Legg mason global asset management

US Small Caps: An Evergreen Opportunity

Citywire Berlin

William Hench, Portfolio Manager

FOR PROFESSIONAL INVESTORS ONLY. NOT TO BE USED OR VIEWED BY RETAIL CLIENTS.

November 2012

Why Small Caps?

A Large Opportunity Set

Page 2

US Equities: % Share based on total # of companies

US Equities: % Share based on Mkt Cap

Source: FactSet, as at 30 June 2012

Basis: All publicly listed US domiciled companies.

Micro caps 3.2% Small caps

7%

Mid caps 23.7%

Large caps 66.1%

Micro caps 66.2%

Small caps 16.3%

Mid caps 13.3%

Large caps 4.2%

Small- and micro-cap companies account for 82% of the publicly-traded universe in the US

Exposure to the US Economy

Page 3 Source: FactSet, Compustat, Russell, J.P. Morgan Global Economics Research, J.P. Morgan Asset Management.

Foreign sales as a percentage of total sales is calculated as an unweighted average of individual index

constituent companies’ reported sales figures and does not capture all index members

reporting practices. As at 30 September 2012

•Small-cap stocks are typically more US

centric

•On average, approximately 80% of revenues

within the Russell 2000 originate from the US

Performance

Page 4

Small Caps have outperformed large caps over the long term

Source: Morningstar. As at 30 September 2012

80

130

180

230

280

01/11/02 01/08/03 01/05/04 01/02/05 01/11/05 01/08/06 01/05/07 01/02/08 01/11/08 01/08/09 01/05/10 01/02/11 01/11/11 01/08/12

LM Royce US Small Cap Opp A Inc USD 159.11% Russell 2000 TR USD USD 134.37% S&P 500 TR USD 87.62%

The Long-Term Advantage Offered by Small Caps

Source: Royce & Associates, as at 31 December 2011.

CRSP 6-10 S&P 500

Cumulative Total Return 1,003,880.9% 233,474.4%

Average Annual Total Return 11.3% 9.5%

Growth of $10,000 $100,398,086 $23,357,439

*CRSP = Centre for Research in Security Prices

The Cap-Based Portfolio data tracks micro, small, mid and large-cap stocks on monthly and quarterly frequencies. The methodology used to calculate the series differs from the CRSP Stock File Capitalization Decile Indices. For the Cap-Based Portfolios, CRSP ranks all NYSE companies by market capitalization and then divides them into ten equally populated portfolios. Amex and NASDAQ stocks are then placed into the deciles determined by the NYSE breakpoints, based on their market capitalization. The largest capitalizations in each decile serve as the breakpoints that are applied to various exchange groupings. CRSP portfolios 1-2 represent large cap stocks, portfolios 3-5 represent mid-caps, portfolios 6-8 represent small caps, and portfolios 9-10 represent our benchmark micro-caps.

Total Returns from 1926

Why Small Caps Now?

Reasons to Consider US Small Caps Now

Page 7

• Valuations: small caps are attractively valued relative to large caps

• M&A activity: cheap valuation, high cash balances and a lack of organic growth should

result in an increase in takeover activity

• Performance over the long term: small caps have historically rebounded strongly from

market declines

Source: Bloomberg, as at 30 September 2012.

Not annualised

Valuations

10

12

14

16

18

20

22

Russell 2000 S&P 500

Recent underperformance and compression in multiples creates an attractive entry point

P/E Ratio

Potential for Consolidation

Page 9 Source: Legg Mason as at 30 September 2012.

Small caps trading at cheap valuations are an attractive target for larger companies

Target Acquirer Sector

Premium (previous

day's closing price) Description

COST PLUS INC/CALIFORNIA Bed Bath &

Beyond Consumer Discretionary 18%

Bed, Bath & Beyond completed the purchase of Cost Plus, a discount retailer of home furnishing in May, for $495M including net debt. The transaction was all cash and BBBY's first acquisition since 2003.

LeCROY CORP Teledyne IT 54% LeCroy makes test and measurement instruments such as oscilloscopes. Teledyne announced the acquisition of Lecroy on May 29th for $14.3, valuing Lecroy at $240M.

NOVELLUS SYSTEMS INC Lam Research IT 28% Novellus is a manufacturer of semi conductor equipments used in the fabrication of integrated circuits. The all-share deal was announced in December 2011 (but completed in 2012) and valued Novellus at $3.3B.

PLX TECHNOLOGY INC IDT IT 43% The $330M cash and share bid on the maker of semiconductor devices has recently been extended.

SOLUTIA INC Eastman Chemical

Materials 42% Eastman Chemical initially announced the acquisition of Solutia, a manufacturer of specialty chemicals and performance materials, in January, in a cash and share deal valuing Solutia at $3.38B.

TALBOTS INC Sycamore Partners

Consumer Discretionary 113% Sycamore, a private equity firm, announced the all cash purchase of Talbots, valuing the retailer of women’s apparel, shoes and accessories at $369M including net debt.

TEMPLE-INLAND INC International

Paper Materials 37%

International Paper completed the acquisition of this manufacturer of packaging products in February, for $4.5B including net debt. The all cash deal represents a 37% premium on the stock price preceding the initial bid in May 2011.

Recent M&A activity

Small Cap Performance Following Major Market Declines

Russell 2000 returns following all peak-to-trough declines of 10% or more since the Russell 2000’s

Inception

Page 10 Source: Royce & Associates, as at 30 September 2012.

*Not annualised

Annualised Returns from Trough (%)

Peak Date Trough Date Drawdown* 6 Months* 1 Year 3 Years

04/29/2011 10/03/2011 -29.1 +38.0 39.64 –

07/13/2007 03/09/2009 -58.9 72.2 97.9 35.3

05/05/2006 06/13/2006 -13.9 18.0 25.3 -6.5

12/28/2004 04/28/2005 -11.8 11.1 34.5 9.4

04/05/2004 08/12/2004 -14.4 23.5 29.2 16.5

03/09/2000 10/09/2002 -44.1 14.7 61.6 26.9

04/21/1998 10/08/1998 -36.5 29.6 39.7 11.4

10/13/1997 01/12/1998 -11.3 11.9 5 7.0

05/24/1996 07/24/1996 -15.4 20.7 34.9 14.9

03/18/1994 12/09/1994 -12.3 18.1 34.7 25.0

02/12/1992 06/25/1992 -12 17.4 25.8 17.0

10/09/1989 10/31/1990 -32.5 46.2 58.6 32

08/25/1987 10/28/1987 -38.9 38 41.8 6.7

07/03/1986 09/16/1986 -14.6 26.7 30.5 12.3

06/24/1983 07/25/1984 -24.1 21 33.8 23.8

06/15/1981 08/12/1982 -26.2 67.1 99.1 28.7

02/08/1980 03/27/1980 -26.3 59.6 81.4 36.2

10/05/1979 10/23/1979 -15.4 7.8 61.3 24.4

Averages 29.6% 46.3% 19.3%

Royce & Associates at a glance

Royce & Associates

One of the oldest (founded in late 1972) and largest

dedicated small-cap managers

• Chuck Royce, the firm’s founder, is considered one of the

pioneers of small-cap investing

• Small-cap value investing is the core of the business

• Seasoned staff of over 30 investment professionals

Co-ownership of funds

• Officers and employees have approximately $143 million

invested in the Royce Funds

$36 billion in total assets under management

Wholly owned, independent subsidiary of Legg Mason, Inc.

since 1st October 2001

Total invested AUM by Geography

Source Royce & Associates, LLC as at 30 September 2012.

Organisation

Source: Royce & Associates, LLC as at 30 June 2012

Business Management

Average Industry Experience: 36 years | Average Experience with Royce: 25 years

Charles M. Royce Co-Chief Investment Officer W. Whitney George Co-Chief Investment Officer

Jack E. Fockler, Jr. Managing Director John D. Diederich Chief Operating Officer & Managing Director

Assistant Portfolio Managers and Analysts

Average Industry Experience: 16 years Average Experience with Royce: 5 years

John Protos Dana Lambert

Derrik C. Li Dilip P. Badlani

Mark Rayner

Traders


Dan A. O’Byrne Kenneth D. Smolanoff

Nickolas J. Spiezio Robert M. Fahy

James P. Tyler John S. Lucas, III

Mark A. Salamone Carl Vanderbush

Elizabeth Winslow

Portfolio Managers


Charles M. Royce Co-Chief Invest Officer

W. Whitney George Co-Chief Investment Officer

Boniface A. Zaino William A. Hench Brendan J. Hartman

Charles R. Dreifus David A. Nadel Jim P. Stoeffel

James A Skinner, III James J. Harvey George Necakov

George U. Wyper Lauren A. Romeo Chris E. Flynn

Jenifer L. Taylor Steven G. McBoyle Christopher D. Clark

Jay S. Kaplan Carl D. Brown Francis D. Gannon

Investment Process and Philosophy

Legg Mason Royce US Small Cap Opportunity Fund

• Experienced team

– Fund is managed by Bill Hench, who is assisted by Buzz Zaino

– Investment approach used to manage the Fund has been in place for more than 30 years

• Active investment style

– Invests in a diversified portfolio of smaller companies with a preference for micro-cap stocks

– Focuses on companies with a market capitalisation of up to $2.5 billion

– Seeks to purchase companies trading at discounts of at least 30% and preferably 50% of the investment

manager’s estimate of their value as businesses

• Stock pickers

– Bottom-up approach to stock selection is employed

• Benchmark

– Russell 2000 index

Please refer to the prospectus of Legg Mason Global Funds Plc (LMGF) for a full description of the Legg Mason Royce US Small Cap Opportunity Fund.

Source: Legg Mason/S&P/OBSR, as at 30 September 2012 The Legg Mason Royce US Small Cap Opportunity Fund is a sub-fund of Legg Mason Global Funds plc, an umbrella fund established as an open-ended

investment company with variable capital incorporated with limited liability under the laws of Ireland. It qualifies, and is authorised in Ireland by the Financial Regulator as an undertaking for collective investment in transferable securities. Please see the full Prospectus and Key Investor Information

Document (KIID) for Legg Mason Global Funds plc for a full description of risk factors associated with the Fund.

Investment Universe – US Smaller Companies

Invest in companies with market caps up to $2.5 billion

Source: Legg Mason, as at 30 September 2012.

Small-Cap Universe

• $500 million - $2.5 billion

• More than 1,100 companies

representing more than

$1.4 trillion in total market

cap

• Greater liquidity, more

research coverage, greater

competition

Portfolio Weight 59.15%

Micro-Cap Universe

• <$500 million

• Approximately 3,000

companies representing

more than $336 billion in

total market cap

• Less liquidity, more

volatility, greater return

potential

Portfolio Weight 35.68%

• Comparable with securities

such as Club Med & WH

Smith

Investment Philosophy

Royce employs a disciplined value approach and strives to provide investors with above-

average absolute performance

Royce invests in small-cap companies that are trading significantly below the investment

team’s assessment of their current worth

Royce maintains the same discipline, regardless of market movements and trends

Value Driven

• Focus on companies with low P/B and P/S ratios

• Select securities from the entire small-cap universe, not just the “value” portion

• Use a long-term investment horizon of generally two-to-five years

Value Driven

Smaller Cap Focus

Consistency

Portfolio Themes

Portfolio companies fall into one of four distinct themes for tracking purposes:

Unrecognised Asset Values (15% - 30%)

• Example: Gaylord Entertainment (GET) - $2 billion hotel and entertainment group which owns valuable assets

including convention hotels near large cities as well as the rights to the Grand Ole Opry, the legendary country

music show.

Turnarounds (25% - 35%)

• Example: Lender Processing Services (LPS) – $2.4 billion provider of home finance services for the mortgage

industry. A new management team was brought in that shed the company’s non-performing businesses and

refocused it on its core activities.

Undervalued Growth (15% - 30%)

• Example: Lithia Motors (LAD) – $650 million car dealership benefiting from the resurgence of GM and Chrysler

brands.

Interrupted Earnings (15% - 35%)

• Example: Inphi (IPHI) - $390 million analog semiconductor producer. “Broken IPO” type stock, which sold off after

its November 2010 listing.

Royce’s Disciplined Approach

Small & Micro-Cap US Companies

Identify Value Themes

Valuation

Portfolio

• Initial universe of over 4,100 stocks

• Sources of ideas:

– Trade journals

– Previously owned companies

– New low list

– Screens: Low P/B, P/S

Focus on four value themes:

• Unrecognised asset values

• Turnarounds/ Special Situations

• Undervalued growth

• Interrupted earnings

• Companies trading at a 30% and preferably, a 50% discount

• Diversified portfolio of 250-300 stocks

Portfolio Construction

• Broad diversification generally among 250 - 300 holdings to help minimise stock specific risk and because

of liquidity/trading considerations

• Portfolio holdings are averaged in over time to help minimise price risk and generally constitute 35 - 50

basis point weightings at the time of purchase

• Position weights are based on valuation and conviction levels

• Positions are cut back when weightings reach 1.0% of portfolio assets and/or when the portfolio manager

determines that company progress is not being met

How Royce Manages a Broadly Diversified Portfolio

• Significant knowledge of the investment universe gained from 40 years of small-cap investing

• Portfolio Managers review all names with significant news flow at the start of each day

• Screen for valuation characteristics such as P/B and P/S

• Diversification is key because it allows sufficient time for turnaround situations to fully develop - it is also a way to

minimise risks that are specific to investing in small caps, including liquidity and trading risks

• Turnover within the investment universe is lower than generally perceived, especially in Industries like Aerospace –

therefore, opportunities remain consistent across the market cycles

Page 21

Portfolio Positioning and Performance


Source: Legg Mason. As at 30/09/12.

Sector Exposure Relative to Russell 2000

Fund Index Underweight Overweight

Materials 10.45% 5.08%

Industrials 20.20% 14.87%

Information Technology 22.15% 17.29%

Consumer Discretionary 16.85% 14.11%

Energy 6.92% 6.19%

Telecommunication Services 0.40% 0.77%

Consumer Staples 0.84% 3.65%

Utilities 0.00% 3.69%

Financials 13.95% 20.74%

Health Care 3.14% 13.60%

Cash & Cash Equivalents 5.09% 0.00%

Fund Composition

Market Capitalisation


0.68

4.49

27.05

32.10

35.68

0.00

7.93

50.60

23.77

17.70

0

10

20

30

40

50

60

5,000-10,000 mil 2,500-5,000 mil 1,000-2,500 mil 500-1,000 mil Less than 500 mil

% o

f F

un

d

$ Millions

Legg Mason Royce US Small Cap Opportunity Fund Russell 2000

Source: FactSet. As at 30/09/12.

Portfolio Characteristics

Please refer to “Important Information” for additional details.


Source: FactSet. As at 30/09/12.

Trailing P/E Ratio (Weighted Average) 14.64 14.43

Current Dividend Yield (Weighted Average) 0.87% 1.48%

Portfolio Characteristics Fund* Index

Value Factors

EPS Growth, Trailing 3-5 Years (Weighted Average) -4.95% 5.42%

Price/Book (Weighted Interquartile Average) 1.43 2.34

Price/Sales Ratio 1.09 2.40

Risk Factors over 3 Years

Standard Deviation 25.81% 21.28%

Tracking Error 5.71% 0.00%

Information Ratio -0.25 -

Sharpe Ratio 0.55 0.68

Treynor 11.79 14.37

Alpha -3.05 0.00

Beta 1.20 1.00

R Squared 0.98 1.00

M Squared 11.75 14.46

Weighted Average Cap ($bn) 0.96 1.27

Market Cap

Weighted Median Market Cap ($bn) 0.69 1.16

Performance

Annualised Returns (USD)

NAV to NAV with gross income reinvested without initial charges, but reflecting annual management fees, based in USD for Class A Shares. For sector figures: Copyright 2009, Morningstar, In. All Rights Reserved.

Past performance is no guide to future returns and may not be repeated.



Performance

Calendar Year Returns (USD)

NAV to NAV with gross income reinvested without initial charges, but reflecting annual management fees, based in USD for Class A Distributing Shares. Please refer to “Important Information” for additional details.




83.43

16.82

3.50

17.89

-4.61

-47.74

59.13

34.04

-12.39

14.67

47.25

18.33

4.55

18.37

-1.57

-33.79

27.17 26.85

-4.18

14.23

-60

-40

-20

0

20

40

60

80

100

2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD

%

Legg Mason Royce US Small Cap Opportunity Fund - Class A Dist. (A) USD Russell 2000 Index

Appendix

Top 10 Fund Holdings



Security

Jones Group Inc

Pennymac Mor Inv Trst

Apogee Enterprises Inc

Trex Company Inc

Unisys Corp

Kaiser Aluminum Corp

Integ Silicon Solution

UNIFI INC USD0.1

Lasalle Hotel Properties

QUANEX BUILDING P USD0.01

Total

Total Number of Holdings

696 0.71

7.48

276

255 0.73

258 0.72

2,303 0.72

537 0.77

839 0.73

1,128 0.73

1,032 0.82

969 0.78

556 0.78

Market Cap ($m) % of Total Fund

Active Share/Tracking Error Positioning

Active share of a fund is a measure of the percentage of stock holdings in a manager's portfolio that differ from the benchmark index. In other words, it’s

a way to estimate how different a fund is from its benchmark.

*Active Share and Mutual Fund Performance (Antti Petajisto – 2010).

Active share is calculated by taking the sum of the absolute value of the differences of the weight of each holding in the portfolio versus the weight of each holding in the benchmark index and dividing by two.



Fund

DiversifiedStock Picks

ConcentratedStock Picks

ClosetIndexing

Factor Bets

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

Active S

hare

Tracking Error (Three-Year Annualized)

Current Active Share - Tracking Error Positioning

Performance in Market Rebounds

1 Year Performance from Market bottom in 2002*

Royce Opportunity Fund

Source: Morningstar/Bloomberg, as at 7 October 2003. Performance is annualised for the Institutional share class and is presented on a total return basis and reflects the reinvestment of distributions. There are differences between the Royce Opportunity Fund and the Legg Mason Royce US Small Cap Opportunity Fund including differences in the amount of assets under management, cash flows, fees and expenses, and applicable regulatory requirements, including investment and borrowing restrictions. The past performance of the Royce Opportunity Fund is, therefore, not indicative of the future performance of the Legg Mason Royce US Small Cap Opportunity Fund. The Royce Opportunity Fund has been used to demonstrate the longer term track record of the investment manager. The Royce Opportunity Fund is US domiciled and is therefore unavailable for investment outside of the US.

1 Year Performance from Market bottom in 2009** Legg Mason Royce US Small Cap Opportunity Fund

Source: Morningstar/Bloomberg, as at 9 March 2010. NAV to NAV with gross income reinvested without initial charges, but reflecting annual management fees, based in

USD for Class A Distributing Shares. Please refer to “Important Information” for additional details.

. Past performance is no guide to future returns and may not be repeated

Class A Distr. (USD)

For illustrative purposes only

Current “Themes”

Page 32

• The fund has exposure to housing related names, which make up 14-15% of the portfolio: Home builders, building materials, decking providers, roofing names, REITs etc.

• The fund has increased its allocation to regional banking and financial related stocks over the last year, making up around 10% of the portfolio

• Consumer related names including retailers make up 15% of the portfolio

• Energy plays poised to benefit from the shale energy boom in the US, represent 5% of the portfolio and growing

• Within Industrials, the fund is invested in several aerospace names which are a particularly bright spot for the US economy

Source Royce & Associates, LLC as at 30 September 2012.

Example: Housing

• The team has steadily built exposure to housing related

names over the last year.

• This exposure includes a variety of names across

different sectors such as builders and wood suppliers,

as well as plumbing-related names and providers of

decking.

• Valuations are still low but the sector seems to be

bottoming and a number of factors are supportive

including:

– Historically low mortgage rates

– High affordability

– The existence of pent-up demand

– Prices have declined 30% nationwide since 2006

peaks

– Significant capacity has been taken out

Page 33 Source top chart: US Department of Commerce: Census Bureau, as at 01 August 2012. Source: Bloomberg, as at 31 August 2012.

. Bottom chart rebased to 100.

70

90

110

130

150

170

190

Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12

Toll Brothers Russell 2000

400

800

1200

1600

2000

2400

Dec 95 Dec 97 Dec 99 Dec 01 Dec 03 Dec 05 Dec 07 Dec 09 Dec 11

Housing Starts: Total: New Privately Owned Housing Units Started

Example: Banks

• The fund’s exposure to banking and other related

financial stocks (around 10%) is now probably close to

historical highs for the strategy.

• The team has also recently added to community banks

where there are good underlying regional economies:

(e.g. Washington D.C. area; Virginia).

• Small-cap banks posted among the best 4Q11 Russell

2000 industry performance and this strong performance

has continued YTD.

• Banks held in portfolio are full service regional/local

banks benefiting from commercial & industrial loan

growth in areas where the larger players have pulled

out.

• They are plays on undervalued assets and are also

ways to play an improving housing market.

Page 34 Source: Bloomberg, as at 31 August 2012. Rebased to 100.

95

100

105

110

115

120

125

130

135

Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12

Washington Federal Russell 2000

Example: Aerospace

• 2012 will be another record year in terms of production

level. 2013 and 2014 should also be record years.

• The large commercial jet backlog is also the highest it

has ever been.*

• US manufacturers and suppliers are benefiting from a

weak US$.

• Barnes ($1.14 billion market cap), a long term portfolio

holding, is a manufacturer of precision metal parts and

distributor of industrial supplies. The company has been

benefiting from improving prospects for its aerospace

clients.

Page 35 Source: Bloomberg, as at 31 August 2012. Rebased to 100.

*According to Aerospace Market News as of 30 September 2011.

90

110

130

150

170

190

210

230

250

270

Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12

Barnes Russell 2000

Legg Mason Royce US Small Cap Opportunity Fund – Investment Team

History & Background

William A Hench, Portfolio Manager and Senior Analyst

2002 – present:

• Portfolio Manager and Senior Analyst

• 20 years investment industry experience

• Portfolio Manager of the Legg Mason Royce US Small Cap Opportunity Fund since 2009.

Previous Investment Experience:

• J P Morgan

• Cooper and Lybrand

Years of Industry

Experience Years at Royce

Other Portfolio Managers

Boniface “Buzz” A Zaino

Managing Director and Assistant Portfolio Manager

MBA, Columbia University

44 14

Traders

Robert Fahy

BA, State University of New York, Albany

23 14

Mark A. Salamone

BA, University of Maryland

13 9


Source: Royce & Associates, as at 30 June 2012.

Important Information

The Legg Mason Royce US Small Cap Opportunity Fund is a sub-fund of Legg Mason Global Funds plc, an umbrella fund with segregated liability

between sub-funds, established as an open-ended investment company with variable capital and incorporated with limited liability under the laws of

Ireland with registered number 278601. It qualifies, and is authorised in Ireland by the Central Bank of Ireland as an undertaking for collective

investment in transferable securities and is a section 264 Scheme as recognised by the FSA.

Royce & Associates is affiliated with Legg Mason through common control and ownership by Legg Mason, Inc. Legg Mason provides its clients with

access to Royce & Associates primarily through its range of Irish and UK authorised funds in which Royce & Associates serves as investment manager

or sub-investment manager.

This document does not constitute an invitation to invest. Past performance is no guide to future returns and may not be repeated. The value of

investments and the income from them can go down as well as up and investors may not get back the amounts originally invested. Fluctuations in

exchange rates can affect the value of the Fund and the income from it.

This Fund is offered solely to non-US investors under the terms and conditions of the Fund’s current prospectus - please refer to the Key Investor

Information Document (KIID) and Prospectus documentation, which describe the full risk factors associated with this Fund.

These Funds may acquire shares in companies with relatively small market capitalisations and may involve a higher degree of risk.

Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and

Wales, Company No. 1732037. Authorised and regulated by the Financial Services Authority. Client Services 0207 070 7444

November 2012

Ref:8355


This document is for Asset Managers, Fund Distributors and Authorised Intermediaries. Not for use by Private Individuals.

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