Legg Mason QS Diversified Income Portfolios

Investment Overview

The Legg Mason QS Diversified Income Portfolios is a multi-asset strategy that uses ETFs to gain exposure to a variety of income sources. The strategy utilizes a dynamic asset allocation approach to seek to maximize income while minimizing risk and maintaining diversification.
 

Investment APPROACH

Quantitative process that seeks to:

  • Balance income with risk
  • Mitigate asset class concentration 
  • Adapt to the current environment 

Seeks:

  • Diversified sources of return 
  • Consistent risk profile 
  • Higher yields

 

Investment Philosophy

Developed based on observations that yields and risk levels of different asset classes change over time and therefore one of the best ways to capture yield without exposing investors to unnecessary risk is to take a diversified and dynamic approach to investing.
 

Diversified Income Portfolio: Approach

Quantitative process that seeks to:

  • Balance income with risk
  • Mitigate asset class concentration
  • Adapt to the current environment

Seeks:

  • Diversified sources of return
  • Consistent risk profile
  • Higher yields
     

Key Differentiators

  •  Managed by QS Investors, an innovator in global quantitative research and asset management 
  • Quantitative process balances high income target with a robust risk framework
  • Dynamic approach seeks to be responsive to changing volatility and yield environments
  • Robust framework balances near- and longer-term inputs to achieve a smoother income stream
     

Responsive Process to Balance Income and Risk

Dynamic Risk Modeling & Yield Assessment

Complementary processes that seek to maximize yield and maintain a moderate risk profile

Dynamic Risk Modeling

  • Integrates information from changing asset class risk and correlations to position the portfolio for the current market environment
  • Risk measured over a full market cycle

Yield Assessment

  • Uses current market yields
  • Robust yield estimate process
  • Reassess yield vs. risk every 6 months  

Our research shows that a long-term view toward risk allows capitalization on yield opportunity while maintaining a moderate risk profile.
 

Diversification does not guarantee a profit or protect against a loss.

There is no guarantee that the Portfolio's objectives will be met.

 

 

Investment
process

Identify universe of income-generating ETFs

  • Includes both Bonds and Stocks
  • Contains less commonly held yield-generating assets: bank loans, mortgage-backed securities, master limited partnerships (MLPs) and emerging market bonds

Assess yield potential

  • Estimate yields of each asset based on the dividends paid over the last 12 months (removing any irregular or special dividends to provide a more conservative and realistic investor experience).

Assess risk of each investment

  • Measure historic volatility of each underlying asset

Determine long-term asset allocation weights

  • Investments are selected and weighted to produce a portfolio with the highest yield estimate 
  • Stocks must be between 31% and 34% of the total portfolio
  • Portfolio is re-evaluated semi-annually as yield and risk characteristics change.

The investment process may change over time. The characteristics set forth above 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.

 

 

meet your managers

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.


Thomas Picciochi, CAIA

Head of Multi-Asset Portfolio Management

Ellen Tesler

Portfolio Manager

Adam J. Petryk, CFA

Head of Multi-Asset and Solutions

To find out more about the Legg Mason QS Diversified Income Portfolios, talk to your financial advisor.


 

What I Should Know
Before Investing

All investments involve risk, including loss of principal and there is no guarantee that investment objectives will be met.  Equity securities are subject to price fluctuation and possible loss of principal. Investments include ETFs representing U.S. securities markets, industry and market capitalization sectors, non-U.S. country and regional markets, and other types of non-U.S. markets and sectors. Clients likely to find strategies that utilizes ETF disciplines most appropriate are those willing to accept market-like returns for the ETF discipline with little potential for the individual ETFs to outperform the indices they track. Potential investors should understand that the annual advisory fee charged is in addition to the management fees, operating expenses, and other expenses associated with an investment in ETFs. An ETF is a type of Investment Company whose investment objective is to achieve a return similar to that of a particular market index. An ETF will invest in either all of the securities or a representative sample of the securities included in the index they track. ETFs may be bought or sold throughout the day in the secondary market, but they are generally not redeemable by retail investors for the underlying basket of securities they track. Investments may also be made in ADRs and other securities of non-U.S. companies in developed and emerging markets, which involve risks in addition to those ordinarily associated with investing in domestic securities, including the potentially negative effects of currency fluctuation, political and economic developments, foreign taxation, and differences in auditing and other financial standards. 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.  Diversification and asset allocation does not guarantee a profit or protect against a loss.  Tapering of the Federal Reserve Board's quantitative easing program and a general rise in interest rates may lead to increased portfolio volatility.

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IMPORTANT INFORMATION: Past performance is no guarantee of future results. Management and performance of individual accounts may vary for reasons that include the existence of different implementation practices and model requirements in different investment programs.

Pure 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 3% annual wrap fee for equity and balanced portfolios and a 1.5% annual wrap fee for fixed income portfolios. These deducted fees amounts are the maximum anticipated wrap fees. 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.

An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. 

Please see GIPS® endnotes for important additional information regarding the portfolio performance shown and for effects of fees. 

Performance Source: Legg Mason

Hypothetical growth of dollars: For illustrative purposes only. Assumes no withdrawals or contributions. The performance results shown were calculated assuming reinvestment of dividends and income and take into account both realized and unrealized capital gains and losses.

Prior to December 1, 2017, the performance results were calculated using QS Dynamic Multi-Income Composite which was comprised of institutional account(s). Net total returns were calculated by reducing the institutional gross-of-fees performance by the highest bundle fee of 3.0%. QS Investors follows substantially the same investment philosophy, strategies and processes in managing SMA Diversified Income account(s) that it does in managing institutional QS Dynamic Multi-Income Composite account(s).  The SMA accounts is managed in a similar manner as an institutional account.  The institutional portfolio and the SMA account(s) both invest in ETF securities and there is no substantial difference in the holdings.

IMPORTANT INFORMATION: Separately Managed Accounts (SMAs) are investment services provided by QS Investors, a federally registered investment adviser. Client portfolios are managed based on investment advice provided by QS Investors. Management is implemented by the program sponsor or its designee.


Professional money management may not be suitable for all investors. Factual information relating to the securities discussed was obtained from sources believed to be reliable, but there can be no guarantee as to its accuracy. It should not be assumed that investments made in the future will be profitable or will equal the performance of the securities discussed in the material.

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Holdings, sector weightings, market capitalization and portfolio characteristics are subject to change at any time and are based on a representative portfolio. Holdings, sector weightings, market capitalization and portfolio characteristics of individual client portfolios in the program may differ, sometimes significantly, from those shown. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities and sectors listed. 

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QS Diversified Income Retail Composite GIPS® Endnotes Schedule of Investment Performance for the Period: December 31, 2017 - Blended Static Benchmark: 30% S&P 500 Index; 30% Bloomberg Barclays Global High Yield Index; and 40% Bloomberg Barclays Global Aggregate Bond Index
Period
Ending (a)
Net Composite Returns (%) Gross Returns (%)  Benchmark
(%)  (b)
Net
Composite 3 -
Year Standard Deviation (c)
Benchmark
3 - Year Standard Deviation  (c)
Number
of Accounts
Composite
Assets (US$m)
Firm
Assets (US$m)
Composite
Dispersion (d)
% of
Bundled Fee Portfolios in the Composite
2017 4.67 7.80 12.51 N/A N/A ≤5 0.2 20,774 N/A 100%
2016 9.10 12.35 10.72 N/A N/A ≤5 392 22,789 N/A 0
2015
6/1– 12/31
-10.45 -8.87 -2.34 N/A N/A ≤5 500 23,725 N/A 0

Notes:

a) If applicable, partial reporting periods are a result of the inception or termination of the composite as further described below. Partial period returns of less than a year are not annualized.

b) Due to differences in sources for benchmark performance, there may be slight variances between benchmark returns noted above and those from other published sources.

c) 3-year annualized ex-post standard deviation; 3-year annualized ex-post standard deviation is not applicable because it does not have a 3-year history.

d) Asset-weighted standard deviation; calculated for net returns for composites with more than five portfolios active over the full year.

See Accompanying Notes below.

1.  Basis of Presentation

QS Investors, LLC (“QS Investors” or “the Firm”), is a registered investment adviser with the Securities and Exchange Commission, providing investment and advisory services to a diverse array of institutional, retail and sub-advisory clients worldwide. Registration as an investment adviser does not imply any level of skill or training.  The Firm is headquartered in New York City with an additional office in Boston, Massachusetts. The Firm provides discretionary and non-discretionary advice and investment management to domestic and international clients based on their investment objectives, guidelines, and risk tolerance, each of which may be customized to address specific client needs. QS Investors, LLC launched in August 2010 and became a wholly-owned, independently managed affiliate of Legg Mason, Inc. on May 31, 2014. As part of this transaction, Legg Mason merged QS Batterymarch Financial Management, Inc. (“QS Batterymarch”) and QS Legg Mason Global Asset Allocation, LLC (“QS LMGAA”), two other affiliates, into QS Investors.

QS Investors claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. QS Investors has been independently verified for the periods August 1, 2010 through December 31, 2016. The verification reports are 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. Verification does not ensure the accuracy of any specific composite presentation.

This presentation of investment performance sets forth the time-weighted net rates of return for the Diversified Income Retail Composite (the "Composite") for the period shown. Past performance is no guarantee of future results and may differ in future time periods.

2.  Composite Description

Prior to December 1, 2017, the Composite consisted of all fee-paying portfolios.  As of December 1, 2017, the Composite includes 100% non-fee-paying portfolios managed on a fully discretionary basis that seek to maximize yield while diversifying asset class and manager exposure. It seeks to avoid over-concentration to credit risk, interest rate risk, country risk, and equity risk.  It also has tools in place to limit volatility, and allows QS to allocate away from certain asset classes during volatile times. From inception through November 30, 2017, the composite returns are represented by institutional accounts managed to the diversified income strategy.  Beginning, December 1, 2017, the composite includes only retail/wrap/SMA accounts managed to the diversified income strategy.

Eligible new portfolios are added to the Composite at the start of the first performance measurement period following the date that the portfolio is fully invested as defined by the Composite strategy. Securities listed on any national exchange are valued at their last trade price. Securities that are not listed are valued at the most recent publicly quoted bid price. Securities transactions are recorded on a trade date basis. If applicable, dividend income is recorded as of the ex-dividend date. Returns reflect the reinvestment of dividends and other earnings. There has been no minimum account size for this composite. The Composite’s inception date is June 1, 2015, with a creation date of October 30, 2017.

3.  Calculation of Rates of Return

Composite returns are expressed in US dollars. For each portfolio within the Composite, the total rate of return for the time period is equal to the change in the market value of the portfolio, including capital appreciation, depreciation and income, as a percentage of the beginning market value of the portfolio, adjusted for the net of all contributions and withdrawals (the "cash flows"). Rates of return are calculated on a daily “time-weighted" basis and are net of withholding taxes, where applicable, for all portfolios which comprise the Composite. Daily time-weighted rates of return minimize the effect of cash flows on the investment performance of the portfolio. There are no known material differences between the Firm’s source of foreign exchange rates and that of the benchmark.

Monthly Composite rates of return are computed by taking an asset weighted average of each portfolio's monthly rate of return within the Composite, utilizing their respective beginning market values for the period. Annual Composite rates of return are derived by geometrically linking monthly Composite rates of return. Prior to December 1, 2017, the composite does not contain actual wrap fee/SMA portfolios. During this period, gross of fee performance is net of transaction and commission costs, and gross of any expense ratios (including investment management fees). After December 1, 2017, pure gross of fee performance is shown and is gross of transaction and commission costs. The fee schedule currently in effect is 3.00% on all assets.  Net of fee composite returns are calculated by reducing each monthly composite gross rate of return by the highest "bundled" fee charged (3.00%) annually, prorated to a monthly ratio. This fee has been applied historically since inception of the composite. After December 1, 2017, net of fees are calculated based on pure gross of fee returns which are gross of transaction and commission costs. The "bundled" fee includes transaction costs, investment management, custodial, and other administrative fees. Advisory fees are described in QS Investors, LLC’s Form ADV, Part 2A brochure. Actual management fees may vary depending upon, among other things, the account type, the applicable management fee schedule and the portfolio size.

The standard deviation of comparable performance over time is a measure of dispersion. This calculation measures the fluctuation of the rates of return of portfolios with the Composite in relation to the average return. Dispersion is not shown for composites with 5 or less portfolios for a full year as it is not meaningful.

4.  Composite Benchmark

Composite returns are measured against a mixed static blend of 30% S&P 500 Index; 30% Bloomberg Barclays Global High Yield; and 40% Bloomberg Barclays Global Aggregate Bond Index. The S&P 500® is widely regarded as the best single gauge of large cap U.S. equities. There is over USD 7 trillion benchmarked to the index, with index assets comprising approximately USD 1.9 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. The Bloomberg Barclays Global High Yield Index is a multi-currency flagship measure of the global high yield debt market. The index represents the union of the US High Yield, the Pan-European High Yield, and Emerging Markets (EM) Hard Currency High Yield Indices. The high yield and emerging markets sub-components are mutually exclusive.

The benchmark is used for comparative purposes only and generally reflects the risk or investment style of the investments reported on the schedule of investment performance. Investments made by the Firm for the portfolios it manages according to the Composite strategy may differ from those of the benchmark. Accordingly, investment results will differ from those of the benchmark.

The Firm’s portfolios are actively managed, while the index is unmanaged and may contain securities different from those included in the Firm’s portfolios. S&P 500® and Bloomberg Barclays, respectively, are the source and owner of the S&P 500® and Bloomberg Barclays Indices data contained or reflected in this material and all trademarks and copyrights related thereto. The material may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is the Firm’s presentation of the data. S&P 500® and Bloomberg Barclays are not responsible for the formatting or configuration of this material or for any inaccuracy in presentation thereof. The index providers are the sources and owners of the index data contained or reflected in this material and all trademarks and copyrights related thereto.

5.  Additional Information and Information Available upon Request

In addition to the Composite, the Firm provides investment management services utilizing different strategies. The following information is available upon request:  policies for valuing portfolios, calculating performance, and preparing compliant presentations;  a complete list and description of the Firm's composites; QS Investors, LLC’s Form ADV, Part 2A brochure; a list of other Legg Mason affiliates.

All investments involve risk, including loss of principal. Past performance is no guarantee of future results. Please see each product’s webpage for specific details regarding investment objective, risks associated with hedge funds, alternative investments and other risks, performance and other important information. Review this information carefully before you make any investment decision.

Certain SMA products may not be available at all firms. 

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