Legg Mason ClearBridge U.S. Equity Sustainability Leaders Fund
August 2019
The value of investments and the income from them may go down as well as up and you may not get back the amount you originally invested. This information is only for use by professional clients, eligible counterparties or qualified investors. It is not aimed at, or for use by, retail clients.
ClearBridge Investments A Distinguished History in Equity Investing
About Us Asset Growth Over Time
• Well-established global investment manager with a legacy dating back more than 160 $146.4 $137.0 50 years 140 $125.5 $114.6 $112.4 • Headquartered in New York and operating from Baltimore, London, San Francisco 120 $107.5 $89.9 and Wilmington 100 80 $57.2 60
• Operating with investment independence, wholly-owned subsidiary of Legg Mason Billion $ 40 20 Culture of Longevity and Consistency 0 2012 2013 2014 2015 2016 2017 2018 2019 • Portfolio management team averages 28 years of investment industry experience YTD and 20 years with the Firm • Investment continuity ensured through team management and a commitment to Assets by Client Type internal promotion
Client Focus Institutional • Alignment of interests with our clients across every aspect of our business, from $46.2 generating consistent investment performance to promoting sustainable business practices and delivering exceptional client service Intermediaries • Ongoing centrally deployed research and risk management functions ensure $96.0 Offshore constant diligence $4.2 B1 Institutional $31.5 Billion
Data as of June 30, 2019. 1Represents funds only – Institutional includes offshore AUM of approximately $1.0 billion. 3 What is Environmental, Social & Governance (ESG) Investing?
Performance Risk
Companies with positive environmental, social Companies with negative and governance attributes are more likely to ESG characteristics represent significant risk to outperform their peers over the long term shareholder value
Fundamentals Active Ownership
ESG analysis is integral to understanding the Active ownership – active proxy voting and fundamentals of a business, leading to a broader engagement with companies to improve view of companies and industries and ESG practices – is an essential aspect of active contributing to better investment decisions investment management
4 ESG Integration Models
Model 1 Model 2 ClearBridge Model
Third party Segregated One team integrating ESG research internal ESG ESG and fundamental firm research team research
Preferred approach to ESG integration: • Same person (investment professional) doing fundamental ESG research • ESG considerations influence fundamental view of company • ESG issues brought up in CEO/CFO engagements vs. separate ESG engagements
5 ESG Integration into Fundamental Research at ClearBridge Proprietary ESG Rating System
B A AA AAA Flagged Beginner Intermediate Best in Class
Company that has Company recognizes Company sees value Company has integrated not focused on potential to capitalize in ESG factors, has ESG strategy into its ESG, has a poor on ESG begun to incorporate business model, usually with ESG record or improvements. sustainability into full CEO and/or employee operates in an business operations support, formally measures unsustainable and products, and sustainability efforts and industry. has started reporting proactively communicates to its progress. investors. Often, these are companies that are providing goods and services that have a positive effect or impact on society or industry.
Progression
6 ESG Considerations Vary by Sub-Sector Sample Sector Considerations
Retailer Software and Technology Services
Green Buildings, HVAC, Power Energy Management, Efficiency, Retail Footprint, Waste and Wastewater Packaging, Transportation Management Environmental
Hourly Wages Supply Chains Data Security
Social Employee Productivity
Gender Diversity Systemic Risk Management Board Independence Competitive Behavior Executive Compensation Governance
7 Portfolio Management Team Sustainability Leaders Strategy
Industry ClearBridge Name and Position Education, Experience and Professional Designations Experience Tenure
Derek Deutsch CFA 20 years • Joined predecessor in 1999 • Member of the CFA Institute Managing Director, • Member of the CFA Society New York Portfolio Manager • Special Assistant, U.S. Department of Health and Human Services, Washington, DC • Journalist, health care policy, American Political Network, Washington, DC • MBA from Georgetown University • BA from Brown University
Mary Jane McQuillen 23 years • Joined predecessor in 1996 • Professional Organization Memberships: UN PRI Listed Equities Steering Committee & ESG Managing Director, • Member of Proxy Committee Integration Sub-Committee, Member of the Board of Directors, Sustainable Investments Institute Head of ESG (Si2) Investment, Portfolio • Former Member of the Board of Directors, Investor Responsibility Research Center Institute Manager (IRRC), Former Board Member, CFA Society New York, Former Board Member, Forum for Sustainable and Responsible Investment (US SIF) • Smith Barney Inc. – Business Unit Analyst • MBA in Finance from Columbia Business School • BS in Finance from Fordham University
8 Portfolio Management Team Sustainability Leaders Strategy
Industry ClearBridge Name and Position Education, Experience and Professional Designations Experience Tenure
Benedict Buckley CFA 6 years • Joined ClearBridge in 2013 • Member of the CFA Institute Vice President, Portfolio • Member of the CFA Society New York Analyst • World Resources Institute – Associate • Trucost – Senior Research Analyst • Kigio Wildlife Conservancy – Rothschild Giraffe Project Manager • Forum for the Future – Research Assistant • MSc in Environmental Technology from Imperial College London • BSc in Biology from University of Manchester
Kimberly Gifford CFA 7 years • Joined ClearBridge in 2015 • Member of the CFA Institute Assistant Vice • ClearBridge Investments - Research Associate, Industrials Sector President, Portfolio • Elm Ridge Capital – Equity Research Associate Analyst • BS in Applied Accounting and Finance from Fordham University
9 Executive Summary Sustainability Leaders Strategy
• All cap portfolio integrating in-depth financial and ESG research to identify companies that are leaders, or emerging leaders, in their sustainability profile and policies
• Employ both quantitative and fundamental analysis to identify high-quality companies with attractive valuations, strong fundamentals, and management teams that allocate capital effectively
• Concentrated portfolio of 30-50 high-conviction investments across a broad range of industries
• Long-term investment horizon with low anticipated turnover
• Integrated ESG and fundamental analysis to identify companies that display ESG leadership characteristics and have attractive risk/reward attributes
• Derive the majority of risk from stock selection
10 Investment Process Overview ClearBridge Sustainability Leaders
• Russell 3000 and ADRs traded on the major U.S. exchanges Initial Universe
• Quantitative analysis to identify companies with quality attributes: Step 1 high returns on capital, strong balance sheets, efficient capital allocation, attractive Quantitative Analysis valuations
Step 2 • Integrated ESG and fundamental analysis to identify companies that display ESG Proprietary ESG and leadership characteristics and have attractive risk/reward attributes Fundamental Analysis • Assignment of proprietary ClearBridge ESG rating (A, AA, AAA)
Step 3 • Construct concentrated portfolio of high conviction holdings with a multi-year investment horizon Portfolio Construction while applying risk controls to ensure the majority of risk is derived from stock selection and Risk Management
Step 4 • Engage management to further develop ESG leadership and prudent financial management Engagement, Portfolio • Continuously review investment positions using both quantitative and fundamental techniques Review and Sell Discipline
11 Fundamental Analysis and ESG Integration
Companies with strong ESG and fundamental attributes
Industry Analysis Business Model Analysis Management Analysis • Relevant ESG factors • Product quality and impact • Evidence of sustainability strategy • Competitive dynamics • Sustainable competitive advantage • Soundness of strategic plan • Industry concentration • Capital intensity • Record of success • Customers and suppliers • Capital structure • Capital discipline • Cyclicality • Incentives/stock ownership • Secular outlook • Profitability and drivers • Return on assets, equity, invested capital • Recurring revenue • Growth potential
Valuation • Cash-on-cash returns • Market implied growth and returns vs. our expectations • Multiple analysis vs. peers and history • Intrinsic value • Risk/reward under bull and bear scenarios
Action/No Action
12 Case Study Trex (TREX)
Investment Thesis ESG Rating Rationale Company Background • Accelerating revenue growth with successful marketing • Composite deck products are made from blend of recycled Manufacturer and marketer of wood campaign against natural lumber wood and plastic film. One of the largest recyclers of plastic alternative decking products made in the U.S., a position that grows in importance as China • Taking market share from composite competitors from recycled wood fibers and plastic stops accepting scrap plastics for residential and commercial • High incremental gross margins from manufacturing • Use of Trex products contributes to LEED certification for customers efficiencies and improving capacity utilization producing builders outsized EPS growth; share repurchases and opportunistic ClearBridge ESG Rating: AAA M&A will further leverage • Production method eliminates the need ClearBridge holding since 2013 EPS growth for smokestacks and leftover material is recycled back into the manufacturing process • Acquisition of commercial railing business to provide cross- sales and product development synergies • High employee retention rates with full participation in Key Statistics incentive compensation program Market Cap: $5.1B Stock Price (Jan. 2013 – Aug. 2019) Forward P/E: 32.2x $100 P/B: 13.2x $80 EV/EBITDA: 29.3x
Debt/Equity: 11% $60
3-Year Sales Growth: 15.8% $40
$20
$0 Jan. 2013 Jan. 2014 Jan. 2015 Jan. 2016 Jan. 2017 Jan. 2018 Jan. 2019
Source: FactSet. All data as of Aug. 31, 2019 unless otherwise indicated. For illustrative purposes only. Not a recommendation to buy or sell any security. 13 Case Study SolarEdge (SEDG)
Investment Thesis ESG Rating Rationale Company Background • Dominant position in module-level power electronics (MLPE) • Innovative technology that has disrupted the solar inverter Leading manufacturer of solar – a disruptive type of solar inverter system with more efficient market inverters and optimizers for residential energy capture • Technology that improves solar power economics for and commercial solar installations • Technology leadership and strong patent portfolio is enabling consumers, expands the addressable market and ClearBridge ESG Rating: AAA rapid market share gains from traditional string inverters accelerates the transition to low-carbon electricity generation ClearBridge holding since 2018 • Secular tailwind provided by improving economics of solar • High-quality management team with a long-term focus, energy, and the low-carbon energy transition indicated by its 4-year vesting period for long-term incentives, which is above average • Margin stability from product cost-outs that keep pace with Key Statistics price declines • Use of contract manufacturers keeps capital intensity low and Market Cap: $3,984M reduces labor management risks
Forward P/E: 28.7x
P/B: 4.4x Stock Price (Jan. 2018 – Sept. 2019) EV/EBITDA: 17.9x $100
Debt/Equity: 9.5% $80 3-Year EPS Growth: 115% $60
$40
$20
$0 Jan. 2018 Jul. 2018 Jan. 2019 Jul. 2019
Source: FactSet. All data as of Sept. 17, 2019 unless otherwise indicated. For illustrative purposes only. Not a recommendation to buy or sell any security. 14 Portfolio Composition Legg Mason ClearBridge U.S. Equity Sustainability Leaders Fund – August 31, 2019
Market Capitalization Sector Weightings
Russell 3000 Relative Fund Russell 3000 Index Sector Fund (%) Index (%) Weight (%) 70 Information Technology 23.9 21.6 2.3 62.6 58.2 60 Financials 14.5 13.2 1.2 Industrials 13.0 10.0 3.1 50 Health Care 11.6 13.8 -2.2 40 Consumer Discretionary 7.9 10.5 -2.6
30 Consumer Staples 7.8 6.8 1.0
% of Portfolio of % Communication Services 6.7 9.5 -2.8 20 14.5 15.4 10.9 12.3 Utilities 5.6 3.4 2.2 8.5 9.8 10 5.2 2.6 Real Estate 3.7 4.3 -0.6 0 Materials 3.2 2.9 0.3 Over 50B 25-50B 10-25B 3-10B 0-3B Energy 0.0 4.1 -4.1 $ Billion Cash 2.1 0.0 2.1
Source: FactSet. Please see additional important information regarding the Fund in the Appendix. 15 Top 10 fund holdings, 31 August 2019
Security % of total fund Microsoft Corp 6.06 Apple Inc 4.55 Alphabet Inc 4.05 Costco Wholesale Corp 3.50 Ecolab Inc 3.19 Trex Co Inc 3.10 Automatic Data Processing Inc 3.07 Home Depot Inc/The 2.79 Danaher Corp 2.75 Visa Inc 2.74 Total 35.80 Total number of holdings 43
As of 31 August 2019 16 ESG Ratings Distribution Legg Mason ClearBridge U.S. Equity Sustainability Leaders Fund – August 31, 2019
70% 64%
60%
50%
40%
32% 30%
20%
Portfolio Rating of Weighted Companies Weighted Rating Portfolio of 10% 4%
0% A AA AAA ESG Rating
Source: ClearBridge. 17 Portfolio Characteristics Legg Mason ClearBridge U.S. Equity Sustainability Leaders Fund – August 31, 2019
Characteristics Fund Russell 3000 Index P/E Ratio (forward 12 mos.) 21.3 17.9 EPS Growth Next 3-5 Years (%) 13.2 11.7 Weighted Average Market Cap ($ bn) 219.9 208.6 ROE 21.8 19.7 Dividend Yield 1.4 1.9 Net Debt/Total Capital 18.9 26.8 Free Cash Flow Yield 4.5 4.7 Turnover (trailing 12 mos.) 39.9 --
Characteristics are subject to change at any time; source: FactSet. Price/Book is weighted average. Risk statistics source: Internal. Benchmark source: Russell Performance is preliminary and subject to change.. Investments. P/E ratios are weighted harmonic average. Past performance is no guarantee of future results. 18 Average Annual Total Returns Legg Mason ClearBridge U.S. Equity Sustainability Leaders Fund – August 31, 2019 (Net of Fees)
Legg Mason ClearBridge U.S. Equity Sustainability Leaders Fund* Russell 3000 Index
25% 23.79
20% 18.02
15% 13.85 13.38 13.16 12.24
10% 8.32
5%
1.31
1 0% YTD 1 Year 3 Years Since Inception (9/30/2015)
*X Class Distr. USD (A). Please see additional important information in the Appendix. Performance is preliminary and subject to change. . From 25 March 2019, the pricing of securities held in the Fund will use the mean (or mid) value of the bid and ask prices, to calculate the Fund’s Net Asset Values (“NAV”). The Fund previously used a bid price methodology for fixed income securities, and last traded price for equity securities. Past performance is no guarantee of future results. 19 Carbon Intensity Sustainability Leaders Strategy
200
180
160
140 +74%
120
100
80
60 (metric tons CO2e/$mm sales) CO2e/$mm (metric tons
40 Weighted average carbon intensity carbon average Weighted
20
0 Sustainability Leaders Russell 3000 Index
Data source: MSCI Carbon Portfolio Analytics. Holdings data as of December 31, 2018. Emissions data as of the most recent year available and estimated by MSCI when actual data is not available. 20 Sample Key Impact Themes Sustainability Leaders Strategy
RESOURCE SCARCITY & CLIMATE CHANGE WATER SCARCITY FINANCIAL INCLUSION IMPROVING HEALTH UTILIZATION
Solutions: Solutions: Solutions: Solutions: Solutions: • Clean energy generation • Water treatment and • Waste reduction • Access to capital and • Drug innovation • Energy efficiency efficiency • Use of recycled products financial services • Addressing unmet • Reuse medical needs • Patient safety • Health care coverage
Related holdings include: Related holdings include: Related holdings include: Related holdings include: Related holdings • Ormat Technologies • Ecolab • Herman Miller • Visa include: • Brookfield Renewable • Xylem • Trex • Charles Schwab • Alexion Partners • Evoqua • Nike • BlackRock • Merck • SolarEdge • UnitedHealth
For illustrative purposes only. Additional holdings may be contained in the portfolio. Not a recommendation to buy or sell any security. 21 Additional Important Information ClearBridge Sustainability Leaders
Risks The Portfolio, which may invest a significant portion of its assets in small and mid cap companies, may be more volatile than an investment that focuses only on large cap companies. The Portfolio may focus its investments in certain regions or industries, thereby increasing its potential vulnerability to market volatility. Opinions and Views The opinions and views expressed herein are of the ClearBridge Investments, LLC Sustainability Leaders portfolio management team as of the date shown, and may differ from other managers, or the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Information Providers Index source: Russell. Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. Neither ClearBridge Investments, LLC nor its information providers are responsible for any damages or losses arising from any use of this information. Neither ClearBridge Investments, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.
22 Disclaimer
This is a sub-fund of Legg Mason Global Funds plc (“LMGF plc”), an umbrella fund with segregated liability between sub-funds, established as an open-ended investment company with variable capital, organised as an undertaking for collective investment in transferable securities (“UCITS”) under the laws of Ireland as a public limited company pursuant to the Irish Companies Acts and UCITS regulations. LMGF plc is authorised in Ireland by the Central Bank of Ireland. This material is not intended as a complete summary or analysis. The information and data in this material has been prepared from sources believed reliable but is not guaranteed in any way by any Legg Mason, Inc. company or affiliate (together "Legg Mason"). No representation is made that the information is correct as of any time subsequent to its date. There is no guarantee or assurance that funds will achieve their investment objectives. Individual securities mentioned are intended as examples only and are not to be taken as advice nor are they intended as a recommendation to buy or sell any security or related investment. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situations or needs of investors. For further explanation on the risks associated with an investment in the fund, please refer to the section entitled "RISK WARNINGS“ in the prospectus. Before investing investors should read in their entirety LMGF plc’s application form and a sub-fund’s share class KIID and the Prospectus (which describe the investment objective and risk factors in full). These and other relevant documents may be obtained free of charge in English, French, German, Greek, Italian, Norwegian and Spanish from LMGF plc’s registered office at Riverside Two, Sir John Rogerson’s Quay, Grand Canal Dock, Dublin 2, Ireland, from LMGF plc’s administrator, BNY Mellon Investment Servicing (International) Limited, at the same address or from www.leggmasonglobal.com.
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This information is only for use by professional clients, eligible counterparties or qualified investors. It is not aimed at, or for use by, retail clients.
September 2019
For institutional investors only. Not for distribution to the general public. Confidential and proprietary information.