HISTORY 1971 Founded Western Asset Management Company Los Angeles - - PowerPoint PPT Presentation

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FRESNO COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION

September 6, 2006

WESTERN ASSET

Frances H. Coombes Andre M. Cuerington

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TABLE OF CONTENTS

I

Organizational Update

II

Market Review

III

Portfolio Review

IV

Appendix

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ORGANIZATIONAL UPDATE

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HISTORY

History

• 1971 – Founded Western Asset Management Company

Los Angeles

• 1986 – Affiliated with Legg Mason, Inc.

Baltimore

• 1996 – Established Western Asset Management Company Limited

London

• 2001 – Established Western Asset Management Company (Asia) Pte Limited

Singapore

• 2005 – Citigroup Asset Management acquisition

New York, London, Tokyo, Singapore, Hong Kong, Melbourne, São Paulo

Focus

• Fixed-income assets
• Separate accounts and mutual funds
• Active management

Statistics (as of 6/30/06)

• 847 staff members
• 737 client relationships
• $511.7 billion under management*

*Assets under management by Western Asset and its supervised affiliates.

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ORGANIZATION

As of 6/30/06. Assets in $ billions. Liquidity Portfolios

$99.2

Govt.- Only Portfolios

$9.9

$

ABS/ MBS Portfolios

$13.1

$ £ €

Corporate Portfolios

$15.7

$ £ €

High Yield Portfolios

$10.7

$

Emerging Market Portfolios

$3.0

$

Portable Alpha Portfolios

$12.5

$ £ €

Inflation- Linked Portfolios

$12.5

Information Technology

Business Management

Compliance Research Risk Management

Investment Management

Reporting Product Development

Client Service

$ £ € $ £ €

Enhanced Cash Portfolios

$20.7

$ £ €

Limited Duration Portfolios

$21.4

$ £ €

Broad Market Portfolios

$145.2

$ £ €

Long Duration Portfolios

$18.1

$ £ € ¥

Global Portfolios

$85.5

$

Structured Portfolios

$2.7

$ £ €

Absolute Return Portfolios

$7.6

$ £ € $

Municipals Portfolios

$33.9

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REPRESENTATIVE CLIENT LIST

CORPORATE PUBLIC TAFT HARTLEY INSURANCE

Abbey plc Arkansas Teacher Retirement System 1199 National Benefit Fund Arch Capital Group Ltd. Allied Domecq plc California Public Employees Retirement System Bricklayers and Trowel Trades International Union Pension Fund Blue Cross Blue Shield of Massachusetts AT&T Investment Management Corporation Commonwealth of Virginia Central Pension Fund Blue Cross Blue Shield of Tennessee BBC Pension Trust Limited Contra Costa County Employees' Retirement Association Directors Guild of America-Producer Pension and Health Plan Health Care Service Corporation Bristol-Myers Squibb Company Denver Public Schools Retirement System Engineers, Operating, Local #3 Horizon Blue Cross Blue Shield of New Jersey Co-operative Group Pension Fund Trustees Limited District of Columbia Retirement Board General Motors Defined Contribution Retiree Health Benefit Trust Oil Investment Corporation Ltd. Consolidated Edison Company Of New York, Inc. Fire & Police Pension Association of Colorado Midwest Operating Engineers Royal Liver Assurance Limited DaimlerChrysler Fresno County Employees' Retirement Association Southwest Carpenters Pension Trust Toyota Motor Insurance Corporation of Vermont DTE Energy Company Glasgow City Council The Western Conference of Teamsters Pension Trust Fund United HealthCare Services, Inc. E.ON Energie AG Gloucestershire County Council United Food & Commercial Workers Unions and Employers Pension Fund United Services Automobile Association Eastman Kodak Company Illinois State Board of Investment

ELEEMOSYNARY

WellPoint, Inc. Electronic Data Systems Corporation Iowa Public Employees Retirement System Alcoa Foundation

HEALTHCARE

General Mills Kansas Public Employees Retirement System Archdiocese of Boston Ascension Health GKN Group Pension Scheme Los Angeles County Employees Retirement Association Archdiocese of Saint Louis Baylor Health Care System Halliburton Co. Merchant Navy Pensions Administration Battelle Memorial Institute BJC HealthCare International Paper Company Michigan Municipal Employees' Retirement System Bill & Melinda Gates Foundation Catholic Health Initiatives John Lewis Partnership Pensions Trust Ltd Minnesota State Board of Investment California Community Foundation Children's Hospital of New Orleans Lockheed Martin Investment Management Company MNOPF Trustees Limited Catholic Relief Services Evanston Northwestern Healthcare MeadWestvaco Corporation Nevada Public Employees Retirement System Commonfund Health Employees Superannuation Trust Australia Metal Box Pension Trustees Limited North Dakota State Investment Board Diocese of Rockville Centre Henry Ford Health System Nestec S.A. Ohio Police & Fire Pension Fund Donald W. Reynolds Foundation Iowa Health System Nortel Networks plc UK Oregon Investment Council Indiana University Lehigh Valley Hospital Northwest Airlines, Inc. Public Employee Retirement System of Idaho Jewish Federation of Metropolitan Chicago Providence Health System Pearson Group Pension Trustee Limited Public School Teachers' Pension and Retirement Fund of Chicago Purdue University

• St. George Corporation

Pensioenfonds Horeca & Catering San Diego County Employees' Retirement Association San Francisco Foundation

• St. Joseph Health System

Perennial Investment Partners Ltd San Francisco Employees' Retirement System The California Wellness Foundation

SUB-ADVISORY

Plumbing Pensions (UK) Ltd San Jose Police & Fire Department Retirement Plan The Church Pension Fund American Express Bank Limited Railpen Investments School Employees Retirement System of Ohio The Commonwealth Fund AssetMark Investment Services Rank Pension Plan State of Wyoming, State Loan And Investment Board The LCMS Foundation Citigroup Investment Advisory Services Inc. Salomon Brothers Global Horizons Funds (SBGH) State Universities Retirement System of Illinois The Pennsylvania State University CitiStreet Sun Microsystems International B.V. Surrey County Council United Negro College Fund Great West Life Assurance Syngenta Pensions Trustee Limited Tennessee Valley Authority University of Colorado GuideStone Capital Management The Johnson Matthey Employees Pension Scheme Treasurer of the State of Connecticut University of Illinois Legg Mason Institutional Funds The RWE npower Group of the ESPS Ventura County Employees' Retirement Association University of Massachusetts Legg Mason, Inc. The Trustees of the Rolls-Royce Pension Fund Virginia College Savings Plan University of Miami MLC Investment Management Unisys Corporation Virginia Retirement System Washington Education Foundation Russell Investment Group United Parcel Service, Inc. Wiltshire County Council Washington State University SEI Investments Management Corporation YMCA Retirement Fund Wyoming Retirement System Workers Benefit Plans of the Lutheran Church - Missouri Synod T&D Asset Management Co., Ltd.

Please see the Representative Client List Disclosure in the appendix for more information. All have authorized the use of their names by Western Asset for marketing purposes. Such authorization does not imply approval or otherwise of Western Asset nor the advisory of services provided.

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INVESTMENT MANAGEMENT TEAM

• Inv. Professionals*: 43

AUM**: $127.4 Products: Liquidity Municipal SMAs

• Inv. Professionals*: 46

AUM**: $231.5 Products: Absolute Return Bank Loan Asset-Backed (ABS) Commodities Core/Core Full Corporate Emerging Markets Enhanced Cash Government High Yield Index Plus Intermediate Limited Long Duration Mortgage-Backed (MBS) Portable Alpha TIPS

• Inv. Professionals*: 23

AUM**: $83.0 Products: Euro: Core/Core Full Corporate Enhanced Cash Limited Duration Liquidity Long Duration Polish Sovereign Sovereign Global: Core /Core Full Corporate Enhanced Cash High Yield Limited Duration Multi-Sector Non-US International Sovereign Inflation-Linked UK: Core /Core Full Corporate Enhanced Cash High Alpha Inflation-Linked Limited Duration Liquidity Long Duration

• S. KENNETH LEECH

Chief Investment Officer

• S. KENNETH LEECH

Chief Investment Officer

STEPHEN A. WALSH

Deputy Chief Investment Officer

STEPHEN A. WALSH

Deputy Chief Investment Officer

PASADENA

• S. Kenneth Leech

Stephen A. Walsh

PASADENA

• S. Kenneth Leech

Stephen A. Walsh

NEW YORK

James J. Flick

NEW YORK

James J. Flick

LONDON

Detlev Schlichter

LONDON

Detlev Schlichter

TOKYO

Kazuto Doi

TOKYO

Kazuto Doi

SINGAPORE

Tay Soo How

SINGAPORE

Tay Soo How

MELBOURNE

Mitchell Stack

MELBOURNE

Mitchell Stack

SÃO PAULO

Paulo Caricatti

SÃO PAULO

Paulo Caricatti *Investment professionals include portfolio managers only. **Billions of assets under management by Western Asset and its supervised affiliates. As of 6/30/06.

• Inv. Professionals*: 9

AUM**: $51.6 Products: Asset-Backed (ABS) Core/Core Full Credit Global Government Mortgage-Backed

• Inv. Professionals*: 5

AUM**: $1.9 Products: Asian HY Credit Asian IG Credit Hong Kong Dollar Indonesian Rupiah Korean Won Malaysian Ringgit Pan Asia Philippine Peso Singapore Dollar Singapore Cash/ Short Term Thai Baht

• Inv. Professionals*: 5

AUM**: $6.3 Products: Australia: Core/Core Full Credit Enhanced Cash Government New Zealand: Government

• Inv. Professionals*: 7

AUM**: $10.0 Products: Brazil Core Liquidity Sovereign

DENNIS J. MCNAMARA

Director of Portfolio Operations

DENNIS J. MCNAMARA

Director of Portfolio Operations

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MARKET REVIEW

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10-YEAR TREASURY YIELDS

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

• 2%

0% 2% 4% 6% 8% 10% 12% 14% 16% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Yield to Maturity Year Over Year Change

Source: Federal Reserve

10-year Treasury Yields vs. CPI Inflation CPI Inflation 10-year Treasury Yields

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TERM STRUCTURE ANALYSIS

3m 6m 1 2 3 4 5 7 10 30

2 4 6 Yield to Maturity (%) Maturity (Years) US Treasury Yield Curves 7/31/05-7/31/06 7/31/05 7/31/06 3 Month 2 Year 5 Year 10 Year 30 Year 30 Yr. STRIPS

• 20
• 15
• 10
• 5

5 Total Return (%) 4.20 2.56 0.20

• 2.00
• 6.16
• 10.65

Periodic Returns 7/31/05-7/31/06

Source: Bloomberg, Western Asset

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TERM STRUCTURE ANALYSIS

Historical & Forward Short Term Interest Rates

1 2 3 4 5 6 7 8 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 3 Month LIBOR (Percent) Actual Yields

Source: Bloomberg

Expected Yields as of 3/31/97 Expected Yields as of 5/30/00 Expected Yields as of 10/31/98 Expected Yields as of 7/31/06 Expected Yields as of 11/30/01

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CREDIT VALUATION

50 100 150 200 250 1989 1991 1993 1995 1997 1999 2001 2003 2005 Lehman Credit OAS (Basis Points)

Source: Lehman Brothers

Russia/LTCM Inverted curve Recession onset Enron WCOM Recession, Gulf War Spread: 95 bps 5-yr Avg.: 127 bps 16-yr Avg.: 105 bps Credit Spreads SE Asia GM

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HIGH YIELD FUNDAMENTALS

High Yield Spreads vs. Altman Default Rate 1/1/85-7/31/06 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2 4 6 8 10 12 14 200 400 600 800 1000 1200 Default Rates (%) Spread (bp) Defaults Spread

Source: Citigroup

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EMERGING MARKET DEBT SPREADS

Emerging Markets Emerging Markets

• Structural reform
• Global recovery
• Commodity bull market
• 10%

0% 10% 20% 30% 1979 1984 1989 1994 1999 2004 YoY Percent Change World Nominal $ GDP

Source: IMF

400 800 1200 1600 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Spreads JP Morgan Emerging Market Bond Index

Source: Bloomberg

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MORTGAGE-BACKED SECTOR ANALYSIS

100 125 150 175 200 225 2003 2004 2005 2006 Basis Points FNMA 30-yr Current Coupon Nominal Spread vs. 5/10 Treasuries Blend

Source: Goldman Sachs and UBS

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MARKET SECTOR RETURNS

Source: Lehman Brothers

Duration-Adjusted Excess Returns 2005 LAGG Agency Mortgage- Backed CMBS Asset- Backed Credit BBB Corporates High Yield Non-US Emerging Market

• 250

250 500 750 1000 Return (Basis Points)

• 31

17

• 37

15 32

• 85
• 177

47 266 959 Duration-Adjusted Excess Returns 2004 LAGG Agency Mortgage- Backed CMBS Asset- Backed Credit BBB Corporates High Yield Non-US Emerging Market 250 500 750 1000 Return (Basis Points) 103 78 142 118 142 159 219 800 156 823

LAGG Agency Mortgage- Backed CMBS Asset- Backed Credit BBB Corporate High Yield Non-US Emerging Market

250 500 Return (Basis Points) 30 27 52 65 41 26 48 380 92 335 Duration-Adjusted Excess Returns - Year to Date Ending July 31, 2006

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2006 OUTLOOK

Outlook

• Moderate growth (3.0+/- GDP)
• Inflation rising moderately (2.0-2.5% Core PCE Deflator)
• Fed tightening is done

Themes

• Overweight market duration
• Yield curve steepener
• Overweight MBS
• Overweight autos
• Modest weightings to plus sectors

The above reflects current opinions of Western Asset Management.

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PORTFOLIO REVIEW

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INVESTMENT RESULTS

Since Inception 6/1/05-7/31/06 Annualized 1 Year Year To Date 1 2 3 Total Return (Percent) 0.9 2.1 2.3 1.5 2.3 2.6 0.6 1.3 1.5 Lehman Aggregate Index Fresno County ERA (net) Fresno County ERA (gross) Periods Ending 7/31/06

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SECTOR ALLOCATION

July 2006

Lehman Aggregate Index

Note: All weightings are a percentage of total market value. 25% 11% 40% 1% 23% Treasury Credit Mortgage- Backed Agency Asset- Backed

Fresno County ERA

7% 1% 3% 53% 18% 9% 3% 5%1% Treasury Credit Mortgage- Backed TIPS Agency High Yield Non-US Emerging Markets Bank Loan

Government Mortgage- Backed Credit High Yield Non-US Emerging Markets 1 2 3 Contribution (years) 1.6 0.9 1.8 2.2 1.3 1.0 0.3 0.3 0.1 Lehman Aggregate Index: 4.7 years Fresno County ERA: 4.8 years Duration Contribution

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INTEREST RATE ANALYSIS

Inflation

1% 2% 3% 4% 5% 6% 7% 8% 9% 1% 2% 3% 4% 5% 6% 7% 8% 9% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Treasury Yields Core CPI YOY Treasury Yields vs. Inflation Core CPI 5-yr Treasuries 30-yr Treasuries

Source: Bloomberg, Bureau of Labor Statistics

20 40 60 80 100 120 140 160 180 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Percent of Benchmark Duration Western Asset Composite Fresno County ERA 102% of Benchmark Benchmark

Period ending 7/31/06

4.7 years 4.8 years

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CREDIT QUALITY ALLOCATION

July 2006

Lehman Credit Index Duration Adjusted Excess Returns

Lehman Credit Index

Note: All weightings are a percentage of total market value. 11% 21% 35% 33% AA A BBB AAA

2005 YTD 2006* AAA

• 0.13%

0.02% AA

• 0.17%

0.26% A

• 0.28%

0.13% BBB

• 1.77%

0.48%

*As of 7/31/06

Fresno County ERA

3% 12% 24% 35% 26% AA A BBB AAA <BBB

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MORTGAGE-BACKED SECTOR ANALYSIS

Lehman Mortgage Index

Note: All weightings are a percentage of total market value.

10% 51% 39% GNMA FNMA FHLMC

4 6 8 10 12 2000 4000 6000 8000 10000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 FNMA 30-yr Current Coupon % MBA Refinancing Index Mortgage Rates and Refinancings MBS Current Coupon MBA Refi Index

Source: Mortgage Bankers Assoc., Bloomberg

Fresno County ERA

20% 68% 12% GNMA FNMA FHLMC

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HIGH YIELD ALLOCATION

July 2006

Opportunistic High Yield Allocation

Allocation: 3%

Opportunistic Bank Loan Allocation Individual Issue Allocation

Allocation: 6%

Opportunistic High Yield Process

• Diversified Approach
• Research Driven
• Large, Liquid Deals

Individual Issue Process

• Rising Star
• Deep Value
• Focused

Bank Loan Allocation

• Capital Preservation
• Diversified Approach
• Research Driven
• BB and B Focus

Note: All weightings are a percentage of total market value.

Last 5 Years

High: 5% Low: 2% Avg: 4%

Last 5 Years

High: 8% Low: 1% Avg: 3%

Allocation: 3%

High: 3% Low: 2% Avg: 3%

Since Inception (10/1/03)

6% 10% 26% 15% 16% 4% 4% 1% 1% 4% 1% 6% 3%1% 2% Natural Gas Basic Industry Energy Transportation Electric Capital Goods Communications REITS Technology Consumer Non-Cyclical Consumer Cyclical Sov/Supra Short Term Securities Financial Other Industrial Other

Media Cable

8% 5% 4% 5% 2% 5% 17% 9% 9% 2% 4% 2% 11% 2% 8% 7%

Finance Basic Industry Capital Goods Wireless Wireline Energy Technology Transportation Utility Cash Equivalents Other Industrial Media Non-Cable Consumer Non-Cyclical Other Consumer Cyclical

67% 3% 4% 14% 12% Communications Technology Consumer Non-Cyclical Utility Autos

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OPPORTUNISTIC NON-BENCHMARK SECTOR ALLOCATION

July 2006

Non-US Allocation

Allocation: 5%

Emerging Markets Allocation

Allocation: 1% Last 5 Years

High: 8% Low: 4% Avg: 6%

Last 5 Years

High: 5% Low: 1% Avg: 4%

Non-US Process

• Opportunistic & Focused
• Primarily Sovereign Credits

Emerging Markets Process

• Opportunistic Allocations
• Focused Country Concentration
• Utilize Liquid Sovereign Issues
• Brady & Global Securities

Note: All weightings are a percentage of total market value.

37% 2% 61% Canada Poland UK 63% 17% 20% Panama Colombia Brazil

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APPENDIX

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WESTERN ASSET

Biographies

Note: Western Asset experience reflects current position title and hire date. FRANCES H. COOMBES 8 Years Experience EXPERIENCE: – Western Asset Management Company – Client Service Executive, 1998- EDUCATION: – Columbia University, School of International and Public Affairs, M.P.P. – University of California, Berkeley, B.A. ANDRE M. CUERINGTON 15 Years Experience EXPERIENCE: – Western Asset Management Company – Client Service Executive, 2002- – Progress Investment Management Company – Senior Vice President, Client Service Operations, 2000-2002 – Callan Associates – Vice President and Manager, Quantitative Consulting, 1997-2000 – United States Military Academy – Asst. Professor, Department of Math, 1991-1997 EDUCATION: – Stanford University, California, M.S. – Naval Postgraduate School, Monterey, California, M.S. – United States Military Academy, West Point, New York, B.S.

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The following supplements the information contained in the attached material: On December 1, 2005, Citigroup Inc. (“Citigroup”) sold substantially all of its worldwide asset management business, Citigroup Asset Management, to Legg Mason, Inc. (“Legg Mason”). As part of this transaction, Salomon Brothers Asset Management Inc., TIMCO Asset Management, Inc., and CAM North America, LLC became wholly-owned subsidiaries of Legg Mason. As a result of the sale of Citigroup Asset Management to Legg Mason as described above, the following changes to Citigroup Asset Management’s North American, institutional investment advisory business, CAM-Institutional, are effective as of December 1, 2005: (1) CAM-Institutional no longer manages assets directly through Citibank, N.A. or Citigroup Global Markets, Inc., which continue to be wholly-owned subsidiaries of Citigroup Inc. (although CAM-Institutional may manage certain assets as a sub-adviser to those entities); (2) CAM-Institutional continues to manage assets through Salomon Brothers Asset Management Inc and TIMCO Asset Management, Inc., which are now wholly-owned subsidiaries of Legg Mason; and (3) CAM-Institutional now manages various assets (including assets formerly managed through Citibank, N.A. and Citigroup Global Markets, Inc.) through CAM North America, LLC, a newly formed registered investment adviser and wholly-owned subsidiary of Legg Mason. In the future, CAM-Institutional expects to transfer various fixed income assets under its management to Western Asset Management, Inc., a wholly-owned subsidiary of Legg Mason. All references to “Citigroup Inc.” or “Citigroup Inc. or its affiliates” are deleted, and replaced by “Legg Mason, Inc.” and “Legg Mason,

• Inc. and its affiliates,” respectively.

Under a licensing agreement between Citigroup and Legg Mason, the names of the investment advisers, Salomon Brothers Asset Management Inc, TIMCO Asset Management, Inc., and CAM North America, LLC, and their affiliated advisory entities, as well as all logos, trademarks and service marks related to Citigroup or any of its affiliates (“Citi Marks”) are licensed for use by Legg Mason. Citi Marks include, but are not limited to, “Salomon Brothers Asset Management,” “Citigroup Asset Management” and “TIMCO Asset Management, Inc.” All Citi Marks are owned by Citigroup, and are licensed for use until no later than one year after date of licensing agreement. Legg Mason and its subsidiaries, including investment advisers Salomon Brothers Asset Management Inc, TIMCO Asset Management, CAM North America, LLC and other advisory entities, are not affiliated with Citigroup.

Important Information

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REPRESENTATIVE CLIENT LIST DISCLOSURE

The clients listed in the Insurance company type are in all mandates, located in all countries and all regions of the United States, and with portfolios with an aum of $225(M) or greater. The clients listed in the Healthcare company type are in all mandates, located in all countries and all regions of the United States, and with portfolios with an aum of $147(M) or greater. The clients listed in the Sub-Advisory company type are in all mandates, located in all countries and all regions of the United States, and with portfolios with an aum of $260(M) or greater. The clients listed in the Corporate company type are in all mandates, located in all countries and all regions of the United States, and with portfolios with an aum of $286(M) or greater. The clients listed in the Public company type are in all mandates, located in all countries and all regions of the United States, and with portfolios with an aum of $195(M) or greater. The clients listed in the Taft-Hartley company type are in all mandates, located in all countries and all regions of the United States, and with portfolios with an aum of $168(M) or greater. The clients listed in the Eleemosynary company type are in all mandates, located in all countries and all regions of the United States, and with portfolios with an aum of $92(M) or greater.