRI Equity Hedge Index (Actual)

HFRI Macro Index (Normalized)

HFRI Equity Hedge Index (Normalized)

Sept 2008

Aug 1998

Sept

Oct 2008

Theory = Reality HFRI Macro (Total) Index and HFRI Equity Hedge (Total) Index

Source: HFR Hedge Fund Database - hedgefundresearch.com. Data as of July 1, 1994 – June 30, 2014. Past performance is not a guide to future results. The views expressed are Permal’s as of the date given and may change as market or other conditions change. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate. See the Important Information page for risks and performance disclosures.

50

0

5

10

15

20

25

30

35

-10% -7% -5% -3% 0% 3% 5% 8% 10%

Obs

erva

tions

Monthly Returns

HFRI Macro (Total) Index and HFRI Relative Value (Total) Index HFRI Macro Index (Actual)

HFRI Relative Value Index (Actual)

HFRI Macro Index (Normalized)

Aug 1998 Sep

Oct 2008

Theory = Reality

HFRI Macro (Total) Index and HFRI Relative Value (Total) Index

Source: HFR Hedge Fund Database - hedgefundresearch.com. Data as of July 1, 1994 – June 30, 2014. Past performance is not a guide to future results. The views expressed are Permal’s as of the date given and may change as market or other conditions change. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate. See the Important Information page for risks and performance disclosures.

EMERGING MARKETS

Kim Catechis Investment Director and Head of Global Emerging Markets, Martin Currie

52

Market performance over three years Market performance over 10 years

0

10

20

30

40

50

60

70

2011 2012 2013 2014

Retu

rn (%

)

MSCI Emerging MarketsMSCI World

(50)

0

50

100

150

200

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Re

turn

(%)

MSCI Emerging MarketsMSCI World

Market performance

Source: Lipper Investment Management as at 31 December 2014. Total return indices used and reported in US$. The figures provided includes the re-investment of dividends. Past performance is not a guide to future returns.

53

Dedicated EM equity funds reported outflows of US$25 billion in 2014

Emerging market flows

Source: Martin Currie and Morgan Stanley (EPFR Global, Fund Flows Database) as at 11 February 2015.

54

MSCI Emerging Markets – market cap (US$ trillion)

GEMS companies were subcontractors

GEMS companies become competitors

Asia crisis 1997 Tequila crisis

1994

China growth worries

2011

US recovery

2014

Global financial

crisis 2008

Tech bubble 2000

LCTM 1998

Ages of emerging market

Source: Martin Currie and MSCI. Past performance is not a guide to future returns.

55

Security alliances today

Source: Rhodium Group – September 2013.

56

List of wars and ongoing conflicts

Dark indicates: 1000+ deaths per year Light indicates: other conflicts

Geopolitics

Source and copyright The Big Picture. http://www.geopolitics.us/

57

Which of these poses the greatest threat to the world?

% population Religious and ethnic hatred Inequality Pollution and environment

Nuclear weapons

AIDS and other diseases

Middle East 34 18 9 20 10

Europe 15 32 14 19 5

Asia 13 18 22 21 12

Latin America 9 18 25 26 19

Africa 24 18 7 22 29

Japan 16 12 20 49 2

US 24 27 15 23 7

It depends where you live

Greatest threat to the world

Source and copyright. PEW Research Centre. Jacob Poushter Spring 2014 Global Attitudes Survey – accessed in October 2014. http://www.pewresearch.org/fact-tank/2014/10/16/what-is-the-greatest-threat-to-the-world-depends-on-where-you-live/. Regional medians. Russia and Ukraine not included.

58

MSCI Emerging Markets – market cap (US$ trillion)

Competitors

Asia crisis 1997

Tequila crisis 1994

China growth worries

2011

US recovery

2014

Global financial crisis 2008

Tech bubble 2000

LCTM 1998

Subcontractors

Transition

Factor driven

Efficiency driven

Innovation driven

Next age of emerging markets

Source: Martin Currie and MSCI. Past performance is not a guide to future returns.

AUSTRALIAN FIXED INCOME

Anthony Kirkham Head of Investment Management Western Asset Management

60

Source: Bloomberg As of 31 Jan 15.

Australia

US

Euro

UK

Japan 0

1

2

3

4

5

6

7

8

9

10

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Yield (

%)

Structurally lower? Australian Bonds still play a part

61

Central Banks Remain Accommodative

Source: Bloomberg As of 31 Jan 15.

0

10

20

30

40

50

60

70

80

2007 2008 2009 2010 2011 2012 2013 2014 2015

Balan

ce Sh

eet (%

of G

DP)

ECB Fed BoJ

Source: Bloomberg. As of 31 Jan 15

Forecast

62

Source: UBS, Bloomberg, Western Asset. Credit Rating is based on the Higher of Standard and Poors, Moodys and Fitch

31 December 2006 31 December 2014

Total Market Value : $ 822.1bn

• The Bond Market Is Growing • Benchmarks Are Changing • Not the time to be indexed

Yield 2.75% Duration 4.5 yrs Average Credit Rating AA+

Yield 6.38% Duration 3.6 yrs Average Credit Rating AA+

Total Market Value : $ 330.4bn

The Changing Nature Of The Australian Bond Market

Government, 22.2%

Semi Govt, 25.7%

Supranational, 16.2%

Corporate, 33.0%

MBS/ABS,3.0%

Government, 42.6%

Semi Govt, 27.8%

Supranational, 17.2%

Corporate, 10.3%

MBS/ABS,0.3% Covered Bonds, 1.9%

31 December 2006 Total Market Value: $330.4bn

31 December 2014 Total Market Value: $822.1bn

63

Debt Issuance (Long Term and Short Term)

Long-term Non-government Debt Securities Issued In Australia

Financials

Non-Financial Corporates

Asset-backed Securities Non-residents

0255075

100125150175200

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

AUD b

illion

Source: RBA. As of 31 Dec 2014.

Non-Government

Government

0100200300400500600700800900

1000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

AUD b

illion

Non-government securities include long term and short term securities issued by financials, non-financial corporations, asset-backed and non-residents in Australia. Government securities include long term and short term securities issued in Australia.Source : RBA. As of 31 Dec 14.

The Evolution Of Non-Government Issuance

64

As at 31 December 2014

0

10

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50

60

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90

100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Perce

nt of

Portfo

lio (M

arket

Value

) .

Semi-Government

Corporates

MBS/ABS

Cash Inflation-linked

Government 2%

4%

0%

16%

28%

0%

7%

Government Guaranteed Banks

Covered Bonds

Supranational

40%

3%

Investment Latitude Gives Skilled Managers The Ability To Generate Outright Returns Legg Mason Western Asset Australian Bond Fund: Historical Sector Allocation

AUSTRALIAN EQUITIES

Reece Birtles Chief Investment Officer and Portfolio Manager Martin Currie Australia

66

Australia: the lucky country

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global Investment Returns Sourcebook 2015.

Cumulative real returns from 1900 to 2014

Equities Bonds Bills

67

Government Debt to GDP

Making our own luck

Political & Economic Risk Ratings Government Debt to GDP

31%

245%

106% 96% 92%

0%

50%

100%

150%

200%

250%

Australia Japan US Euro Zone UK

Political & Economic Risk Ratings

0

2

4

6

8

10

Sing

apor

e

Aust

ralia

Japa

n

Hong

Kon

g

USA

Taiw

an

Mal

aysia

Thai

land

Sout

h Ko

rea

Chin

a

Viet

nam

Phili

ppin

es

Indo

nesia

Indi

a

Grades are scaled from zero to 10, with zero representing the best situation possible and 10 the worst

Political & Economic Risk Ratings

Source: Political & Economic Risk Consultancy, March 2013 ASIAN INTELLIGENCE #871

68

Market Share Australia USA Financials Banks Top 3 = 60% Top 3 = 32% P&C Insurance Top 3 (IAG/SUN) = 61% Top 3 = 21% Equity/Futures operators #1 (ASX) = 95% #1 ~ 35% Consumer Supermarkets Top 3 = 83% Top 3 = 50% Mobile Operators #1 (TLS) = 50% share #1 = 36% share Real Assets Super Regional Shopping Centres Top 2 (WRT/CFX) = 11% Top 2 = 4% Gas Transmission Pipelines #1 (APA) 1500 companies = 70% share =

69

Source: United Nations Population Division Period: 2010 -2050

A growing but ageing population

0%

1%

2%

3%

4%

5%

Jan-1995 Jan-2002 Jan-2009 Jan-2016 Jan-2023 Jan-2030

Australian population growth Population 65

Australian population growth

-15.8 -14.9 -12.6

1.8

18.4

28.4

34.4

50.6

-20

-10

0

10

20

30

40

50

60

ロシア日本ドイツ中国ブラジル米国インドオースト

ラリア

Population growth forecast （%）

China Brazil USA India Australia

Japan Russia China Brazil USA India Australia Germany

70

ZIRPs necessitate new sources of income

0

1

2

3

4

5

6

7

8

Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

Dividend RBA cash rate

Income yield %

Source: Martin Currie Australia

71

Australian government asset sales planning amounts for A$125Bn in next 6 years.

Real Asset Privatizations

Queensland

South Australia New South Wales

Western Australia

Victoria

・Energex （Generation, Transmission, Distribution of electricity）・CS Energy （Generation of electricity）

・Port Melbourne（Ports）・Yarra Valley （Water pipes）

・Fremantle Ports （Ports）・Western Power （Transmission, Distribution of electricity）

・TransGrid （Transmission, Distribution of electricity）・Sydney Water （Water pipes）

・SA Water （Water pipes）

Primary asset candidates for privatization Recent privatizations of infrastructure

Asset Sector Seller Acquirer Selling Price

(Billion A$) Completed

Mighty River Power

Electricity New Zealand Government

Mighty River Power

3.0 May 2013

Meridian Energy Renewable Electricity

New Zealand Government

Meridian Energy 2.0 Oct 2013

Genesis Energy Electricity New Zealand Government

Genesis Energy 1.5 Apr 2014

Queensland Moterways

Road Queensland state

Government Transurban Group 3.5 Apr 2014

Macquarie Generation

Energy New South Wales state Government

AGL Energy (Expected)

1.0 3Q 2014

Source: JETRO March 2014

72

Soruce: Factset, Martin Currie Australia

The index is not the answer

0

5

10

15

20

25

30

35

Jan-73 Oct-77 Jul-82 Apr-87 Jan-92 Oct-96 Jul-01 Apr-06 Jan-11

Bank sector as % of Market

ASX200 Concentration

50

55

60

65

70

75

Jan-73 Oct-77 Jul-82 Apr-87 Jan-92 Oct-96 Jul-01 Apr-06 Jan-11

Top20 as % of Market

ASX200 Concentration

73

Source: Factset, Martin Currie Australia

0

5

10

15

20

25

30

35

1990 1993 1996 1999 2002 2005 2008 2011 2014

Value of Initial Public Offerings $bn

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

1990 1993 1996 1999 2002 2005 2008 2011 2014

Number of ASX listings

The market (& Australia) adapt via Small Caps

74

• Meeting needs rather than alpha • Tailoring • Multi Asset solutions

Needs based portfolios

QUESTIONS?

Joseph Filicetti – Western Asset Management Product Manager

Timothy Schuler - The Permal Group Portfolio Manager and Investment Strategist

IS MACRO THE ANSWER TO ALL-WEATHER PROTECTION?

Panel Discussion 2

MACRO OPPORTUNITIES

Joseph Filicetti Product Manager Western Asset Management

78

0%

20%

40%

60%

80%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Perce

nt of

GDP

Central Bank Balance SheetsBoJ ECB Fed

Forecast

Source: Bloomberg. As of 30 Sep 14

Global Central Bank easing

Central Bank Balance Sheets

Source: Bloomberg. As of 30 Sep 14.

79

0

2

4

6

8

10

12

14

16

18

1980 1985 1990 1995 2000 2005 2010 2015 2020

Perce

ntGlobal Inflation

DM Median EM Median

IMF Forecast

Source: IMF. As of 31 Dec 14

Global inflation is falling

Source: IMF. As of 31 Dec 14

Global inflation

80

0

1

2

3

2008 2009 2010 2011 2012 2013 2014 2015 2016

Perce

nt (%

chan

ge ov

er 12

mon

ths)Core PCE Inflation: Actual and Forecast

FOMC Forecastas of Sep 2012

Source: Federal Reserve, Census Bureau. As of 30 Nov 14

U.S. Core inflation

Source: Federal Reserve, Census Bureau. As of 30 Nov 14.

Core PCE Inflation: Actual and Forecast

81

Unconstrained strategies Historical risk/return comparison

Source: Western Asset. As of 30 Sep 14. Performance shown is gross of fees. Returns for periods greater than one year are annualized. Please see the Performance Disclosure in the Appendix 3 for more information.

Total Return Unconstrained

(3-Year)

Barclays U.S. Aggregate Index

Macro Opportunities(Since Inception, March 2012

to September 2014)

0

4

8

12

16

0 2 4 6 8 10

Annu

alized

Retur

n (%)

Annualized Standard Deviation (%)

Unconstrained Strategies Historical Risk/Return Comparison

Source: Western Asset. As of 30 Sep 14Performance shown is gross of fees. Returns for periods greater than one year are annualized. Please see the Performance Disclosure in the Appendix for more information.

Unconstrained Strategies Historical Risk/Return Comparison

82

Duration exposure in Western Asset’s unconstrained portfolios

Source: Barclays, Western Asset. The information provided is supplemental to the Total Return Unconstrained (TRU) Bond Composite. Please see performance disclosure in the Appendix 3. The information provided is supplemental to the Macro Opportunities Composite. Please see performance disclosure in Appendix 3.

-6

-4

-2

0

2

4

6

8

10

Barclays Aggregate TRU RepresentativePortfolio¹

Macro Opportunities RepresentativePortfolio²

Years

of Du

ration

Interest Rate Duration, Range in 2014

Source: Barclays, Western Asset¹The information provided is supplemental to the Total Return Unconstrained (TRU) Bond Composite. Please see performance disclosure in the appendix. ²The information provided is supplemental to the Macro Opportunities Composite. Please see performance disclosure in the appendix.

Interest Rate Duration, Range in 2014

83

Curve exposure in Western Asset’s unconstrained portfolios

-4

-3

-2

-1

0

1

2

3

4

6mo 2y 5y 10y 20y 30y

Years

of Du

ration

Key Rate Duration ExposureBarclaysAggregate

TRU RepresentativePortfolio¹

Macro OpportunitiesRepresentative Portfolio²

Source: Barclays, Western Asset. As of 30 Jun 14¹The information provided is supplemental to the Total Return Unconstrained (TRU) Bond Composite. Please see performance disclosure in the appendix. ²The information provided is supplemental to the Macro Opportunities Composite. Please see performance disclosure in the appendix.

Key Rate Duration Exposure

Source: Barclays, Western Asset. As of 30 Jun 14. The information provided is supplemental to the Total Return Unconstrained (TRU) Bond Composite. Please see performance disclosure in the Appendix 3. The information provided is supplemental to the Macro Opportunities Composite. Please see performance disclosure in Appendix 3.

84

Foreign currency exposure in Western Asset’s unconstrained portfolios

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

USD JPY EUR AUD CNH MXN BRL PLN RUB

Perce

ntFX Exposure

Barclays Aggregate TRU Representative Portfolio¹ Macro Opportunities Representative Portfolio²

100%

Source: Western Asset. Exposures as of 30 Jun 14¹The information provided is supplemental to the Total Return Unconstrained (TRU) Bond Composite. Please see performance disclosure in the appendix. ²The information provided is supplemental to the Macro Opportunities Composite. Please see performance disclosure in the appendix.

FX Exposure

Source: Western Asset. Exposures as of 30 Jun 14. 1. The information provided is supplemental to the Total Return Unconstrained (TRU) Bond Composite. Please see performance disclosure in the Appendix 3. The information provided is supplemental to the Macro Opportunities Composite. Please see performance disclosure in Appendix 3.

85

0

200

400

600

800

1000

1200

1400

1600

1800

2000

0

100

200

300

400

500

600

1990 1995 2000 2005 2010 2015

OAS (basis points)OAS (

basis

point

s)

Investment-Grade (left) High-Yield (right)

Source: Bloomberg, Barclays. As of 31 Dec 14

Spread product likely to remain attractive

Source: Bloomberg, Barclays. As of 31 Dec 14

86

Spread product in Western Asset’s unconstrained portfolios

Source: Barclays, Western Asset. The information provided is supplemental to the Total Return Unconstrained (TRU) Bond Composite. Please see performance disclosure in the Appendix 3. The information provided is supplemental to the Macro Opportunities Composite. Please see performance disclosure in Appendix 3.

0

1

2

3

4

5

6

7

Barclays Aggregate TRU RepresentativePortfolio¹

Macro Opportunities RepresentativePortfolio²

Perce

ntCash Flow Yield, Range in 2014

Source: Barclays, Western Asset¹The information provided is supplemental to the Total Return Unconstrained (TRU) Bond Composite. Please see performance disclosure in the appendix. ²The information provided is supplemental to the Macro Opportunities Composite. Please see performance disclosure in the appendix.

Cash Flow Yield, Range in 2014

CONNECTING THE DOTS

Timothy Schuler Portfolio Manager and Investment Strategist The Permal Group

88

January 7, 2015

GLOBAL MACRO The divergence between equities and commodities

Source: Bloomberg. Past performance is not a guide to future results. The views expressed are Permal’s as of the date given and may change as market or other conditions change. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate. See the Important Information page for risks and performance disclosures.

Commodities v Equities

89

Euro/USD: February 2014 – February 2015

Europe – Paging Dr. Draghi


90

Europe – Paging Dr. Draghi

Source: ECB, Zero Hedge Past performance is not a guide to future results. The views expressed are Permal’s as of the date given and may change as market or other conditions change. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate. See the Important Information page for risks and performance disclosures.

Euro Area Private Sector Loan Creation and M3

91

2 Year Yields: February 2014 – February 2015

0%

Sweden

Denmark

Switzerland

Germany

Europe – How low can you go?


92

January 2, 2015

United States – The dreaded ‘D-word’

US 5-Year inflation


93

United States – Neither a borrower nor a lender be

Source: H.8; Zero Hedge Past performance is not a guide to future results. The views expressed are Permal’s as of the date given and may change as market or other conditions change. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate. See the Important Information page for risks and performance disclosures.

Difference Between Total Bank Deposits and Loans ($ BN)

94

United States – M x V = GDP


95

EM Currencies vs US Dollar : February 2012 – February 2015

Brazilian Real

South African Rand

Turkish Lira

Indonesian Rupiah

“Taper Tantrum” Levels

GLOBAL MACRO – FX effects from policy divergence


96

GLOBAL MACRO – Significant impact

December 31, 2014 Source: CitiFX. Past performance is not a guide to future results. The views expressed are Permal’s as of the date given and may change as market or other conditions change. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate. See the Important Information page for risks and performance disclosures.

Impact Of Negative Shock On Robust and Weak Economies

97

Continuous Commodity Index: June 2006 – February 2015

GLOBAL MACRO – Not an isolated incident


98

Continuous Commodity Index – June 2006 – February 2015 Continuous Commodity Index – June 2006 – February 2015 Continuous Commodity Index and AUD: June 2006 – February 2015

AUD

CCI

GLOBAL MACRO – Not an isolated incident


99

Global GDP

Copper (Spot)

Global GDP vs Spot Copper: June 2006 – February 2015

2.67

5714

GLOBAL MACRO – Follow the leader


100

United States – Something does not compute


101

United States – A recurring trend

Source: streettalklive.com Past performance is not a guide to future results. The views expressed are Permal’s as of the date given and may change as market or other conditions change. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate. See the Important Information page for risks and performance disclosures.

GDP – Estimates vs. Actual 2011- 14

102

United States – Connecting the dots


Target Federal Funds Rate at Year-End %

103

United States – Spot the odd man out


104

Global GDP Growth Expectations: February 2013 – February 2015

2014 Estimates

2015 Estimates

2.74

2.42

GLOBAL MACRO – Things that make you go hmmm…


QUESTIONS?

Ian Irvine Head of Customer & Business Development ASX

HOW CAN MFUNDS CHANGE THE FUTURE OF INVESTING?

108

What is the mFund settlement service?

The mFund Settlement Service uses CHESS to automate the process to apply for (buy) and to redeem (sell) units in selected unlisted managed funds using an ASX broker

Units acquired in this way are settled and delivered to the individual investors’ Holder Identification Number (CHESS HIN) in their name alongside other ASX investments – shares, LICs, ETFs etc.

The process is similar to that currently followed for managed funds

ASX mFund Settlement Service

109

What is the mFund settlement service?

• Does not require the completion of a

paper application form

• Does not require a direct investor to be identified for each transaction

• Use CHESS to communicate between an ASX broker and a fund manager’s registry and to move money and units


110

Some statistics about how investors use ASX as an investment supermarket

5.98 million hold shares directly

6.68 million adult Australians own shares (38%)

1 million SMSF trustees have chosen to invest 40% of the $560Bn SMSF sector via ASX


Source: ASX Share Ownership Study 2012 ATO, Self Managed Super Fund Statistical Report (Sep 2014)

111

What are the trends?

$2 trillion 2035

Size of sector $560 billion

Number of trustees

1,000,000

Average fund value

$1,000,000

2,470,000

$1,620,000

Source: Macquarie/SPAA, 2014 SMSF Service Model Report; ASX estimates

$2 trillion 2014 $560 billion


112

What are the opportunities? To add value to the growing self-directed/SMSF trustee market with ‘advice’ • Australian retail investors have been successful in managing a portfolio of quality large cap.

Domestic equities – their comfort zone, but are open to advice relating to other asset classes, where they feel less comfortable to ‘go it alone’

• mFund brings many of the elements they are familiar with when using shares: • An ASX broker (either directly or via an adviser) to access investments • Not having to complete complex paperwork (applications and identification) • Seeing their holding on CHESS under their HIN with other ASX investments • Access to comparative data and information from a central location at ASX • Electronic connectivity provides for ease of access and data management

• To play to this cost efficient thinking by introducing fee for service pricing to advice, on-going

administration and tax reporting • Unbundled solutions – customer pays for what is needed


113

Where are we at? • Fund managers – of which Legg Mason is a foundation member

• 24 product issuers (some REs act for more than one product issuer/fund) • 75 funds admitted to the service

• 45 additional funds expected to be admitted by end of June 2015

• Unit registries • 7 external registries have joined the exchange as Product Issuer Settlement Participants (PISPs)

• 2 managers provide own ‘in-house’ solutions • 3 additional external registries expected to join by end June 2015

• Brokers and distributors

• 12 brokers have committed to build the IT to connect • 9 live now +1 expected by end of March 2015

• 3 have a dedicated ‘wholesale’ service for financial advisers • 3-4 ‘white label’ clients expected to connect through a broker by end June 2015


114

More information – visit www.mfund.com.au [email protected]


http://www.mfund.com.au/http://www.mfund.com.au/mailto:[email protected]

115

Legg Mason mFunds

Legg Mason Australian Equity Income Trust LMA01 Legg Mason Real Income Fund LMA02 Legg Mason Australian Small Companies Trust LMA03 Legg Mason Western Asset Australian Bond Trust LMA04 Legg Mason Retirement Income Trust LMA05 Legg Mason Diversified Trust LMA06 Legg Mason Brandywine Global Opportunistic Fixed Income Trust LMA07

Fund name ASX Code

INCOME SOLUTIONS FOR THE FUTURE

Panel Discussion 3

Anthony Kirkham - Western Asset Management Head of Investment Management Reece Birtles - Martin Currie Australia Chief Investment Officer and ortfolio Manager


Anthony Kirkham Head of Investment Management Western Asset Management

118

Aust Equities

Aust REITS

Aust Bonds

Global Bonds (AUD Hedged)

Global Equities (AUD Unhedged)

EM Bonds (USD Unhedged)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0

Rewa

rd (An

nualiz

ed Re

turn %

)

Risk (Annualized Standard Deviation %)

Risk vs Return Select asset classes: 10 Years ending 31st December 2014

*Aust Equity is represented by the returns of the ASX 200 Index; Aust REITS = ASX Property Index, Aust Bonds = Bloomberg Composite Index, Global Bond = Barclays Global Aggregate Total Return (AUD Hedged) Index, EM Bonds = JPMorgan EMBI Global Index (USD Unhedged) Past performance is not an indication of future performance. Source: Bloomberg. As of 31 Dec 14

119

*Aust Equity is represented by the returns of the ASX 200 Index; Aust REITS = ASX Property Index, Aust Bonds = Bloomberg Composite Index, Global Bond = Barclays Global Aggregate Total Return (AUD Hedged) Index, EM Bonds = JPMorgan EMBI Global Index (USD Unhedged) Past performance is not an indication of future performance. RBA Term Deposit special rate is defined as Retail deposit and investment rates; Banks' term deposits ($10000); Average special rate (all terms) by the RBA. Source: Bloomberg, RBA. As of 31 Dec 14 .

119

Select Asset Class Returns

0

50

100

150

200

250

Dec 04 Dec 06 Dec 08 Dec 10 Dec 12 Dec 14

Cumulative Return (Dec 2004 = 100)

Aust Equities Aust REITS Aust Bonds

Global Equities (AUD Unhedged) Global Bonds (AUD Hedged) RBA Term Deposit (Special Rate)

Source: Bloomberg. As of 31 Dec 14.

Cumulative Return (Dec 2004 = 100)

120

RBA Term Deposit special rate is defined as Retail deposit and investment rates; Banks' term deposits ($10000); Average special rate (all terms) by the RBA. Source: RBA, Bloomberg, Western Asset. As of 31 December 14

Return comparison: Australian Bonds vs Australian Term Deposits

0

2

4

6

8

10

12

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Total

Retu

rn (%

)

Legg Mason Western Asset Australian Bond Trust RBA Term Deposit (Special Rate)

Source: RBA, Bloomberg, Western Asset. As of 31 Dec 14.

121

Source: NAB Wholesale Banking Credit Research As of 31 Dec 14 Note: The series was revised by the index provider and may be subject to revision given changes in market conditions and assumptions. Historical data is included for reference only.

Take more risk, get more return?

0

100

200

300

400

500

600

700

800

900

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Swap

Sprea

d (bp

s)

AAA AA A BBB (ex sub-debt)

Source: NAB Wholesale Banking Credit Research. As of 31 Dec 14.Note: The series was revised by the index provider and may be subject to revision given changes in market conditions and assumptions.Historical data is included for reference only.

122

Duration Rating

Building Blocks: Fixed Income Opportunities

1.5 1.6

2.6 2.73.0

3.3 3.43.9

4.4 4.5

5.46.0 6.2

6.5 6.5 6.6 6.7

0

1

2

3

4

5

6

7

8

USTreasury

BarclaysGlobal

Agg

Mortgage-Backed

BBGAust

Comp

USIG

Credit

BarclaysGlobal

Corporate

BBGAust

Credit

Asiaex-Japan

LocalCurrency

NewZealand

IGCorporate

Non-AgencyMBS²

BankLoan¹

EmergingMarkets

Corporate(USD)

EmergingMarkets

Sov(USD)

EmergingMarkets

LocalCurrency

Asiaex-Japan

Credit(USD)

US High-YieldCredit

GlobalHigh-Yield

5.6 6.5 4.3 4.5 7.1 5.9 3.1 5.8 3.0 1.7 0.3 5.3 7.1 4.9 6.1 4.3 4.3

AAA AA AA+ AA- A BBB+ A+ A+ B+ BBB BBB+ B+ BB- AAA BBB BBB- BBB+

Yield

(%)

Source: Barclays, JPMorgan, Bloomberg, ANZ, Western Asset. As of 31 Dec 14.¹Source: S&P/LSTA

Fixed Income. It’s not just one asset class

Source: Barclays, JPMorgan, Bloomberg, ANZ, Western Asset As of 31 Dec 14. Source: S&P/LSTA

Reece Birtles Chief Investment Officer and Portfolio Manager Martin Currie Australia


124

Where to find income & inflation protection in a QE world?

Source: Deutsche Bank, RBA, Martin Currie Australia. ‘Investment property’ calculated on housing rental yield.

125

• A 65 year old has over 20 years of inflation to offset

• Growing income stream needed (most income strategies are flat or declining)

• 2.5% growth needed to reduce longevity risk

Income growth

80

90

100

110

120

130

140

150

160

170

0 5 10 15 20

Over 20 years, income needs to grow 63% to offset loss of purchasing power from inflation

The need for growth assets

Years

Source: Martin Currie Australia.

126


$1

$3

$5

$7

$9

$11

$13

1 2 3 4 5 6 7 8 9 10

Next 10yr Income Stream from $100 Invested

LMA Equity Income Global Eq Needs

• When annual income is greater than annual expenditure needs, retirees don’t need to sell into volatile markets

• Retiree can maintain a higher tolerance for holding capital volatile but growing assets

The value of High Income Growth Assets

Equity Income Strategy

Years

127

Equities grow dividends over time, Term Deposit income down 40% since GFC

Annual volatility of growth in income is lower for Equities vs Cash

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0

50

100

150

200

250

300

Jul-02 Jul-04 Jul-06 Jul-08 Jul-10 Jul-12 Jul-14

Last 12 years of Annual Income Australian Stockmarket Dividends per Share LHS

Term Deposit Rate RHS

17.2%

9.6%

20.8%

0%

5%

10%

15%

20%

25%

ASX200 Price ASX200 Dividend Term Deposit Income

Income Growth Volatility Last 12 years

Source: Factset, RBA, Martin Currie Australia

Capital stable not same as income stable

128

Exp. Return 5.0% 9.5% 11.5% Risk 4.0% 10.0% 15.0% Sharpe 1.3 0.9 0.7

Equities

Real Assets

Fixed Income

• Listed A-REITs, essential infrastructure and utilities

• Large sunk capital base - limited business risk and low capex

• Assets can naturally raise prices to match inflation

• Liquid and transparent - only owns listed ASX entities

• 50% A-REITs / 50% infrastructure & utilities

3 Protection from inflation 4 Low risk 1 Sustainable income stream 2 Attractive yield target


Real assets can provide sustainable income

129

0

400

800

1,200

1,600

1980 1984 1988 1992 1996 2000 2004 2008 2012

0

40

80

120

160

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

0

50

100

150

200

250

1980 1984 1988 1992 1996 2000 2004 2008 2012

0

50

100

150

200

250

300

350

1970 1976 1982 1988 1994 2000 2006 2012

Traffic Volume

Due to population increase, traffic volume and airport passenger tend to increase, consumption of electricity and gas is also growing in Australia

（Billion passenger km）

Airport Passenger

（Year）

（Million）

Electricity Consumption （Billion Cubic Feet）（Billion kilowatthours）

Natural Gas Consumption

（Year）（Year）

（Fiscal Year）

Source: Australian infrastructure statistics - Yearbook 2014 Period: Fiscal year 1970-2012 Traffic volume is the sum of passenger cars and buses

Source: EIA, Period: 1980-2012

Source: BITRE （Department of Infrastructure and Regional Development） Period: 1985-2013 Total passenger is the sum of inbound and outbound passenger

Source: EIA, Period: 1980-2013

Stable growth due to demand for infrastructure

130

Australian retail rents typically escalate with reference to the CPI

Since 1983, retail sales have grown by 2.5% pa above the inflation rate of 3.8% pa

Gas & Electricity Grids

Australia’s Energy Regulator (AER) determines a regulated return for our gas and electricity grids every 5 years

The Regulated Asset Base that this return is applied to rises by the CPI each year

Tollroads

Australia’s toll road concession model adopts pricing that references the CPI for escalation

Transurban’s Citylink growth in tolls over its first 15 years is the greater of CPI or 4.5% pa

Real Assets In-built inflation protection

Australian retail rents typically escalate with reference to the CPI.

Since 1983, retail sales have grown by 2.5% pa above the inflation rate of 3.8% pa.

Australia’s Energy Regulator (AER) determines a regulated return for our gas and electricity grids every 5 years.

The Regulated Asset Base that this return is applied to rises by the CPI each year.

Australia’s toll road concession model adopts pricing that references the CPI for escalation.

Transurban’s Citylink growth in tolls over its first 15 years is the greater of CPI or 4.5% pa.

Shopping Centres

Gas & Electricity Grids

Toll Roads

Real Assets offer a natural match to inflation

Source: Martin Currie Australia. The securities refer to above are for illustrating purposes only and do not constitute a recommendation.

131

• Australian Real Asset dividend yields relatively high compared to other global real asset options

• An attractive investment opportunity for offshore investors

Source: Factset, Iress, A-REIT: S&P/ASX 200 A-REIT Index, US REIT: FTSE EPRA/NAREIT USA Index, J-REIT: FTSE EPRA/NAREIT Japan Index. The Real Income strategy is the estimated dividend yield of the portfolio by Legg Mason Asset Management Australia Limited

Comparison of Dividend Yields and Bond Rates ( As of the end of August 2014 )

Australian Real Assets attractive dividend yield on a global basis

Strategy

132

Max Drawdown

Source: Martin Currie Australia. Past performance is not a reliable indicator of future performance.

The Real Income strategy has outperformed with lower draw down risk

$219

$139

$180

$156

90

110

130

150

170

190

210

230

Nov

-10

May

-11

Nov

-11

May

-12

Nov

-12

May

-13

Nov

-13

May

-14

Nov

-14

Total Gross Returns Common Base Real Income since inception to Dec 2014

Real Income Fund S&P/ASX 300 A-REIT 300 UBS Infrastructure & Utilities - Accum

Real Income comparison to equities, A-Reits and utilities

Strategy

133

Equity Income strategy is designed to provide a yield of more than 125% of ASX200 franked yield and to continually grow investors income over time.

1. Income focused portfolio construction

• Low stock & sector concentration to avoid income shocks • Diversified portfolio across economic sectors to hedge cost of living

2. After tax efficiency • Portfolio optimised for 0% tax payers • Low turnover for superannuation investors

3. Growing income stream

• Invests in high quality companies paying high dividends • Focused on sustainability of dividends • No derivative or dividend stripping strategies • Regular quarterly distribution with a unique “5th” distribution to

reinvest capital

The combination of these factors has resulted in a strategy that is exceeding its objective of provide a high, growing and well diversified long term income stream.

Equity Income

134

Source: Martin Currie Australia and Morningstar Direct. As at January 2015.

20

30

40

50

60

70

80

90

0 20 40 60 80 100

% A

sset

s in

top

10 h

oldi

ngs

Number of holdings

Low concentration in top 10 holdings

Legg Mason Australian Equity Inc A Perennial Value Shares for Income TrustMerlon Australian Equity Income Denning Pryce Equity IncomeArmytage Australian Equity Income Plato Australian Shares IncomeCFS Wholesale Equity Income Investors Mutual Equity Income

ASX200

Top20 Weight

LMEI 39.9%

ASX200/typical fund 68.0%

Low weight to ASX Top20 complements direct shareholdings

Low stock and sector concentration

30

35

40

45

50

55

60

65

70

75

0 20 40 60 80 100

135

0%

10%

20%

30%

40%

50%

Legg Mason EquityIncome

ASX200 Competitor

Low bank sector concentration reduces risk to economic shock

Manage absolute risk with low stock concentration

Comp

Martin Currie Australia and Morningstar Direct. As at January 2015.

Low stock and sector concentration

0%

2%

4%

6%

8%

10%

1 2 3 4 5 ASX200 Competitor Equity Income Strategy

MCA risk limit


136


Portfolio Distribution


Top 200

14%

28% 27%24%

8%

0%4%

25%

43%

28%

0%

20%

40%

60%

Equity Income Strategy – stable income Quality

Low quality High quality 5 4 3 2 1

EPS Variability

0%

10%

20%

30%

40%

50%

60%

70%

All StocksQuality Income Universe

A fundamentally high quality portfolio leads to low volatility

137

Source: Martin Currie Australia as at December 14 *Assumes zero percent tax rate and franking benefits realised in tax return. Past performance is not indicative of future performance. Returns are quoted before fees.

Next 12 months expected income from $100 invested at inception after paying distributions

Source: Martin Currie Australia , Factset. Next 12 Months Income is calculated using the weighted average of broker consensus forecasts of each portfolio holding

Legg Mason Equity Income Strategy as at December 2014 (%)

6 mth 1 Yr 3Yr pa S.I. pa

Dividends 3.5 6.5 6.6 6.6 Franking 1.1 2.1 2.1 2.0 Income* 4.7 8.5 8.7 8.6 Total Return* 7.3 11.4 20.2 13.2

Inception date May 2010

3

5

7

9

11

May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 Last 12 months Income MCA Next 12 months Income MCA Next 6 months Income from Best Rate TD

Attractive and growing income stream

$

138

1

3

5

7

9

11

13

1 2 3 4 5 6 7 8 9 10

Aust Bills Aust Core BondLMA Equity Income LMA REAL incomeGlobal Eq NeedsBuy/Write

1

3

5

7

9

11

13

1 2 3 4 5 6 7 8 9 10

Needs


Legg Mason Multi Asset Retirement Income Trust maximises chance of covering living needs

Next 10yr income stream from $100 invested Next 10yr income stream from $100 invested

Equity Income Strategy Real Income Strategy


Years Years

$

139

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

Next 12 month expected Yield Cash Bond Real Assets Eq Income Multi Asset Retirement Income

Source: Martin Currie Australia. Past performance is not indicative of future performance

Divergence of yields since GFC - focus on income allocation

MARIT

140

Best TD

LM Aust Bonds

Global Bonds

AREIT

Aust Shares Global Shares

EM

LMA Real Income

LM Equity Income

LMA Multi Asset Retirement

Income

0%

2%

4%

6%

8%

10%

12%

14%

0% 5% 10% 15% 20% 25%

Expe

cted

Ret

run

Risk (expected SD of Return)

Return vs Return Risk

Best TDAust Bonds

Global Bonds

AREIT

ASX200 Shares

Global Shares EM shares

LM Real Income

LM Equity Income

LMA Multi Asset Retirement

Income

0%

2%

4%

6%

8%

0% 5% 10% 15% 20% 25%

Expe

cted

Inco

me

Income Risk (expected SD of Income)

Income vs Income RiskReturn vs Return Risk


Ingredients for optimal income different to accumulation

141

Conservative

MARIT

MARIT DAA

Balanced

Growth

0%

2%

4%

6%

8%

10%

12%

0% 5% 10% 15%

Expe

cted

Ret

urn

Risk

Total Return Focus - Portfolios

Conservative

MARIT

MARIT DAA

Balanced Growth

2%

4%

6%

8%

0% 2% 4% 6% 8% 10% 12%

Expe

cted

Inco

me

Income Risk

Income Focus - Portfolios

min requirement

Source: Martin Currie Australia. Growth, Balanced and Conservative based on industry standard strategic asset allocations.

Traditional multi asset fails to differentiate income/stability

QUESTIONS?

WRAP UP & CLOSE

Beau Titchkosky Head of Sales Legg Mason

144

Contact us

Beau Titchkosky Head of Sales 0410 407 046 [email protected]

Colin Taylor Director of Sales 0427 023 692 [email protected]

Tony Pattison Director of Sales 0448 277 060 [email protected]

John Besley Client Service and Distribution Support Manager 0422 211 644 [email protected]

One of the world’s largest global asset managers, Legg Mason combines expertise in a wide range of investment disciplines with a singular focus on delivering powerful financial solutions for both individuals and institutions. Our network of independent investment managers currently manages over US$709B* for clients in sixe continents.

As of 31 December 2014. Total AUM reflects assets of Legg Mason’s full network of investment managers, some of whom are not listed above.

APPENDIX

147

This information is provided by Legg Mason Asset Management Australia Limited (ABN 76 004 835 849 AFSL 240827) (Legg Mason). Any reference to “Legg Mason Australia” or “Martin Currie Australia” is a reference to Legg Mason Asset Management Australia Limited as a division thereof. The information in this document is of a general nature only and is not intended to be, and is not a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Legg Mason Australia does not guarantee any rate of return or the return of capital invested. Past performance is not necessarily indicative of future performance. Investments are subject to risk, including, but not limited to, possible delays in payments and loss of income or capital invested. All opinions, estimates and projections included in this communication constitute our judgement as of the date of this communication and are subject to change without notice. The views and opinions expressed by the quest speakers are their own, and are not endorsed by Legg Mason Asset Management Australia Limited.

Appendix 1 – Important disclosure information Legg Mason

148

This presentation has been prepared by Brandywine Global Investment Management, LLC (“Brandywine Global”). It may not be reproduced or used in any form or medium without written permission. The views expressed herein represent the opinions of Brandywine Global and are presented for informational purposes only. In rendering portfolio management services, Brandywine Global may use the portfolio management services, research and other resources of its affiliates including Brandywine Global Investment Management (Europe) Limited. They are not intended to be a recommendation or investment advice and do not take into account the individual financial circumstances or objectives of the investor who receives it. The securities herein may not be suitable for all investors. Brandywine Global recommends that investors independently evaluate each issuer, security or instruments discussed herein and consult any independent advisors they believe necessary. The views herein are for informational purposes only and represent the opinions of Brandywine Global and are not intended to be a recommendation, investment advice, forecast or guarantee of future results. The information should not be considered a solicitation or offer to provide any Brandywine Global service in any jurisdiction where it would be unlawful to do so under the laws of that jurisdiction. The information contained within this presentation is obtained from sources believed to be accurate, reliable and current as of the presentation date. Brandywine Global will not undertake to supplement, update or revise such information at a later date. There may be additional risks associated with international investments. International securities may be subject to risks including, but not limited to: market/currency fluctuations, investment risks, and other risks involving foreign economic, political, monetary, taxation, auditing and/or legal factors. These risks may be magnified in emerging markets. Fixed income securities are subject to credit and interest rate risk. High yield, lower-rated, fixed income securities involve greater risk that investment-grade fixed income securities. Asset-backed, mortgage-backed or mortgage related securities are subject to additional risks such as prepayment and extension risks. High yield bonds possess greater price, volatility, illiquidity, and possibility of default. The aforementioned investments may not be suitable for everyone. Brandywine Global believes that transactions in any option, future, commodity, or other derivative product are not suitable for all persons, and that accordingly, clients should be aware of the risks involved in trading such instruments. There may be significant risks which should be considered prior to investing. Derivatives transactions may increase liquidity risk and introduce other significant risk factors of a complex character. All securities trading, whether in stocks, options or other investment vehicles, is speculative in nature and involves substantial risk of loss. Certain statements included in this presentation constitute forward looking statements. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as “expects”, “anticipates”, “plans”, “believes”, “estimates”, “intends”, “targets”, “projects”, “forecasts” or negative versions thereof and other similar expressions, or future or conditional verbs such as “may”, “will”, “should”, “would” and “could”, and similar expressions to the extent they relate to the Firm. The forward-looking statements are not historical facts but reflect the current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. Brandywine Global’s investment process may prove incorrect, which may have a negative impact on performance. Please see attached appendix containing description of indices used in connection with this product. All indices are unmanaged and are not available for direct investment. The indices do not incur costs including the payment of transaction costs, fees and other expenses. Past performance is no guarantee of future results. ©2014, Brandywine Global Investment Management, LLC. All rights reserved.

Appendix 2 – Important disclosure information Brandywine Global – Francis A. Scotland presentation

149

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, 2013. The verification report is available upon request.

Verification assesses whether (1) the Firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the Firm’s policies and procedures are designed to calculate and present performance in compliance with 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 commingled funds in the Composite are calculated daily using net value (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. Any gross total three-year annualized ex-post standard deviation measures prior to 2011, included within the "Examination Period" identified above, are not covered by the report of independent accountants. Past investment results are not indicative of future investment results. Western Asset’s list of composite descriptions is available upon request. Please contact Jan Pieterse at 626-844-9977 or [email protected]. All returns for strategies with inception prior to January 1, 2005 are available upon request.

Appendix 3 – Important disclosure information Western Asset – Joseph A. Filicetti presentation

150

Performance disclosure – 31 December 2014

151

Performance disclosure – 31 December 2014

152

© Western Asset Management Company 2015. This presentation is the property of Western Asset Management Company and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.

Past results are not indicative of future investment results. This presentation is for informational purposes only and reflects the current opinions of Western A

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