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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
35,000
40,000
45,000
50,000
55,000
60,000
65,000
70,000
75,000
30,000
35,000
40,000
45,000
50,000
55,000
60,000
65,000
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
4
5
6
7
8
9
10
11
4
5
6
7
8
9
10
11
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
76
80
84
88
92
96
100
104
108
76
80
84
88
92
96
100
104
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
0
5
10
15
20
25
30
35
0
5
10
15
20
25
30
35
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
8
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
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
2010 2011 2012 2013 2014 2015
U.S. GERMANY
10-YEAR BREAKEVEN INFLATION RATES % %
As of 2/17/2015.
Brandywine Global
10
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.
11
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.
-6
-4
-2
0
2
4
6
8
10
-6
-4
-2
0
2
4
6
8
10
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
13
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?
15
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
42
44
46
48
50
52
54
56
58
60
42
44
46
48
50
52
54
56
58
60
2011 2012 2013 2014 2015
U.S. EUROZONE CHINA
MANUFACTURING PMI
As of 01/31/2015.
Brandywine Global
16
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.
0
2
4
6
8
10
12
14
16
-5
-4
-3
-2
-1
0
1
2
3
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
4,000
6,000
8,000
10,000
12,000
14,000
4,000
6,000
8,000
10,000
12,000
14,000
LEVEL
EUR (Bn) EUR (Bn)
-4
-2
0
2
4
-4
-2
0
2
4 3-MONTH RATE OF CHANGE
% %
-5
0
5
10
15
-5
0
5
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
17
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
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.
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
INDIA INDONESIA
POLICY RATES % %
As of 02/28/2015.
Brandywine Global
19
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
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.
-80
-40
0
40
80
120
160
200
-80
-40
0
40
80
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
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.
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
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.
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?
25
The board of Eastman Kodak: • Highly respected professional directors
• Compliant with regulation
• 2009 were cited as examples of Best
Practice in diversity and governance
EASTMAN KODAK – What went wrong?
26
Wicked problems
https://www.youtube.com/watch?v=qUH5XOPF8pc
27
Typology of problems
28
Our world in chaos
https://www.youtube.com/watch?v=XrJjfDUzD7M
29
The Stock Exchange
30
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
32
Eastman Kodak Board is an example of what happens when we solve wicked (information age) problems with tame (old capitalist age) thinking.
EASTMAN KODAK – What went wrong?
33
Our brain & change
34
Levels of thinking
35
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
40
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
41
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
47
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
48
Hedge fund growth – Idiosyncratic behaviours
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.
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
20
30
40
50
60
70
80
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
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.
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?
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.
92
January 2, 2015
United States – The dreaded ‘D-word’
US 5-Year inflation
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.
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
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.
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
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.
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
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.
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
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.
99
Global GDP
Copper (Spot)
Global GDP vs Spot Copper: June 2006 – February 2015
2.67
5714
GLOBAL MACRO – Follow the leader
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.
100
United States – Something does not compute
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.
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
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.
Target Federal Funds Rate at Year-End %
103
United States – Spot the odd man out
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.
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…
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.
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
ASX mFund Settlement Service
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
ASX mFund Settlement Service
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
ASX mFund Settlement Service
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
ASX mFund Settlement Service
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
ASX mFund Settlement Service
114
More information – visit www.mfund.com.au [email protected]
ASX mFund Settlement Service
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
INCOME SOLUTIONS FOR THE FUTURE
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
INCOME SOLUTIONS FOR THE FUTURE
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
Source: Martin Currie Australia
$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
Source: Martin Currie Australia
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
Equity Income Strategy
136
Source: Martin Currie Australia
Portfolio Distribution
Equity Income Strategy
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
Source: Martin Currie Australia
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
Equity 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
Source: Martin Currie Australia
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