UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21128
Legg Mason Partners Variable Equity Trust
(Exact name of registrant as specified in charter)
55 Water Street, New York, NY 10041
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Legg Mason & Co., LLC
100 First Stamford Place, 4th Floor
Stamford, CT 06902
(Name and address of agent for service)
Registrant’s telephone number, including area code: (800) 451-2010
Date of fiscal year end: October 31
Date of reporting period: October 31, 2008
ITEM 1. REPORT TO STOCKHOLDERS.
The Annual Report to Stockholders is filed herewith.
ANNUAL REPORT / OCTOBER 31, 2008
Legg Mason Partners
Variable International All
Cap Opportunity Portfolio
Managed by GLOBAL CURRENTS
INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
Portfolio objective
The Portfolio seeks total return on its assets from growth of capital and income.
What’s inside
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| Letter from chairman | | I |
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| Portfolio overview | | 1 |
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| Portfolio at a glance | | 6 |
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| Portfolio expenses | | 7 |
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| Portfolio performance | | 9 |
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| Historical performance | | 10 |
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| Schedule of investments | | 11 |
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| Statement of assets and liabilities | | 15 |
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| Statement of operations | | 16 |
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| Statements of changes in net assets | | 17 |
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| Financial highlights | | 18 |
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| Notes to financial statements | | 19 |
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| Report of independent registered public accounting firm | | 29 |
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| Additional information | | 30 |
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| Important tax information | | 37 |
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Portfolio’s investment manager and Global Currents Investment Management, LLC (“Global Currents”) is the Portfolio’s subadviser. LMPFA and Global Currents are wholly-owned subsidiaries of Legg Mason, Inc.
Letter from the chairman
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
Dear Shareholder,
Economic growth in the U.S. was mixed during the 12-month reporting period ended October 31, 2008. Looking back, third quarter 2007 U.S. gross domestic product (“GDP”)i growth was a strong 4.8%. However, continued weakness in the housing market, an ongoing credit crunch and soaring oil and food prices then took their toll on the economy, as fourth quarter 2007 GDP declined 0.2%. The economy then expanded 0.9% and 2.8% during the first and second quarters of 2008, respectively. This rebound was due, in part, to rising exports that were buoyed by a weakening U.S. dollar, and solid consumer spending, which was aided by the government’s tax rebate program. The dollar’s rally and the end of the rebate program, combined with other strains on the economy, then caused GDP to take a step backward in the third quarter of 2008. According to the preliminary estimate released by the U.S. Department of Commerce, third quarter 2008 GDP declined 0.5%.
The latest Bureau of Economic Research release indicates that the U.S. is currently in recession. Evidence supporting this conclusion includes a slowdown in consumer spending, with four consecutive months of declining retail sales from July through October 2008. According to the Department of Commerce, October’s 2.8% fall in retail sales is the sharpest decline since it began tracking this data in 1992. In terms of the job market, the U.S. Department of Labor reported that payroll employment declined in each of the first 10 months of 2008. Year-to-date through October, roughly 1.2 million jobs have been shed and the unemployment rate now stands at 6.5%, its highest level since 1994.
Ongoing issues related to the housing and subprime mortgage markets and seizing credit markets prompted the Federal Reserve Board (“Fed”)ii to take aggressive and, in some cases, unprecedented actions. Beginning in September 2007, the Fed reduced the federal funds rateiii from 5.25% to 4.75%. This marked the first such reduction since June 2003. The Fed then reduced the federal funds rate on six additional occasions through April 2008, bringing the federal funds rate to 2.00%. The Fed then shifted gears in the face of mounting inflationary prices and a weakening U.S. dollar. At its meetings in June, August and September 2008, the Fed held rates
Legg Mason Partners Variable International All Cap Opportunity Portfolio 
I
Letter from the chairman continued
steady. Then, on October 8, 2008, in a global coordination effort with six central banks around the world, interest rates were cut in an attempt to reduce the strains in the global financial markets. At that time, the Fed lowered the federal funds rate from 2.00% to 1.50%. The Fed again cut rates from 1.50% to 1.00% at its regularly scheduled meeting on October 29, 2008. In conjunction with its October meeting, the Fed stated: “The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. ... Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.”
In addition to the interest rate cuts, the Fed took several actions to improve liquidity in the credit markets. In March 2008, the Fed established a new lending program allowing certain brokerage firms, known as primary dealers, to also borrow from its discount window. Also in March, the Fed played a major role in facilitating the purchase of Bear Stearns by JPMorgan Chase. In mid-September 2008, it announced an $85 billion rescue plan for ailing AIG and pumped $70 billion into the financial system as Lehman Brothers’ bankruptcy and mounting troubles at other financial firms roiled the markets.
The U.S. Department of the Treasury has also taken an active role in attempting to stabilize the financial system, as it orchestrated the government’s takeover of mortgage giants Fannie Mae and Freddie Mac in September. In addition, on October 3, 2008, the Treasury’s $700 billion Troubled Asset Relief Program (“TARP”) was approved by Congress and signed into law by President Bush. As part of TARP, the Treasury had planned to make a $250 billion capital injection into some of the nation’s largest banks. However, in November 2008 (after the reporting period ended), Treasury Secretary Paulson said the Treasury no longer intended to use TARP to purchase bad loans and other troubled financial assets.
The U.S. stock market was extremely volatile and generated poor results during the 12 months ended October 31, 2008. Stock prices declined during each of the first five months of the reporting period. This was due, in part, to the credit crunch, weakening corporate profits, rising inflation and fears of an impending recession. The market then reversed course and posted positive returns in April and May 2008. The market’s rebound was largely attributed to hopes that the U.S. would skirt a recession and that corporate profits would rebound as the year progressed. However, given the escalating credit crisis and the mounting turmoil in the financial markets, stock prices moved lower during four of the last five months of the period, including S&P 500 Indexiv declines of 8.91% and 16.79% in September and October, respectively. All told, the S&P 500 Index returned -36.10% during the 12-month reporting period ended October 31, 2008.
II Legg Mason Partners Variable International All Cap Opportunity Portfolio
As poorly as the U.S. stock market performed, the international equity markets were even worse. Fears of a deep and prolonged global recession and the fallout from the U.S. credit crisis dragged stock prices lower around the globe. During the 12-month period ended October 31, 2008, the MSCI EAFE Indexv returned -46.62%. As was the case in the U.S., international equities experienced periods of extreme volatility. This was especially true in September and October 2008, as the MSCI EAFE Index returned -14.46% and -20.18%, respectively, during those two months.
A special note regarding increased market volatility
In recent months, we have experienced a series of events that have impacted the financial markets and created concerns among both novice and seasoned investors alike. In particular, we have witnessed the failure and consolidation of several storied financial institutions, periods of heightened market volatility, and aggressive actions by the U.S. federal government to steady the financial markets and restore investor confidence. While we hope that the worst is over in terms of the issues surrounding the credit and housing crises, it is likely that the fallout will continue to impact the financial markets and the U.S. economy during the remainder of the year and into 2009 as well.
Like all asset management firms, Legg Mason has not been immune to these difficult and, in some ways, unprecedented times. However, today’s challenges have only strengthened our resolve to do everything we can to help you reach your financial goals. Now, as always, we remain committed to providing you with excellent service and a full spectrum of investment choices. And rest assured, we will continue to work hard to ensure that our investment managers make every effort to deliver strong long-term results.
We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our enhanced website, www.leggmason.com/individualinvestors. Here you can gain immediate access to many special features to help guide you through difficult times, including:
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| • | Market insights and commentaries from our portfolio managers and | |
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| • | A host of educational resources. | |
During periods of market unrest, it is especially important to work closely with your financial advisor and remember that reaching one’s investment goals unfolds over time and through multiple market cycles. Time and again, history has shown that, over the long run, the markets have eventually recovered and grown.
Legg Mason Partners Variable International All Cap Opportunity Portfolio III
Letter from the chairman continued
Information about your portfolio
As you may be aware, several issues in the mutual fund industry have come under the scrutiny of federal and state regulators. Affiliates of the Portfolio’s manager have, in recent years, received requests for information from various government regulators regarding market timing, late trading, fees, and other mutual fund issues in connection with various investigations. The regulators appear to be examining, among other things, the Portfolio’s response to market timing and shareholder exchange activity, including compliance with prospectus disclosure related to these subjects. The Portfolio is not in a position to predict the outcome of these requests and investigations.
Please read on for a more detailed look at prevailing economic and market conditions during the Portfolio’s reporting period and to learn how those conditions have affected Portfolio performance.
Important information with regard to recent regulatory developments that may affect the Portfolio is contained in the Notes to Financial Statements included in this report.
As always, thank you for your confidence in our stewardship of your assets. We look forward to helping you meet your financial goals.
Sincerely,
R. Jay Gerken, CFA
Chairman, President, and Chief Executive Officer
December 1, 2008
IV Legg Mason Partners Variable International All Cap Opportunity Portfolio
All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
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| i | | Gross domestic product (“GDP”) is the market value of all final goods and services produced within a country in a given period of time. |
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| ii | | 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. |
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| iii | | The federal funds rate is the rate charged by one depository institution on an overnight sale of immediately available funds (balances at the Federal Reserve) to another depository institution; the rate may vary from depository institution to depository institution and from day to day. |
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| iv | | The S&P 500 Index is an unmanaged index of 500 stocks and is generally representative of the performance of larger companies in the U.S. |
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| v | | The MSCI EAFE Index is a free float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. |
Legg Mason Partners Variable International All Cap Opportunity Portfolio V
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Portfolio overview
Q. What is the Portfolio’s investment strategy?
A. The Portfolio seeks total return on its assets from growth of capital and income. Under normal circumstances, the Portfolio invests primarily in a diversified portfolio of equity securities of foreign companies. The Portfolio may invest up to 20% of the value of its net assets in bonds, notes and debt securities. The investment team leverages an integrated global research approach that seeks stocks in companies that the team believes offer the best potential for capital appreciation. While the portfolio managers select investments primarily for their capital appreciation potential, some investments have an income component as well. The Portfolio may also invest in emerging markets on an opportunistic basis.
Q. What were the overall market conditions during the Portfolio’s reporting period?
A. During the reporting period, a time of extreme volatility and market turmoil, international equity markets suffered significant losses. Unprecedented events roiled capital markets and left investors with nowhere to hide. The international equity markets, as measured by the MSCI EAFE Indexi, posted a decline of 46.62% during the 12 months ended October 31, 2008.
During the fiscal year, both domestically and internationally, markets were dominated by a “supercycle” theme characterized by price momentum that drove stock prices in a way that was not supported by fundamentals. Many commodity and cyclical stocks traded at price/book and margin levels not seen in 50 years. Historically, these bubbles run their course and eventually have to be deflated. From the fourth quarter of 2007 through the second quarter of 2008, growth stocks outperformed value stocks by a significant margin. During the summer of 2008, the tide finally turned and began favoring value stocks as momentum investing and commodities began to buckle. On a macro level, 2008 can be characterized by weakening economic growth, global recession and a credit crisis that froze many capital markets across the globe. The crisis started with a boom and bust in real estate, which stemmed from relaxed lending policies, unchecked leverage and questionable valuations of unregulated securities. These troubling factors converged and essentially impaired the state of the U.S. financial infrastructure, ultimately spreading fear and instability worldwide.
Q. How did we respond to these changing market conditions?
A. Given its contrarian value approach, the portfolio was positioned in accordance with its fundamental stock-selection process and we refined the holdings to assemble a “portfolio for all seasons.” During the reporting period, earnings expectations were unrealistically high in many sectors and we anticipated an overall trend of downward revisions. Accordingly, the portfolio was positioned to avoid cyclical companies that trade at high
Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report 1
Portfolio overview continued
multiples and high expectations. In the third quarter of 2008, cyclical and momentum stocks suffered as earnings multiples contracted and the Portfolio benefited by avoiding these types of companies. As the credit crisis unfolded, the portfolio was also positioned defensively to avoid purchasing stocks of companies with an imbalance of risk and reward, such as many of the financial companies that ultimately failed. In short, as market volatility increased, the Portfolio’s composition was tailored to invest in those companies that reflected, what we believed to be, low valuation factors and strong balance sheets, and were high-quality franchises in the marketplace.
Performance review
For the 12 months ended October 31, 2008, Legg Mason Partners Variable International All Cap Opportunity Portfolio1 returned -46.09%. The Portfolio’s unmanaged benchmark, the MSCI EAFE Index, returned -46.62% over the same time frame. The Lipper Variable International Value Funds Category Average2 returned -46.86% for the same period.
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| | PERFORMANCE SNAPSHOT as of October 31, 2008 (unaudited) |
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| | | 6 MONTHS | | 12 MONTHS |
Variable International All Cap Opportunity Portfolio1 | | | -39.50% | | | | -46.09% | |
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| MSCI EAFE Index | | | -41.21% | | | | -46.62% | |
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Lipper Variable International Value Funds Category Average2 | | | -40.89% | | | | -46.86% | |
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The performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown above. Principal value and investment returns will fluctuate and investors’ shares, when redeemed, may be worth more or less than their original cost.
Portfolio returns assume the reinvestment of all distributions, including returns of capital, if any, at net asset value and the deduction of all Portfolio expenses.
Performance figures reflect expense reimbursements and/or fee waivers, without which the performance would have been lower.
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| | TOTAL ANNUAL OPERATING EXPENSES (unaudited) |
As of the Portfolio’s most current prospectus dated February 28, 2008, as supplemented June 6, 2008, the gross total operating expense ratio was 1.11%.
1 The Portfolio is an underlying investment option of various variable annuity and variable life insurance products. The Portfolio’s performance returns do not reflect the deduction of expenses imposed in connection with investing in variable annuity or variable life insurance contracts, such as administrative fees, account charges and surrender charges, which, if reflected, would reduce the performance of the Portfolio. Past performance is no guarantee of future results.
2 Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the period ended October 31, 2008, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 67 funds for the six-month period and among the 61 funds for the 12-month period in the Portfolio’s Lipper category.
2 Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report
Q. What were the leading contributors to performance?
A. Relative to the Fund’s benchmark, stock selection in the Industrials, Information Technology (“IT”), Materials and Telecommunication Services sectors significantly enhanced the Portfolio’s results during the reporting period. An overweight to the IT sector and an underweight to the Materials sector also contributed positively to relative performance. On a country basis, the Portfolio benefited through stock selection in Australia, Switzerland, the Netherlands and France. Over the reporting period, individual stocks that made a significant positive contribution to performance included Vedior NV in the Industrials sector, Konami Corp. in the IT sector and Lonza Group AG in the Health Care sector.
Q. What were the leading detractors from performance?
A. During the reporting period, stock selection in the Consumer Discretionary, Consumer Staples, Energy and Financials sectors negatively impacted performance, as did an underweight to the Utilities and Financials sectors and an overweight to the Consumer Staples sector. On a country basis, the Portfolio’s performance declined through stock selection in Italy, Japan and the United Kingdom. Individual holdings that had a negative impact on Portfolio performance during the period included British Sky Broadcasting Group PLC in the Consumer Discretionary sector, Cadbury PLC in the Consumer Staples sector and Barclays PLC and Cheung Kong Holdings Ltd., both in the Financials sector.
Q. Were there any significant changes to the Portfolio during the reporting period?
A. There were no significant changes to the Portfolio during the reporting period.
Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report 3
Portfolio overview continued
Thank you for your investment in Legg Mason Partners Variable International All Cap Opportunity Portfolio. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Portfolio’s investment goals.
Sincerely,
Paul D. Ehrlichman
Global Equities
Chief Investment Officer and Portfolio Manager
Global Currents Investment Management, LLC
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Sean M. Bogda, CFA
Portfolio Manager
Global Currents
Investment Management, LLC | | Safa R. Muhtaseb, CFA
Portfolio Manager
Global Currents
Investment Management, LLC |
November 18, 2008
4 Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report
The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.
Portfolio holdings and breakdowns are as of October 31, 2008 and are subject to change and may not be representative of the portfolio managers’ current or future investments. The Portfolio’s top 10 holdings (as a percentage of net assets) as of this date were: Sanofi-Aventis (3.4%), William Morrison Supermarkets PLC (2.9%), Novartis AG, Registered Shares (2.8%), Unilever NV, CVA (2.7%), Total SA (2.5%), France Telecom SA (2.3%), Henkel AG & Co. KGaA (2.3%), Rhoen-Klinikum AG (2.2%), Cheung Kong Holdings Ltd. (2.2%) and Deutsche Telekom AG, Registered Shares (2.1%). Please refer to pages 11 through 14 for a list and percentage breakdown of the Portfolio’s holdings.
The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. The Portfolio’s top five sector holdings (as a percentage of net assets) as of October 31, 2008 were: Financials (20.0%), Health Care (16.9%), Consumer Staples (13.8%), Industrials (10.3%) and Information Technology (8.6%). The Portfolio’s composition is subject to change at any time.
RISKS: Keep in mind, the Portfolio is subject to certain risks of overseas investing not associated with domestic investing, including currency fluctuations, changes in political and economic conditions, differing securities regulations and periods of illiquidity, which could result in significant market fluctuations. These risks are magnified in emerging markets. Please see the Portfolio’s prospectus for more information on these and other risks.
All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
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| i | | The MSCI EAFE Index is a free float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. |
Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report 5
Portfolio at a glance (unaudited)
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| | INVESTMENT BREAKDOWN (%) As a percent of total investments — October 31, 2008 |
6 Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report
Portfolio expenses (unaudited)
Example
As a shareholder of the Portfolio, you may incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Portfolio expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds.
This example is based on an investment of $1,000 invested on May 1, 2008 and held for the six months ended October 31, 2008.
Actual Expenses
The table below titled “Based on Actual Total Return” provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled “Expenses Paid During the Period”.
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| | BASED ON ACTUAL TOTAL RETURN1 |
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| | | BEGINNING
| | ENDING
| | ANNUALIZED
| | EXPENSES
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ACTUAL TOTAL
| | ACCOUNT
| | ACCOUNT
| | EXPENSE
| | PAID DURING
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| RETURN2 | | VALUE | | VALUE | | RATIO | | THE PERIOD3 |
| | (39.50 | )% | | $ | 1,000.00 | | | $ | 605.00 | | | | 1.15% | | | $ | 4.64 | |
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| 1 | | For the six months ended October 31, 2008 |
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| 2 | | Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value. Total return is not annualized, as it may not be representative of the total return for the year. Total returns do not reflect expenses associated with the separate account such as administrative fees, account charges and surrender charges which, if reflected, would reduce the total returns. Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. |
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| 3 | | Expenses (net of fee waivers and/or expense reimbursements) are equal to the Portfolio’s annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 366. |
Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report 7
Portfolio expenses (unaudited) (continued)
Hypothetical example for comparison purposes
The table below titled “Based on Hypothetical Total Return” provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not the Portfolio’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information provided in this table to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare the 5.00% hypothetical example relating to the Portfolio with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table below are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
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| | BASED ON HYPOTHETICAL TOTAL RETURN1 |
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HYPOTHETICAL
| | BEGINNING
| | ENDING
| | ANNUALIZED
| | EXPENSES
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ANNUALIZED
| | ACCOUNT
| | ACCOUNT
| | EXPENSE
| | PAID DURING
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| TOTAL RETURN | | VALUE | | VALUE | | RATIO | | THE PERIOD2 |
| | 5.00% | | | $ | 1,000.00 | | | $ | 1,019.36 | | | | 1.15% | | | $ | 5.84 | |
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| 1 | | For the six months ended October 31,2008 |
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| 2 | | Expenses (net of fee waivers and/or expense reimbursements) are equal to the Portfolio’s annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 366. |
8 Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report
Portfolio performance (unaudited)
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| | AVERAGE ANNUAL TOTAL RETURNS1 |
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| Twelve Months Ended 10/31/08 | | | (46.09 | )% | | |
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| Five Years Ended 10/31/08 | | | 1.41 | | | |
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| Ten Years Ended 10/31/08 | | | (0.97 | ) | | |
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| 10/31/98 through 10/31/08 | | | (9.28 | )% | | |
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| 1 | | Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value. All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect expenses associated with the separate account such as administrative fees, account charges and surrender charges which, if reflected, would reduce the total returns. Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. |
Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report 9
Historical performance (unaudited)
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| | VALUE OF $10,000 INVESTED IN LEGG MASON PARTNERS VARIABLE INTERNATIONAL ALL CAP OPPORTUNITY PORTFOLIO VS. MSCI EAFE INDEX† — October 1998 - October 2008 |
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| † | | Hypothetical illustration of $10,000 invested in Legg Mason Partners Variable International All Cap Opportunity Portfolio on October 31, 1998, assuming the reinvestment of all distributions, including returns of capital, if any, at net asset value through October 31, 2008. The MSCI EAFE Index is a free float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. The Index is unmanaged and is not subject to the same management and trading expenses as a mutual fund. Please note that an investor cannot invest directly in an index. |
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| | All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect expenses associated with the separate account such as administrative fees, account charges and surrender charges which, if reflected, would reduce the total returns. Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. |
10 Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report
Schedule of investments
October 31, 2008
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| | LEGG MASON PARTNERS VARIABLE INTERNATIONAL ALL CAP OPPORTUNITY PORTFOLIO |
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| SHARES | | | SECURITY | | VALUE | |
| COMMON STOCKS — 94.6% |
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| | | | | Australia — 3.0% | | | | |
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| | 211,000 | | | Foster’s Group Ltd.(a) | | $ | 804,190 | |
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| | 532,300 | | | Telstra Corp., Ltd.(a) | | | 1,461,177 | |
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| | | | | Total Australia | | | 2,265,367 | |
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| | | | | Belgium — 1.0% | | | | |
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| | 18,400 | | | InBev NV(a) | | | 740,656 | |
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| | | | | Bermuda — 1.6% | | | | |
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| | 60,834 | | | BW GAS Ltd.(a)* | | | 130,147 | |
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| | 109,900 | | | Cosan Ltd., Class A Shares* | | | 294,532 | |
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| | 76,163 | | | Signet Jewelers Ltd. | | | 775,339 | |
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| | | | | Total Bermuda | | | 1,200,018 | |
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| | | | | Canada — 4.0% | | | | |
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| | 169,300 | | | Bombardier Inc., Class B Shares | | | 656,037 | |
| | | | | | | | | |
| | 25,000 | | | EnCana Corp. | | | 1,275,625 | |
| | | | | | | | | |
| | 25,300 | | | Ensign Energy Services Inc. | | | 327,003 | |
| | | | | | | | | |
| | 22,700 | | | Magna International Inc., Class A Shares | | | 767,487 | |
| | | | | | | | | |
| | | | | Total Canada | | | 3,026,152 | |
| | | | | | | | | |
| | | | | China — 0.6% | | | | |
| | | | | | | | | |
| | 16,200 | | | LDK Solar Co., Ltd., ADR* | | | 294,192 | |
| | | | | | | | | |
| | 16,800 | | | Trina Solar Ltd., ADR* | | | 176,232 | |
| | | | | | | | | |
| | | | | Total China | | | 470,424 | |
| | | | | | | | | |
| | | | | France — 15.9% | | | | |
| | | | | | | | | |
| | 40,000 | | | Axa(a) | | | 769,573 | |
| | | | | | | | | |
| | 19,700 | | | BNP Paribas SA(a) | | | 1,427,755 | |
| | | | | | | | | |
| | 63,800 | | | European Aeronautic Defence & Space Co.(a) | | | 1,060,199 | |
| | | | | | | | | |
| | 70,500 | | | France Telecom SA(a) | | | 1,776,179 | |
| | | | | | | | | |
| | 11,586 | | | Neopost SA(a) | | | 967,777 | |
| | | | | | | | | |
| | 17,800 | | | Publicis Groupe(a) | | | 400,382 | |
| | | | | | | | | |
| | 40,600 | | | Sanofi-Aventis(a) | | | 2,551,351 | |
| | | | | | | | | |
| | 13,200 | | | Societe Generale(a) | | | 723,612 | |
| | | | | | | | | |
| | 16,500 | | | Technip SA(a) | | | 492,533 | |
| | | | | | | | | |
| | 34,000 | | | Total SA(a) | | | 1,864,438 | |
| | | | | | | | | |
| | | | | Total France | | | 12,033,799 | |
| | | | | | | | | |
| | | | | Germany — 15.6% | | | | |
| | 2,700 | | | Allianz AG | | | 200,933 | |
| | | | | | | | | |
| | 30,300 | | | Bayerische Motoren Werke AG(a) | | | 783,063 | |
| | | | | | | | | |
| | 9,607 | | | Deutsche Boerse AG(a) | | | 765,879 | |
| | | | | | | | | |
See Notes to Financial Statements.
Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report 11
Schedule of investments continued
October 31, 2008
| |
| | LEGG MASON PARTNERS VARIABLE INTERNATIONAL ALL CAP OPPORTUNITY PORTFOLIO |
| | | | | | | | | |
| SHARES | | | SECURITY | | VALUE | |
| | | | | Germany — 15.6% (continued) | | | | |
| | | | | | | | | |
| | 108,500 | | | Deutsche Telekom AG, Registered Shares(a) | | $ | 1,612,372 | |
| | | | | | | | | |
| | 30,200 | | | Fresenius Medical Care AG & Co.(a) | | | 1,353,048 | |
| | | | | | | | | |
| | 245,500 | | | Infineon Technologies AG(a)* | | | 776,610 | |
| | | | | | | | | |
| | 17,100 | | | Linde AG(a) | | | 1,413,558 | |
| | | | | | | | | |
| | 31,300 | | | MTU Aero Engines Holding AG(a) | | | 612,987 | |
| | | | | | | | | |
| | 80,000 | | | Rhoen-Klinikum AG(a) | | | 1,703,071 | |
| | | | | | | | | |
| | 12,500 | | | Siemens AG, Registered Shares(a) | | | 746,662 | |
| | | | | | | | | |
| | 25,100 | | | Stada Arzneimittel AG(a) | | | 773,058 | |
| | | | | | | | | |
| | 89,300 | | | Symrise AG(a) | | | 1,103,109 | |
| | | | | | | | | |
| | | | | Total Germany | | | 11,844,350 | |
| | | | | Hong Kong — 4.0% | | | | |
| | | | | | | | | |
| | 169,000 | | | Cheung Kong Holdings Ltd.(a) | | | 1,645,674 | |
| | | | | | | | | |
| | 58,000 | | | Jardine Matheson Holdings Ltd.(a) | | | 1,374,525 | |
| | | | | | | | | |
| | | | | Total Hong Kong | | | 3,020,199 | |
| | | | | | | | | |
| | | | | Ireland — 1.6% | | | | |
| | | | | | | | | |
| | 53,600 | | | Ryanair Holdings PLC, ADR* | | | 1,193,672 | |
| | | | | | | | | |
| | | | | Israel — 1.6% | | | | |
| | | | | | | | | |
| | 27,800 | | | Teva Pharmaceutical Industries Ltd., ADR | | | 1,192,064 | |
| | | | | | | | | |
| | | | | Italy — 1.3% | | | | |
| | | | | | | | | |
| | 423,200 | | | UniCredito Italiano SpA(a) | | | 1,032,823 | |
| | | | | | | | | |
| | | | | Japan — 9.2% | | | | |
| | | | | | | | | |
| | 292 | | | Mizuho Financial Group Inc.(a) | | | 701,121 | |
| | | | | | | | | |
| | 22,500 | | | Nidec Corp.(a) | | | 1,160,700 | |
| | | | | | | | | |
| | 5,752 | | | SBI Holdings Inc.(a) | | | 686,278 | |
| | | | | | | | | |
| | 32,500 | | | Secom Co., Ltd.(a) | | | 1,261,234 | |
| | | | | | | | | |
| | 320 | | | Sumitomo Mitsui Financial Group Inc.(a) | | | 1,302,471 | |
| | | | | | | | | |
| | 62,200 | | | Sundrug Co., Ltd.(a) | | | 1,132,688 | |
| | | | | | | | | |
| | 13,080 | | | Yamada Denki Co., Ltd.(a) | | | 710,605 | |
| | | | | | | | | |
| | | | | Total Japan | | | 6,955,097 | |
| | | | | | | | | |
| | | | | Jersey — 1.1% | | | | |
| | | | | | | | | |
| | 157,200 | | | Experian PLC(a) | | | 867,969 | |
| | | | | | | | | |
| | | | | Netherlands — 5.1% | | | | |
| | | | | | | | | |
| | 84,570 | | | Aegon NV(a) | | | 345,922 | |
| | | | | | | | | |
| | 52,378 | | | Royal Dutch Shell PLC, Class A Shares | | | 1,440,994 | |
| | | | | | | | | |
| | 86,300 | | | Unilever NV, CVA(a) | | | 2,077,158 | |
| | | | | | | | | |
| | | | | Total Netherlands | | | 3,864,074 | |
| | | | | | | | | |
See Notes to Financial Statements.
12 Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report
| |
| | LEGG MASON PARTNERS VARIABLE INTERNATIONAL ALL CAP OPPORTUNITY PORTFOLIO |
| | | | | | | | | |
| SHARES | | | SECURITY | | VALUE | |
| | | | | Spain — 0.6% | | | | |
| | | | | | | | | |
| | 34,500 | | | Acerinox SA(a) | | $ | 436,134 | |
| | | | | | | | | |
| | | | | Switzerland — 10.3% | | | | |
| | | | | | | | | |
| | 33,700 | | | Credit Suisse Group AG, Registered Shares(a) | | | 1,284,496 | |
| | | | | | | | | |
| | 43,028 | | | Nobel Biocare Holding AG, Registered Shares(a) | | | 739,476 | |
| | | | | | | | | |
| | 41,400 | | | Novartis AG, Registered Shares(a) | | | 2,091,574 | |
| | | | | | | | | |
| | 7,853 | | | Roche Holding AG(a) | | | 1,200,421 | |
| | | | | | | | | |
| | 9,084 | | | Synthes Inc.,(a) | | | 1,171,321 | |
| | | | | | | | | |
| | 78,638 | | | UBS AG, Registered Shares(a)* | | | 1,340,025 | |
| | | | | | | | | |
| | | | | Total Switzerland | | | 7,827,313 | |
| | | | | | | | | |
| | | | | Taiwan — 2.2% | | | | |
| | | | | | | | | |
| | 147,405 | | | Advanced Semiconductor Engineering Inc., ADR | | | 319,869 | |
| | | | | | | | | |
| | 150,148 | | | Siliconware Precision Industries Co., ADR | | | 846,835 | |
| | | | | | | | | |
| | 221,087 | | | United Microelectronics Corp., ADR | | | 541,663 | |
| | | | | | | | | |
| | | | | Total Taiwan | | | 1,708,367 | |
| | | | | | | | | |
| | | | | United Kingdom — 15.9% | | | | |
| | | | | | | | | |
| | 62,200 | | | Amdocs Ltd.* | | | 1,403,232 | |
| | | | | | | | | |
| | 493,015 | | | Barclays PLC(a) | | | 1,457,006 | |
| | | | | | | | | |
| | 180,500 | | | British Sky Broadcasting Group PLC(a) | | | 1,104,400 | |
| | | | | | | | | |
| | 166,720 | | | Cadbury PLC(a) | | | 1,537,382 | |
| | | | | | | | | |
| | 236,600 | | | Enterprise Inns PLC(a) | | | 371,098 | |
| | | | | | | | | |
| | 119,000 | | | HSBC Holdings PLC(a) | | | 1,441,387 | |
| | | | | | | | | |
| | 255,600 | | | International Power PLC(a) | | | 918,094 | |
| | | | | | | | | |
| | 149,300 | | | Punch Taverns PLC(a) | | | 382,043 | |
| | | | | | | | | |
| | 642,250 | | | Vodafone Group PLC(a) | | | 1,241,385 | |
| | | | | | | | | |
| | 506,747 | | | William Morrison Supermarkets PLC(a) | | | 2,172,644 | |
| | | | | | | | | |
| | | | | Total United Kingdom | | | 12,028,671 | |
| | | | | | | | | |
| | | | | TOTAL COMMON STOCKS (Cost — $117,471,935) | | | 71,707,149 | |
| | | | | | | | | |
| PREFERRED STOCK — 2.2% |
| | | | | | | | | |
| | | | | Germany — 2.2% | | | | |
| | | | | | | | | |
| | 59,300 | | | Henkel AG & Co. KGaA(a)
(Cost — $3,236,678) | | | 1,713,530 | |
| | | | | | | | | |
| RIGHTS — 0.0% |
| | | | | | | | | |
| | | | | Netherlands — 0.0% | | | | |
| | | | | | | | | |
| | 47,500 | | | Fortis Bank NV/SA(a)(b)*
(Cost — $0) | | | 0 | |
| | | | | | | | | |
| | | | | TOTAL INVESTMENTS BEFORE SHORT-TERM INVESTMENT
(Cost — $120,708,613) | | | 73,420,679 | |
| | | | | | | | | |
See Notes to Financial Statements.
Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report 13
Schedule of investments continued
October 31, 2008
| |
| | LEGG MASON PARTNERS VARIABLE INTERNATIONAL ALL CAP OPPORTUNITY PORTFOLIO |
| | | | | | | | | |
FACE
| | | | | | |
| AMOUNT | | | SECURITY | | VALUE | |
| SHORT-TERM INVESTMENT — 6.9% |
| | | | | | | | | |
| | | | | Repurchase Agreement — 6.9% | | | | |
| | | | | | | | | |
| $ | 5,213,000 | | | State Street Bank & Trust Co. repurchase agreement, dated 10/31/08, 0.010% due 11/3/08; Proceeds due at maturity — $5,213,004; (Fully collateralized by U.S. Treasury Bill, 0.000%
due 11/28/08; Market value — $5,319,468)
(Cost — $5,213,000) | | $ | 5,213,000 | |
| | | | | | | | | |
| | | | | TOTAL INVESTMENTS — 103.7% (Cost — $125,921,613#) | | | 78,633,679 | |
| | | | | | | | | |
| | | | | Liabilities in Excess of Other Assets — (3.7)% | | | (2,834,851 | ) |
| | | | | | | | | |
| | | | | TOTAL NET ASSETS — 100.0% | | $ | 75,798,828 | |
| | | | | | | | | |
| | |
| * | | Non-income producing security. |
| |
| (a) | | Security is valued in good faith at fair value by or under the direction of the Board of Trustees (See Note 1). |
| |
| (b) | | Illiquid security. |
| |
| # | | Aggregate cost for federal income tax purposes is $125,943,442. |
| |
| | Abbreviations used in this schedule: |
| |
| | ADR — American Depositary Receipt |
| |
| | CVA — Certificaaten van aandelen (Share Certificates) |
| |
| | SUMMARY OF INVESTMENTS BY SECTOR† |
| | | | | |
| Financials | | | 19.2 | % |
| | | | | |
| Health care | | | 16.3 | |
| | | | | |
| Consumer staples | | | 13.3 | |
| | | | | |
| Industrials | | | 9.9 | |
| | | | | |
| Information technology | | | 8.3 | |
| | | | | |
| Telecommunication services | | | 7.7 | |
| | | | | |
| Energy | | | 7.0 | |
| | | | | |
| Consumer discretionary | | | 6.7 | |
| | | | | |
| Materials | | | 3.8 | |
| | | | | |
| Utilities | | | 1.2 | |
| | | | | |
| Short-term investment | | | 6.6 | |
| | | | | |
| | | | 100.0 | % |
| | | | | |
| | |
| † | | As a percentage of total investments. Please note that Portfolio holdings are as of October 31, 2008 and are subject to change. |
See Notes to Financial Statements.
14 Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report
Statement of assets and liabilities
October 31, 2008
| | | | | |
| ASSETS: | | | | |
| | | | | |
| Investments, at value (Cost — $125,921,613) | | $ | 78,633,679 | |
| | | | | |
| Foreign currency, at value (Cost — $32,314) | | | 30,817 | |
| | | | | |
| Cash | | | 985 | |
| | | | | |
| Receivable for securities sold | | | 247,577 | |
| | | | | |
| Dividends and interest receivable | | | 238,757 | |
| | | | | |
| Prepaid expenses | | | 3,059 | |
| | | | | |
Total Assets | | | 79,154,874 | |
| | | | | |
| LIABILITIES: | | | | |
| | | | | |
| Payable for securities purchased | | | 3,099,226 | |
| | | | | |
| Investment management fee payable | | | 58,545 | |
| | | | | |
| Payable for Portfolio shares repurchased | | | 51,605 | |
| | | | | |
| Trustees’ fees payable | | | 1,819 | |
| | | | | |
| Accrued expenses | | | 144,851 | |
| | | | | |
Total Liabilities | | | 3,356,046 | |
| | | | | |
| TOTAL NET ASSETS | | $ | 75,798,828 | |
| | | | | |
| NET ASSETS: | | | | |
| | | | | |
| Par value (Note 4) | | $ | 149 | |
| | | | | |
| Paid-in capital in excess of par value | | | 156,894,325 | |
| | | | | |
| Undistributed net investment income | | | 1,705,098 | |
| | | | | |
| Accumulated net realized loss on investments and foreign currency transactions | | | (35,510,841 | )1 |
| | | | | |
| Net unrealized depreciation on investments and foreign currencies | | | (47,289,903 | ) |
| | | | | |
| TOTAL NET ASSETS | | $ | 75,798,828 | |
| | | | | |
Shares Outstanding | | | 14,938,714 | |
| | | | | |
Net Asset Value | | | $5.07 | |
| | | | | |
| | |
| 1 | | Net of foreign capital gains tax of $149. |
See Notes to Financial Statements.
Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report 15
Statement of operations
For the Year Ended October 31, 2008
| | | | | |
| INVESTMENT INCOME: | | | | |
| | | | | |
| Dividends | | $ | 3,564,972 | |
| | | | | |
| Interest | | | 64,082 | |
| | | | | |
| Less: Foreign taxes withheld | | | (339,841 | ) |
| | | | | |
Total Investment Income | | | 3,289,213 | |
| | | | | |
| EXPENSES: | | | | |
| | | | | |
| Investment management fee (Note 2) | | | 1,104,969 | |
| | | | | |
| Shareholder reports | | | 213,377 | |
| | | | | |
| Custody fees | | | 60,510 | |
| | | | | |
| Legal fees | | | 33,384 | |
| | | | | |
| Audit and tax | | | 31,774 | |
| | | | | |
| Trustees’ fees | | | 7,997 | |
| | | | | |
| Insurance | | | 3,286 | |
| | | | | |
| Transfer agent fees | | | 479 | |
| | | | | |
| Miscellaneous expenses | | | 4,133 | |
| | | | | |
Total Expenses | | | 1,459,909 | |
| | | | | |
Less: Fee waivers and/or expense reimbursements (Note 2) | | | (588 | ) |
| | | | | |
Net Expenses | | | 1,459,321 | |
| | | | | |
| NET INVESTMENT INCOME | | | 1,829,892 | |
| | | | | |
REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS (NOTES 1 AND 3): | | | | |
| | | | | |
| Net Realized Loss From: | | | | |
| | | | | |
| Investment transactions | | | (7,857,348 | )1 |
| | | | | |
| Foreign currency transactions | | | (110,855 | ) |
| | | | | |
Net Realized Loss | | | (7,968,203 | ) |
| | | | | |
| Change in Net Unrealized Appreciation/Depreciation From: | | | | |
| | | | | |
| Investments | | | (63,416,703 | )2 |
| | | | | |
| Foreign currencies | | | (12,018 | ) |
| | | | | |
Change in Net Unrealized Appreciation/Depreciation | | | (63,428,721 | ) |
| | | | | |
| NET LOSS ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS | | | (71,396,924 | ) |
| | | | | |
| DECREASE IN NET ASSETS FROM OPERATIONS | | $ | (69,567,032 | ) |
| | | | | |
| | |
| 1 | | Net of foreign capital gains tax of $149. |
| |
| 2 | | Net of decrease of $17,131 in deferred foreign capital gains tax. |
See Notes to Financial Statements.
16 Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report
Statements of changes in net assets
| | | | | | | | | |
| FOR THE YEARS ENDED OCTOBER 31, | | 2008 | | | 2007 | |
| OPERATIONS: | | | | | | | | |
| | | | | | | | | |
| Net investment income | | $ | 1,829,892 | | | $ | 2,277,433 | |
| | | | | | | | | |
| Net realized gain (loss) | | | (7,968,203 | ) | | | 87,278,975 | |
| | | | | | | | | |
| Change in net unrealized appreciation/depreciation | | | (63,428,721 | ) | | | (58,521,211 | ) |
| | | | | | | | | |
Increase (Decrease) in Net Assets From Operations | | | (69,567,032 | ) | | | 31,035,197 | |
| | | | | | | | | |
| DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 1): | | | | | | | | |
| | | | | | | | | |
| Net investment income | | | (1,500,002 | ) | | | (3,500,004 | ) |
| | | | | | | | | |
| Net realized gains | | | (78,540,689 | ) | | | (3,577,244 | ) |
| | | | | | | | | |
Decrease in Net Assets From Distributions to Shareholders | | | (80,040,691 | ) | | | (7,077,248 | ) |
| | | | | | | | | |
| PORTFOLIO SHARE TRANSACTIONS (NOTE 4): | | | | | | | | |
| | | | | | | | | |
| Net proceeds from sale of shares | | | 907,657 | | | | 5,271,937 | |
| | | | | | | | | |
| Reinvestment of distributions | | | 80,040,359 | | | | 7,077,248 | |
| | | | | | | | | |
| Cost of shares repurchased | | | (24,918,598 | ) | | | (36,694,422 | ) |
| | | | | | | | | |
Increase (Decrease) in Net Assets From Portfolio Share Transactions | | | 56,029,418 | | | | (24,345,237 | ) |
| | | | | | | | | |
| DECREASE IN NET ASSETS | | | (93,578,305 | ) | | | (387,288 | ) |
| | | | | | | | | |
| NET ASSETS: | | | | | | | | |
| | | | | | | | | |
| Beginning of year | | | 169,377,133 | | | | 169,764,421 | |
| | | | | | | | | |
| End of year* | | $ | 75,798,828 | | | $ | 169,377,133 | |
| | | | | | | | | |
| * Includes undistributed net investment income of: | | | $1,705,098 | | | | $1,465,349 | |
| | | | | | | | | |
See Notes to Financial Statements.
Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report 17
Financial highlights
| |
| | FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31: |
| | | | | | | | | | | | | | | | | | | | | |
| | | 20081 | | | 20071 | | | 20062 | | | 20052 | | | 20041,2 | |
NET ASSET VALUE,
BEGINNING OF YEAR | | | $19.31 | | | $ | 16.79 | | | | $13.56 | | | | $11.77 | | | | $10.43 | |
| | | | | | | | | | | | | | | | | | | | | |
| INCOME (LOSS) FROM OPERATIONS: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | 0.12 | | | | 0.24 | | | | 0.17 | | | | 0.13 | | | | 0.07 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net realized and unrealized gain (loss) | | | (5.02 | ) | | | 2.99 | | | | 3.25 | | | | 1.77 | | | | 1.37 | |
| | | | | | | | | | | | | | | | | | | | | |
Total income (loss) from operations | | | (4.90 | ) | | | 3.23 | | | | 3.42 | | | | 1.90 | | | | 1.44 | |
| | | | | | | | | | | | | | | | | | | | | |
| LESS DISTRIBUTIONS FROM: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | (0.17 | ) | | | (0.35 | ) | | | (0.19 | ) | | | (0.11 | ) | | | (0.10 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net realized gains | | | (9.17 | ) | | | (0.36 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Total distributions | | | (9.34 | ) | | | (0.71 | ) | | | (0.19 | ) | | | (0.11 | ) | | | (0.10 | ) |
| | | | | | | | | | | | | | | | | | | | | |
NET ASSET VALUE,
END OF YEAR | | | $5.07 | | | $ | 19.31 | | | | $16.79 | | | | $13.56 | | | | $11.77 | |
| | | | | | | | | | | | | | | | | | | | | |
Total return3 | | | (46.09 | )% | | | 19.78 | % | | | 25.46 | % | | | 16.21 | % | | | 13.90 | % |
| | | | | | | | | | | | | | | | | | | | | |
NET ASSETS,
END OF YEAR (MILLIONS) | | | $76 | | | $ | 169 | | | | $170 | | | | $160 | | | | $160 | |
| | | | | | | | | | | | | | | | | | | | | |
| RATIOS TO AVERAGE NET ASSETS: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Gross expenses | | | 1.12 | % | | | 1.00 | %4 | | | 0.96 | % | | | 1.00 | % | | | 1.01 | % |
| | | | | | | | | | | | | | | | | | | | | |
Net expenses5 | | | 1.12 | 6 | | | 1.00 | 4,6 | | | 0.96 | 6 | | | 1.00 | | | | 1.01 | 6 |
| | | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | 1.41 | | | | 1.32 | | | | 1.03 | | | | 0.98 | | | | 0.67 | |
| | | | | | | | | | | | | | | | | | | | | |
| PORTFOLIO TURNOVER RATE | | | 63 | % | | | 101 | % | | | 8 | % | | | 16 | % | | | 21 | % |
| | | | | | | | | | | | | | | | | | | | | |
| | |
| 1 | | Per share amounts have been calculated using the average shares method. |
| |
| 2 | | Represents a share of capital stock outstanding prior to April 30, 2007. |
| |
| 3 | | Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. Total returns do not reflect expenses associated with the separate accounts such as administrative fees, account charges and surrender charges which, if reflected, would reduce the total return for all periods shown. Past performance is no guarantee of future results. |
| |
| 4 | | Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Portfolio during the period. Without these fees, the gross and net expense ratios would have been 0.99% and 0.98%, respectively. |
| |
| 5 | | As a result of a voluntary expense limitation, the ratio of expenses, other than interest, brokerage, taxes and extraordinary expenses, to average net assets of the Portfolio will not exceed 1.50%. |
| |
| 6 | | Reflects fee waivers and/or expense reimbursements. |
See Notes to Financial Statements.
18 Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report
Notes to financial statements
| |
| 1. | Organization and significant accounting policies |
Legg Mason Partners Variable International All Cap Opportunity Portfolio (the “Portfolio”) is a separate diversified investment series of Legg Mason Partners Variable Equity Trust (the “Trust”). The Trust, a Maryland business trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company.
Shares of the Portfolio may only be purchased or redeemed through variable annuity contracts and variable life insurance policies offered by the separate accounts of participating insurance companies or through eligible pension or other qualified plans.
The following are significant accounting policies consistently followed by the Portfolio and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.
(a) Investment valuation. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the primary market or exchange on which they trade. Debt securities are valued at the mean between the last quoted bid and asked prices provided by an independent pricing service that are based on transactions in debt obligations, quotations from bond dealers, market transactions in comparable securities and various other relationships between securities. When prices are not readily available, or are determined not to reflect fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Portfolio calculates its net asset value, the Portfolio may value these securities at fair value as determined in accordance with the procedures approved by the Portfolio’s Board of Trustees. Fair valuing of securities may also be determined with the assistance of a pricing service using calculations based on indices of domestic securities and other appropriate indicators, such as prices of relevant American depository receipts (ADRs) and futures contracts. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates fair value.
(b) Repurchase agreements. When entering into repurchase agreements, it is the Portfolio’s policy that its custodian or a third party custodian take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market to ensure the adequacy of the collateral. If the seller defaults, and the market
Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report 19
Notes to financial statements continued
value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Portfolio may be delayed or limited.
(c) Foreign currency translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates at the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.
The Portfolio does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.
Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Portfolio’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities, at the date of valuation, resulting from changes in exchange rates.
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.
(d) Foreign risk. The Portfolio’s investments in foreign securities may involve risks not present in domestic investments. Since securities may be denominated in foreign currencies, may require settlement in foreign currencies or pay interest or dividends in foreign currencies, changes in the relationship of these foreign currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Portfolio. Foreign investments may also subject the Portfolio to foreign government exchange restrictions, expropriation, taxation or other political, social or economic developments, all of which affect the market and/or credit risk of the investments.
(e) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Foreign dividend income is recorded on the ex-dividend date or as soon as practical after the Portfolio determines the
20 Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report
existence of a dividend declaration after exercising reasonable due diligence. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults on an expected interest payment, the Portfolio’s policy is to generally halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default.
(f) Distributions to shareholders. Distributions from net investment income and distributions of net realized gains, if any, are declared at least annually. Distributions to shareholders of the Portfolio are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(g) Federal and other taxes. It is the Portfolio’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, the Portfolio intends to distribute substantially all of its taxable income and net realized gains, if any, to shareholders each year. Therefore, no federal income tax provision is required in the Portfolio’s financial statements.
Management has analyzed the Portfolio’s tax positions taken on federal income tax returns for all open tax years and has concluded that as of October 31, 2008, no provision for income tax would be required in the Portfolio’s financial statements. The Portfolio’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
Under the applicable foreign tax laws, a withholding tax may be imposed on interest, dividends and capital gains at various rates. Realized gains upon disposition of Thailand securities held by the Portfolio are subject to capital gains tax in that country. As of October 31, 2008, there were no deferred capital gains tax liabilities accrued on realized gains.
(h) Reclassification. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. During the current year, the following reclassifications have been made:
| | | | | | | | | | | | | |
| | | UNDISTRIBUTED NET
| | ACCUMULATED NET
| | PAID-IN
|
| | | INVESTMENT INCOME | | REALIZED LOSS | | CAPITAL |
| (a) | | | — | | | $ | 19,470,215 | | | $ | (19,470,215 | ) |
| | | | | | | | | | | | | |
| (b) | | $ | (90,141 | ) | | | 90,141 | | | | — | |
| | | | | | | | | | | | | |
| | |
| (a) | | Reclassifications are primarily due to the expiration of a capital loss carryforward. |
| |
| (b) | | Reclassifications are primarily due to foreign currency transactions treated as ordinary income for tax purposes and book/tax differences in the treatment of various items. |
Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report 21
Notes to financial statements continued
| |
| 2. | Investment management agreement and other transactions with affiliates |
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Portfolio’s investment manager and Global Currents Investment Management, LLC (“Global Currents”) is the Portfolio’s subadviser. Prior to July 1, 2008, Brandywine Global Investment Management, LLC (“Brandywine”) was the Portfolio’s subadviser. LMPFA, Global Currents and Brandywine are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).
Under the investment management agreement, the Portfolio pays an investment management fee, calculated daily and paid monthly, at an annual rate of the Portfolio’s average daily net assets in accordance with the following breakpoint schedule:
| | | | | |
| AVERAGE DAILY NET ASSETS | | ANNUAL RATE |
| First $1 billion | | | 0.850 | % |
| | | | | |
| Next $1 billion | | | 0.825 | |
| | | | | |
| Next $3 billion | | | 0.800 | |
| | | | | |
| Next $5 billion | | | 0.775 | |
| | | | | |
| Over $10 billion | | | 0.750 | |
| | | | | |
LMPFA provides administrative and certain oversight services to the Portfolio. LMPFA delegates to the subadviser the day-to-day portfolio management of the Portfolio, except for the management of cash and short-term instruments. For its services, effective July 1, 2008, LMPFA pays Global Currents 70% of the net management fee it receives from the Portfolio. Prior to July 1, 2008, LMPFA paid Brandywine 70% of the net management fee it received from the Portfolio.
During the year ended October 31, 2008, the Portfolio had a voluntary expense limitation in place of 1.50%.
During the year ended October 31, 2008, LMPFA waived a portion of its fee in the amount of $588.
Effective January 1, 2008, the manager is permitted to recapture amounts previously voluntarily forgone or reimbursed by the manager to the Portfolio during the same fiscal year if the Portfolio’s total annual operating expenses have fallen to a level below the voluntary fee waiver/reimbursement (“expense cap”) shown in the fee table of the Portfolio’s prospectus. In no case will the manager recapture any amount that would result, on any particular business day of the Portfolio, in the Portfolio’s total annual operating expenses exceeding the expense cap.
Effective December 1, 2007, Legg Mason Investor Services, LLC (“LMIS”), a wholly-owned broker-dealer subsidiary of Legg Mason, serves as the Portfolio’s
22 Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report
sole and exclusive distributor. Prior to December 1, 2007, Citigroup Global Markets Inc. (“CGM”) and LMIS served as co-distributors of the Portfolio.
The Portfolio had adopted an unfunded, non-qualified deferred compensation plan (the “Plan”) which allowed non-interested trustees (“Trustees”) to defer the receipt of all or a portion of the trustees’ fees earned until a later date specified by the Trustees. The deferred balances are reported in the Statement of Operations under Trustees’ fees and are considered a general obligation of the Portfolio and any payments made pursuant to the Plan will be made from the Portfolio’s general assets. The Plan was terminated effective January 1, 2007. This change will have no effect on fees previously deferred. As of October 31, 2008, the Portfolio had accrued $1,446 as deferred compensation payable.
Certain officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.
During the year ended October 31, 2008, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
| | | | | |
| | | | | |
| Purchases | | $ | 79,374,592 | |
| | | | | |
| Sales | | | 101,994,022 | |
| | | | | |
At October 31, 2008, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
| | | | | |
| | | | | |
| Gross unrealized appreciation | | $ | 214,824 | |
| | | | | |
| Gross unrealized depreciation | | | (47,524,587 | ) |
| | | | | |
| Net unrealized depreciation | | $ | (47,309,763 | ) |
| | | | | |
| |
| 4. | Shares of beneficial interest |
At October 31, 2008, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share. Each share represents an indentical interest and has the same rights. Prior to April 30, 2007, the Company had six billion shares of capital stock authorized with a par value of $0.00001 per share.
Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report 23
Notes to financial statements continued
Transactions in shares of the Portfolio were as follows:
| | | | | | | | | |
| | | YEAR ENDED
| | YEAR ENDED
|
| | | OCTOBER 31, 2008 | | OCTOBER 31, 2007 |
| Shares sold | | | 111,000 | | | | 292,279 | |
| | | | | | | | | |
| Shares issued on reinvestment | | | 9,023,716 | | | | 410,275 | |
| | | | | | | | | |
| Shares repurchased | | | (2,967,260 | ) | | | (2,039,788 | ) |
| | | | | | | | | |
| Net increase (decrease) | | | 6,167,456 | | | | (1,337,234 | ) |
| | | | | | | | | |
| |
| 5. | Income tax information and distributions to shareholders |
The tax character of distributions paid during the fiscal years ended October 31 were as follows:
| | | | | | | | | |
| | | 2008 | | 2007 |
Distributions paid from: | | | | | | | | |
| Ordinary income | | $ | 1,500,005 | | | $ | 3,500,004 | |
| | | | | | | | | |
| Net long-term capital gains | | | 78,540,686 | | | | 3,577,244 | |
| | | | | | | | | |
| Total distributions paid | | $ | 80,040,691 | | | $ | 7,077,248 | |
| | | | | | | | | |
As of October 31, 2008, the components of accumulated earnings on a tax basis were as follows:
| | | | | |
| Undistributed ordinary income — net | | $ | 1,804,700 | |
| | | | | |
Capital loss carryforward* | | | (35,489,011 | ) |
| | | | | |
Other book/tax temporary differences(a) | | | (99,603 | ) |
| | | | | |
Unrealized appreciation/(depreciation)(b) | | | (47,311,732 | ) |
| | | | | |
| Total accumulated earnings/(losses) — net | | $ | (81,095,646 | ) |
| | | | | |
| | |
| * | | As of October 31, 2008, the Portfolio had the following net capital loss carryforward remaining: |
| | | | | |
| YEAR OF EXPIRATION | | AMOUNT |
| 10/31/2009 | | $ | (13,815,906 | ) |
| | | | | |
| 10/31/2010 | | | (6,907,953 | ) |
| | | | | |
| 10/31/2011 | | | (6,907,953 | ) |
| | | | | |
| 10/31/2016 | | | (7,857,199 | ) |
| | | | | |
| | | $ | (35,489,011 | ) |
| | | | | |
These amounts will be available to offset any future taxable capital gains. Additionally, $27,631,812 of the capital loss carryforward is subject to an annual limitation of $6,907,953 resulting from an ownership change the Portfolio experienced in a prior year.
| | |
| (a) | | Other book/tax temporary differences are attributable primarily to the realization for tax purposes of unrealized losses on certain foreign currency contracts and book/tax differences in the timing of the deductibility of various expenses. |
| |
| (b) | | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to book/tax differences in the treatment of certain stock dividends. |
24 Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report
On May 31, 2005, the U. S. Securities and Exchange Commission (“SEC”) issued an order in connection with the settlement of an administrative proceeding against Smith Barney Fund Management LLC (“SBFM”), a wholly-owned subsidiary of Legg Mason and the then investment adviser or manager to the Portfolio, and CGM, a former distributor of the Portfolio, relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds, including the Portfolio (the “Affected Funds”).
The SEC order found that SBFM and CGM willfully violated Section 206(1) of the Investment Advisers Act of 1940, as amended, and the rules promulgated thereunder (the “Advisers Act”). Specifically, the order found that SBFM and CGM knowingly or recklessly failed to disclose to the boards of the Affected Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent that: First Data Investors Services Group (“First Data”), the Affected Funds’ then-existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that Citigroup Asset Management (“CAM”), the Citigroup business unit that, at the time, included the Affected Funds’ investment manager and other investment advisory companies, had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange, among other things, for a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGM. The order also found that SBFM and CGM willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Affected Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Affected Funds’ best interests and that no viable alternatives existed.
SBFM and CGM do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding. The SEC censured SBFM and CGM and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order required Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest, and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the Affected Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan submitted for the approval of the SEC. At this time, there is no certainty as to how the above-described proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by
Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report 25
Notes to financial statements continued
which such distributions will be allocated, and when such distributions will be made. The order also required that transfer agency fees received from the Affected Funds since December 1, 2004, less certain expenses, be placed in escrow and provided that a portion of such fees might be subsequently distributed in accordance with the terms of the order. On April 3, 2006, an aggregate amount of approximately $9 million held in escrow was distributed to the Affected Funds.
The order required SBFM to recommend a new transfer agent contract to the Affected Funds’ boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGM would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Affected Funds’ boards selected a new transfer agent for the Affected Funds. No Citigroup affiliate submitted a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.
Although there can be no assurance, the manager does not believe that this matter will have a material adverse effect on the Affected Funds.
On December 1, 2005, Citigroup completed the sale of substantially all of its global asset management business, including SBFM, to Legg Mason.
Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filed against CGM, a former distributor of the Portfolio, and other affiliated funds (collectively, the “Funds”) and a number of its then affiliates, including SBFM and Salomon Brothers Asset Management Inc. (“SBAM”), which were then investment adviser or manager to certain of the Funds (the “Managers”), substantially all of the mutual funds then managed by the Managers (the “Defendant Funds”), and Board members of the Defendant Funds (collectively, the “Defendants”). The complaints alleged, among other things, that CGM created various undisclosed incentives for its brokers to sell Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Managers caused the Defendant Funds to pay excessive brokerage commissions to CGM for steering clients towards proprietary funds. The complaints also alleged that the Defendants breached their fiduciary duty to the Defendant Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions. The complaints also alleged that the Defendant Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Defendant Funds’ contracts with the Managers, recovery of all fees paid to the Managers pursuant to such contracts and an award of attorneys’ fees and litigation expenses.
26 Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report
On December 15, 2004, a consolidated amended complaint (the “Complaint”) was filed alleging substantially similar causes of action. On May 27, 2005, all of the Defendants filed motions to dismiss the Complaint. On July 26, 2006, the court issued a decision and order (1) finding that plaintiffs lacked standing to sue on behalf of the shareholders of the Funds in which none of the plaintiffs had invested and dismissing those Funds from the case (although stating that they could be brought back into the case if standing as to them could be established), and (2) other than one stayed claim, dismissing all of the causes of action against the remaining Defendants, with prejudice, except for the cause of action under Section 36(b) of the 1940 Act, which the court granted plaintiffs leave to repeal as a derivative claim.
On October 16, 2006, plaintiffs filed their Second Consolidated Amended Complaint (“Second Amended Complaint”) which alleges derivative claims on behalf of nine funds identified in the Second Amended Complaint, under Section 36(b) of the 1940 Act, against CAM, SBAM and SBFM as investment advisers to the identified funds, as well as CGM as a distributor for the identified funds (collectively, the “Second Amended Complaint Defendants”). The Portfolio was not identified in the Second Amended Complaint. The Second Amended Complaint alleges no claims against any of the funds or any of their Board Members. Under Section 36(b), the Second Amended Complaint alleges similar facts and seeks similar relief against the Second Amended Complaint Defendants as the Complaint.
On December 3, 2007, the court granted the Defendants’ motion to dismiss, with prejudice. On January 2, 2008, the plaintiffs filed a notice of appeal to the Second Circuit Court of Appeals.
Additional lawsuits arising out of these circumstances and presenting similar allegations and requests for relief may be filed in the future.
* * *
Beginning in August 2005, five class action lawsuits alleging violations of federal securities laws and state law were filed against CGM and SBFM, (collectively, the “Defendants”) based on the May 31, 2005 settlement order issued against the Defendants by the SEC as described in Note 6. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the investment manager for the Smith Barney family of funds, rescission of the funds’ management and other contracts with SBFM, recovery of all fees paid to SBFM pursuant to such contracts, and an award of attorneys’ fees and litigation expenses. The five actions were subsequently consolidated, and a consolidated complaint was filed.
On September 26, 2007, the United States District Court for the Southern District of New York issued an order dismissing the consolidated complaint,
Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report 27
Notes to financial statements continued
and judgement was later entered. An appeal has been filed and is pending before the U.S. Court of Appeals for the Second Circuit.
8 Recent accounting pronouncements
On September 20, 2006, the Financial Accounting Standards Board (“FASB”) released Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). FAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. The application of FAS 157 is required for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Management has determined that there is no material impact to the Portfolio’s valuation policies as a result of adopting FAS 157. The Portfolio will implement the disclosure requirements beginning with its January 31, 2009 Form N-Q.
* * *
In March 2008, the Financial Accounting Standards Board issued the Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“FAS 161”). FAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. FAS 161 requires enhanced disclosures about the Portfolio’s derivative and hedging activities, including how such activities are accounted for and their effect on the Portfolio’s financial position, performance and cash flows. Management is currently evaluating the impact the adoption of FAS 161 will have on the Portfolio’s financial statements and related disclosures.
* * *
During September 2008, FASB Staff Position FAS 133-1 and FASB Interpretation 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (“Amendment”) was issued and is effective for annual and interim reporting periods ending after November 15, 2008. The Amendment requires enhanced disclosures regarding credit derivatives and hybrid financial instruments containing embedded credit derivatives. Management is currently evaluating the impact the adoption of the Amendment will have on the Portfolio’s financial statement disclosures.
28 Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report
Report of independent registered public accounting firm
The Board of Trustees and Shareholders
Legg Mason Partners Variable Equity Trust:
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Legg Mason Partners Variable International All Cap Opportunity Portfolio, a series of Legg Mason Partners Variable Equity Trust, as of October 31, 2008, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Portfolio’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2008, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Legg Mason Partners Variable International All Cap Opportunity Portfolio as of October 31, 2008, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
New York, New York
December 15, 2008
Legg Mason Partners Variable International All Cap Opportunity Portfolio 2008 Annual Report 29
Additional information (unaudited)
Information about Trustees and Officers
The business and affairs of Legg Mason Partners Variable International All Cap Opportunity Portfolio (the “Portfolio”) are managed under the direction of the Board of Trustees. Information pertaining to the Trustees and Officers is set forth below. The Statement of Additional Information includes additional information about Trustees and is available, without charge, upon request by calling Legg Mason Partners Shareholder Services at 1-800-451-2010.
| | | |
| NON-INTERESTED TRUSTEES |
PAUL R. ADES
c/o R. Jay Gerken, CFA, Legg Mason & Co., LLC (“Legg Mason”)
620 Eighth Avenue, New York, NY 10018 |
| | | |
| Birth year | | 1940 |
| | | |
Position(s) held
with Fund1 | | Trustee |
| | | |
Term of office1 and length of time served2 | | Since 1983 |
| | | |
Principal
occupation(s) during past five years | | Law Firm of Paul R. Ades, PLLC (since 2000) |
| | | |
Number of portfolios
in fund complex over- seen by Trustee | | 57 |
| | | |
| Other board member- ships held by Trustee | | None |
| | | |
ANDREW L. BREECH
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue, New York, NY 10018 |
| | | |
| Birth year | | 1952 |
| | | |
Position(s) held
with Fund1 | | Trustee |
| | | |
Term of office1 and length of time served2 | | Since 1991 |
| | | |
Principal
occupation(s) during
past five years | | President, Dealer Operating Control Service, Inc. (automotive retail management) (since 1985) |
| | | |
Number of portfolios
in fund complex over- seen by Trustee | | 57 |
| | | |
| Other board member- ships held by Trustee | | None |
| | | |
30 Legg Mason Partners Variable International All Cap Opportunity Portfolio
| | | |
DWIGHT B. CRANE
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue, New York, NY 10018 |
| | | |
| Birth year | | 1937 |
| | | |
Position(s) held
with Fund1 | | Trustee |
| | | |
Term of office1 and length of time served2 | | Since 1981 |
| | | |
Principal
occupation(s) during
past five years | | Independent Consultant (since 1969); Professor, Harvard Business School (from 1969 to 2007) |
| | | |
Number of portfolios
in fund complex over- seen by Trustee | | 59 |
| | | |
| Other board member- ships held by Trustee | | None |
| | | |
ROBERT M. FRAYN, JR.
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue, New York, NY 10018 |
| | | |
| Birth year | | 1934 |
| | | |
Position(s) held
with Fund1 | | Trustee |
| | | |
Term of office1 and length of time served2 | | Since 1981 |
| | | |
Principal
occupation(s) during past five years | | Retired |
| | | |
Number of portfolios
in fund complex over- seen by Trustee | | 57 |
| | | |
| Other board member- ships held by Trustee | | None |
| �� | | |
FRANK G. HUBBARD
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue, New York, NY 10018 |
| | | |
| Birth year | | 1937 |
| | | |
Position(s) held
with Fund1 | | Trustee |
| | | |
Term of office1 and length of time served2 | | Since 1993 |
| | | |
Principal
occupation(s) during
past five years | | President of Avatar International, Inc. (Business Development) (since 1998) |
| | | |
Number of portfolios
in fund complex over- seen by Trustee | | 57 |
| | | |
| Other board member- ships held by Trustee | | None |
| | | |
Legg Mason Partners Variable International All Cap Opportunity Portfolio 31
Additional information (unaudited) continued
Information about Trustees and Officers
| | | |
HOWARD J. JOHNSON
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue, New York, NY 10018 |
| | | |
| Birth year | | 1938 |
| | | |
Position(s) held
with Fund1 | | Trustee |
| | | |
Term of office1 and length of time served2 | | From 1981 to 1998 and 2000 to Present |
| | | |
Principal
occupation(s) during
past five years | | Chief Executive Officer, Genesis Imaging LLC (technology company) (since 2003) |
| | | |
Number of portfolios
in fund complex over- seen by Trustee | | 57 |
| | | |
| Other board member- ships held by Trustee | | None |
| | | |
DAVID E. MARYATT
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue, New York, NY 10018 |
| | | |
| Birth year | | 1936 |
| | | |
Position(s) held
with Fund1 | | Trustee |
| | | |
Term of office1 and length of time served2 | | Since 1983 |
| | | |
Principal
occupation(s) during
past five years | | Private Investor; President and Director, ALS Co. (real estate management and development firm) (since 1993) |
| | | |
Number of portfolios
in fund complex over- seen by Trustee | | 57 |
| | | |
| Other board member- ships held by Trustee | | None |
| | | |
JEROME H. MILLER
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue, New York, NY 10018 |
| | | |
| Birth year | | 1938 |
| | | |
Position(s) held
with Fund1 | | Trustee |
| | | |
Term of office1 and length of time served2 | | Since 1995 |
| | | |
Principal
occupation(s) during past five years | | Retired |
| | | |
Number of portfolios
in fund complex over- seen by Trustee | | 57 |
| | | |
| Other board member- ships held by Trustee | | None |
| | | |
32 Legg Mason Partners Variable International All Cap Opportunity Portfolio
| | | |
KEN MILLER
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue, New York, NY 10018 |
| | | |
| Birth year | | 1942 |
| | | |
Position(s) held
with Fund1 | | Trustee |
| | | |
Term of office1 and length of time served2 | | Since 1983 |
| | | |
Principal
occupation(s) during
past five years | | President of Young Stuff Apparel Group, Inc. (apparel manufacturer) (since 1963) |
| | | |
Number of portfolios
in fund complex over- seen by Trustee | | 57 |
| | | |
| Other board member- ships held by Trustee | | None |
| | | |
JOHN J. MURPHY
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue, New York, NY 10018 |
| | | |
| Birth year | | 1944 |
| | | |
Position(s) held
with Fund1 | | Trustee |
| | | |
Term of office1 and length of time served2 | | Since 2002 |
| | | |
Principal
occupation(s) during past five years | | President; Murphy Capital Management (investment advice) (since 1983) |
| | | |
Number of portfolios
in fund complex over- seen by Trustee | | 57 |
| | | |
Other board member-
ships held by Trustee
| | Director, Nicholas Applegate funds; Trustee; Consulting Group Capital Markets Funds; Formerly, Director, Atlantic Stewardship Bank (from 2004 to 2005); Director, Barclays International Funds Group Ltd. and affiliated companies (from 1983 to 2003) |
| | | |
THOMAS F. SCHLAFLY
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue, New York, NY 10018 |
| | | |
| Birth year | | 1948 |
| | | |
Position(s) held
with Fund1 | | Trustee |
| | | |
Term of office1 and length of time served2 | | Since 1983 |
| | | |
Principal
occupation(s) during
past five years | | Of Counsel, Husch Blackwell Sanders LLP (law firm) (since 1984); President, The Saint Louis Brewery, Inc. (brewery) (since 1989) |
| | | |
Number of portfolios
in fund complex over- seen by Trustee | | 57 |
| | | |
| Other board member- ships held by Trustee | | Director, Citizens National Bank St. Louis, Maplewood, MO (since 2006) |
| | | |
Legg Mason Partners Variable International All Cap Opportunity Portfolio 33
Additional information (unaudited) continued
Information about Trustees and Officers
| | | |
JERRY A. VISCIONE
c/o R. Jay Gerken, CFA, Legg Mason
620 Eighth Avenue, New York, NY 10018 |
| | | |
| Birth year | | 1944 |
| | | |
Position(s) held
with Fund1 | | Trustee |
| | | |
Term of office1 and length of time served2 | | Since 1993 |
| | | |
Principal
occupation(s) during past five years | | Retired |
| | | |
Number of portfolios
in fund complex over- seen by Trustee | | 57 |
| | | |
| Other board member- ships held by Trustee | | None |
| |
| INTERESTED TRUSTEE |
R. JAY GERKEN, CFA3
Legg Mason
620 Eighth Avenue, New York, NY 10018 |
| | | |
| Birth year | | 1951 |
| | | |
Position(s) held
with Fund1 | | Trustee, President, Chairman, and Chief Executive Officer |
| | | |
Term of office1 and length of time served2 | | Since 2002 |
| | | |
Principal
occupation(s) during
past five years | | Managing Director of Legg Mason; Chairman of the Board and Trustee/ Director of 163 funds associated with Legg Mason Partners Fund Advisor, LLC (‘‘LMPFA”) and its affiliates; President of LMPFA (since 2006); Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason and its affiliates; Formerly, Chairman, Smith Barney Fund Management LLC (‘‘SBFM”) and CitiFund Management Inc. (‘‘CFM”) (from 2002 to 2005); Formerly, Chairman President and Chief Executive Officer of Travelers Investment Adviser, Inc. (‘‘TIA”) (from 2002 to 2005) |
| | | |
Number of portfolios
in fund complex over- seen by Trustee | | 148 |
| | | |
| Other board member- ships held by Trustee | | Trustee, Consulting Group Capital Markets Funds (from 2002 to 2006) |
| |
| OFFICERS |
KAPREL OZSOLAK
Legg Mason
55 Water Street, New York, NY 10041 |
| | | |
| Birth year | | 1965 |
| | | |
Position(s) held
with Fund1 | | Chief Financial Officer and Treasurer |
| | | |
Term of office1 and length of time served2 | | Since 2004 |
| | | |
Principal
occupation(s) during
past five years
| | Director of Legg Mason; Chief Financial Officer and Treasurer of certain mutual funds associated with Legg Mason; Formerly, Controller of certain mutual funds associated with certain predecessor firms of Legg Mason (from 2002 to 2004) |
| | | |
34 Legg Mason Partners Variable International All Cap Opportunity Portfolio
| | | |
TED P. BECKER
Legg Mason
620 Eighth Avenue, New York, NY 10018 |
| | | |
| Birth year | | 1951 |
| | | |
Position(s) held
with Fund1 | | Chief Compliance Officer |
| | | |
Term of office1 and length of time served2 | | Since 2006 |
| | | |
Principal
occupation(s) during
past five years
| | Director of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance at Legg Mason (since 2005); Chief Compliance Officer with certain mutual funds associated with Legg Mason, LMPFA and certain affiliates (since 2006); Formerly, Managing Director of Compliance at CAM or its predecessor (from 2002 to 2005) |
| | | |
JOHN CHIOTA
Legg Mason
300 First Stamford Place, Stamford, CT 06902 |
| | | |
| Birth year | | 1968 |
| | | |
Position(s) held
with Fund1 | | Chief Anti-Money Laundering Compliance Officer |
| | | |
Term of office1 and length of time served2 | | Since 2006 |
| | | |
Principal
occupation(s) during
past five years
| | Vice President of Legg Mason or its predecessor (since 2004); Chief Anti-Money Laundering Compliance Officer with certain mutual funds associated with Legg Mason or its affiliates (since 2006); Prior to August 2004, Chief AML Compliance Officer with TD Waterhouse |
| | | |
ROBERT I. FRENKEL
Legg Mason
300 First Stamford Place, Stamford, CT 06902 |
| | | |
| Birth year | | 1954 |
| | | |
Position(s) held
with Fund1 | | Secretary and Chief Legal Officer |
| | | |
Term of office1 and length of time served2 | | Since 2003 |
| | | |
Principal
occupation(s) during
past five years
| | Managing Director and General Counsel of Global Mutual Funds for Legg Mason and its predecessors (since 1994); Secretary and Chief Legal Officer of mutual funds associated with Legg Mason (since 2003); Formerly, Secretary of CFM (from 2001 to 2004) |
| | | |
THOMAS C. MANDIA
Legg Mason
300 First Stamford Place, Stamford, CT 06902 |
| | | |
| Birth year | | 1962 |
| | | |
Position(s) held
with Fund1 | | Assistant Secretary |
| | | |
Term of office1 and length of time served2 | | Since 2000 |
| | | |
Principal
occupation(s) during
past five years | | Managing Director and Deputy General Counsel of Legg Mason (since 2005); Managing Director and Deputy General Counsel for CAM (from 1992 to 2005) |
| | | |
Legg Mason Partners Variable International All Cap Opportunity Portfolio 35
Additional information (unaudited) continued
Information about Trustees and Officers
| | | |
STEVEN FRANK
Legg Mason
55 Water Street, New York, NY 10041 |
| | | |
| Birth year | | 1967 |
| | | |
Position(s) held
with Fund1 | | Controller |
| | | |
Term of office1 and length of time served2 | | Since 2005 |
| | | |
Principal
occupation(s) during
past five years
| | Vice President of Legg Mason (since 2002); Controller of certain mutual funds associated with Legg Mason or its predecessors (since 2005); Formerly, Assistant Controller of certain mutual funds associated with Legg Mason predecessors (from 2001 to 2005) |
| | | |
ALBERT LASKAJ
Legg Mason
55 Water Street, New York, NY 10041 |
| | | |
| Birth year | | 1977 |
| | | |
Position(s) held
with Fund1 | | Controller |
| | | |
Term of office1 and length of time served2 | | Since 2007 |
| | | |
Principal
occupation(s) during
past five years
| | Vice President of Legg Mason (since 2008); Controller of certain mutual funds associated with Legg Mason (since 2007); Formerly, Assistant Controller of certain mutual funds associated with Legg Mason (from 2005 to 2007); Formerly, Accounting Manager of certain mutual funds associated with certain predecessor firms of Legg Mason (from 2003 to 2005) |
| | | |
| | |
| 1 | | Each Trustee and Officer serves until his or her successor has been duly elected and qualified or until his or her earlier death, resignation, retirement or removal. |
| |
| 2 | | Indicates the earliest year in which the Trustee or Officer became a Board Member or Officer, as applicable for a fund in the Legg Mason Partners funds complex. |
| |
| 3 | | Mr. Gerken is an “interested person” of the Trust as defined in the 1940 Act because Mr. Gerken is an officer of LMPFA and certain of its affiliates. |
36 Legg Mason Partners Variable International All Cap Opportunity Portfolio
Important tax information (unaudited)
The following information is provided with respect to the distributions paid during the taxable year ended October 31, 2008:
| | | | | |
| | | | | |
| Record date | | | 12/20/2007 | |
| Payable date | | | 12/21/2007 | |
| | | | | |
| Foreign source income | | | 100.00 | % |
| | | | | |
| Foreign taxes paid per share | | | $0.041043 | |
| | | | | |
| Long-term capital gain dividend | | | $9.166417 | |
| | | | | |
The foreign taxes paid represent taxes incurred by the Portfolio on income received by the Portfolio from foreign sources. Foreign taxes paid may be included in taxable income with an offsetting deduction from gross income or may be taken as a credit for taxes paid to foreign governments. You should consult your tax adviser regarding the appropriate treatment of foreign taxes paid.
Please retain this information for your records.
Legg Mason Partners Variable International All Cap Opportunity Portfolio 37
Legg Mason Partners Variable International All Cap Opportunity Portfolio
Trustees
Paul R. Ades
Andrew L. Breech
Dwight B. Crane
Robert M. Frayn Jr.
R. Jay Gerken, CFA
Chairman
Frank G. Hubbard
Howard J. Johnson
David E. Maryatt
Jerome H. Miller
Ken Miller
John J. Murphy
Thomas F. Schlafly
Jerry A. Viscione
Investment manager
Legg Mason Partners Fund
Advisor, LLC
Subadviser
Global Currents
Investment Management, LLC
Distributor
Legg Mason Investor Services, LLC
Custodian
State Street Bank and Trust
Company
Transfer agent
PNC Global Investment Servicing
(formerly, PFPC Inc.)
4400 Computer Drive
Westborough, Massachusetts 01581
Independent registered public accounting firm
KPMG LLP
345 Park Avenue
New York, New York 10154
Legg Mason Partners Variable International All Cap Opportunity Portfolio
The Portfolio is a separate investment series of Legg Mason Partners Variable Equity Trust, a Maryland business trust.
LEGG MASON PARTNERS VARIABLE INTERNATIONAL ALL CAP OPPORTUNITY PORTFOLIO
Legg Mason Partners Funds
55 Water Street
New York, New York 10041
The Portfolio files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Portfolio’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Portfolio’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Portfolio, shareholders can call Legg Mason Partners Shareholder Services at 1-800-451-2010.
Information on how the Portfolio voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Portfolio uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-800-451-2010, (2) on the Portfolio’s website at www.leggmason.com/individualinvestors and (3) on the SEC’s website at www.sec.gov.
This report is submitted for the general information of the shareholders of Legg Mason Partners Variable International All Cap Opportunity Portfolio. This report is not authorized for distribution to prospective investors in the Portfolio unless preceded or accompanied by a current prospectus.
Investors should consider the Portfolio’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the Portfolio. Please read the prospectus carefully before investing.
www.leggmason.com/individualinvestors
2008 Legg Mason Investor Services, LLC
Member FINRA, SIPC
| | | |
BUILT TO WINSM | |  |
At Legg Mason, we’ve assembled a collection of experienced investment management firms and empowered each of them with the tools, the resources and, most importantly, the independence to pursue the strategies they know best.
• Each was purposefully chosen for their commitment to investment excellence.
• Each is focused on specific investment styles and asset classes.
• Each exhibits thought leadership in their chosen area of focus.
Together, we’ve built a powerful portfolio of solutions for financial advisors and their clients. And it has made us a world leader in money management.*
| | | |
| | * | Ranked ninth-largest money manager in the world, according to Pensions & Investments, May 26, 2008, based on 12/31/07 worldwide assets under management. | |
www.leggmason.com/individualinvestors
2008 Legg Mason Investor Services, LLC Member FINRA, SIPC
FDXX010542 12/08 SR08-707
NOT PART OF THE ANNUAL REPORT
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Directors of the registrant has determined that Jerry A. Viscione possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert,” and has designated Mr. Viscione as the Audit Committee’s financial expert. Mr. Viscione is an “independent” Director pursuant to paragraph (a)(2) of Item 3 to Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
a) Audit Fees. The aggregate fees billed in the last two fiscal years ending October 31, 2007 and October 31, 2008 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $133,800 in 2007 and $146,300 in 2008.
b) Audit-Related Fees. The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrant’s financial statements were $31,000 in 2007 and $0 in 2008. These services consisted of procedures performed in connection with the Re-domiciliation of the various reviews of Prospectus supplements, and consent issuances related to the N-1A filings for the Legg Mason Partners Variable Equity Trust.
In addition, there were no Audit-Related Fees billed in the Reporting Period for assurance and related services by the Auditor to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Legg Mason Partners Variable Equity Trust (“service affiliates”), that were reasonably related to the performance of the annual audit of the service affiliates. Accordingly, there were no such fees that required pre-approval by the Audit Committee for the Reporting Periods (prior to July 6, 2003 services provided by the Auditor were not required to be pre-approved).
(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by KPMG for tax compliance, tax advice and tax planning (“Tax Services”) were $33,900 in 2007 and $30,750 in 2008. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.
There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee.
d) All Other Fees. There were no other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item for the Legg Mason Partners Variable Equity Trust.
All Other Fees. There were no other non-audit services rendered by the Auditor to Legg Mason Partners Fund Advisors, LLC (“LMPFA”), and any entity controlling, controlled by or under common control with LMPFA that provided ongoing services to Legg Mason Partners Variable Equity Trust requiring pre-approval by the Audit Committee in the Reporting Period.
(e) Audit Committee’s pre-approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by LMPFA or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee duly implements policies and procedures by which such services are approved other than by the full Committee.
The Committee shall not approve non-audit services that the Committee believes duly impairs the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services July not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.
Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.
(2) For the Legg Mason Partners Variable Equity Trust, the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 0% for 2007 and 2008; Tax Fees were 100% and 0% for 2007 and 2008; and Other Fees were 100% and 0% for 2007 and 2008.
(f) N/A
(g) Non-audit fees billed by the Auditor for services rendered to Legg Mason Partners Variable Equity Trust, LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Legg Mason Partners Variable Equity Trust during the reporting period were $0 in 2008.
(h) Yes. Legg Mason Partners Variable Equity Trust’s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates, which were not pre-approved (not requiring pre-approval), is compatible with maintaining the Accountant’s independence. All services provided by the Auditor to the Legg Mason Partners Variable Equity Trust or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
a) The independent board members are acting as the registrant’s audit committee as specified in Section 3(a)(58)(B) of the Exchange Act. The Audit Committee consists of the following Board members:
Paul R. Ades
Andrew L. Breech
Dwight B. Crane
Robert M. Frayn, Jr.
Frank G. Hubbard
Howard J. Johnson
David E. Maryatt
Jerome H. Miller
Ken Miller
John J. Murphy
Thomas F. Schlafly
Jerry A. Viscione
b) Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Included herein under Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 11. CONTROLS AND PROCEDURES.
| | (a) | | The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934. |
| |
| | (b) | | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal half-year (the registrant’s second fiscal half-year in the case of an annual report) that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting. |
ITEM 12. EXHIBITS.
(a) (1) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(a) (2) Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.CERT
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.906CERT
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
Legg Mason Partners Variable Equity Trust
| | | |
| By: | | /s/ R. Jay Gerken |
| | | |
| | | (R. Jay Gerken) |
| | | Chief Executive Officer of |
| | | Legg Mason Partners Variable Equity Trust |
Date: December 30, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | |
| By: | | /s/ R. Jay Gerken |
| | | |
| | | (R. Jay Gerken) |
| | | Chief Executive Officer of |
| | | Legg Mason Partners Variable Equity Trust |
Date: December 30, 2008
| | | |
| By: | | /s/ Kaprel Ozsolak |
| | | |
| | | (Kaprel Ozsolak) |
| | | Chief Financial Officer of |
| | | Legg Mason Partners Variable Equity Trust |
Date: December 30, 2008
