2019 western asset managed municipals portfolios · 2020-03-13 · western asset managed municipals...

4Q 2019 Separately Managed Accounts

WESTERN ASSETMANAGEDMUNICIPALSPORTFOLIOS

Separately Managed Accounts (SMAs) are investment services provided by Legg Mason Private Portfolio Group, LLC (LMPPG), a federally registered investment advisor. Client portfolios are managed based on investment instructions or advice provided by one or more of the following Legg Mason-affiliated subadvisors: Western Asset Management Company, LLC. Management is implemented by LMPPG, the designated subadvisor or, in the case of certain programs, the program sponsor or its designee.These materials are being provided for illustrative and informational purposes only. The information contained herein is obtained from multiple sources that are believed to be reliable. However, such information has not been verified, and may be different from the information included in documents and materials created by the sponsor firm in whose investment program a client participates. Some sponsor firms may require that these materials be preceded or accompanied by investment profiles or other documents or materials prepared by such sponsor firms, which will be provided upon a client’s request. For additional information, documents and/or materials, please speak to your Financial Advisor.

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

Introduction | Legg Mason

Meet our investment managers

Having honed their expertise over many decades and market cycles, our global asset managers offer specialized capabilities across a scope of asset classes and strategies. Each skilled team operates with independent vision to help deliver powerful financial solutions for both individuals and institutions.

Global value investing Acting with conviction and discipline, Brandywine Global looks beyond short-term, conventional thinking to rigorously pursue long-term value across differentiated fixed income, equity and alternative solutions.

Global listed infrastructure investing RARE is a specialized investment managerfocused exclusively on global listed infrastructure. Established in 2006, RARE offers expertise acrossthe infrastructure spectrum and aims to identify and invest in high-quality listed infrastructure assets with the goal of delivering strong absolute returns over an investment cycle.

Global alternatives EnTrust Global is one of the world’s largest alternative solutions providers. With deep industry knowledge, expertise, scale and resources, the firm manages alternative strategies (through customized portfolios, co-investments, real asset investments and established funds)with comprehensive risk management, rigorous due diligence and a diversified selection of investment partners.

Real estate investment specialistsClarion Partners has been a leading pure-play real estate investment manager since 1982. Headquartered in New York, the firm maintains offices across the U.S. and in Europe, managing a broad range of real estate strategies across the risk/return spectrum for global investors.

Small-cap equity Royce Investment Partners specializes in small-cap investing, managing both U.S. and international portfolios for individual investors, financial advisors and institutions. The firm is generally regarded as a pioneer in small-cap investing andhas focused on this distinctive asset class formore than 45 years, leading to unparalleled domain knowledge of the smaller-companyinvestment universe.

Active equity specialists Martin Currie builds global, stock-driven portfolios based on fundamental research, devoting all of its resources to delivering optimum investment outcomes and superior client relationships.

Quality-focused equity With a legacy dating back over 50 years, ClearBridge Investments is a leading global equity manager committed to deliveringdifferentiated long-term results through authentic active management.

Global value fixed income One of the world’s leading global fixed income managers. Founded in 1971, the firm is known for team management and proprietary research, supported by robust risk management and a long-term fundamental value approach.

Systematic investment solutions QS Investors is a quantitative asset manager that provides multi-asset class and global equity solutions. Their approach unites intellectual and academic precision with the power of data and technology in their quest to elevate the certainty of outcomes they deliver.

Royce & Associates, LP primarily conducts its business under the name Royce Investment Partners.EnTrustPermal also conducts business as EnTrust Global.Active share is a measure of the percentage of stock holdings in a manager’s portfolio that differs from the benchmark index.

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Introduction | Western Asset

Western Asset Management Approach and Philosophy

Western Asset is a global investment management firm committed to understanding the needs of each client, identifying investment solutions, and delivering superior long-term investment results.

Team-managed approach• Team unites groups of

specialists dedicated to different market sectors

• Each group of sector specialists utilizes its expertise in bottom-up analysis of each portfolio sector

Investment PhilosophyLong-term, fundamental value discipline• Bottom-up

• Top-down Diversified strategies• Depth of resources

• Global Integrated analytics and risk management• Relative value analysis

• Transparency and communication

Objective-Driven InvestingSeeks to:• Protect from rising rates

• Protect from inflation

• Preserve capital

• Diversify globally

• Hedge liabilities

• Enhance income

• Generate tax-free income

• Generate total return

• Achieve ESG objectives

Core Fixed Income§• Intermediate

• Core

• Core Full Discretion

• Investment-Grade Credit

• Agency Mortgage-Backed Generate Total Return§• Total Return Unconstrained

• Global Total Return

• Global Multi-Sector

• Dynamic Fixed Income

• Credit Opportunities

• MBS Opportunities

• Emerging Market Opportunities

Enhance Income§• Short-Duration High Income

• Emerging Markets Debt

• High Yield

• Diversified High Income

• Structured Products/REIT/CLO

Increase Alpha§• Global Credit Absolute

Return§

• Macro Opportunities§

Hedge Liabilities§• Long Duration§

• Long Credit§

• Liability-Driven Investing

• Tail Risk Protection§

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Your investment portfolio | Managed Municipals

Western Asset Managed Municipals Portfolios

OverviewWestern Asset Managed Municipals Portfolios consist of directly owned individual securities and shares of a no-fee mutual fund advised by Western Asset. The no-fee fund is used by Western Asset to achieve appropriate levels of diversification, as well as blend the attractive features of individually managed portfolios with the benefit of exposures to sectors that are normally difficult to include in a separately managed account with low minimum investment requirements.ObjectivesThe strategy seeks to provide current income exempt from regular federal income taxes and achieve total return over a full market cycle.Investment Philosophy• Provide investors with diversified, long-term value-oriented portfolios

• Through integrated risk management and analytics, seek to deliver solid risk-adjusted returns

• Bottom-up credit focus targets long-term trends leading to lower-turnover portfolios seeking to weather cyclical storms

Key differentiatorsUnique structureHybrid approach combining; • flexibility across the full municipal credit and duration spectrum

• ability to rotate sectors more tactically

• ability to own smaller, less liquid holdings

• ability to manage through the interest rates cycle by employing the firm’s macro views with interest rate hedges

Provides broader access and greater diversification among fixed income sectors than traditional separately managed accounts of similar sizeMunicipal expertise• Managing municipal portfolios since 1981

• Team supported by both credit and quantitative research analystsOverseen by a fixed income leader• Institutional-caliber buying power and trading expertise

• Access to highly regarded municipal bond sector specialists

• Exclusively focused on fixed income management

Risks: All investments involve risk, including loss of principal and there is no guarantee that investment objectives will be met.For tax-exempt securities, certain investors may be subject to the federal Alternative Minimum Tax, and state and local taxes may apply. Capital gains, if any, are fully taxable. Depends on individual tax situation. Please see important tax information.Fixed income securities are subject to interest rate and credit risk, which is a possibility that the issuer of a security will be unable to make interest payments and repay the principal on its debt. As interest rates rise, the price of fixed income securities falls.Fixed income securities may be subject to extension risk, which is the risk that the issuer will repay their obligations more slowly than the market anticipates in the event market interest rates rise. Issuers also have the right to pay their payment obligations ahead of schedule in the event market interest rates fall, subjecting to prepayment risk.Fixed income securities are subject to illiquidity risk, which is the risk that securities may be difficult to sell at certain prices when no market participants are willing to purchase the securities at such prices.Managers seek to keep portfolio turnover low to allow for the positive compounding effect of dividends over time, although market, security and other investment considerations may cause turnover to be higher from time to time. Also, all capitalization ranges will not necessarily be represented in an individual account.Tapering of the Federal Reserve Board’s quantitative easing program and a general rise in interest rates may lead to increased portfolio volatility.Shares of the no-fee funds may only be purchased by or on behalf of separately managed accounts by Legg Mason affiliates, including Western Asset. Managed account clients will pay fees to program sponsors or to their account managers, and such fees will be calculated taking into account assets invested in shares of no-fee funds. Unless reimbursed by the fund’s manager or its affiliates, ordinary and extraordinary fund-level operating expenses are borne by shareholders. The manager of the no-fee funds has entered into an expense reimbursement agreement with the funds pursuant to which the manager has agreed to reimburse 100% of each fund’s ordinary operating expenses through December 31, 2020. The expense reimbursement agreement does not cover brokerage, taxes and extraordinary expenses.

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Western Asset Managed Municipals Portfolios

Western Asset portfolios will normally maintain a minimum of 50% of the portfolio in individual securities. These securities will consist primarily of municipal securities across the investment-grade sector, but they may also include higher-yielding, lower-rated municipals. These municipal securities are an integral part of the overall portfolio construction and are actively managed in concert with the no-fee fund.

Individual securities

• Revenue municipal bonds• Core positions• General obligation municipal bonds• Cash and equivalents

No-fee mutual fund sectors

• Revenue municipal bonds• General obligation municipal

bonds• Cash and equivalents• Treasury futures• Below-investment-grade issues

Portfolio composition

For illustrative purposes only.Allocations are subject to change.Important Information: Managed Municipals are available as separately managed accounts that utilize both individual securities and no-fee mutual funds. These mutual funds were created specifically for, and are made available exclusively through, these separately managed accounts. Investments in these separately managed accounts present special considerations. The mix of investments may vary depending on market conditions, the manager’s views as to relative attractiveness of available sectors, cash flows into and out of the account, and other factors. The funds prospectus is available from your financial professional and includes information on fund investment objectives, strategies and risks.

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Western Asset Managed Municipals Portfolios investment process

Identify attractive sectorsInvest mainly investment grade municipals, but may also include higher-yielding, lower-rated securities, limited to 20% of assets.

Identify municipal issuersBottom-up credit research targeting long-term relative value positions within the municipal sector.

Manage through interest rate cyclesEmploys a book yield objective, integrated throughout the portfolio and risk processes, with the goal of maintaining a buy/hold low-turnover portfolio that can weather cyclical storms.

The investment process may change over time. The characteristics set forth are intended as a general illustration of some of the criteria the strategy team considers in selecting securities for client portfolios. There is no guarantee investment objectives will be achieved.

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Western Asset Managed Municipals Portfolios investment process

By implementing the process illustrated, Western seeks to provide investors with diversified, value-oriented, tightly controlled portfolios that exceed benchmark returns while approximating the benchmark’s risk. Of course, there is no guarantee that investment objectives will be achieved.

Sub-sector & Security Selection

Strategic Portfolio

Client Portfolio

Term Structure Weighting

IMPLEMENTATION

MONITORING & CONTROLSSector

Allocation

Investment Outlook

Portfolio Guidelines

Interest Rate Exposure

The investment process may change over time. The characteristics set forth are intended as a general illustration of some of the criteria the strategy team considers in selecting securities for client portfolios. There is no guarantee investment objectives will be achieved.

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Strategy characteristics & performance | Fixed Income Portfolio characteristics

Fixed Income Portfolio characteristics as of December 31, 2019

Maturity (%)

9.19

3.49

3.61

11.74

14.57

57.4010+

7 - 10

5 - 7

3 - 5

1 - 3

0 - 1

0 10 20 30 40 50 60 70

Yea

rs (%

)

Sector weightings (%)

Revenue 68.27

General Obligation 20.86

Other 10.23

Pre-Refunded 0.64

Source: Legg Mason. Portfolio characteristics and sector weightings are based on a representative account within the composite. Portfolio characteristics and sector weightings of individual client portfolios in the program may differ, sometimes significantly, from those shown above. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the sectors listed and should not be used as a sole basis to make any investment decisions.

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Strategy characteristics & performance | Fixed Income Portfolio characteristics

Fixed Income Portfolio characteristics as of December 31, 2019

Credit Quality (%)

AAA 18.38AA 43.75A 28.76BBB 5.55Below BBB 1.06Not Rated 2.5

AAA 18.38

AA 43.75

A 28.76

BBB 5.55

Below BBB 1.06

Not Rated 2.5

Characteristics (%)

Effective Duration (Years) 6.24

Average Coupon Rate (%) 4.54

Average Maturity (Years) 12.39

Yield to Worst (%) 1.87

Yield to Maturity (%) 2.56

Source: Legg Mason. Portfolio characteristics and sector weightings are based on a representative account within the composite. Portfolio characteristics and sector weightings of individual client portfolios in the program may differ, sometimes significantly, from those shown above. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the sectors listed and should not be used as a sole basis to make any investment decisions.Credit quality is a measure of a bond issuer’s ability to repay interest and principal in a timely manner. The credit ratings shown are based on each portfolio security’s rating as provided by the following Nationally Recognized Statistical Rating Organizations (“NRSRO”): Standard and Poor’s (“S&P”), Moody’s Investors Service (“Moody’s”), Fitch Ratings, Ltd. In the event a portfolio security is rated by more than one NRSRO, the higher rating is shown. In the case where a security is not rated by an NRSRO, these are listed as “Non Rated”. The credit quality of the investments in the Portfolio does not apply to the stability or safety of the Portfolio. These ratings may change over time. The Portfolio itself has not been rated by an NRSRO.

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Strategy characteristics & performance | Performance

Performance

Calendar-year total returns – gross and net of fees (%) ending December 31

2019 2018 2017 2016 2015 2014 2013 2012 2011 2010

Managed Municipals (gross) 7.95 0.92 5.61 0.53 3.45 11.65 -3.72 10.92 13.53 0.75

Managed Municipals (net) 6.37 -0.58 4.05 -0.96 1.92 10.01 -5.15 9.30 11.86 -0.74

Bloomberg Barclays Municipal Bond Index 7.54 1.28 5.45 0.25 3.30 9.05 -2.55 6.78 10.70 2.38

Annualized rates of return – gross and net of fees (%) as of December 31, 2019 – PRELIMINARY

Dec ‘19 Q4 ‘19 YTD 1-year 3-year 5-year 7-year 10-year 15-year 20-year 25-year

Managed Municipals (gross) 0.38 0.61 7.95 7.95 4.78 3.65 3.66 5.02 5.02 5.71 6.08

Managed Municipals (net) 0.26 0.24 6.37 6.37 3.24 2.12 2.13 3.47 3.47 4.15 4.52

Bloomberg Barclays Municipal Bond Index 0.31 0.74 7.54 7.54 4.72 3.53 3.40 4.34 4.33 5.04 5.41

The strategy returns shown are preliminary composite returns, subject to future revision (downward or upward). Please visit www.leggmason.com for the latest performance figures. YTD numbers are not annualized. Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.§Past performance is no guarantee of future results. YTD numbers are not annualized. Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance. Net performance includes the deduction of a 1.5% annual wrap fee, which is the maximum anticipated wrap fee for fixed income portfolios. Actual fees may vary. For fee schedules, contact your financial professional, or if you enter into an agreement directly with Legg Mason Private Portfolio Group, LLC (“LMPPG”), refer to LMPPG’s Form ADV disclosure document. Returns reflect the reinvestment of dividends and other earnings. Please see GIPS® Endnotes for additional important information regarding the portfolio’s performance shown and for effects of fees. Management and performance of individual accounts may vary for reasons that include the existence of different implementation and model requirements in different investment programs.Prior to January 2016, performance results were calculated using Western Asset’s US Municipal Long Composite which was comprised of institutional accounts with a minimum of US $10 million. Net total returns were calculated by reducing the institutional gross-of-fees performance by the highest bundle fee of 1.5%. Western Asset follows substantially the same investment philosophy, strategies and processes in managing SMA Managed Municipal portfolios that it does in managing institutional US Municipal Long portfolios. The performance of Western’s Managed Municipals Composite may vary from the performance of the institutional Municipal Long Composite, especially over shorter time periods and during periods of extraordinary market conditions. The SMA portfolios are implemented through a combination if individual holdings along with an allocation to a no load mutual fund share created to allow the portfolio managers to replicate the same themes and characteristics of our managed municipal institutional and mutual fund strategy. Members in the institutional composite typically hold individual securities.

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Risk/return profile (%)

Gross of fees (based on 10-year period ending December 31, 2019)

0 1 2 3 4 5 60

1

2

3

4

5

6

Managed Municipals Bloomberg Barclays Municipal Bond Index

Ann

ualiz

ed r

ate

of r

etur

n (%

)

Risk (% annualized standard deviation)

Modern portfolio statistics as of December 31, 2019

Managed

Municipals

Bloomberg Barclays

Municipal Bond Index

Annualized return (%) 5.02 4.34

Annualized standard deviation (%) 3.98 3.44

Sharpe ratio 1.11 1.09

Beta 1.11 N/A

Alpha 0.27 N/A

R-squared 0.91 N/A

The strategy returns shown are preliminary composite returns, subject to future revision (downward or upward). Please visit www.leggmason.com for the latest performance figures. YTD numbers are not annualized. Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.Alpha, Beta, and R-squared are shown versus the Bloomberg Barclays Municipal Bond Index. Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. Please see appendix for term definitions.Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance. Actual fees may vary. For fee schedules, contact your financial professional, or if you enter into an agreement directly with Legg Mason Private Portfolio Group, LLC (“LMPPG”), refer to LMPPG’s Form ADV disclosure document. Please see GIPS® Endnotes for additional important information regarding the portfolio’s performance and for effects of fees. Management and performance of individual accounts may vary for reasons that include the existence of different implementation and model requirements in different investment programs.

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Up/Down market capture ratios (%)


1.10

1.00

1.00

1.00

2

1

0

1

2

Managed Municipals Bloomberg Barclays Municipal Bond Index

Up86 positive months

Down34 negative months

The strategy returns shown are preliminary composite returns, subject to future revision (downward or upward). Please visit www.leggmason.com for the latest performance figures. YTD numbers are not annualized. Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance. Actual fees may vary. For fee schedules, contact your financial professional, or if you enter into an agreement directly with Legg Mason Private Portfolio Group, LLC (“LMPPG”), refer to LMPPG’s Form ADV disclosure document. Please see appendix for term definitions.Please see GIPS® Endnotes for additional important information regarding the portfolio’s performance and for effects of fees. Management and performance of individual accounts may vary for reasons that include the existence of different implementation and model requirements in different investment programs. Past performance is no guarantee of future results.

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Growth of $250,000


2010 2011 2013 2015 2017 2019$0

$100,000

$200,000

$300,000

$400,000

$500,000Managed Municipals Bloomberg Barclays Municipal Bond

Index $407,938 $382,375

For illustrative purposes only. Assumes no withdrawals or contributions. These statistics are based on gross-of-fees quarterly composite returns, were calculated assuming reinvestment of dividends and income, and take into account both realized and unrealized capital gains and losses. Past performance is no guarantee of future results. All investments involve risk, including the loss of principal.Gross performance shown does not reflect the deduction of investment management fees and certain transaction costs, which will reduce portfolio performance. Actual fees may vary. For fee schedules, contact your financial professional, or if you enter into an agreement directly with Legg Mason Private Portfolio Group, LLC (“LMPPG”), refer to LMPPG’s Form ADV disclosure document. Please see GIPS® Endnotes for additional important information regarding the portfolio’s performance and for effects of fees. Management and performance of individual accounts may vary for reasons that include the existence of different implementation and model requirements in different investment programs.

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Appendix | Investment Management Team

Investment management team

Western Asset, one of the world’s leading fixed income managers, was founded in 1971. With a focus on long-term fundamental value investing that employs a top-down, bottom-up approach, the firm has nine offices around the globe and deep experience across the range of fixed income sectors. Western Asset has been recognized for its emphasis on team management and intensive proprietary research, supported by robust risk management.

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Appendix | Performance Endnotes

GIPS® Endnotes

Western Asset Managed Municipals – December 31

Year Net return(%)“Pure”1 gross

return (%)Benkmark total

return (%)Gross total

3 Yr St Dev (%)Benchmark total3 Yr St Dev (%)

Number of portfolios

% of bundled fee portfolios in the

compositeInternal

dispersion (%)Composite assets

($ millions) % of firm assets

2009 22.48 24.28 12.91 -n/a- -n/a- 2 0 -n/a- 5,178 1.07

2010 -0.74 0.75 2.38 -n/a- -n/a- 2 0 -n/a- 5,735 1.26

2011 11.86 13.53 10.70 6.65 4.63 2 0 -n/a- 5,446 1.23

2012 9.30 10.92 6.78 4.68 3.76 2 0 -n/a- 6,052 1.31

2013 -5.15 -3.72 -2.55 5.33 4.02 1 0 -n/a- 4,255 0.94

2014 10.01 11.65 9.05 4.82 3.72 1 0 -n/a- 4,446 0.95

2015 1.92 3.45 3.30 4.22 3.41 1 0 -n/a- 4,783 1.10

2016 -0.96 0.53 0.25 3.47 3.43 1 100 -n/a- 5 0.00

2017 4.05 5.61 5.45 3.14 3.35 13 100 -n/a- 19 0.00

2018 -0.58 0.92 1.28 3.24 3.40 43 100 0.08 36 0.01

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, 2018. 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, LLC; Western Asset Management Company Limited, authorised and regulated by the Financial Conduct Authority (“FCA”); Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R, holder of the Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore; Western Asset Management Company Ltd, a registered Financial Instruments Business operator and regulated by the Financial Services Agency of Japan; Western Asset Management Company Pty Ltd ABN 41 117 767 923, holder of the Australian Financial Services Licence 303160; and Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários (DTVM) Limitada, authorised and regulated by Comissão de Valores Mobiliários and Banco Central do Brazil, with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Zürich. 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.Western Asset - Managed Municipals portfolios are discretionary fixed-income portfolios that seek to maximize current income exempt from regular federal income tax by investing primarily in municipal securities and other investments with similar economic characteristics. The Managed Municipals portfolios normally invest in intermediate-term and long-term municipal securities that have maturities from one to more than thirty years at the time of purchase. They typically focus on investment grade bonds but may invest up to 20% of their assets in below investment grade bonds in order to enhance current income. The Managed Municipals portfolios involve investments in individual municipal securities as well as investments in shares of the Western Asset SMASh Series TF Fund, an open-end investment management company. The composite is comprised of accounts that are separately managed accounts (SMAs) managed in accordance with the strategy with an account minimum of US $250,000.The composite employs a 10% significant cash flow policy. The composite was created on January 1, 2016.Beginning January 1, 2016, the composite includes only SMA portfolios that are managed in accordance with the Western Asset Managed Municipals strategy. Prior to January 2016, performance results were calculated using Western Asset’s US Municipal Long Composite which was comprised of institutional accounts with a minimum of US $10 million. Net total returns were calculated by reducing the institutional gross-of-fees performance by the highest bundle fee of 1.5%. Western Asset follows substantially the same investment philosophy, strategies and processes in managing SMA Managed Municipal portfolios that it does in managing institutional US Municipal Long portfolios. The performance of Western’s Managed Municipals Composite may vary from the performance of the institutional Municipal Long Composite, especially over shorter time periods and during periods of extraordinary market conditions. The SMA portfolios are implemented through a combination if individual holdings along with an allocation to a no load mutual fund share created to allow the portfolio managers to replicate the same themes and characteristics of our managed municipal institutional and mutual fund strategy. Members in the institutional composite typically hold individual securities. For comparison purposes, composite returns are shown against returns of the Bloomberg Barclays U.S. Municipal Bond Index. An investor cannot invest directly in an index.1“Pure” gross returns are presented as supplemental information to the net returns. The current fee schedule is 1.50% on all assets. Net returns are calculated by deducting the anticipated maximum annual bundled fee applied on a monthly basis from the “pure” gross monthly return. The bundled fee includes all charges for trading costs, portfolio management, custody, and other administrative fees. Bundled fees may vary across different financial firms and across different accounts based upon account size and other factors. Returns and market values are expressed in USD.Dispersion is calculated using the asset-weighted standard deviation of annual returns of those portfolios that were included in the composite for the entire year. 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. Standard deviation is not presented for periods where 36 monthly returns are not available for the composite or the benchmark.Past investment results are not indicative of future investment results. Information contained herein is believed to be accurate, but cannot be guaranteed. Employees and/or clients of Western Asset may have a position in the securities mentioned. Western Asset’s list of composite descriptions and policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Please contact Michael Van Raaphorst at 212-601-6211 or [email protected].

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Appendix | Index Definitions

Definitions

Index DefinitionsThe Bloomberg Barclays 1-3 Year Government Bond Index is a broad measure of the performance of short-term government bonds. Please note an investor cannot invest directly in an index.

The Bloomberg Barclays 1-Year Municipal Bond Index is an unmanaged index composed of national municipal bond issues with a maturity range of 1-2 years.

The Bloomberg Barclays 5-Year Municipal Bond Index is a market-value-weighted index representative of the medium term (4 to 6 years) tax-exempt bond market.

The Bloomberg Barclays Asset-Backed Securities Index is composed of debt securities backed by credit card, auto and home equity loans that are rated investment grade or higher by Moody’s Investors Service, Standard & Poor’s Ratings Service or Fitch Investor’s Service, in that order. Issues must have at least one year to maturity and an outstanding par value of at least $50 million. Price, coupon and total return are reported on a month-end to month-end basis. All returns are market value-weighted inclusive of accrued interest but do not include adjustments for advisory fees or other expenses.

The Bloomberg Barclays Fixed-Rate Mortgage-Backed Securities Index is composed of about 600 15- year to 30-year fixed-rate mortgage-backed pools of Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Corporation.

The Bloomberg Barclays U.S. Agencies Index is the U.S. Agency component of the U.S. Government/Credit index, consisting of publicly issued debt of U.S. Government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. Government (such as USAID securities). The largest issues are Fannie Mae, the Resolution Trust Funding Corporation (REFCORP), and the Federal Home Loan Bank System (FHLB). The index includes both callable and non-callable agency securities.

The Bloomberg Barclays U.S. Aggregate Bond Index includes the Government/Credit and the Mortgage-Backed indexes. The return comprised price appreciation/depreciation and income as a percent of the original investment. Indexes are rebalanced monthly by market capitalization.

The Bloomberg Barclays U.S. Credit Index is the U.S. Credit component of the U.S. Government/Credit Index consisting of publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. To qualify, bonds must be SEC-registered. The U.S. Credit Index is the same as the former U.S. Corporate Investment Grade Index, which has been renamed the U.S. Credit Index. The name change is effective as of 6/1/00 (for statistics) and as of 7/1/00 (for returns).

The Bloomberg Barclays U.S. Government/Credit Bond Index includes the Bloomberg Barclays U.S. Government bond Index and the Barclays Credit Bond Index. The Government Index includes all public U.S. Treasury obligations and the debt of U.S. Government agencies and quasi-federal corporations. The Credit Index includes corporates (industrial, utility and finance including both U.S. and non-U.S. corporations) and noncorporates (sovereign, supernational, foreign agencies and foreign local governments).

The Bloomberg Barclays U.S. Intermediate Government/Credit Bond Index is a market value weighted performance benchmark for government and corporate fixed-rate debt issues (rated Baa/BBB or higher) with maturities between one and ten years.

The Bloomberg Barclays U.S. Intermediate Treasury Bond Index is composed of all public obligations of the U.S. Treasury. This index has an average current maturity of 3.69 years (average maturity may vary over time).

The Bloomberg Barclays U.S. Treasury Index is a measure of the public obligations of the U.S. Treasury.

The FTSE 3-Month U.S. Treasury Bill Index is an index based upon the average monthly yield of the 90-day Treasury bills. Treasury bills are secured by the full faith and credit of the U.S. Government and offer a fixed rate of return.

The Merrill Lynch 1-3 Year Treasury Bond Index is a market capitalization-weighted index including all U.S. Treasury notes and bonds with maturities greater than or equal to one year and less than three years.

Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges.

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Appendix | Market terms

Definitions

Market termsAsset-Backed Security-(ABS) - A financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities. For investors, asset-backed securities arean alternative to investing incorporate debt.

Commercial Mortgage-Backed Securities-(CMBS) - are a type of mortgage-backed security that is secured by the loan on a commercial property. A CMBS can provide liquidity to real estate investors and to commercial lenders.

Collateralized Mortgage Obligations-(CMO) - are securities backed by a pool of pass-through securities, which consists of several classes of bondholders with varying maturities. The principal payments from the underlying pool of pass-through securities are used to retire the bonds on a priority basis as specified in the prospectus.

Mortgage-Backed Securities-(MBS) - A type of asset-backed security that is secured by amortgage, or a collection of mortgages. These securities must also begrouped inone of thetop tworatings as determined by an accredited credit rating agency, andusually pay periodic payments that are similar to coupon payments.Furthermore, the mortgage must have originated from a regulated and authorized financial institution.

Mortgage Pool - Group of related financial instruments, such as mortgages, combined for resale to investors on a secondary market.

Mortgage Dollar Roll - A special type of repurchase agreement in which the security, transferred to the investor as collateral, is a mortgage-backed security. The investor who sells the security gives up the cash flows during the roll period, buthas use of the proceeds.

Treasury Inflation Protected Securities-(TIPS) - A special type of Treasury note or bond that offers protection from inflation. Like other Treasuries, an inflation-indexed security pays interestevery six months and pays the principal when the security matures. The difference is that the coupon payments and underlying principal are automatically increased to compensate for inflation as measured by the consumer price index (CPI). Also referred to as “Treasury inflation-indexed securities.”

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Appendix | Term Definitions

Definitions

Term definitionsMaturity is the date at which a debt instrument is due and payable. A bond due to mature on January 1, 2010, will return the bondholder’s principal and final interest payment when it reaches maturity on that date. Bond yields are frequently calculated on a yield-to-maturity basis.

Duration (Modified Duration) is the measure of the price sensitivity of a fixed income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows.

Yield to Worst (YTW) is based on a portfolio’s current holdings on one specific day, is gross of all portfolio expenses, and is calculated based on assumptions that prepayment occurs if the bond has call or put provisions and the issuer can offer a lower coupon rate based on current market rates. If market rates are higher than the current yield of a bond, the YTW calculation will assume no prepayments are made, and YTW will equal the yield to maturity. The YTW will be the lowest of yield to maturity or yield to call (if the bond has prepayment provisions). The YTW of a bond portfolio is the market-weighted average of the YTWs of all the bonds in the portfolio.

Insured municipal bonds are ones where scheduled interest and principal payments are guaranteed by AAA-rated municipal bond insurers.

General Obligation municipal bonds are backed by the credit and taxing power of the issuing jurisdiction rather than the revenue of a given project.§

Revenue bonds are municipal bonds supported by the revenue from a specific project.

Pre-refunded bonds are municipal bonds that are generally backed or secured by U.S. Treasury bonds.

Effective Duration is a duration calculation for bonds with embedded options. Effective duration takes into account that expected cash flows will fluctuate as interest rates change.

Average Maturity is the average length of maturity for all fixed-rate debt instruments held in a portfolio.

Average Coupon based on the portfolio’s underlying holdings, which may differ and are subject to change. Coupon rate is the annual coupon payments paid by the issuer relative to a bond’s face or par value.

Yield to Maturity - The rate of return anticipated on a bond if it is held until the maturity date. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity.

The Sharpe Ratio is a risk-adjusted measure that is calculated using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe Ratio, the better the portfolio’s historical adjusted performance.§

Alpha is a measure of the difference between actual returns and expected performance, given the level of risk as measured by Beta, where Beta measures sensitivity to benchmark movements.

R-Squared measures the strength of the linear relationship between the portfolio and its benchmark. R-squared at 1.0 implies perfect linear relationship and zero implies no relationship exists. Standard deviation is based on quarterly data.

Standard Deviation is a measure of the variability of returns; the higher the standard deviation, the greater the range of performance (i.e., volatility).

The Capture Ratios measure a manager’s composite performance relative to the benchmark, considering only those quarters that are either positive (Up) or negative (Down) for the benchmark.

An Up Market Capture Ratio greater than 1.0 indicates a manager who has outperformed the benchmark in the benchmark’s positive quarters.

A Down Market Capture Ratio of less than 1.0 indicates a manager who has outperformed the relative benchmark in the benchmark’s negative quarters.

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Brandywine Global

Clarion Partners

ClearBridge Investments

EnTrust Global

Martin Currie

QS Investors

RARE Infrastructure

Royce Investment Partners

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2019 western asset managed municipals portfolios · 2020-03-13 · western asset managed municipals...

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