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  • V:\\Regions\\Global\\Credit\\TR Charts

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  • 1. Fixed Income Investing in a Low Growth World Dipankar Shewaram Citywire Newcits Retreat 1-3 December 2010 This document is for Asset Managers, Fund Distributors and Authorised Intermediaries. Not for use by Private Individuals.
  • 2. Western Asset Page Source: Assets under management in USD (billions), as of 30 Sep 10. Total AUM: $469.4 7 Countries Singapore $2.0 Tokyo $43.0 Hong Kong New York $164.8 London $50.0 Melbourne $9.0 São Paulo $15.8 Pasadena $184.8
  • 3. Western Asset Page Source: Western Asset as of 20 Oct 10. Brendan A. Bowman (5 yrs) – US Investment-Grade Credit & High-Yield Credit/Leveraged Loans Investment-Grade Credit Ryan K. Brist, CFA (17 yrs) – US Blanton Keh, CFA (10 yrs) – US Takahiro Omura, CFA (18 yrs) – Japan Dipankar Shewaram, CFA (13 yrs) – UK Jeffrey Van Schaick, CFA (29 yrs) – US Stephen A. Walsh (29 yrs) Chief Investment Officer Michael C. Buchanan, CFA (20 yrs) Head of Credit High-Yield Credit/Leveraged Loans Michael C. Buchanan, CFA (20 yrs) – US Ian R. Edmonds (20 yrs) – UK Timothy J. Settel (17 yrs) – US Emerging Markets Credit Matthew Duda, CFA (17 yrs) – US Portfolio Managers Research Rene Ledis (17 yrs) – US Basic Industries/Utilities/Energy DeAndre L. Parks, CFA (17 yrs) – US Healthcare / Consumer Products / Retail Davis Smith (21 yrs) – US Communications Ivor Schucking (19 yrs) – US Financial Institutions Adrian Chee (18 yrs) – Singapore Asian Investment-Grade & Financials Kailash Chhaya, CFA (9 yrs) – Japan Credit Analyst David Klein (13 yrs) – UK Consumer Products, Retail Sean Rogan (21 yrs) – Australia Credit Analyst Trading J. Gibson Cooper, CFA (23 yrs) – US Chemicals, Energy, Pipelines & Gas Distribution Arvinder S. Chowdhary, CFA (15 yrs) – UK European High-Yield Credit Thomas R. Galloway (18 yrs) – US Healthcare, Gaming, Lodging, REITS, Pharmaceuticals Henrietta Gourlay (11 yrs) – Singapore Asian High-Yield Christopher N. Jacobs, CFA (22 yrs) – US Distressed, Media, Environmental, Brokerage/Insurance/Finance Araceli M. Sibley (18 yrs) – US Consumer Products, Entertainment, Restaurants, Consumer Services, Textiles Suzanne M. Trepp, CFA (20 yrs) – US Aerospace/Defense, Transportation, Retail, Food & Beverage, Tobacco Robert Abad (21 yrs) – US EMD Credit Analyst Marcos Collina (25 yrs) – Brazil Banks, Financials Daniel Araujo (26 yrs) – Brazil Industrials Oberto Alvarez (17 yrs) – US Chetna Mistry (13 yrs) – UK Walter E. Kilcullen (13 yrs) – US Charles Shia (14 yrs) – US Kevin Ritter, CFA (12 yrs) – US Christopher Kilpatrick (13 yrs) – US Telecom, Cable Portfolio Analyst Dan Alexander, CFA (6 yrs) – US Sophala Chhoeng (5 yrs) – US Matthew Graves, CFA (5 yrs) – US Product Specialist Shing Chi (Charles) Poon, CFA (12 yrs) – US Jeffrey Nuruki, CFA (13 yrs) – US Credit Analyst Taylor Dowling (9 yrs) – Australia Ian Justice (12 yrs) – UK Whole Business Securitization Samira Sattarzadeh (8 yrs) – UK Vivek K. Acharya (9 yrs) – UK Thomas V. McMahon (31 yrs) – US Investment-Grade Credit & High-Yield Credit/Leveraged Loans Mark A. Hughes, CFA (12 yrs) – US Automotive, Media Non-Cable, Industrials, Building Products, Rental Service John M. King, CFA (13 yrs) – US Utilities, Metals & Mining, Packaging, Paper & Forest Products Tobias Grün (22 yrs) – UK Financial Institutions Paul S. Olsen (27 yrs) – US Generalist, Liquidity Edward T. Ma, CFA (8 yrs) – US Kurt D. Halvorson, CFA (9 yrs) – US James Newbery (15 yrs) – UK European Credit Roderick MacPhee (7 yrs) – UK Ruchi Gupta (12 yrs) – UK European High-Yield Credit
  • 4. Where is growth going to come from? Page
  • 5. Gross National Product Where is growth going to come from ?
    • GNP = C + I + G + ( X – M )
    Consumers are deleveraging Investment is not picking up Fiscal deficits need to be cut C = Consumption, I = Investments, G= Government Spending, X= Exports, M = Imports
  • 6. Deleveraging Financial Sector
    • Banks are reducing balance sheet size and improving capital significantly
    Page Balance sheet numbers represent the change over the period year end 2008 to year end 2009.
  • 7. Unemployment Rates Remain Extremely High
    • Consumption to remain soft
    Page
  • 8. Firms Look To Rebuild Profits Before Investment
  • 9. Fiscal Deficits to Continue
    • Government finances need to be tightened
    Page
  • 10. Equity Market Focus Page
  • 11. Government Bonds Look Expensive vs Equities Risk aversion has driven investors into lower risk assets pushing up their prices
  • 12. Historical Dow Jones P/E Ratio
    • Stocks are NOT cheap in isolation
    Page
  • 13. Japan’s 20 Year Bear Market
    • Equity markets can fall for prolonged periods of time
    Page
  • 14. Are We In A Severe Bear Market Rally?
    • Equities may have further adjustments to go through
    Page
  • 15. Volatility in Bond Markets: Government vs. Credit Page
  • 16. 10 Year Treasury Yield At Historic Lows
    • If yields rise then passive government bond investment can bring negative returns
    Page
  • 17. How Risk-free Is The Risk-free Rate?
    • European sovereign issuers protection premiums higher than corporate issuers
    Page
  • 18. The Advantage of Beta Flexibility
    • Premium increases can lead to capital losses
    Page iTraxx Europe Main CDS index 0 50 100 150 200 250 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Spread (bps) Source: Bloomberg, Western Asset. As of 30 Sep 10. Returns for shaded regions shown in bold. 1.13 -3.18 6.44 -2.89 3.26 -6.91 4.35 -5.87 1.65 -2.07 0.14
  • 19. Return Dispersion in Credit
    • 2005/06 was about alpha - we expect similar themes for 2010/11
    Page Excess Returns in European Corporates 0.0 -1.8 59.4 -11.2 -86.4 2.6 -100 -50 0 50 100 2007 2008 2009 Excess Return (%) Top Decile Bottom Decile Source: Deutsche Bank. As of 31 Dec 09
  • 20. Conclusions
        • We are in a period of extreme uncertainty. Having more tools to manage portfolios is key
        • Absolute government bond yields are at historically low levels against a backdrop of heightened volatility
        • 2010/11 will see a large divergence between positive and negative performance of individual issuers
    Page These are the views of Western Asset as at 30 September 2010. These are subject to change.
  • 21. Legg Mason Western Asset Global Credit Absolute Return Fund Page
  • 22. Why a Credit Absolute Return Fund?
        • Credit sector and security selection are key to positive returns as market moves to alpha from beta; credit dispersion has been the key theme in 2010/2011
        • Broad opportunity set – ability to invest in all credit sectors (investment grade and high yield)
        • Increased volatility in sovereign markets therefore active interest rate management is the key to positive returns from global fixed income going forward
        • Credit is a core strength of Western Asset
    Page The above reflects current opinions of Western Asset Management.
  • 23. Legg Mason Western Asset Global Credit Absolute Return Fund
      • Expected sources of gross total return for target 8-10%* per annum over a market cycle
        • Focused credit alpha generation
        • Medium-term and opportunistic credit beta generation
        • Active interest rate management
      • Global Credit Absolute Return and Risk Target
        • Absolute return focus, with a target of 8-10% p.a. over a market cycle*
        • Target 8-10% volatility*
        • Target sharpe ratio of at least 1*
    Page * This is a target and there is no guarantee that it will be met.
      • Some key strategy limits
        • Seek to invest at least 50% in investment grade securities
        • Duration range of +/- 10yrs
        • Maximum 20% foreign currency exposure
        • Maximum VaR limit of 20%
      • Other features
        • Daily Liquidity
        • Takes advantage of alpha opportunities in global credit markets
        • Invests in a diverse portfolio of investment grade and high yield credit (including emerging market credit)
        • Active interest rate management (can be long or short duration)
        • Maximum flexibility allowing the generation of positive returns through the credit cycle
        • Ability to use single name CDS (long and short) to express views on specific issuers
        • Ability to use index CDS (long and short) to manage beta
        • UCITS III vehicle utilising VaR to measure and control global exposure
  • 24. Portfolio Characteristics
      • As of 30 September 2010
    Page Source: * Ca sh Bonds & Single Name CDS Delta Adj Wht (%) Spread Duration (yrs) Duration (yrs) Cash Cash Equivalents Currency Forwards US Governments Euro Governments UK Governments Norway Governments IG Financials* IG Non-financials* High Yield* iTraxx Main iTraxx Crossover iTraxx Main Options iTraxx Crossover Options iTraxx SOVXWE Options
  • 25. Legg Mason Western Asset Global Credit Absolute Return Fund
        • Long: Long Financials across the capital structure
        • Short: Short Non-Financials using CDS indices and single name CDS
        • Interest Rate Risk: Tactical approach to duration management
        • Currency: Short Australian Dollar and Euro versus long in US Dollar
    Page Source: Western Asset as at 30 September 2010
  • 26. Legg Mason Western Asset Global Credit Absolute Return Fund Performance since launch Page Source: Legg Mason at at 30 September 2010 Source: Legg Mason as of 30 September 2010. Performance shown is net of investment management fees.
  • 27. Legg Mason Western Asset Global Credit Absolute Return Fund Page Net Asset Value (NAV) Since Launch Source: Western Asset as of 12 th November 2010 Value Date
  • 28. Important Information
      • This information has been prepared from sources believed reliable but is not guaranteed by Legg Mason Investments and is not a complete summary or statement of all available data. Individual securities mentioned are intended as examples of portfolio holdings and are not intended as buy or sell recommendations. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors.
      • Western Asset Management is affiliated with Legg Mason through common control and ownership by Legg Mason, Inc.. Legg Mason provides its clients with access to Western Asset Management primarily through its range of Irish and UK authorised funds in which Western Asset Management serves as investment manager or sub-investment manager. Some of the affiliates are not authorised to offer their investment advisory services in all European jurisdictions.
      • The Legg Mason Western Asset Global Credit Absolute Return Fund is a sub-fund of Legg Mason Global Funds plc, an umbrella fund with segregated liability between sub-funds, established as an open-ended investment company with variable capital and incorporated with limited liability under the laws of Ireland with registered number 278601. It qualifies and is authorised in Ireland by the Financial Regulator as an undertaking for collective investment in transferable securities and is a section 264 Scheme as recognised by the FSA. This Fund is offered solely to non-US investors under the terms and conditions of the Fund’s current prospectus - please refer to the Simplified Prospectus and Prospectus documentation, which describe the full risk factors associated with this Fund.
      • This document does not constitute an invitation to invest. The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested. Fluctuations in exchange rates can affect the value of the Fund and the income from it.
      • The fund may invest in ‘non-investment grade’ bonds, which carry a higher degree of default risk than ‘investment grade’ bonds.
      • The Legg Mason Western Asset Global Credit Absolute Return Fund may invest in emerging markets that may be less liquid and may have less reliable custody arrangements than mature markets and may involve a higher degree of risk. Unlike a bank or building society account, your money is at risk.
    • This Fund may invest extensively in certain types of financial derivative instruments (FDIs) for efficient portfolio management or investment purposes. These instruments involve additional and higher levels of risk including but not limited to market risk, liquidity risk, counterparty risk and operations risk.
    • This Fund may use eligible derivatives to hedge their foreign currency exposure back to the class currency. Hedging transactions can reduce the effects of currency and asset fluctuations but can expose additional risks, e.g. counterparty default.
    • Due to its investment policies, this Fund may have particularly volatile performance.
      • Issued and approved by Legg Mason Investments (Europe) Limited, registered office 75 King William Street, London, EC4N 7BE. Registered in England and Wales, Company No. 1732037. Authorised and regulated by the Financial Services Authority. Client Services 0207 070 7400.
      • This document is for use by asset managers, fund distributors and authorised intermediaries. Not for use by private individuals.
      • Issued November 2010 Ref: 6168
    Page