Legg Mason : Infrastructure Funds, New to U.S. Markets, Offer Investors Opportunity to Tap into Attractive Income and Growth Possibilities

Madelyn McHugh mmchugh@leggmason.com 212-805-6039

Predictability of Global Regulated Assets Can Make Infrastructure Funds Heirs to Old Utility Stocks for Smart and Patient Investors

Infrastructure funds generally have lower correlations to equity indexes and can enhance portfolio diversification.

The selling points relative to equities are attractive income potential from high dividends; long-term growth potential with relatively lower volatility potential; and a degree of inflation management.

"Many of these new U.S. infrastructure funds are designed to offer higher income than investors can get from U.S. government or other sovereign bonds," explained Nick Langley, a founder, co-CEO and co-chief investment officer of RARE Infrastructure Limited, an affiliate of Legg Mason based in Sydney, Australia. Mr. Langley and his team were recently appointed as the subadvisor to a Legg Mason U.S. fund.

"Since the inception of the infrastructure index in 2001, the real return for investors in infrastructure was 6.68% vs. 2.63% for bonds*," Mr. Langley said. "That's pretty good in this market, especially when you factor in their potential for lower risk profiles, the possibility of the assets growing over time, and potential inflation hedges. We have designed funds like this for many years for institutions and well-heeled individuals, and are now excited to be advising on these attractive products for the U.S. retail market."

"They can help improve the lives of investors who seek income, growth and diversification."

The universe of stocks available to U.S. infrastructure funds is significant: over $2 trillion in market capitalization. Roughly 35 percent is in U.S. utilities, 25 percent in other countries' utilities, and 40 percent is in "user pays" infrastructure (generally toll roads, airports, seaports, railways and communications towers). Around 65 percent is invested in non-U.S. projects.

And the sector continues to grow, in the U.S. and worldwide: the value of global infrastructure assets is estimated at $50 trillion now, and is projected to rise to over $110 trillion by 2030 (Source: David Hale Global Economics). Thus there should be no shortage of infrastructure investment opportunities for the foreseeable future.

"Emerging market countries are voracious developers of infrastructure, and they can often offer more attractive returns than projects in the developed countries of Europe and the U.S.," Mr. Langley noted. "In 2014 there were 28 cities around the world with more than

10 million people; by 2030 that's projected to grow to 40. With this massive population growth, you're starting to see burgeoning middle classes in many emerging markets. First they want cars, then home ownership, then they want to travel more. All of this requires investment in roads, airports, power and water, but governments can't cover it all. They need private sector support."

With global need estimated at more than $1 trillion per year, and governmental budgets everywhere under pressure, that private sector support can deliver attractive returns to investors.

"This is where retail investors can benefit from investing in funds overseen by specialist infrastructure managers," Mr. Langley said. "Not all projects are of the highest quality, which anyone who deals with emerging markets understands. We do the research: and visit companies, regulators and financiers to assess the quality of the underlying assets. Although some funds are tradable on U.S. equity exchanges, the RARE team notes that its subadvisory approach is directed primarily to investors who are in it for the longer term.

"Since most large infrastructure projects take five years-plus to plan and build, these are not short-term plays," Mr. Langley said. "These funds are invested in listed stocks, and

the psychology that makes markets inherently volatile can make stocks more volatile than they need be. For the first three years these funds can be highly correlated to the market. But if investors hold, they can benefit from steady, solid dividend payments, plus see the value of their assets appreciate over time. We believe that's how to make infrastructure investing payoff: consider putting 3 to 10 percent of your portfolio in it, then put it in the bottom drawer - and forget about it."

In the case of regulated infrastructure such as water, gas and electricity, the regulator determines the revenues. If the project earns too much, then the company has to return some to its customers; if it earns too little, then the regulator will let the company increase

prices. This can lead to fairly stable cash flows over time. As increases in prices are often linked to inflation, these assets also act as good hedges for inflation.

As economies grow, infrastructure assets also typically grow: for example, as more people use mobile phone data, communications towers are likely to add capacity to meet this demand.

"New technology like renewable energy can impact this sector, as can the implications of climate change," Mr. Langley said. "Large-scale water barrier projects may need to be built, but demand will be driven by the increasingly pressing need - which grows more obvious every year - to replace ageing infrastructure in the developed world. It's costly, but in fiscal terms it's the gift that can keep on giving: spurring local infrastructure building creates jobs and stimulus, then the country can enjoy the productivity boost enabled by the completed projects over the long term."

"Easing bottlenecks or taking congestion away are ideal ways to build better economies," And from this comes opportunity for U.S. investors to benefit from global growth enhancement.

Mr. Langley concluded, "By investing in infrastructure funds, investors may not only benefit from strong dividend income and capital growth, but may also manage their portfolio through diversification and hedge against potential rising inflation, but maybe help make the world a little better too."

# # #

As a founder, Co-Chief Executive and Co-Chief Investment Officer of RARE, Nick Langley is a member of the management and investment leadership teams, responsible for the governance and management of the investment team and process. As a portfolio manager, Mr. Langley is responsible for investment performance across all strategies. Prior to founding RARE in 2006, he spent 11 years in the infrastructure sector, including four years as a principal of AMP Capital's Infrastructure Funds Management team. There he was also the CFO of DUET, an ASX-listed investment trust with AUD 5 billion in electricity and gas assets. Mr. Langley spent two years with UBS in New York and, prior to that, worked with ABN AMRO in Sydney to provide advice across infrastructure sectors such as communications, multi-utilities and transport. He holds a Bachelor of Laws and a Bachelor of Commerce from the University of Auckland.

Established in 2006, RARE is a dedicated infrastructure investment manager focused on global listed infrastructure. Headquartered in Sydney, with offices in Melbourne, London and Chicago, RARE became an affiliate of Legg Mason Inc. in 2015. RARE provides investors with high quality portfolios of listed infrastructure securities, focused around three key areas: global value, emerging markets and yield.

Legg Mason is a global asset management firm with $737 billion in assets under management as of August 31, 2016. The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange (symbol: LM).

*S&P Global Infrastructure USD vs. Barclays Global Aggregate, annualized returns from 12/31/2001 to 12/31/2015.

The S&P Global Infrastructure Index is designed to track 75 companies from around the world chosen to represent the listed infrastructure industry while maintaining liquidity and tradability. To create diversified exposure, the index includes three distinct infrastructure clusters: energy, transportation, and utilities.

The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. The multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.

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

©2016 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC and RARE Infrastructure are subsidiaries of Legg Mason, Inc.