1. Equity ETFs, Active Strategies & Portfolios for Volatile Markets
VINAY
NADKARNI
Managing Director, Head of Global Business Development
ClearBridge Investments

2. Clearbridge INVESTMENTs
Global active investment manager based in New York
$137 billion under management
Focused on high active share, income solutions and low volatility strategies
Affiliate of Legg Mason
As of December 31, 2017.

3. Market Weighted Passive Factor Tilted Strategies
Next generation portfolio construction separates alpha from beta
Market Weighted Passive
Factor Tilted Strategies
Idiosyncratic
(Fundamental Alpha)

4. No Time to Give Up on Active
Active and passive outperformance moves in cycles
While this decade has seen passive strategies outperform, asset owners should note the cyclicality of active vs. passive performance
Active Outperformance:
6 out of 9 years
Internet and Mega Cap Stock Bubble
Active Outperformance:
8 out of 10 years
Quantitative Easing, Low Vol Environment
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Active Outperformance
Passive Outperformance
Source: eVestment. As of Dec. 31, Active is defined as the eVestment Large Cap Core universe. Passive is defined as the eVestment Passive U.S. S&P 500 universe.
An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

5. We Have Been Here Before Each Trough Has Been Followed by Recovery
Source: Morningstar. As of December 31, 2017.

6. Regimes Favoring Active Management
Active Managers Tend to Outperform in Certain Types of Market Environments Including:
Active Managers Tend to Underperform in Certain Types of Market Environments Including:
High Dispersion Markets
Where stock picking can have more of an impact
Market Corrections
Where the ability to underweight or avoid certain stocks or sectors can limit the downside
Markets Where Valuations Matter Less
Late '90s
'10s
Low Quality Markets
Where markets don’t distinguish between stocks with healthy or poor fundamentals
There’s no guarantee active strategies will outperform passive strategies.

7. Active Management and Fiduciary Duty
The Decision to Hire an Active Manager is About More Than Fees
“Fees are just one of several factors fiduciaries need to consider in deciding on service providers and plan investments. When the fees for services are paid out of plan assets, fiduciaries will want to understand the fees and expenses charged and the services provided. While the law does not specify a permissible level of fees, it does require that fees charged to a plan be ‘reasonable.’ After careful evaluation during the initial selection, the plan's fees and expenses should be monitored to determine whether they continue to be reasonable.”
Excerpt from “Meeting Your Fiduciary Duties” '12, Department of Labor

8. The More Active the Better
By definition, active managers can only beat the benchmark by looking different than the benchmark. A study of different forms of active management found that diversified stock pickers delivered the most alpha.
Excess Return: Alpha (%)*
*Prior to fees/transaction costs.
Source: Antii Petajisto, Active Share and Mutual Fund Performance, 1/15/13.
Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

9. Active ETFs are Evolving Quickly
Innovation in the ETF space has led to the adoption of transparent, active ETFs
Today, active ETFs represent 1% of the ETF market and are primarily focused on income producing strategies
Active management combined with daily transparency presented in a cost-efficient vehicle
ETF investors can avoid the constraints of tracking a market benchmark or other index based approach
The ETF format allows the delivery of actively managed strategies in an efficient format for both retail and institutional users
Demand is expected be strong for early adapters

10. Etf universe PASSIVE ACTIVE Market Cap Weighted Smart Beta Active ETF
Active (Share) ETF
Daily Transparent
Simple Passive Indexing
$2.5T
Rules Based Passive Indexing
$500B
Fully Transparent
Daily Active Management
$28B
Semi- Transparent
In Progress
PASSIVE
ACTIVE
Active Share is a Legg Mason coined term. It falls within the Active ETF category.

11. Resulting Network Effects
Impediment to critical mass in fundamental etfs
Transparency
Supply
Resulting Network Effects

12. Legg mason clearbridge solutions offered
CACG
YLDE
LRGE

13. Parallels to Health Care Industry & How We Must Adapt
Does anyone go to their doctor and say “Just prescribe me branded drugs” or “Just give me the lowest cost option”?
Index funds = Generic drugs
Ken & Barbie don’t drive sales
Blockbusters & Niches
Need technical expertise; knowledge based economy
Avoid crowded spaces and solve for unmet needs
Tier 1 formulary = Select lists and the hurdle rate for what is “efficacious” is higher by the day
Need scale distribution capability to drive both types of strategies
Excess capacity leads to SG&A and R&D optimization

14. How is Investing Different than Health Care?
Must tolerate short-term ineffectiveness
92% of ten-year, top-quartile funds spent at least one three-year stretch in bottom half of peer group1
56% spent at least one five-year period in the bottom half of peer group1
1 DiMeo Schneider & Associates

15. Equity ETFs, Active Strategies & Portfolios for Volatile Markets
VINAY
NADKARNI
Managing Director, Head of Global Business Development
ClearBridge Investments