Legg Mason MetLife QS Multi Asset MetLife QS Multi AssetAsset€¦ · Founded in 1899, Legg Mason is one of the world’s largest global asset managers. Designed around nine independent

Legg Mason MetLife QS Multi Asset

February 2018

MetLife QS Multi AssetAsset

Confidential – for internal use only

Founded in 1899, Legg Mason is one of the world’s largest global asset managers.

Designed around nine independent investment managers, we bring you expertise across

equities, fixed income and alternatives.

About Legg Mason Global Asset Management

Source: Legg Mason, as at 31 December 2017. 2

Global presence with approximately 3,300 employees,

including 360 investment professionals in 40 offices.

AUM breakdown

Assets under management of $767

billion as of 31 December 2017.


Global listed

infrastructure

investing

Global value

investing

Global Alternative

Asset Manager

Real estate

investment

specialists

Active equity

specialists

Small-cap equity

Systematic

investment solutions

Global Value Fixed

income

Quality-focused

equity

Legg Mason Investment Family


QS Investors – Legg Mason’s Asset allocation experts: Deep resources, experienced professionals

DIVERSIFIED

SYSTEMATIC

ADAPTIVE

• Build advanced solutions

for Multi-Asset and

Equity portfolios

• US$22.5 Billion in AUM *

• 50 investment

professionals, 73

employees

• Formed in 1999, based

in New York and Boston

* As at 30 September 2017


Why multi-asset?


Why asset allocation? No crystal ball, only smart diversification

• No one can predict

which asset class will

come out on top each

year.

• The worst-performing

investment one year

can be the best the

next, and vice versa.

• Asset classes

typically perform

differently due to the

macro environment

and risk tolerances.


Benefits of Dividends: 21st Century Important Contributor to Total Return

Source: QS Investors Analysis; MSCI.

*Price return history available starting from January 1, 2001. Please refer to important disclosure information at the end of this presentation.

0.5% 0.4% 2.1% 3.5% 11.0%

3.6% 2.2%

2.0%

2.7%

1.4%

21st Century:January 2000 - July

2017


2017


2017


2017*


2017*

UK Dividends

Germany Dividends

Australia Dividends

Taiwan Dividends

South Korea Dividends

Dividends

Price

Return

Europe Dividends

AC Asia Pac

ex Japan Dividends

89% of

Total Return

84% of

Total Return

0.2%

3.7% 3.3%

3.2%


2017


2017

47% of

Total Return

95% of

Total Return

49% of

Total Return

44% of

Total Return

12% of

Total Return

Dividends

Price

Return

1 - Have been the main contributors to total return in equity investments

2 – Provide a strong compounding effect and dollar cost averaging


The power of numbers: importance of limiting downside

Preserving capital during down markets; enhancing returns over long run

Source: Legg Mason, for illustrative purpose only and not representative of an actual portfolio.

70

80

90

100

Period 1 Period 2 Period 3

$ $100

$90

$80

$100

B

Portfolio When portfolio falls 20%

Has to rise 25% to recover

Portfolio When portfolio falls 30%

Has to rise 43% to recover! C

When portfolio falls 10%

Has to rise 11% to recover

Portfolio

A

$70

Moral of the story – Dig a smaller hole in the first place!


The Multi-asset advantage – constrain risk not return

• Outcome-based Investing provides a broad diversified approach

to investment solutions that address specific investor needs

• QS employs multiple tools and multiple asset classes to

increase the certainly of achieving the investment outcome

• Rigorous manager selection and sophisticated portfolio

construction addresses the challenges and opportunities

presented by the marketplace, and ensures the portfolios are

positioned appropriately

Benefits of Outcome-based Investing


How does Legg Mason QS do multi asset?


QS Investors – Asset allocation experts: Applying diverse expertise to build smart solutions

* Years of experience as of December 2017

Diverse team of scientists,

mathematicians, engineers,

finance and investment experts

working together too elevate

the certainty of outcomes.

RESEARCH TEAM Focus on long-term research and alpha model

SOLUTIONS TEAM Execute on short-term client demands PORTFOLIO MANAGEMENT TEAM Day-to-day management of funds

Supported by client relationship team and strategic IT resources


Legg Mason QS Investors’ robust investment process

• THREE risk-defined portfolios designed for investors with

different risk profiles

• Each portfolio targets consistent long term risk

characteristics to maintain client suitability

• RISK is managed by diversifying across a range of markets and investments

• The funds combine specialist active strategies with low cost passive funds to seek uncorrelated sources of return

• TACTICAL allocations implemented to adapt to changing market conditions

Risk Targeted

Diversified

Dynamic


Legg Mason QS Investors: Comprehensive Investment Model

3

Tactical

Asset

Allocation

1

Strategic

Asset

Allocation

2

Fund

Selection

4

Portfolio

Implementation

Customer


Investment Process Tactical Asset Allocation

Source: QS Investors.

Portfolio tactically shifts among assets to take advantage of changes in investment opportunity set

Evaluate Environment

Evaluate Opportunities

Produce Tactical Tilts

• Risk sentiment

• Economic cycle

• Liquidity

• Volatility

• Macro factors

GDP growth, fiscal policy,

monetary policy,

unemployment, current

account trends, political

environment

• Market factors

Earnings trends and revisions,

sentiment, risk appetite, flows

• Global equities

• Global fixed income

• Credit

EXPLOITING MARKET OPPORTUNITIES

14


Disciplined approach to rebalancing

− Monitor and reconcile holdings daily

− Use cash flows to maintain target allocation

− Rebalance to target allocation on a monthly basis

− Assess transaction costs

Expertise in Manager of Manager Portfolio Trading

− Leverage efficient trading operation of QS Investors

− Understand liquidity and tax issues

Efficient portfolio fulfilment

Investment Process Portfolio Implementation

15

Provides professional oversight of the portfolios


Source: QS Investors, December 2017

QS Investors – Outlook Mixed economic data has moderated our economic outlook


QS Investors – Outlook


Continue to favor U.S. stocks over bonds, but with increased caution


QS Investors – Outlook


Tightening monetary and leverage indicators bodes poorly for

small-cap companies



QS Investors – Tactical shift Equity



QS Investors – Tactical shift Fixed Income


Legg Mason Multi Asset Funds Breakdown by Asset Class

Source Legg Mason, Morningstar, as at 31 December 2017. *Fund names changed on 1 January 2018 to Legg Mason QS Growth Fund (previously Legg Mason Multi-Manager Performance Fund), Legg

Mason QS Balanced Fund (previously Legg Mason Multi-Manager Balanced Fund) and Legg Mason QS Conservative Fund (previously Legg Mason Multi-Manager Conservative Fund). Multi Asset US

Funds: These funds were created from the contribution of all the assets of the no longer existing Luxembourg SICAV (Legg Mason Multi-Manager Conservative Fund (US), Legg Mason Multi-Manager

Balanced Fund (US), and the Legg Mason Multi-Manager Performance Fund (US)) established on 13 December 2004, funds with substantially similar investment objectives and policies. Past performance

was calculated using historical performance data of the Luxembourg SICAV] funds may not be a reliable indicator of the fund's future performance.

The performance data should be used for illustrative purposes only, as performance prior to the inception date of these Funds have not been adjusted to reflect the fees of

the Funds. As at Fund inception, the Funds’ fixed annual expenses for the share class shown above (investment management fees, custody and administration fees and

shareholder servicing fees) were around 1.45% in comparison to the predecessor fund of 1.83% – there may be other variable costs not included in these figures.

*Legg Mason QS Growth Fund*

At least 55% in Equity strategies

Long-term volatility range of 10-12% over the

market cycle

*Legg Mason QS Conservative Fund*

At least 60% in Bonds/Money Market/ Capital

preservation strategies

Long-term volatility range of 6-8% over the market

cycle

*Legg Mason QS Balanced Fund*

At least 35% in Bonds/Money market/ Capital

preservation strategies

Long-term volatility range of 8-10% over the market

cycle


Legg Mason Multi-asset Funds Growth Fund

Source Legg Mason, Morningstar, as at 31 December 2017. Fund names changed on 1 January 2018 to Legg Mason QS Growth Fund (previously Legg Mason Multi-Manager

Performance Fund), Legg Mason QS Balanced Fund (previously Legg Mason Multi-Manager Balanced Fund) and Legg Mason QS Conservative Fund (previously Legg Mason Multi-

Manager Conservative Fund). Multi Asset US Funds: These funds were created from the contribution of all the assets of the no longer existing Luxembourg SICAV (Legg Mason Multi-

Manager Conservative Fund (US), Legg Mason Multi-Manager Balanced Fund (US), and the Legg Mason Multi-Manager Performance Fund (US)) established on 13 December 2004,

funds with substantially similar investment objectives and policies. Past performance was calculated using historical performance data of the Luxembourg SICAV] funds may not be a

reliable indicator of the fund's future performance.

Legg Mason QS Growth Fund – Top 10 Holdings % of Portfolio

Legg Mason ClearBridge US Appreciation Fund 14.19

Lyxor ETF MSCI Europe 13.94

Legg Mason Brandywine Global Opportunistic Fixed Income Fund 8.36

DBX MSCI USA 7.99

iShares MSCI World Minimum Volatility UCITS ETF 7.08

Lyxor ETF MSCI Emerging Markets 5.42

Legg Mason QS MV European Equity Growth and Income Fund 4.77

iShares US Aggregate Bond UCITS ETF 4.03

Legg Mason ClearBridge US Aggressive Growth Fund 3.89

Legg Mason Royce US Smaller Companies Fund 3.81

Top 10 holdings


Legg Mason Multi asset funds cumulative Performance

Source Legg Mason, Morningstar, as at 31 December 2017. Performance is shown for the A Acc USD Share Class. Performance is calculated on a NAV to NAV basis.

*Fund names changed on 16 January 2018 to Legg Mason QS Growth Fund (previously Legg Mason Multi-Manager Performance Fund), Legg Mason QS Balanced Fund (previously Legg Mason Multi-

Manager Balanced Fund) and Legg Mason QS Conservative Fund (previously Legg Mason Multi-Manager Conservative Fund). Multi Asset US Funds: These funds were created from the contribution of

all the assets of the no longer existing Luxembourg SICAV (Legg Mason Multi-Manager Conservative Fund (US), Legg Mason Multi-Manager Balanced Fund (US), and the Legg Mason Multi-

Manager Performance Fund (US)) established on 13 December 2004, funds with substantially similar investment objectives and policies. Past performance was calculated using historical performance

data of the Luxembourg SICAV] funds may not be a reliable indicator of the fund's future performance. The performance data should be used for illustrative purposes only, as performance prior to the

inception date of these Funds have not been adjusted to reflect the fees of the Funds. As at Fund inception, the Funds’ fixed annual expenses for the share class shown above (investment management

fees, custody and administration fees and shareholder servicing fees) were around 1.45% in comparison to the predecessor fund of 1.83% – there may be other variable costs not included in these figures.

©2017 Morningstar. All Rights Reserved. Past Performance is no guide to future results. Please refer to the section entitled “Important Information” for

additional details. Past performance is no guide to future returns and may not be repeated.

Multi Asset (US) Funds

Cumulative Performance

1 Month 3 Months 1 Year 3 Years 5 Years Since Inception

(13 Dec 2004)

% Qtl % Qtl % Qtl % Qtl % Qtl % Qtl

Legg Mason QS Conservative Fund* 0.57 2 1.59 2 10.59 1 11.63 1 24.05 1 57.49 -

Morningstar Peer Group Average (USD) 0.47 1.39 6.90 6.38 12.02 -

Legg Mason QS Balanced Fund* 0.75 3 2.17 3 13.01 2 13.49 2 30.77 2 61.35 -

Morningstar Peer Group Average (USD) 0.90 2.71 11.28 11.31 23.36

Legg Mason QS Growth Fund* 1.03 2 2.90 2 15.26 1 16.73 1 38.77 1 70.16 -

Morningstar Peer Group Average (USD) 0.90 2.71 11.28 11.31 23.36

Past performance is not a reliable indicator of future results

Currency exchange rate fluctuations may impact the value of your investment


Legg Mason Multi asset funds Calendar year performance

Source Legg Mason, Morningstar, as at 31 December 2017. Performance is shown for the A Acc USD Share Class. Performance is calculated on a NAV to NAV basis.

Fund names changed on 1 January 2018 to Legg Mason QS Growth Fund (previously Legg Mason Multi-Manager Performance Fund), Legg Mason QS Balanced Fund (previously Legg

Mason Multi-Manager Balanced Fund) and Legg Mason QS Conservative Fund (previously Legg Mason Multi-Manager Conservative Fund). Multi Asset US Funds: These funds were

created from the contribution of all the assets of the no longer existing Luxembourg SICAV (Legg Mason Multi-Manager Conservative Fund (US), Legg Mason Multi-Manager

Balanced Fund (US), and the Legg Mason Multi-Manager Performance Fund (US)) established on 13 December 2004, funds with substantially similar investment objectives and

policies. Past performance was calculated using historical performance data of the Luxembourg SICAV] funds may not be a reliable indicator of the fund's future performance. The

performance data should be used for illustrative purposes only, as performance prior to the inception date of these Funds have not been adjusted to reflect the fees of the Funds. As at

Fund inception, the Funds’ fixed annual expenses for the share class shown above (investment management fees, custody and adm inistration fees and shareholder servicing fees) were

around 1.45% in comparison to the predecessor fund of 1.83% – there may be other variable costs not included in these figures.

©2017 Morningstar. All Rights Reserved. Past Performance is no guide to future results. Please refer to the section entitled “Important Information” for

additional details. Past performance is no guide to future returns and may not be repeated.

Calendar Year Performance 2017 2016 2015 2014 2013 2012

% Qtl % Qtl % Qtl % Qtl % Qtl % Qtl

Legg Mason QS Conservative Fund 10.59 1 2.69 2 -1.70 3 5.59 1 5.24 2 9.83 1

Morningstar Peer Group Average (USD) 6.90 2.17 -2.61 1.31 3.94 6.32

Legg Mason QS Balanced Fund 13.01 2 2.58 3 -2.11 3 5.04 2 9.70 2 13.08 1


Legg Mason QS Growth Fund 15.26 1 3.83 2 -2.47 3 4.89 2 13.33 1 15.19 1



Currency exchange rate fluctuations may impact the value of your investment


Macro update


• Global Review of 2017

• Key region views 2018

• Views on key macro

• US tax cuts and the key winners, US economy vs market

• Japan and Europe

• EM and China

• Central Banks and Inflation

• Credit markets and the hunt for yield

• Exchange rates opportunity

• Bitcoin – FOMA!

Macro update


US Equities - 2017 review


11.9%

13.6%

21.8%

22.2%

30.2%

30.6%

0% 10% 20% 30% 40%

UK (FTSE 100)

Europe ex UK (MSCI)

US (S&P 500)

Japan (TOPIX)

Asia Pacific ex Japan (MSCI AC)

Emerging Markets (MSCI)

2017 International stock market returns (local currency)

International equities – 2017 review


The world economy in great shape

Data as of Nov. 2017.

Source: IMFWEO, Haver Analytics, DB Global Markets Research.

0

10

20

30

40

50

60

70

80

90

100

1980 1985 1990 1995 2000 2005 2010 2015 2020

Number of Countries in the World in a Recession

IMF forecast:

Smallest number

of countries in

recession ever


Source: http://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD

Please refer to Important Information slide at the end of this presentation.

Economic growth forecasts to be low

0% 1% 2% 3% 4% 5%

EM & DevelopingEconomies

European Union

Germany

UK

US

2017 2018 2019

Some drivers include:

Low Productivity Growth

Macro Uncertainty

– Political

– Regulatory

– Trade Policy

Real GDP Growth Forecast


GDP Growth exceeded 3% in 3Q and 4Q

US Economy on a solid footing…

0.5 0.1

2.8

0.8

3.1

4.0

-0.9

4.6

5.2

2.0

3.2 2.7

1.6

0.5 0.6

2.2

2.8

1.8

1.2

3.1 3.2

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Real US GDP Growth


Source: US Bureau of Economic Analysis, Federal Reserve of St Louis, as of December 30 2017


Recovery / expansion in US

Data as of Sept. 30, 2017.

Source: http://www.bea.gov/national/.

• Recoveries (1960-2007) averaged 27 quarters

• Low-inflation expansions tend to be longer than high-inflation expansions

• Currently recovery is equal to the average low-inflation expansion

U.S. Real GDP

35 Quarters 12 Quarters 20 Quarters 31 Quarters 40 Quarters 24 Quarters 34 Quarters

as of 4Q17

These “low inflation” recoveries averaged 33 quarters

0

50

100

150

200

250

300

350

400

450

500

-6

-4

-2

0

2

4

6

8

10

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015


Tax cuts have been enacted

Policy action in 2017 – The visible

Source: ClearBridge, OECD, as of January 8 2018

0

5

10

15

20

25

30

35

40

OECD Corporate Tax Rates



0

5

10

15

20

25

30

Micro-cap Small-cap Mid-cap Large-cap

%

Source: Royce, Furey Research and FactSet, as at 31 December 2016. Micro-caps: <$500 million. Small-caps: $500 million - $4 billion. Mid-

caps: $4 billion - $10 billion. Large-caps: >$10 billion. The definitions applied by Furey Resarch differ from the Royce & Associates' one.

Small and micro cap stock

Average foreign sales as percentage of total

Tax benefits from being more domestic


Repatriation – how lower taxes could bring back cash

2016 Unremitted Foreign Earnings: S&P 500 Sectors

0 100 200 300 400 500 600 700 800 900

Information Technology

Health Care

Consumer Staples

Financials

Industrials

Energy

Consumer Discretionary

Materials

Utilities

Real Estate

Telecommunication Services

$ Billion

Unremitted Foreign Earnings

19.7% of market value

18.4% of market value

Data as of Jan. 2018.

Source: Bloomberg


U.S. consumer spending is larger than the next 4 largest countries

(China, Japan, U.K., Germany) combined

The consumer is king in the US U.S. Consumer Spending Is Largest in the World

Source: Cornerstone Macro.

$12.3

$4.2

$2.4

$1.9

$1.8

0 2 4 6 8 10 12 14

United States

China

Japan

U.K.

Germany

$ Trillion

Nominal Consumer Spending 2015


US Corporate earnings are growing

Source: Bloomberg, as of January 12 2018.

S&P 500 Quarterly Bottom-Up Earnings Per Share Actuals & Estimates

98.87 103.65

110.56 119.7 117.55 118.53

133.92

149.47

31-Dec-11 31-12-12 31-12-13 31-12-14 31-12-15 30-12-16 29-12-17 31-12-2018(Estimated)

S&P500 earnings-per-share

US

D P

er

Sh

are



Multiple expansion has driven markets higher

Us equity valuations: no longer cheap

Source: Bloomberg, as of December 30 2017

10

12

14

16

18

20

22

500

1000

1500

2000

2500

3000

31/12/200428/04/200631/08/200731/12/200830/04/201031/08/201131/12/201230/04/201431/08/201530/12/2016

S&P 500 price (LHS) S&P 500 forward P/E (RHS) Average forward P/E (RHS)



0

5

10

15

20

25

S&P 500 TR

US equities: where is the risk?

“FAANG” stocks and Microsoft made up 29% of the market’s overall return last year

Source: Bloomberg, as of December 31 2017. *FAANG stocks are Facebook, Amazon, Apple, Netflix and Alphabet (Google).

S&P 500 YTD

Total Return

21.83%

“FAANG”

Stocks +

Microsoft



Data as of Dec. 31, 2017.

Source: Cornerstone Macro.

Market corrections It’s Been a Long Time Since the Market Has Seen a 15% Correction

1,610

1,173

1,928

1,306

1,035

2,072

982

515

0 500 1,000 1,500 2,000 2,500

2017

2008

1998

1987

1962

1957

1946

1937

Days

S&P 500: Trading Days without a 15% Correction


GDP-Services, YoY (left)

PMI-Services (right)

38

43

48

53

58

63

68

-2

-1

0

1

2

3

4

5

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Index Level

Per

cent

Eurozone: Service Output

GDP-Manufacturing, YoY (left)

PMI-Manufacturing (right)

30

35

40

45

50

55

60

65

-15

-10

-5

0

5

10

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Index Level

Per

cent

Eurozone: Manufacturing Output

Europe Outlook – growth continues to improve but inflation remains subdued

Source: Bloomberg, ECB, Western Asset. As of 31 Oct 17 Source: Bloomberg, ECB, Western Asset. As of 31 Oct 17


Large Manufacturers

Large Non-Manufacturers

-60

-50

-40

-30

-20

-10

0

10

20

30

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Diff

usio

n In

dex

Tankan Business Conditions

Source: Bloomberg, Bank of Japan, Cabinet office, Western Asset. As of 31 Dec 17

Japan Outlook – inflation expectations rising

Inflation and Expectation

BEI 10-Year

CPI ex Food & Energy (Core)

-3

-2

-1

0

1

2

3

2009 2010 2011 2012 2013 2014 2015 2016 2017

Per

cent


EM Outlook – Government finances healthy

Advanced Economies

Emerging Markets

0

20

40

60

80

100

120

2001 2003 2005 2007 2009 2011 2013 2015 2017

Per

cent

Government Debt as a Percentage of GDP

Source: International Monetary Fund, World Economic Outlook Database. As of 31 Oct 17


2nd Tier City

1st Tier City

5

15

25

35

45

2010 2011 2012 2013 2014 2015 2016 2017

3-M

onth

Rol

ling

Ave

rage

(t

hous

ands

)

Average Residential Price (Yuan/M²)

Source: Bank for International Settlements, Bloomberg. As of 31 Dec 17

Manufacturing PMI

Services PMI

48

50

52

54

56

58

60

2011 2012 2013 2014 2015 2016 2017

Per

cent

Broad-Based Recovery in Economic Activity

Source: China Federation of Logistics and Purchasing. As of 31 Dec 17Note: 3-Month Moving Average

Index=50

China outlook – solid economic activity • China has been able to support growth with a tremendous amount of stimulus to

make growth resilient. At some point policy will turn back to neutral and growth will

likely downshift toward the policy directive of 6.5% GDP growth.


• Number of millennials in China is larger than the working populations of U.S., Canada and Western Europe combined

• More than one-quarter of China’s millennials are college graduates

• As 400 million new Chinese people enter the spending class, implications are huge

Long-Term Growth Prospects for China

Source: VisualCapitalist.com.

415

207

87

22

0 50 100 150 200 250 300 350 400 450

China

Western Europe

U.S.

Canada

Population (Millions)

Number of Millennials (16-35 Years Old)


Source: Pew Research Center and South China Morning Post.

Secular trends bring opportunities


520 million

220 million

203 million

Alipay

Paytm

PayPal

Source: www.Bloomberg.com. The information provided should not be considered a recommendation to purchase or sell any particular security. It should

not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.

Annual active users

World leaders in innovation


The changing nature of emerging markets

Source: Martin Currie as at 31 December 2017. MSCI Emerging Markets index used. Prior to 2016 real estate sector was categorised with financials.


MSCI Emerging Markets Index sector weight comparison

10.1

22.4

9.6

14.8

17.0

8.9

12.0

0.0

3.6

27.7

23.5

16.8

7.4

6.8

5.2

4.8

2.8

2.7

2.4

Technology

Financials

Consumer

Materials

Energy

Industrials

Telecommunications

Real estate

Healthcare

Utilities2008

2017


Past performance is not a guide to future returns.

Source: Lipper for Investment Management as at 31 March 2017. Total return indices used and reported in US$. The figures provided include the re-investment of dividends.

Market Performance

Market performance over three years Market performance over ten years

19.5

4.7

(25)

(20)

(15)

(10)

(5)

0

5

10

15

20

25

2014 2015 2016 2017

Retu

rn (

%)

MSCI World MSCI Emerging Markets Free

59.9

35.0

(60)

(40)

(20)

0

20

40

60

80

Retu

rn (

%)

MSCI World MSCI Emerging Markets Free


Created by Brandywine Global

The One Belt One Road program (OBOR) is a development strategy proposed by Chinese President Xi Jinping

in 2013 that focuses on connectivity and cooperation between Eurasian countries and China th rough the land-

based "Silk Road Economic Belt" (SREB) and the "Maritim e Silk Road" (MSR). It’s about building infrastructure,

mostly around transport and energy: roads, bridges, gas pipelines, ports, railways, and power p lants.

• Involves 65 count ries

account ing for 62% of the

world’s populat ion, 40% of

world GDP, 75% of global

energy resources.

• Anticipated cumulat ive

investment over an uncertain

t imescale is estimated to be

between US$4 t rillion and

US$8 t rillion.

One Belt One Road


As of 10 Jan 18

Financial Income Investment Outlook

• Global growth and inflation improving from subdued levels

• US growth and inflation aided by fiscal stimulus

• Central banks very cautiously signaling their path to normalization

• Spread credit sectors should outperform but margins are thin

• Emerging markets debt and currencies should provide superior performance


0.5

1.6

3.0 3.1 3.3 3.53.9

6.1

7.27.7

13.3

15.3

0

2

4

6

8

10

12

14

16

18

USMBS

USCMBS

USBank

Loans¹

AustraliaIG Credit

EuroCredit

US IGCredit

UK IGCredit

USHigh-Yield

EMDUSD

EuroHigh-Yield

EMLocal

Currency

EuropeanBanks(CoCo)

Per

cent

Year to Date Ending 31 Dec 17 Excess Returns

Source: Bloomberg Barclays, J.P. Morgan, Western Asset. As of 31 Dec 17¹Bank loan excess return vs. 3-Month LIBOR

Spread Sectors Most spread sectors performed well over the quarter with emerging markets

leading the way.


300

350

400

450

500

550

600

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Bas

is P

oint

s

Spread Between Local Currency EM and DM Sovereign Yields

Source: J.P. Morgan. As of 31 Dec 17

Emerging Markets

DM Rate -47 bps

EM Rate +162 bps

Difference +207 bps

30 Apr 13 – 28 Feb 16

708090

100110120130

2013 2014 2015 2016 2017

Inde

x Le

vels

J.P. Morgan GBI-EM Global Diversified Index FX Return

Source: J.P. Morgan, Bloomberg. As of 31 Dec 17

Emerging markets valuations look attractive both on a historical basis and relative

to developed markets, particularly given a better global recovery, lower risks in

China and commodity stabilization.


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2010 2011 2012 2013 2014 2015 2016 2017

Per

cent

Germany: Lending to Households (Year-Over-Year)

European growth continues to improve but core inflation remains subdued

30-Year Bund (left)

Core CPI, YoY (right)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0

1

2

3

4

5

6

2002 2004 2006 2008 2010 2012 2014 2016 2018

PercentP

erce

nt

Eurozone: Core Inflation and Bund Yields

Source: Bloomberg, ECB, Western Asset. As of 30 Nov 17

Source: Bloomberg, ECB, Western Asset. As of 31 Dec 17


Absence of price acceleration continues to puzzle

Source: Bloomberg, as of December 30 2017

0

0.5

1

1.5

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US Core CPI


No sign of inflation in US


Could low inflation actually be “More ingrained and turn out to be permanent”?

The chart shows a 36-month average of this same core PCE deflator measure. The 36-month average smooths out

short-and intermediate-term swings in inflation. It has been nowhere near 2% at any time in the 10 year coverage

of this chart. The 36-month averages for 2010 include inflation data back to 2008.

EM Core Inflation

G10 GDP Weighted Core Inflation

0

1

2

3

4

5

2005 2007 2009 2011 2013 2015 2017

Per

cent

Emerging Market Inflation

Source: J.P. Morgan. As of 30 Jun 17


-25

TRY JPY MXN BRL ZAR MYR NOK CAD RUB GBP SEK PLN HUF EUR AUD CLP IDR PHP CHF CZK NZD SGD THB KRW USD CNY INR

As of 10/31/2017

Data has been obtained by Thomson Reuters DataStream (© 2017, Thomson Reuters) which Brandywine Global believes to be accurate and reliable. Charts created by

Brandywine Global. Please refer to Appendix 1 for important disclosure information.

-20

-10

-15

-5

5

0

10

15

REAL EFFECTIVE EXCHANGE RATE: PERCENTAGE DEVIATION FROM 10-YEAR MA %

+2 Std. Dev.

-2 Std. Dev.

Average

Dollar and yuan look expensive, the Turkish lira and yen cheap

How far are some exchange rates from long term averages?


Both the height of the fed chair and rates have fallen over time, could a taller fed chair mean rates rise?

Source: LPL Research, Bloomberg, as at 22 October 2017


The easy assumption that the dollar will rise with Fed tightening is not validated by history, as

in only one of the last seven tightening cycles did the dollar clearly rise (1983). Here are four

examples where the dollar declined in a tightening cycle.

Dollar Might Not Rise

Source: Bloomberg.

080

85

90

95

100

105

110

Jul. 1976 Jan. 1977 Jul. 1977 Jan. 1978 Jul. 1978

DX

Y

1976

Fir

st

Rate

Hik

e

-23% 090

95

100

105

110

115

120

Aug. 1971 Feb. 1972 Aug. 1972 Feb. 1973 Aug. 1973

DX

Y

1972

Fir

st

Rate

Hik

e

-17%

080

85

90

95

100

Aug. 1993 Feb. 1994Aug. 1994 Feb. 1995Aug. 1995

DX

Y

1994

Fir

st

Rate

Hik

e

-15% 080

85

90

95

Jan. 2004 Jan. 2005 Jan. 2006 Jan. 2007

DX

Y

2004

Fir

st

Rate

Hik

e

-8%


27.5

20.2

12.8

3.9

0.9 0.2

0

5

10

15

20

25

30

U.S. Stock Market U.S. Gov't Debt World Gold U.S MonetaryBase

Apple Bitcoin

($)

Tri

llio

n

Bitcoin’s Value is Relatively Small


How does the Bitcoin bubble stack up to history?

Source: Thomson Reuters, World Gold Council, bitcoin.com, CE.

-100

100

300

500

700

900

1100

1300

Year1

Year2

Year3

Year4

Year5

Year6

Year7

Year8

Year9

Year10

Bitcoin Nasdaq Composite Nikkei 225 Gold $/oz Case Shiller Home Price Index


Questions?


Bonds: There is a risk that issuers of bonds held by the fund may not be able to repay the bond or pay the interest due on it, leading

to losses for the fund.

Liquidity: In certain circumstances it may be difficult to sell the fund’s investments because there may not be enough demand for

them in the markets, in which case the fund may not be able to minimise a loss on such investments.

Investment in company shares: The fund invests in shares of companies, and the value of these shares can be negatively affected

by changes in the company, its industry or the economy in which it operates.

Emerging markets investment: The fund may invest in the markets of countries which are smaller, less developed and regulated,

and more volatile than the markets of more developed countries.

Fund currency: Changes in exchange rates between the currencies of investments held by the fund and the fund's base currency

may negatively affect the value of an investment and any income received from it.

Interest rates: Changes in interest rates may negatively affect the value of the fund. Typically as Interest rates rise, bond values fall.

Fund counterparties: The fund may suffer losses if the parties that it trades with cannot meet their financial obligations.

Fund operations: The fund is subject to the risk of loss resulting from inadequate or failed internal processes, people or systems or

those of third parties such as those responsible for the custody of its assets.

Fund of Funds: The fund is subject to the overall costs, investment objectives or policy changes, performance and investment

valuations of the underlying funds in which it invests which could result in a loss to the fund.

Charges from capital: Fees and expenses of this share class may be charged to the capital of the share class rather than its income.

This policy will result in an increase in income available for distribution to investors. However, this will forego some of the capital that

the share class has available for future investment and potential growth.

Class currency: The value of your investment may fall due to changes in the exchange rate between the currency of your share class

and the base currency of the fund.

Income from capital: For this share class a portion of the class's capital may be declared as dividends. This policy may result in

higher dividends to investors. However, such higher dividends limit the capital that the share class has available for future investment

and potential growth.

Fund Risks



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