1Q 2020 Product Commentary

CLEARBRIDGE VALUE TRUST

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

Sam Peters, CFA, and Jean Yu, CFA Portfolio Managers Average annual total returns and fund expenses (%)

as of March 31, 2020

Since Incept. Expenses

Class A 3-mo 1-yr 5-yr 10-yr (02/02/09) Gross Net

Excluding sales charges

-30.45 -23.57 -0.98 5.56 9.59 1.08 1.08

Including effects of maximum sales charges

-34.45 -27.97 -2.15 4.94 9.01 1.08 1.08

S&P 500 Index -19.60 -6.98 6.73 10.53 N/A - -

Performance shown represents past performance and is no guarantee of future results. Current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate so shares, when redeemed, may be worth more or less than the original cost. Class A shares have a maximum front-end sales charge of 5.75%. Total returns assume the reinvestment of all distributions at net asset value and the deduction of all Fund expenses. Total return figures are based on the NAV per share applied to shareholder subscriptions and redemptions, which may differ from the NAV per share disclosed in Fund shareholder reports. Performance would have been lower if fees had not been waived in various periods. Returns for less than one year are cumulative. For the most recent month-end information, please visit www.leggmason.com.

Gross expenses are the Fund's total annual operating expenses for the share class(es) shown. Net expenses are the Fund's total annual operating expenses for the share classes indicated and would reflect contractual fee waivers and/or reimbursements, where these reductions reduce the Fund's gross expenses. These arrangements cannot be terminated prior to December 31, 2021 without the Board’s consent. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the numbers shown in the table above. The Gross and Net Expenses listed include 0.01 of Acquired Fund Fees and Expenses (AFFE) that are required to be shown in the Fund’s prospectus. AFFE reflects the Fund’s pro rata share of fees and expenses relating to its investments in acquired funds; however, AFFE are not incurred directly by the Fund. Therefore, AFFE are not reflected in the Fund’s audited financial statements or financial highlights. S&P 500 Index is a market capitalization-weighted index of 500 widely held common stocks. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

Key takeaways

• Given the policy response to COVID-19 and the reversal of globalization as a major deflationary force, there is potential for a major change in economic and market dynamics.

• During episodes of such market stress, we tend to get very active as we look to take advantage of the price volatility and resulting dislocations between price and underlying value.

• Even after the recent compression in valuation spreads, from current levels the forward 12-month relative performance opportunity in favor of value has averaged almost 30% historically.

Market overview

The COVID-19 crisis will almost certainly be one of the most

dramatic events we will experience in our lives, if not the most

dramatic. What makes a global pandemic so frightening and

challenging is that pandemics are not linear, but rather

exponential, enemies. The continuous compounding of

COVID-19 resulted in cases doubling almost every two days in

the early stages of the crisis, and even now cases are still

doubling roughly every nine days in the U.S. Tackling an

enemy that doubles every few days has quickly altered the

world as we knew it, as the scale of many things — virus

outbreak, economic slowdown, market selling, policy response

— has blown up well beyond all past experience. The physicist

Albert Bartlett argued that “the greatest shortcoming of the

human race is our inability to understand the exponential

function.” To tackle this natural shortcoming, we will explore

how the virus has exploded the scale of recent economic and

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market events, and how we are adapting as long-term

valuation-disciplined investors.

We will spare our readers any real math, but the proper way to

handle data that varies widely, which is almost always the case

with exponential growth, is to use a logarithmic or log scale on

all charts. A log is the inverse function of an exponential, and

its basic power is its ability to reverse the effects of

exponential growth so that you can more easily compare data

across time. In almost all cases a log scale will squeeze the

drama out of a long-term chart by flattening a curve and

making it look linear. Unfortunately, the scale of the ongoing

fight against our exponential enemy has not been tamed in

any way by a log scale.

Despite the intensity of the Global Financial Crisis (GFC) in

2008, in which jobless claims rose almost threefold (Exhibit 1),

scarring most investors and profoundly affecting behavior and

policy over the ensuing market cycle, it did not prepare us for

the scale of what we have experienced over the past few

weeks. By contrast, the thirty-fold increase in claims in April

2020 turns the intense job stress of the GFC into a noticeable

but modest foothill by comparison.

Exhibit 1: Initial Jobless Claims Soar in 2020

As of April 11, 2020. Source: ClearBridge Investments, Bloomberg.

When 20 years of experience gets amplified by a ten-fold

multiplier, it quickly becomes clear we need a new map. The

real challenge is that we are still somewhat early in this

process, and we are facing many unknowns around the

ultimate duration and magnitude of the crisis. Clearly,

however, we are witnessing the largest decline in global

economic activity ever over such a brief period, as the virus’s

exponential nature has been dictating the pace of the crisis.

Left to run its course, this pace would quickly run the global

economy into a depression.

Fortunately, the economic fallout of the crisis is being met by a

fiscal and monetary response that is also historic in its scale

and speed. The key objective for policy is to fill the historic gap

in economic activity, and, with the combination of monetary

and fiscal policy now adding up to 35% of the U.S. economy,

the response has been massive. The other objective of policy is

to buy time to fight the virus. As a natural system, the virus

has the advantage of continuous compounding, but natural

systems have the disadvantage of organic limiters. We may

face several COVID-19 infection waves, but the virus will

ultimately burn itself out as we attain herd immunity with

time and, ultimately, the aid of a vaccine. In addition, with

each wave we will have more diagnostic information to isolate

outbreaks and balance the economic response.

As importantly, policy has the advantage of being a man-made

system, which has no organic limits — at least over the short

to intermediate term. Money supply historically used the gold

standard as a natural limiter, but money is now free to follow

its own exponential path. This freedom has allowed the

Federal Reserve (“Fed”) to grow the money supply over this

crisis at an unprecedented rate. The following chart shows the

M2 broad money supply over the last 20 years. This chart may

not look as dramatic as the previous chart, but that vertical line

at the far right is truly shocking on a long-term log chart of

this scale. Over the past 20 years the Fed has grown the money

supply at roughly 6% annually. Over the past two weeks the

Fed has increased the money supply by roughly $1.2 trillion, or

7.5%, which is almost 200% annualized. More importantly, the

Fed has pledged to provide whatever it takes and has followed

up with its continuously expanding interventions across asset

classes to ensure ample liquidity. We expect the exponential

battle between the economic fallout of the virus and the policy

response to swing back and forth over the coming months, but

ultimately policy and time will win out over the virus. We are

certainly not gold bugs, but we do think the long-term cost of

the policy response is an unknown that will linger long beyond

COVID-19.

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Exhibit 2: Money Supply Growth Is Unprecedented

As of April 11, 2020. Source: ClearBridge Investments, Bloomberg.

Despite the terrible nature of this economic crisis, new market

cycles always emerge from the pain and fear of downturns.

However, in the early stages of this crisis, pre-existing market

trends in favor of growth and against value accelerated. Value

as a broad category has been suffering mightily since 2017

(Exhibit 3), but this suffering accelerated into a value collapse

in March that was arguably the worst period for value on

record. However, as the battle between policy and the virus

ensued, value started to bottom and fight back (Exhibit 4).

Fortunately, our relative performance started to rebound

materially with the better performance of value, but we still

have a long way to go to restore long-term relative

performance after facing such intense headwinds over this

market cycle and the recent crisis. The key question is, how to

dimension the potential for a value cycle?

Exhibit 3: Value Stocks Have Suffered Since 2017

As of April 11, 2020. Source: ClearBridge Investments, Bloomberg.

Exhibit 4: Value Vs. Growth Trend Accelerated

As of April 11, 2020. Source: ClearBridge Investments, Bloomberg.

To measure value cycles, we have long used the following

valuation spread chart from Empirical Research Partners

(Exhibit 5). The chart tracks the cheapest 20% of the market

over time. When the line is rising, value is underperforming

materially, but it sets up major opportunities for value

outperformance when the spread compresses. Value cycles are

violent in nature, characterized by sharp peaks and reversals.

The nature of value cycles requires the discipline and

temperament to stick with value when it is at its most painful

moments. As valuation spreads rise, the math becomes easier

while the emotional stress intensifies. Therefore, most people

understandably lose confidence in value and value managers

at exactly the wrong time, and this behavioral response is,

ironically, one of the critical ingredients powering a value

cycle.

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Exhibit 5: Valuation Spreads Peaked at Third-Highest Ever

As of April 1, 2020. Source: National Bureau of Economic Research, Empirical Research

Partners Analysis. Measures U.S. large-cap valuation spreads, top quintile compared to the average.

Valuation spreads peaked in mid-March at their third-highest

level ever and have recently compressed to just over three

standard deviations. Even after the recent compression in

valuation spreads, from current levels the forward 12-month

relative performance opportunity in favor of value has

averaged almost 30% historically.

However, if there is one clear message here, it is that we are

dealing with a scale of events that we have never witnessed.

When you see the exponential moves in log scale highlighted

in the charts above, you are clearly dealing with some very fat

tails, and the range of possible outcomes is incredibly wide.

With such ongoing uncertainty we cannot be sure that the

equity market has truly bottomed and that valuation spreads

will not widen again before a new market cycle begins.

Especially with so much economic pain and dislocation headed

our way.

What we do know is that ultimately there will be a very big

tactical move in favor of value strategies like ours, as policy

and time win the battle over the virus. There is also the

distinct possibility that the next cycle could favor value

strategically if the historic merging of fiscal and monetary

policy at an unprecedented scale gives birth to a higher level of

inflation (although stagflation is a possibility). To be clear, as

we navigate this deflationary collapse in the economy, there is

zero evidence of inflation, and technology and demographics

will continue to be structurally deflationary. However, given

the emerging policy response and the reversal of globalization

as a major deflationary force, there is potential for a major

change in economic and market dynamics. For now, our goal is

to survive this cycle in order to take full advantage of a tactical

value cycle, while gauging if the current uncertainty gives rise

to a longer-lasting opportunity for value down the road. How

are we doing this?

As the crisis steamrolled through financial markets, daily

volatility rose to historic levels and valuation spreads exploded

higher at a record pace. During episodes of such market stress,

we tend to get very active as we look to take advantage of the

price volatility and resulting dislocations between price and

underlying value. Given the magnitude and pace of this crisis,

our portfolio turnover rose to the highest level in our tenure,

as we established 15 new positions and sold 14.

In the very early stages of the crisis our focus was on

minimizing direct risk to the most virus-exposed market areas,

and we sold our travel-related positions and reduced auto,

financial and energy exposure. These were prudent moves, but

with hindsight we wish we had done even more.

A primary process transition in every crisis is that equity

analysts quickly become credit analysts. Accordingly, we had

the team stress test every position in the portfolio. The simple

goal is to make sure that each company can survive this

historic collapse in economic activity, as price and value

cannot converge if a company cannot survive. The added

challenge of this crisis is that stress tests had never included

multiple cases of company revenues collapsing toward zero. In

the few cases where we thought balance sheets would become

too stressed, we exited or reduced positions, especially in

certain energy and credit-sensitive companies. To be clear, as

the wave of economic pain is still cresting, stress testing will

be iterative and ongoing. Our goal is simply to maintain a

healthy gap between the price and value of portfolio positions,

but while continually reducing liquidity and solvency risk.

Given the high level of uncertainty and such an incredibly

wide range of future outcomes, we are well-diversified, while

staying true to our valuation discipline. The portfolio now has

roughly 10% in international equities, and we added three

international companies: Melco Resorts, Sony and Unilever.

We also added to our greater than 4% position in gold by

adding Newmont Corporation and Wheaton Precious Metals.

As we commented previously, we are not gold bugs by any

means, but if there was ever a time to own gold, we think this

is it. We also added to dominant U.S. “platform companies” as

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their prices fell, with new positions in Amazon, Comcast and

UnitedHealth Group. These companies should navigate the

ongoing crisis well and will also do well over the long term if

deflation intensifies.

Despite the intense focus on managing risk by stress testing

companies and adding diversification to an already diversified

portfolio, the portfolio’s valuation potential remains extremely

high and fully reflects our valuation-driven investment

process. As a result, we should do well in a wide range of

future scenarios, and we are certainly positioned to navigate

the crisis and enjoy an eventual compression in valuation

spreads. The biggest risk to relative performance remains

continued headwinds to value, which were historically intense

until very late in the quarter.

Dimensioning the historic scale of this crisis is critical context

for investors, but we remain intensely aware of the stress and

toll this crisis is having at the individual level. We will,

however, beat this exponential enemy with an exponential

policy response, time, and the greatest strength of humans:

our ability to organize at a global scale to tackle our collective

challenges. As this crisis fades, we hope our global efforts are

energized to tackle the other great challenges we face. At a

smaller scale, we also hope for a restoration of value.

Fund highlights

During the first quarter of 2020, the ClearBridge Value Trust –

Class A shares generated a total return of -30.45%, excluding

sales charges. In comparison, the Fund’s unmanaged

benchmark, the S&P 500 Index, returned -19.60%.

On an absolute basis, the Fund had losses in all 11 sectors in

which it was invested during the quarter. The least negative

contributions to the Fund’s performance were the real estate,

materials and consumer staples sectors. The financials and

energy sectors were the main laggards.

In relative terms, the Fund underperformed its benchmark

during the quarter due to stock selection and sector allocation

decisions. In particular, stock selections in the financials,

consumer discretionary and energy sectors were detrimental,

as were overweights to the energy and financials sectors.

Conversely, stock selection in the materials sector and an

underweight to the industrials sector proved beneficial.

On an individual stock basis, the greatest contributors to

absolute returns during the quarter included positions in

Amazon.com, Arista Networks, McKesson, Newmont and

Expedia. The largest detractors from absolute performance

were positions in American International Group, Energy

Transfer LP, Synchrony Financial, Wells Fargo and Capri

Holdings.

Besides the new positions discussed above, portfolio activity

for the period included initiation of positions in Western

Digital, in the information technology (IT) sector, McKesson,

in the health care sector, Vail Resorts, in the consumer

discretionary sector, Uber, in the industrials sector, and Valero

Energy, in the energy sector. Meanwhile, larger positions

closed during the quarter included Royal Gold, in the materials

sector, Delta Air Lines, in the industrials sector, Anheuser-

Busch InBev, in the consumer staples sector, Voya Financial, in

the financials sector, and Advance Auto Parts, in the consumer

discretionary sector.

Top contributors

Amazon.com (AMZN), in the consumer discretionary sector,

is a leading retail e-commerce site and provider of web hosting

and related cloud services that continues to benefit from the

migration of commerce from offline to online. The company is

well-positioned in the current “stay at home” environment,

given its dominant e-commerce platform and rapidly growing

Amazon Web Services cloud platform.

Expedia (EXPE) announced broad plans to improve efficiency

across its business on the fourth-quarter earnings call. Digging

further into details regarding the achievability of Expedia’s

cost reduction efforts, investors felt more comfortable with

Expedia now that the business is in the hands of an operator

willing to take decisive action for change.

Arista Networks (ANET) reported an EPS beat driven by better gross margins in February but guided margins down worse than expected, which led to some selling. With the stock trading near trough levels on what we believed were trough EPS, we saw the opportunity for both significant EPS growth and multiple re-rating when hyperscale spending resumes (and 400G deploys), likely in 2H20/1H21. The stock performed well in March as it benefited from the virus driving internet demand for cloud titans such as Facebook and Microsoft, to which Arista supplies network equipment.

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Top detractors

American International Group (AIG) shares traded lower,

along with the financial services sector, as investors grappled

with the reality of low interest rates for an extended period of

time and the economic fallout of COVID-19. While concerns

over credit losses in the investment portfolio are real and there

are many unknowns with respect to insurance coverage during

a pandemic, AIG trades at a considerable discount to book

value, suggesting many risks are already incorporated in the

stock price.

Synchrony Financial (SYF) is embedding a huge credit cycle,

given the spike in unemployment. Directionally this is right, of

course, and unsecured credit card lenders have among the

highest frequency and severity of loss. However, unlike past

bad unemployment cycles, the government is providing

absolutely massive stimulus directly to the consumer. Loan

losses per unit of unemployment this cycle should be less than

it has been in past recessions, as resulting consumer liquidity

is substantially better this go-round. Furthermore, the market

continues to underestimate the counterbalance in Synchrony’s

model that is different from other lenders. It shares economics

with its retail partners and pays them less when loan losses

spike. This has the potential to be a multiyear and multibillion

dollar offset to higher loan losses. Wall street analysts and the

market mis-frame this dynamic.

Wells Fargo (WFC) reported disappointing fourth-quarter

earnings in January. Fees were slightly below estimates and

expenses were slightly higher than expected, which was at

least in part a reflection of the fact that Q4 was something of a

“clean-up” quarter for new CEO Charles Scharf. Credit remains

fine and Wells is still well-capitalized. Wells’ exposure to the

pandemic is the impact from the broad economic drawdown;

the narrative is that Wells has a comparatively fixed cost base

and as such could see more discontinuous earnings downside

as revenues decline in a recession and as loan losses increase.

This is true to a point, but Wells also has meaningfully de-

risked over the past few years as the company has shifted its

balance sheet due to the asset cap, and it has a lower consumer

credit mix, which will likely see the biggest absolute increase

in loan losses.

Outlook Value stocks have underperformed materially of late, although value cycles are violent in nature, characterized by sharp peaks and reversals. The nature of value cycles requires the discipline and temperament to stick with value when it is at its most painful moments. As valuation spreads rise, the potential reversal is larger, while the emotional stress intensifies. Therefore, most people understandably lose confidence in value and value managers at exactly the wrong time, and this behavioral response is, ironically, one of the critical ingredients powering a value cycle.

Even after the compression in valuation spreads in late March 2020, the forward 12-month relative opportunity in favor of value has averaged between 30% and 40% from current levels. We cannot know if valuation spreads will widen again or continue to compress, but the current math is very much in favor of value as the painful uncertainty of the COVID-19 crisis slowly gives way to risks that we can model and price.

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Top 10 equity holdings (%)

Microsoft Corp 7.5

Alphabet Inc 7.4

Alexion Pharmaceuticals Inc 3.9

Amazon.com Inc 3.9

American International Group Inc 3.1

Oracle Corp 3.1

Wells Fargo & Co 3.0

Bristol-Myers Squibb Co 2.9

AbbVie Inc 2.8

Facebook Inc 2.7

Sector allocation (%)

Information Technology 19.2

Financials 14.9

Health Care 14.3

Communication Services 12.3

Consumer Discretionary 12.1

Energy 6.8

Utilities 5.3

Materials 4.7

Consumer Staples 4.5

Industrials 2.0

Real Estate 1.1

Cash/Other 3.0

Percentages are based on total portfolio as of quarter end and are subject to change at any time. For informational purposes only and not to be considered a recommendation to purchase or sell any security.

Definitions and additional terms:

Please note that an investor cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

Coronavirus disease (COVID-19) was discovered in 2019 and has not been previously identified in humans.

Deflation is a general decline in prices, often caused by a reduction in the supply of money or credit.

Earnings per share (EPS) is a company's profit divided by its number of common outstanding shares. If a company earning $2 million in one year had 2 million common shares of stock outstanding, its EPS would be $1 per share. The Global Financial Crisis (GFC) was the recessionary period between December 2007 and June 2009, which was caused primarily by the U.S. housing market bubble collapsing.

The Federal Reserve Board ("Fed") is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

M2 is a calculation of the money supply that includes all elements of M1 as well as "near money." M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds, and other time deposits.

S&P 500 Index is an unmanaged index of roughly 500 stocks that is generally representative of the performance of larger companies in the U.S.

Stagflation is a seemingly contradictory condition described by slow economic growth and relatively high unemployment, or economic stagnation, which is at the same time accompanied by rising prices (i.e. inflation).

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Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional. Portfolio holdings and sector allocations may not be representative of the portfolio manager's current or future investment and are subject to change at any time. Percentages are based on total portfolio as of quarter end and are subject to change at any time. For informational purposes only and not to be considered a recommendation to purchase or sell any security. ClearBridge Investments, LLC and Legg Mason Investor Services, LLC are subsidiaries of Legg Mason, Inc. © 2020 Legg Mason Investor Services, LLC. Member FINRA, SIPC. CBAX107131 D7407 04/20

BEFORE INVESTING, CAREFULLY CONSIDER A FUND’S INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. YOU CAN FIND THIS AND OTHER INFORMATION IN EACH PROSPECTUS, AND SUMMARY PROSPECTUS, IF AVAILABLE, AT WWW.LEGGMASONFUNDS.COM. PLEASE READ THE PROSPECTUS CAREFULLY.

What should I know before investing? Equity securities are subject to price fluctuation and possible loss of principal. International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. The manager’s investment style may become out of favor and/or the manager’s selection process may prove incorrect, which may have a negative impact on the Fund’s performance. Because this Fund expects to hold a concentrated portfolio of securities, and invests in certain regions or industries, it has increased vulnerability to market volatility. Diversification does not guarantee a profit or protect against a loss.

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