The Western Asset Approach to Unconstrained Investing: An Overview

Ken Leech
Chief Investment Officer

Executive Summary

  • There is considerable confusion and disagreement over what, exactly, unconstrained investing is or should be. The only widespread agreement within the industry is that unconstrained investing means different things to different people.
  • Western Asset has been successfully managing unconstrained programs for over two decades. We are fortunate that all five of our client-focused programs have achieved significantly positive returns and fine long-term track records.
  • We believe there is no “one size fits all” approach to unconstrained investing. Instead, we believe in offering a range of our best strategies to meet the varying concerns and objectives of our clients.
  • By providing clarity about the volatility, opportunity set and sources of alpha, investors can pick the approach that best fits their needs. Importantly, we believe each of Western Asset’s approaches can, and has provided, results in line with our clients’ understanding and goals.

Background

Unconstrained fixed-income investing has recently come into prominence due largely to two factors. First is investor desire to avoid having their portfolios tied to benchmarks whose composition may not reflect the optimal or desired components of their investment needs and objectives. The second stems from the strong consideration that after 35 years of falling bond yields to multi-generational lows, the risk of principal loss inherent in tying fixed-income investments to benchmarks with longer durations may not be worth taking.

But as this “unconstrained” approach to fixed-income investing has taken off, it still leaves considerable confusion and disagreement over what, exactly, unconstrained investing is or should be. Indeed, amidst this confusion the only widespread agreement within the industry is that unconstrained investing means different things to different people.

We believe the very term “unconstrained” is the most ill-fated label possible. Immediately after broaching the prospect of unconstrained programs the first question a client asks quite appropriately is, “What are the constraints?”

One consideration some have proposed is that these should be “best ideas” funds without being tethered to a benchmark. But if this is the approach then a firm can have only one program; after all, how can you have more than one “best ideas” strategy?

Western Asset’s Client-Focused Approach

At Western Asset we have been successfully managing unconstrained programs for over two decades, having been a pioneer in the mid-1990s with our Global Multi-Sector (GMS) portfolios. Our US and global total return portfolios—Total Return Unconstrained (TRU) and Global Total Return (GTR)—have track records over a decade long. Our more recent programs—Multi-Asset Credit (MAC) and Macro Opportunities (MO) have over six- and four-year track records, respectively (see Appendix for details). We are fortunate that all five programs have achieved significantly positive returns and fine long-term track records.

Our approach is to be completely client focused. In our collaborative discussions with clients over the decades, we have found investors vary widely in their risk tolerances, their preferred fixed-income asset type and the nature of the risk they are willing to assume. Some investors are US centric, some have a more global bent. Many are focused on income as their primary motivation whereas some are more focused on total return. Many of our clients are very comfortable with credit risk while others wish to limit credit exposure but are more willing to take interest-rate, or “macro” risk. We believe there is no “one size fits all” approach. Instead, we believe in offering a range of our best strategies to meet the varying concerns and objectives of our clients.

The keys to having a successful program and client relationships are clarity and transparency. We feel that many of the unconstrained programs in our industry are somewhat ad-hoc and investors are not always clear as to the nature of the risks inherent in each or among the different offerings. We are devoted to establishing clarity and transparency immediately with our clients, and before further discussion or entering into specific programs.

In addition to client guidelines, we start with clarity about the three key parameters by which we identify every unconstrained program:

  1. Volatility
  2. Opportunity Set (what type of assets will the portfolio hold?)
  3. Sources of Alpha (what are the risks and returns likely to come from?)

For example, many US investors have chosen to invest in TRU instead of a traditional US Core full discretion approach. It traditionally has a target volatility similar to that of the US bond market—currently on the order of 4%. The opportunity set is predominantly US assets and the major sources of alpha over time will come from spread products. It utilizes a healthy component of below-investment-grade sectors and securities. For our global clients, GTR is typically the chosen vehicle. It typically has a volatility much like the global aggregate, also approximately 4%. The opportunity set is global investment-grade and the major sources of alpha come from global macro strategies.

These considerations make it very straightforward for clients to understand precisely what they should expect from their programs. How much risk am I willing to take? What types of securities am I comfortable with? How much latitude will the program have? Where are the sources of risk and reward? How much volatility in returns am I comfortable with?

Challenges

These considerations are crucial for clients who have decided to allocate away from a traditional benchmark-based program. Often the question here becomes, will this “unconstrained” approach beat my benchmark? As everyone who has studied markets and the efficient markets hypothesis understands, it is hard enough to beat one benchmark—it would be foolhardy in the extreme to posit that you could beat two. Total return “unconstrained” approaches designed with no benchmark are attempting to achieve positive returns in line with their volatility targets and risk budget sources; therefore, a traditional benchmark that happens to have exceptional results can generate better returns. Think of allocating away from stocks into bonds. If the bond performance is excellent, that is good news. But one cannot fault the bond manager for failing to beat the stock market. That is the decision of the asset allocator. Indeed, it is this concept of “serving multiple masters” that has persisted in muddying the discussion and analysis of unconstrained fixed-income investing programs. Many investors, hopeful that unconstrained investments would generate higher returns than “Aggregate” indices due to a combination of greater latitude providing greater alpha and/or higher rates leading to lower benchmark returns have often been disappointed, predominantly because interest rates have continued falling in recent years.

Another difficulty traditional fixed-income investors have with unconstrained investing is in evaluating their managers. In the absence of a benchmark or easy peer group comparisons, this can be difficult. The approach that finance theory would suggest may also take the allocator out of their comfort zone. Unconstrained investing can be judged by how the manager has adhered to various parameters—volatility, composition, risk budget and latitude. But after that, what about the performance? Is it good? Bad? So-so? The most common approach is to judge performance relative to volatility (e.g., Sharpe ratio/information ratios). Drawdown, or the amount of one’s worst case performance during a period, is another gauge of performance. The use of correlation studies is also commonplace. How correlated are returns to different asset classes? Our preferred method is for our clients to have the clear expectation of superior returns relative to target volatility.

Western Asset’s Investment Philosophy

As in any field, the “four Ps” of investment are important to evaluate—philosophy, process, people and performance. Western Asset has adhered to our value-driven philosophy and use of diversified strategies for over 40 years. Our process has evolved as markets have expanded but the basic investment philosophy has not changed. For unconstrained investing, people and performance are important to evaluate. Unconstrained investing requires many of the skills inherent in successful fixed-income benchmark investing, but there are differences and having dedicated teams is important.

Similarly, the length of track record is probably even more important in this field, because as is the case with any new investment style, it is easier to say “I can do it” than to actually succeed over long periods of time. In this still relatively young investment space, a five-year track record easily puts a program in the top quartile, whereas 10 and 20-plus year track records are rare and therefore more valuable. Why are established track records that may seem short relative to more established investment fields so important? Simply, it is the most important source of information that one has to go on. Is the program doing what I expected it to do? Is the volatility what I expected? Is the manager staying on the course they originally explained? Are we getting “style” drift whereby the assets and the risk budget in the program have now changed?

So as elementary as it may seem, the consistency of the investment approach is the first question the track record may answer. Next, the investment results shine light in the time-honored way on whether the manager has delivered alpha relative to risk taken.

Western Asset’s Unconstrained Program

Exhibit 1 provides a snapshot of Western Asset’s five flagship programs (additional details, objectives and annual return information are provided in the Appendix). The programs have been simplified in these quick descriptors for convenience in reading the table. All the programs are designed to seek the maximum benefits from incorporating the strategies from our global platform; note that each uses asset allocation, sector rotation and macro strategies to varying degrees. This gives each program more alpha sources and better diversification. The predominant alpha sources are displayed for ease of understanding both the individual programs and the differentiation between programs.

Exhibit 1
Western Asset’s Unconstrained Strategies
approach-to-unconstrained-investing-2017-01
Source: Western Asset

As Exhibit 2 illustrates, all the programs have generated significant total returns over significant periods of time and across many different market environments. In each program returns are also substantial relative to their target volatilities. More meaningfully, performance has been good across what are very disparate strategic approaches. GMS blends higher-yielding credit and macro with a global focus. GTR and MO are driven by global macro strategies, the former with an investment-grade, low-volatility emphasis, and the latter with a high-volatility approach incorporating below-investment-grade sectors. MAC, a “go anywhere” spread product or credit program focused on global sector rotation and which incorporates a tail-risk protection feature to minimize portfolio downside risk, has done remarkably well in the slow global growth environment of the last several years. And TRU, our flagship US program, has been an exceptional complement to our benchmark-focused core programs over the last 12 years. This is especially remarkable considering the global financial crisis, which severely battered spread product, and the declining yield environment, both of which provided a strong tailwind for core returns.

Exhibit 2
Total Returns
approach-to-unconstrained-investing-2017-01
*Since inception ending 31 Dec 16.

Western Asset is a firm that has truly differentiated itself with Core and Core-Plus strategies over our 45-year history. Our unconstrained programs are fully integrated into our investment approach. Each unconstrained program has a dedicated team, emphasizing Western Asset’s key themes and strategies in the most effective way consistent with the uniquely identified parameters of each portfolio. We have built out our sector teams around the globe in order to offer excellence in all market segments. Sector rotation has always been at the heart of Western Asset’s investment approach and is a hallmark of our success. Evaluating various market sectors on a relative value basis, and efficiently incorporating those themes in conjunction with our macro strategies is central to unconstrained investing.

Summary

The case we lay out is one of having clearly defined programs across a variety of parameters, with dedicated teams to provide the best opportunities to achieve superior risk-adjusted returns. This menu of programs is designed to give clients a meaningful breadth of choice, and to provide significant differentiation in their respective approaches. We have been doing this successfully for 20 years, albeit with a much increased and focused effort over the last decade. We believe that investors looking for a non-benchmark (unconstrained) fixed-income solution can count on our investment philosophy and approach, which has carried our firm for over 40 years, to be effectively translated into our clients’ portfolios. We believe that by providing clarity about the volatility, opportunity set and sources of alpha, investors can pick the approach that best fits their needs. Importantly, we believe each of these approaches can, and has provided, results in line with our clients’ understanding and goals.

Appendix

Total Return Unconstrained (inception date 01 Jul 04)
Predominantly US fixed-income with some allocations to “plus” sectors—US Core Plus without a benchmark
Flexibility in duration, sector, curve and quality
Duration Range: -3 to +8
Minimum 50% investment-grade securities
Maximum 25% non-dollar exposure unhedged
Targeted volatility: 3% to 6% per annum over a cycle

Global Multi-Sector (inception date 01 Nov 96)
Global fixed-income investing across high-yield, emerging markets, non-US and FX
Active sector rotation, duration management, and management of volatility risk
Maintains an overall investment-grade rating
Duration Range: 0 to +8
Targeted volatility: 5% to 7% per annum over a cycle

Macro Opportunities (inception date 01 Apr 12)
Concentrated and opportunistic exposure to Western Asset’s key global themes
Active positioning of rates, curve, FX and volatility
Duration Range: -5 to +10
Minimum 50% investment-grade securities
Maximum 50% non-dollar exposure unhedged
Targeted volatility: 8% to 10% per annum over a cycle

Global Total Return (inception date 01 Jan 06)
Global investment-grade fixed-income
Greater flexibility in duration, sector, curve and FX
Duration range -3 to 8 years
100% investment-grade securities
25% currency flexibility
Targeted Volatility: 4% to 6% per annum over a cycle

Multi-Asset Credit (inception date 01 Oct 10)
Diversified exposure to global higher-yielding assets
Tail-risk hedging strategy provides downside protection
Greater flexibility in duration, sector, curve and credit quality
Duration Range: 0 to +10
Targeted volatility: 5% to 7% per annum over a cycle

Exhibit 3
Total Return Unconstrained (TRU) Bond Composite Performance Disclosure December 31, 2016
approach-to-unconstrained-investing-2017-01

Description: Western Asset’s Total Return Unconstrained (TRU) Bond Composite includes portfolios that employ actively managed, diversified fixed-income portfolios. Portfolio construction is based on Western Asset’s fundamental view of the fixed-income markets and is independent of broad market benchmarks. The approach is to construct a portfolio in which the manager intends to actively manage sector, duration and term structure exposure.

Objective: Maximize return consistent with the current market environment and outperform the broad market over the course of a market cycle.

Benchmark Description: The Composite is not measured against a benchmark as accounts that may comprise the Composite are measured on an absolute return basis. There is no benchmark available that appropriately reflects the guidelines of all accounts within the Composite.

Base Currency: USD | Composite Minimum: No minimum asset size requirement.

Current Fee Schedule: .60 of 1% on the first $100 million, .40 of 1% on amounts over $100 million.

Examination Period: The Composite has been examined for the period from July 1, 2004 to December 31, 2015.

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, 2015.

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 and performance examination reports are available upon request.

For GIPS® purposes, the Firm is defined as Western Asset, a primarily fixed-income investment manager comprised of Western Asset Management Company, Western Asset Management Company Limited, Western Asset Management Company Pte. Ltd., Western Asset Management Company Ltd, Western Asset Management Company Pty Ltd, and Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários (DTVM) Limitada, with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Dubai. 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.

The Composite is valued monthly. The Composite returns are the asset-weighted average of the performance results of all the accounts in the Composite. Gross-of-fees returns are presented before management fees, but after all trading expenses. Net of fees results are calculated using a model approach whereby the current highest tier of the appropriate strategy’s fee schedule is used. This model fee does not reflect the deduction of performance-based fees. The portfolios in the Composite are all actual, fee-paying and performance fee-paying, fully discretionary accounts managed by the Firm for at least one full month. Investment results shown are for taxable and tax-exempt accounts and include the reinvestment of all earnings. Any possible tax liabilities incurred by the taxable accounts have not been reflected in the net performance. Composite performance results are time-weighted net of trading commissions and other transaction costs including non-recoverable withholding taxes. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.

The returns for the accounts in the Composite are calculated using a time-weighted rate of return adjusted for weighted cash flows. The returns for the commingled funds in the Composite are calculated daily using net asset values (NAV), adding back the funds’ total expense ratio or equivalent. Trade date accounting is used since inception and market values include interest income accrued on securities held within the accounts. Performance is calculated using asset values denominated in a base currency. Composite market value at year-end presented in the schedule are translated to U.S. dollars using end of year exchange rates.

Composite returns are measured against a benchmark. The benchmark is unmanaged and provided to represent the investment environment in existence during the time periods shown. For comparison purposes, its performance has been linked in the same manner as the Composite. The benchmark presented was obtained from third party sources deemed reliable but not guaranteed for accuracy or completeness. Benchmark returns and benchmark three-year annualized ex-post standard deviation are not covered by the report of independent accountants.

Internal dispersion is calculated using the asset-weighted standard deviation of annual gross returns of those portfolios that were included in the Composite for the entire year. For each annual period, accounts with less than 12 months of returns are not represented in the dispersion calculation. 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. The three-year annualized ex-post standard deviation is not presented for periods where 36 monthly returns are not available for the composite or the benchmark. Any gross total three-year annualized ex-post standard deviation measures prior to 2011, included within the “Examination Period” identified above, are not covered by the report of independent accountants.

Past investment results are not indicative of future investment results.

Western Asset’s list of composite descriptions is available upon request. Please contact Jan Pieterse at 626-844-9977 or jan.pieterse@westernasset.com. All returns for strategies with inception prior to

January 1, 2006 are available upon request.

Exhibit 4
Global Multi-Sector (USD Unhedged) Composite Performance Disclosure December 31, 2016
approach-to-unconstrained-investing-2017-01

Description: Western Asset’s Global Multi-Sector (USD Unhedged) Composite includes portfolios that employ an active, team-managed investment approach around a long-term, value-oriented investment philosophy. These portfolios use diversified strategies and all sectors of the fixed-income market in seeking to add value while minimizing risk. The approach is to construct a strategic multi-sector portfolio by investing in global fixed-income markets and currencies. Primarily, these are mortgage-backed and asset-backed securities, high-yield corporate securities, investment-grade corporate securities and emerging market securities.

Objective: Maximise total return from income and capital appreciation within a volatility target of 5%-7%.

Benchmark Description: The Composite is not measured against a benchmark as accounts that may comprise the Composite are measured on an absolute return basis. There is no benchmark available that appropriately reflects the guidelines of all accounts within the Composite.

Base Currency: USD | Composite Minimum: $25 million as of 4/1/07 (previously $5 million).

Current Fee Schedule: .40 of 1% on the first $100 million, .20 of 1% on amounts over $100 million.

Examination Period: The Composite has been examined for the period from November 1, 1996 to December 31, 2015.

1The Composite returns and summary information have been restated to historically include one account that was previously excluded due to strategy misclasification. Such restatement resulted in a change to the Annual Gross and Net Total Return for 2009 -0.14% and -0.15%.

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, 2015.

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 and performance examination reports are available upon request.

For GIPS® purposes, the Firm is defined as Western Asset, a primarily fixed-income investment manager comprised of Western Asset Management Company, Western Asset Management Company Limited, Western Asset Management Company Pte. Ltd., Western Asset Management Company Ltd, Western Asset Management Company Pty Ltd, and Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários (DTVM) Limitada, with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Dubai. 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.

The Composite is valued monthly. The Composite returns are the asset-weighted average of the performance results of all the accounts in the Composite. Gross-of-fees returns are presented before management fees, but after all trading expenses. Net of fees results are calculated using a model approach whereby the current highest tier of the appropriate strategy’s fee schedule is used. This model fee does not reflect the deduction of performance-based fees. The portfolios in the Composite are all actual, fee-paying and performance fee-paying, fully discretionary accounts managed by the Firm for at least one full month. Investment results shown are for taxable and tax-exempt accounts and include the reinvestment of all earnings. Any possible tax liabilities incurred by the taxable accounts have not been reflected in the net performance. Composite performance results are time-weighted net of trading commissions and other transaction costs including non-recoverable withholding taxes. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.

The returns for the accounts in the Composite are calculated using a time-weighted rate of return adjusted for weighted cash flows. The returns for the commingled funds in the Composite are calculated daily using net asset values (NAV), adding back the funds’ total expense ratio or equivalent. Trade date accounting is used since inception and market values include interest income accrued on securities held within the accounts. Performance is calculated using asset values denominated in a base currency. Composite market value at year-end presented in the schedule are translated to U.S. dollars using end of year exchange rates.

Composite returns are measured against a benchmark. The benchmark is unmanaged and provided to represent the investment environment in existence during the time periods shown. For comparison purposes, its performance has been linked in the same manner as the Composite. The benchmark presented was obtained from third party sources deemed reliable but not guaranteed for accuracy or completeness. Benchmark returns and benchmark three-year annualized ex-post standard deviation are not covered by the report of independent accountants.

Internal dispersion is calculated using the asset-weighted standard deviation of annual gross returns of those portfolios that were included in the Composite for the entire year. For each annual period, accounts with less than 12 months of returns are not represented in the dispersion calculation. 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. The three-year annualized ex-post standard deviation is not presented for periods where 36 monthly returns are not available for the composite or the benchmark. Any gross total three-year annualized ex-post standard deviation measures prior to 2011, included within the “Examination Period” identified above, are not covered by the report of independent accountants.

Past investment results are not indicative of future investment results.

Western Asset’s list of composite descriptions is available upon request. Please contact Jan Pieterse at 626-844-9977 or jan.pieterse@westernasset.com. All returns for strategies with inception prior to January 1, 2006 are available upon request

Exhibit 5
Macro Opportunities Composite Performance Disclosure December 31, 2016
approach-to-unconstrained-investing-2017-01

Description: Western Asset’s Macro Opportunities Composite is an unconstrained, global macro strategy that focuses on long-term value investing and active management of duration, yield curve and volatility. It does this primarily by identifying relative value among securities and sectors in global fixed-income markets.

Objective: Maximize total return.

Benchmark Description: The Composite is not measured against a benchmark as accounts that may comprise the Composite are measured on an absolute return basis. There is no benchmark available that appropriately reflects the guidelines of all accounts within the Composite.

Base Currency: USD | Composite Minimum: $50 million as of 1/1/16 (previously $1 million)

Current Fee Schedule: 1% on all assets.

Examination Period: The Composite has been examined for the period from April 1, 2012 to December 31, 2015.

1 Partial period return (April 1, 2012 to December 31, 2012).

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, 2015.

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 and performance examination reports are available upon request.

For GIPS® purposes, the Firm is defined as Western Asset, a primarily fixed-income investment manager comprised of Western Asset Management Company, Western Asset Management Company Limited, Western Asset Management Company Pte. Ltd., Western Asset Management Company Ltd, Western Asset Management Company Pty Ltd, and Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários (DTVM) Limitada, with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Dubai. 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.

The Composite is valued monthly. The Composite returns are the asset-weighted average of the performance results of all the accounts in the Composite. Gross-of-fees returns are presented before management fees, but after all trading expenses. Net of fees results are calculated using a model approach whereby the current highest tier of the appropriate strategy’s fee schedule is used. This model fee does not reflect the deduction of performance-based fees. The portfolios in the Composite are all actual, fee-paying and performance fee-paying, fully discretionary accounts managed by the Firm for at least one full month. Investment results shown are for taxable and tax-exempt accounts and include the reinvestment of all earnings. Any possible tax liabilities incurred by the taxable accounts have not been reflected in the net performance. Composite performance results are time-weighted net of trading commissions and other transaction costs including non-recoverable withholding taxes. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.

The returns for the accounts in the Composite are calculated using a time-weighted rate of return adjusted for weighted cash flows. The returns for the commingled funds in the Composite are calculated daily using net asset values (NAV), adding back the funds’ total expense ratio or equivalent. Trade date accounting is used since inception and market values include interest income accrued on securities held within the accounts. Performance is calculated using asset values denominated in a base currency. Composite market value at year-end presented in the schedule are translated to U.S. dollars using end of year exchange rates.

Composite returns are measured against a benchmark. The benchmark is unmanaged and provided to represent the investment environment in existence during the time periods shown. For comparison purposes, its performance has been linked in the same manner as the Composite. The benchmark presented was obtained from third party sources deemed reliable but not guaranteed for accuracy or completeness. Benchmark returns and benchmark three-year annualized ex-post standard deviation are not covered by the report of independent accountants.

Internal dispersion is calculated using the asset-weighted standard deviation of annual gross returns of those portfolios that were included in the Composite for the entire year. For each annual period, accounts with less than 12 months of returns are not represented in the dispersion calculation. 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. The three-year annualized ex-post standard deviation is not presented for periods where 36 monthly returns are not available for the composite or the benchmark. Any gross total three-year annualized ex-post standard deviation measures prior to 2011, included within the “Examination Period” identified above, are not covered by the report of independent accountants.

Past investment results are not indicative of future investment results.

Western Asset’s list of composite descriptions is available upon request. Please contact Jan Pieterse at 626-844-9977 or jan.pieterse@westernasset.com. All returns for strategies with inception prior to January 1, 2006 are available upon request.

Exhibit 6
Global Total Return Composite Performance Disclosure December 31, 2016
approach-to-unconstrained-investing-2017-01

Description: Western Asset’s Global Total Return Composite includes portfolios that employ actively, team-managed investment approach around a long-term, value-oriented investment philosophy. The strategy utilizes an opportunistic fixed-income approach, independent of any traditional bond index benchmark, which seeks to maximize total return through active macro strategies and tactical asset allocation across the global fixed-income opportunity set. It does this primarily by identifying relative value among securities and sectors in the investment-grade global fixed-income and currency markets. Strategies employed include duration and yield curve positioning, currency allocation / hedging, relative-value trading as well as sector rotation and issuer selection; while emphasizing macro strategies.

Objective: Seeks to maximize total return consistent with the current market environment independent of market direction and outperform the global broad market over the course of a market cycle.

Benchmark Description: The Composite is not measured against a benchmark as accounts that may comprise the Composite are measured on an absolute return basis. There is no benchmark available that appropriately reflects the guidelines of all accounts within the Composite.

Base Currency: USD | Composite Minimum: No minimum asset size requirement.

Current Fee Schedule: .60 of 1% on the first $100 million, .40 of 1% on amounts over $100 million.

Examination Period: The Composite has been examined for the period from January 1, 2014 to December 31, 2015.

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, 2015.

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 and performance examination reports are available upon request.

For GIPS® purposes, the Firm is defined as Western Asset, a primarily fixed-income investment manager comprised of Western Asset Management Company, Western Asset Management Company Limited, Western Asset Management Company Pte. Ltd., Western Asset Management Company Ltd, Western Asset Management Company Pty Ltd, and Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários (DTVM) Limitada, with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Dubai. 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.

The Composite is valued monthly. The Composite returns are the asset-weighted average of the performance results of all the accounts in the Composite. Gross-of-fees returns are presented before management fees, but after all trading expenses. Net of fees results are calculated using a model approach whereby the current highest tier of the appropriate strategy’s fee schedule is used. This model fee does not reflect the deduction of performance-based fees. The portfolios in the Composite are all actual, fee-paying and performance fee-paying, fully discretionary accounts managed by the Firm for at least one full month. Investment results shown are for taxable and tax-exempt accounts and include the reinvestment of all earnings. Any possible tax liabilities incurred by the taxable accounts have not been reflected in the net performance. Composite performance results are time-weighted net of trading commissions and other transaction costs including non-recoverable withholding taxes. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.

The returns for the accounts in the Composite are calculated using a time-weighted rate of return adjusted for weighted cash flows. The returns for the commingled funds in the Composite are calculated daily using net asset values (NAV), adding back the funds’ total expense ratio or equivalent. Trade date accounting is used since inception and market values include interest income accrued on securities held within the accounts. Performance is calculated using asset values denominated in a base currency. Composite market value at year-end presented in the schedule are translated to U.S. dollars using end of year exchange rates.

Composite returns are measured against a benchmark. The benchmark is unmanaged and provided to represent the investment environment in existence during the time periods shown. For comparison purposes, its performance has been linked in the same manner as the Composite. The benchmark presented was obtained from third party sources deemed reliable but not guaranteed for accuracy or completeness. Benchmark returns and benchmark three-year annualized ex-post standard deviation are not covered by the report of independent accountants.

Internal dispersion is calculated using the asset-weighted standard deviation of annual gross returns of those portfolios that were included in the Composite for the entire year. For each annual period, accounts with less than 12 months of returns are not represented in the dispersion calculation. 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. The three-year annualized ex-post standard deviation is not presented for periods where 36 monthly returns are not available for the composite or the benchmark. Any gross total three-year annualized ex-post standard deviation measures prior to 2011, included within the “Examination Period” identified above, are not covered by the report of independent accountants.

Past investment results are not indicative of future investment results.

Western Asset’s list of composite descriptions is available upon request. Please contact Jan Pieterse at 626-844-9977 or jan.pieterse@westernasset.com. All returns for strategies with inception prior to January 1, 2006 are available upon request.

Exhibit 7
Multi-Asset Credit Composite Performance Disclosure December 31, 2016
approach-to-unconstrained-investing-2017-01

Description: Western Asset’s Multi-Asset Credit Composite includes portfolios that employ an active, team-managed investment approach around a long-term, value-oriented investment philosophy. These portfolios seek to generate income from diversified investments in high yielding securities from all sectors of the global fixed-income market. The approach is to construct a diversified portfolio of global high income securities, including investment-grade credit, non-dollar, high yield, bank loan, emerging markets, and structured securities. We seek to add value through sector rotation, yield curve positioning, issue selection, duration management, country selection, and currency positioning.

Objective: Maximize return consistent with the current market environment and outperform the broad market over the course of a market cycle.

Benchmark Description: The Composite is not measured against a benchmark as accounts that may comprise the Composite are measured on an absolute return basis. There is no benchmark available that appropriately reflects the guidelines of all accounts within the Composite.

Base Currency: USD | Composite Minimum: No minimum asset size requirement.

Current Fee Schedule: .60 of 1% on the first $100 million, .40 of 1% on amounts over $100 million.

Examination Period: The Composite has been examined for the period from January 1, 2013 to December 31, 2015.

1 Partial period return (October 1, 2010 to December 31, 2010).

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, 2015.

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 and performance examination reports are available upon request.

For GIPS® purposes, the Firm is defined as Western Asset, a primarily fixed-income investment manager comprised of Western Asset Management Company, Western Asset Management Company Limited, Western Asset Management Company Pte. Ltd., Western Asset Management Company Ltd, Western Asset Management Company Pty Ltd, and Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários (DTVM) Limitada, with offices in Pasadena, New York, London, Singapore, Tokyo, Melbourne, São Paulo, Hong Kong, and Dubai. 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.

The Composite is valued monthly. The Composite returns are the asset-weighted average of the performance results of all the accounts in the Composite. Gross-of-fees returns are presented before management fees, but after all trading expenses. Net of fees results are calculated using a model approach whereby the current highest tier of the appropriate strategy’s fee schedule is used. This model fee does not reflect the deduction of performance-based fees. The portfolios in the Composite are all actual, fee-paying and performance fee-paying, fully discretionary accounts managed by the Firm for at least one full month. Investment results shown are for taxable and tax-exempt accounts and include the reinvestment of all earnings. Any possible tax liabilities incurred by the taxable accounts have not been reflected in the net performance. Composite performance results are time-weighted net of trading commissions and other transaction costs including non-recoverable withholding taxes. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.

The returns for the accounts in the Composite are calculated using a time-weighted rate of return adjusted for weighted cash flows. The returns for the commingled funds in the Composite are calculated daily using net asset values (NAV), adding back the funds’ total expense ratio or equivalent. Trade date accounting is used since inception and market values include interest income accrued on securities held within the accounts. Performance is calculated using asset values denominated in a base currency. Composite market value at year-end presented in the schedule are translated to U.S. dollars using end of year exchange rates.

Composite returns are measured against a benchmark. The benchmark is unmanaged and provided to represent the investment environment in existence during the time periods shown. For comparison purposes, its performance has been linked in the same manner as the Composite. The benchmark presented was obtained from third party sources deemed reliable but not guaranteed for accuracy or completeness. Benchmark returns and benchmark three-year annualized ex-post standard deviation are not covered by the report of independent accountants.

Internal dispersion is calculated using the asset-weighted standard deviation of annual gross returns of those portfolios that were included in the Composite for the entire year. For each annual period, accounts with less than 12 months of returns are not represented in the dispersion calculation. 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. The three-year annualized ex-post standard deviation is not presented for periods where 36 monthly returns are not available for the composite or the benchmark. Any gross total three-year annualized ex-post standard deviation measures prior to 2011, included within the “Examination Period” identified above, are not covered by the report of independent accountants.

Past investment results are not indicative of future investment results.

Western Asset’s list of composite descriptions is available upon request. Please contact Jan Pieterse at 626-844-9977 or jan.pieterse@westernasset.com. All returns for strategies with inception prior to January 1, 2006 are available upon request.

Past results are not indicative of future investment results. Investments are not guaranteed and you may lose money. This publication is for informational purposes only and reflects the current opinions of Western Asset Management. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset Management may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorised and regulated by Comissão de Valores Mobiliários and Banco Central do Brasil. Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered financial instruments dealer whose business is investment advisory or agency business, investment management, and Type II Financial Instruments Dealing business with the registration number KLFB (FID) No. 427, and members of JIAA (membership number 011-01319) and JITA. Western Asset Management Company Limited ("WAMCL") is authorised and regulated by the Financial Conduct Authority ("FCA"). In the UK this communication is a financial promotion solely intended for professional clients as defined in the FCA Handbook and has been approved by WAMCL. Potential investors in emerging markets should be aware that investment in these markets can involve a higher degree of risk.