Legg Mason QS Strategic Real Return Portfolios

Investment Overview

The Legg Mason QS Strategic Real Return Portfolios combines tactical asset allocation and an expanded range of asset classes to hedge against increases in U.S. inflation and achieve long-term real return. The strategy allocates its assets among five investment “sleeves” that the advisor believes generally complement each other and have various inflation-hedging qualities.
 

Investment Philosophy

We believe:

  • Inflation is difficult to predict, and typically damaging to investment portfolios. However, inflation patterns are complex and a result of various factors: the economic cycle, monetary policy, investor expectations and exogenous shocks. Therefore, different asset classes tend to outperform in different inflationary periods.
  • Traditional inflation-aware strategies tend to be limited, with a narrow investment universe, little diversification and higher volatility. Therefore, investors should consider a diversified allocation to inflation-aware assets that work in different inflationary periods.
     

Key Differentiators

Rigorous manager selection and sophisticated portfolio construction address the challenges and opportunities presented by the marketplace and that ensures the portfolios are positioned appropriately using:

  • Structural diversification across asset classes that typically do well in different types of inflationary periods
  • Tactical asset allocation† that seeks to tilt the portfolio to current market opportunities to enhance returns
     

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

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

Key benefits

  • Sophisticated flexible approach to inflation-aware investing seeks to help protect purchasing power in times of high or accelerating levels of inflation while also providing benefits during periods of low inflation expectations
  • Includes traditional and alternative asset classes that seeks to hedge against short-term and long-term inflation
  • Complements traditional portfolios with core inflationary assets
     

Investment
process

Identify asset classes with real return potential

  • QS allocates to traditional and alternative asset classes that have consistently provided long-term growth, especially in times of economic inflation
  • Assets include:
    • Inflation-linked bonds: seeks to keep up with U.S. consumer price inflation
    • Commodity-linked securities: expected to perform positively during times of high commodity inflation
    • Real Estate Investment Trusts: historically have added value during inflationary real estate periods
    • Global stocks: diversified global exposure offering economic growth across various international economies

Determine long-term asset allocation weights

  • Weights are diversified across assets based on historical performance relationships, track record during inflationary times, along with forecasted real return potential

Take advantage of shorter-term opportunities presented by the market

  • 10% of the portfolio can shift between stocks and bonds depending on QS Investors’ view of which market has the potential to outperform

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 Implementation

Ellen Tesler

Portfolio Manager

Adam J. Petryk, CFA

Head of Multi-Asset and Solutions

To find out more about the Legg Mason Strategic Real Return 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 may 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. In addition, a client will bear a proportionate share of the separate fees and expensed incurred by any ETF in which the clients’ account is invested.  Real estate investment trusts (REITs) are closely linked to the performance of the real estate markets. REITs are subject to illiquidity, credit and interest rate risks, and risks associated with small and mid-cap investments. Underlying Mutual Funds may also include investments 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 Investors Strategic Real Return 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 Strategic Real Return account(s) that it does in managing institutional QS Investors Strategic Real Return account(s). The SMA accounts are implemented through a combination of mutual funds and ETFs whereas the institutional composite invests in ETFs and individual global equity and fixed-income (inflation indexed) securities.

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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Legg Mason QS Strategic Real Return Retail Composite GIPS® Endnotes Schedule of Investment Performance for the Period: December 31,
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
2016 0.84
3.86 4.68 8.77 4.14 ≤5 120 22,789 N/A 0
2015 -12.66 -10.01 -1.44 8.97 507 ≤5 117 23,725 N/A 0
2014 -8.97 -6.21 3.64 9.46 5.23 ≤5 144 19,388 N/A 0
2013 0.12 3.13 -8.61 11.52 5.43 ≤5 143 N/A N/A 0
2012 6.82 10.01 6.98 N/A N/A ≤5 134 N/A N/A 0
2011 1.21 4.24 13.56 N/A N/A ≤5 130 N/A N/A 0
2010 
3/1–12/31
10.29 13.01 5.85 N/A N/A ≤5 20 N/A 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, two of Legg Mason’s existing affiliates – Batterymarch Financial Management, Inc. and Legg Mason Global Asset Allocation, LLC – became subject to common management and investment oversight under QS Investors, LLC. Effective June 30, 2014, Batterymarch Financial Management, Inc.’s and Legg Mason Global Asset Allocation, LLC’s names were changed to QS Batterymarch Financial Management, Inc. (“QS Batterymarch”) and QS Legg Mason Global Asset Allocation, LLC (“QS LMGAA”), respectively, to reflect this integration. Effective April 1, 2016, all of the duties, responsibilities and obligations set forth in QS Batterymarch’s and QS LMGAA’s client investment advisory, sub-advisory and management agreements were assumed by QS Investors, LLC.

Effective October 1, 2014, the firm was redefined for GIPS purposes to include all three firms as one combined entity.  Historical assets under management for QS Batterymarch and QS LMGAA are not included under Firm Assets in the table above for periods before 2014 since these firms were not part of the GIPS defined firm until October 1, 2014.  Prior to October 1, 2014, performance results for this composite were attained at QS LMGAA (which was not part of the GIPS defined firm during such period).

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. QS LMGAA has been independently verified for the periods January 1, 2008 through September 30, 2014. 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 Strategic Real Return 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 that contains accounts managed on a fully discretionary basis that seek to provide an attractive long-term real return by investing in investing in various real return focused asset classes and changing the composition tactically.  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. The Composite’s inception date is March 1, 2010, 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. From March 1, 2010 through July 31, 2014, gross returns were sourced from Legg Mason, Inc. and the underlying account’s custodian. Prior to August 1, 2014, the I share class gross performance for the fund was used. Prior to December 1, 2017, the composite does not contain actual wrap fee/SMA portfolios. During this period, gross of fee performance are 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  the Bloomberg Barclays Capital US TIPS Index. The Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L) measures the performance of the US Treasury Inflation Protected Securities (TIPS) market. Federal Reserve holdings of US TIPS are not index eligible and are excluded from the face amount outstanding of each bond in the index. The US TIPS Index is a subset and the largest component of the Global Inflation-Linked Bond Index (Series-L). US TIPS are not eligible for other Barclays nominal US Treasury or broad-based aggregate bond indices. 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. Bloomberg Barclays is the source and owner of the index providers 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. Bloomberg Barclays is 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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