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
Stamford, CT 06902
(Name and address of agent for service)
Registrant’s telephone number, including area code: 1-877-721-1926
Date of fiscal year end: December 31
Date of reporting period: December 31, 2011
| ITEM 1. | REPORT TO STOCKHOLDERS. |
The Annual Report to Stockholders is filed herewith.
December 31, 2011
Annual Repor t
Legg Mason
Dynamic Multi-Strategy VIT Portfolio
INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
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| II | | Legg Mason Dynamic Multi-Strategy VIT Portfolio |
Portfolio objective
The Portfolio seeks the highest total return (that is, a combination of income and long-term capital appreciation) over time consistent with its asset mix. The Portfolio will seek to reduce volatility as a secondary objective.
Letter from the chairman
Dear Shareholder,
We are pleased to provide the annual report of Legg Mason Dynamic Multi-Strategy VIT Portfolio for the period since the Portfolio’s inception on November 30, 2011 through December 31, 2011. Please read on for a detailed look at prevailing economic and market conditions during the Portfolio’s reporting period and to learn how those conditions have affected Portfolio performance.
As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our website, www.leggmason.com/individualinvestors. Here you can gain immediate access to market and investment information, including:
| Ÿ | | Market insights and commentaries from our portfolio managers and |
| Ÿ | | A host of educational resources. |
We look forward to helping you meet your financial goals.
Sincerely,
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
January 27, 2012
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| Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report | | | 1 | |
Portfolio overview
Q. What is the Portfolio’s investment strategy?
A. The Portfolio seeks the highest total return (that is, a combination of income and long-term capital appreciation) over time consistent with its asset mix. The Portfolio will seek to reduce volatility as a secondary objective. The Portfolio is a fund of funds —it invests primarily in other funds. These underlying funds are open-end funds managed by Legg Mason or its affiliates, or exchange-traded funds (“ETFs”) that are based on an index and managed by unaffiliated investment advisers.
The Portfolio seeks to achieve its objectives by investing in a broad range of asset classes and investment styles, combined with multiple layers of risk management strategies. Legg Mason Global Asset Allocation, LLC (“LMGAA”), one of the Portfolio’s subadvisers, is responsible for implementation of the Portfolio’s overall asset allocation and the Dynamic Risk Management strategy. Western Asset Management Company (“Western Asset”), the Portfolio’s other subadviser, is responsible for the Event Risk Management strategy and manages the Portfolio’s cash and short-term instruments.
The Portfolio’s initial target allocation for long-term investments (the “Target Allocation”) is 70% in equity funds and 30% in fixed-income funds that are not money market funds (“long-term fixed-income funds”). While changes to the Target Allocation are not expected to be frequent or substantial, the Portfolio’s Target Allocation may range from 60% of its net assets in equity funds and 40% of its net assets in long-term fixed-income funds to 75% of its net assets in equity funds and 25% of its net assets in long-term fixed-income funds as, in LMGAA’s opinion, market conditions warrant. In addition to these long-term investments, the Portfolio may invest in short-term defensive instruments, including money market funds, Treasury bills and cash, and may enter into derivative transactions involving options and futures as part of its risk management strategies.
A combination of risk management strategies will be implemented that will attempt to limit downside volatility within the Portfolio. These strategies include Dynamic Risk Management and Event Risk Management. Dynamic Risk Management attempts to limit losses by allocating Portfolio assets away from equity and long-term fixed-income funds. Dynamic Risk Management allocates a portion of the Portfolio’s assets into short-term defensive instruments that are expected to decline in value less than riskier assets in the event of market declines and into index options and index futures contracts that are expected to increase in value in the event of market declines. A small portion of the Portfolio’s assets will be invested in the Event Risk Management strategy. Event Risk Management invests in options and futures that are expected to increase in value in the event of declines in the broad equity and bond markets during a short period of time. Both strategies attempt to limit losses in exchange for a smaller and disproportionate reduction in the Portfolio’s total return. The Portfolio’s net asset value (“NAV”)i will fluctuate and is not guaranteed.
Q. What were the overall market conditions during the Portfolio’s reporting period?
A. Global equity markets fell in the first half of the short period covered by this report, and then rose in the second half. The net results varied across different markets. For the one-month ending December 31, 2011, the Russell 1000 Indexii of large-cap U.S. stocks produced a total return of 0.8%. Small-cap U.S. stocks, as measured by the Russell 2000 Indexiii, were up 0.7%. International stock markets, however, were down slightly. The MSCI EAFE Indexiv produced a total return of -0.9%.
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| 2 | | Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report |
Portfolio overview (cont’d)
Fixed-income markets generally produced positive returns for the period. The Barclays Capital U.S. Aggregate Indexv rose 1.1% for the period, and the Barclays Capital Global Aggregate ex-USD Indexvi gained 0.4%.
Q. How did we respond to these changing market conditions?
A. The Portfolio uses a Dynamic Risk Management strategy to attempt to limit losses when markets fall. The implementation of this strategy caused the Portfolio to increase its cash position as equity markets declined in the first half of the period. As equity markets recovered during the second half of the period, the Portfolio reduced its cash position.
Performance review
For the period since inception on November 30, 2011 through December 31, 2011, Class I shares of Legg Mason Dynamic Multi-Strategy VIT Portfolio1 returned -0.12%. The Portfolio’s unmanaged benchmarks, the Barclays Capital U.S. Aggregate Index and the Russell 3000 Indexvii, returned 1.10% and 0.82%, respectively, for the same period. The Lipper Variable Global Flexible Portfolio Funds Category Average2 returned -0.63% over the same time frame.
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Performance Snapshot as of December 31, 2011
(unaudited) | |
| | | Since Portfolio
Inception* | |
Legg Mason Dynamic
Multi-Strategy VIT Portfolio1: | |
Class I | | | -0.12 | % |
Class II | | | -0.16 | % |
| Barclays Capital U.S. Aggregate Index | | | 1.10 | % |
| Russell 3000 Index | | | 0.82 | % |
| Composite Indexviii | | | 0.60 | % |
| Lipper Variable Global Flexible Portfolio Funds Category Average | | | -0.63 | % |
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.
All share class returns assume the reinvestment of all distributions at net asset value and the deduction of all Portfolio expenses. Performance figures for periods shorter than one year represent cumulative figures and are not annualized. Results for longer periods will differ, in some cases, substantially.
Portfolio performance figures reflect fee waivers and/or expense reimbursements, without which the performance would have been lower.
* The Portfolio’s inception date is November 30, 2011.
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| Total Annual Operating Expenses† (unaudited) |
As of the Portfolio’s current prospectus dated November 30, 2011, the gross total annual operating expense ratios for Class I and Class II shares were 1.12% and 1.37%, respectively.
Actual expenses may be higher. For example, expenses may be higher than those shown if average net assets decrease. Net assets are more likely to decrease and Portfolio expense ratios are more likely to increase when markets are volatile.
| 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 one-month period ended December 31, 2011, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 49 funds in the Portfolio’s Lipper category. |
| † | Includes expenses of the underlying funds in which the Portfolio invests. |
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| Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report | | | 3 | |
As a result of expense limitation arrangements, the ratio of expenses, other than brokerage, interest, taxes and extraordinary expenses, to average net assets is not expected to exceed 1.10% for Class I shares and 1.35% for Class II shares. These expense limitation arrangements cannot be terminated prior to December 31, 2013 without the Board of Trustees’ consent.
The manager is permitted to recapture amounts previously waived or reimbursed to a class during the same fiscal year if the class’ total annual operating expenses have fallen to a level below the expense limitation in effect at the time the fees were earned or the expenses incurred.
Q. What were the leading contributors to performance?
A. Taking into account both the underlying fund returns and their weightings within the portfolio, the leading contributors to absolute performance were Legg Mason BW Diversified Large Cap Value Fund and Legg Mason Batterymarch U.S. Large Cap Equity Fund.
In relative terms (i.e., relative to the Portfolio’s blended benchmark), the leading contributors to performance were the same two funds just mentioned.
Q. What were the leading detractors from performance?
A. Taking into account both the underlying fund returns and their weightings within the portfolio, the leading detractors from performance were The Royce Heritage Fund and Legg Mason Batterymarch International Equity Trust.
In relative terms (i.e., relative to the Portfolio’s blended benchmark), the leading detractors from performance were The Royce Heritage Fund and Legg Mason ClearBridge Aggressive Growth Fund. The cash position created by the Dynamic Risk Management strategy also detracted from relative performance.
Thank you for your investment in Legg Mason Dynamic Multi-Strategy VIT 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,
Steven Bleiberg
Portfolio Manager
Legg Mason Global Asset Allocation, LLC
Andrew D. Purdy
Portfolio Manager
Legg Mason Global Asset Allocation, LLC
Y. Wayne Lin
Portfolio Manager
Legg Mason Global Asset Allocation, LLC
January 17, 2012
RISKS: Equity securities are subject to price fluctuation and possible loss of principal. International investments are subject to special risks including currency fluctuations, as well as social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Fixed-income securities are subject to interest rate, credit, inflation and reinvestment risks. As interest rates rise, the value of fixed-income securities falls. There are additional risks and other expenses associated with investing in other mutual funds rather than directly in portfolio securities. In addition to the Portfolio’s
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| 4 | | Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report |
Portfolio overview (cont’d)
operating expenses, you will indirectly bear the operating expenses of the underlying funds. Each underlying fund may engage in active and frequent trading, resulting in higher portfolio turnover and transaction costs. Certain of the underlying funds may engage in short selling, which is a speculative strategy that involves special risks. Unlike the possible loss on a security that is purchased, there is no limit on the amount of loss on an appreciating security that is sold short. The model used to manage the Portfolio’s assets provides no assurance that the recommended allocation will either maximize returns or minimize risks. Derivatives, such as options and futures, can be illiquid, may disproportionately increase losses, and have a potentially large impact on Portfolio performance. Please see the Portfolio’s prospectus for a more complete discussion of these and other risks, and the Portfolio’s investment strategies.
All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
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.
| i | Net asset value ("NAV") is the dollar value of a single mutual fund share, based on the value of the underlying assets of the fund minus its liabilities, divided by the number of shares outstanding. NAV is calculated at the end of each business day. |
| ii | The Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index. |
| iii | The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. |
| iv | 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. |
| v | The Barclays Capital U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage- and asset-backed issues, rated investment grade or higher, and having at least one year to maturity. |
| vi | The Barclays Capital Global Aggregate ex-USD Index tracks an international basket of government, corporate, agency and mortgage-related bonds. |
| vii | The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the U.S. equity market. |
| viii | The Composite Index reflects the blended rate of return of the following underlying indices: 50% Russell 1000 Index, 10% Russell 2000 Index, 10% MSCI All Country World Index Ex-U.S. ("MSCI ACWI Ex-U.S."), 15% Barclays Capital Global Aggregate ex-USD Index and 15% Barclays Capital U.S. Aggregate Index. The MSCI ACWI Ex-U.S. is a market-capitalization-weighted index that is designed to measure performance of stocks throughout the world, with the exception of U.S.-based companies, and includes both developed and emerging markets. |
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| Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report | | | 5 | |
Portfolio at a glance (unaudited)
Legg Mason Permal Tactical Allocation Fund Breakdown† (%) as of — December 31, 2011
Investments in Underlying Funds
| | | | |
| % of Total Long-Term Investments | | Top 5 Sectors |
 | | 19.1 Legg Mason Partners Equity Trust — Legg Mason Batterymarch U.S. Large Cap Equity Fund, Class IS Shares | | Information Technology Health Care Energy Financials Consumer Discretionary |
 | | 14.1 Legg Mason Global Asset Management Trust — Legg Mason BW Diversified Large Cap Value Fund, Class IS Shares | | Financials Health Care Energy Information Technology Industrials |
 | | 14.0 Legg Mason Partners Equity Trust — Legg Mason ClearBridge Aggressive Growth Fund, Class IS Shares | | Health Care Consumer Discretionary Energy Information Technology Industrials |
 | | 14.0 Legg Mason Charles Street Trust, Inc. — Legg Mason BW Global Opportunities Bond Fund, Class IS Shares | | Sovereign Bonds Corporate Bonds & Notes U.S. Government & Agency Obligations Municipal Bonds Collateralized Mortgage Obligations |
 | | 13.8 Western Asset Funds Inc. — Western Asset Intermediate Bond Fund | | Corporate Bonds & Notes U.S. Government & Agency Obligations Asset-backed Securities Collateralized Mortgage Obligations Mortgage-backed Securities |
 | | 9.1 Legg Mason Global Trust, Inc. — Legg Mason Batterymarch International Equity Trust, Class IS Shares | | Financials Industrials Health Care Consumer Staples Materials |
 | | 9.0 Royce Heritage Fund | | Industrials Information Technology Financials Consumer Discretionary Materials |
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| 6 | | Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report |
Portfolio at a glance (unaudited) (cont’d)
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| % of Total Long-Term Investments | | Top 5 Sectors |
 | | 2.0 iShares Trust — iShares Russell 1000 Index Fund | | Technology Financial Services Consumer Discretionary Energy Health Care |
 | | 1.0 iShares Trust — iShares MSCI EAFE Index Fund | | Financials Industrials Consumer Staples Materials Health Care |
 | | 1.0 iShares Trust — iShares S&P/Citigroup International Treasury Bond Fund | | Japan Italy Germany France Belgium |
 | | 1.0 iShares Trust — iShares Russell 1000 Value Index Fund | | Financial Services Health Care Utilities Energy Consumer Discretionary |
 | | 1.0 iShares Trust — iShares Barclays Intermediate Credit Bond Fund | | Industrial Financial Institutions Supranational Utility Agencies |
 | | 0.9 iShares Trust — iShares Russell 2000 Index Fund | | Financial Services Technology Consumer Discretionary Producer Durables Health Care |
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| Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report | | | 7 | |
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; service and/or distribution (12b-1) 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 July 1, 2011 and held for the six months ended December 31, 2011, unless otherwise noted.
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”.
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 actual total return1 | | | | | Based on hypothetical total return4 | |
| | | Actual
Total Return2 | | | Beginning
Account
Value | | | Ending
Account
Value | | | Annualized
Expense
Ratio | | | Expenses
Paid
During
the
Period3 | | | | | | | Hypothetical
Annualized
Total Return | | | Beginning
Account
Value | | | Ending
Account
Value | | | Annualized
Expense
Ratio | | | Expenses
Paid
During
the
Period5 | |
| Class I | | | -0.12 | % | | $ | 1,000.00 | | | $ | 998.80 | | | | 0.44 | % | | $ | 0.39 | | | | | Class I | | | 5.00 | % | | $ | 1,000.00 | | | $ | 1,022.99 | | | | 0.44 | % | | $ | 2.24 | |
| Class II | | | -0.16 | | | | 1,000.00 | | | | 998.40 | | | | 0.69 | | | | 0.60 | | | | | Class II | | | 5.00 | | | | 1,000.00 | | | | 1,021.73 | | | | 0.69 | | | | 3.52 | |
| 1 | For the period November 30, 2011 (inception date) to December 31, 2011. |
| 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. Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. |
| 3 | Expenses (net of compensating balance arrangements, fee waivers and/or expense reimbursements) are equal to each class’ respective annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal period (32), then divided by 365. |
| 4 | For the six months ended December 31, 2011. |
| 5 | Expenses (net of compensating balance arrangements, fee waivers and/or expense reimbursements) are equal to each class’ respective 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 (184), then divided by 365. |
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| 8 | | Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report |
Portfolio performance (unaudited)
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| Average annual total returns1 | |
| | | Class I† | | | Class II† | |
| Inception* through 12/31/11 | | | -0.12 | % | | | -0.16 | % |
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| Cumulative total returns1 | | | | | |
| | | | | | |
| Class I (Inception date of 11/30/11 through 12/31/11) | | | | | -0.12 | % |
| Class II (Inception date of 11/30/11 through 12/31/11) | | | | | -0.16 | |
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. Results for longer periods will differ in some cases substantially. The returns shown do not reflect expenses associated with separate accounts such as administrative fees, account charges and surrender charges, which, if reflected, would reduce the total returns. Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower.
| 1 | Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value. |
| * | Inception date for Class I and Class II shares is November 30, 2011. |
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| Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report | | | 9 | |
Schedule of investments
December 31, 2011
Legg Mason Dynamic Multi-Strategy VIT Portfolio
| | | | | | | | | | | | | | |
| Description | | | | | | | Shares | | | Value | |
| Investments In Underlying Funds — 99.6% | | | | | | | | | | | | | | |
iShares Trust: | | | | | | | | | | | | | | |
iShares Barclays Intermediate Credit Bond Fund | | | | | | | | | 370 | | | $ | 39,657 | |
iShares MSCI EAFE Index Fund | | | | | | | | | 810 | | | | 40,119 | |
iShares Russell 1000 Index Fund | | | | | | | | | 1,140 | | | | 79,082 | |
iShares Russell 1000 Value Index Fund | | | | | | | | | 625 | | | | 39,675 | |
iShares Russell 2000 Index Fund | | | | | | | | | 530 | | | | 39,056 | |
iShares S&P/Citigroup International Treasury Bond Fund | | | | | | | | | 400 | | | | 39,960 | |
Legg Mason Charles Street Trust, Inc. — Legg Mason BW Global Opportunities Bond Fund, Class IS Shares | | | | | | | | | 51,239 | | | | 555,940 | (a) |
Legg Mason Global Asset Management Trust — Legg Mason BW Diversified Large Cap Value Fund, Class IS Shares | | | | | | | | | 40,080 | | | | 561,117 | (a) |
Legg Mason Global Trust, Inc. — Legg Mason Batterymarch International Equity Trust, Class IS Shares | | | | | | | | | 32,221 | | | | 362,491 | (a) |
Legg Mason Partners Equity Trust: | | | | | | | | | | | | | | |
Legg Mason Batterymarch U.S. Large Cap Equity Fund, Class IS Shares | | | | | | | | | 72,862 | | | | 759,947 | (a) |
Legg Mason ClearBridge Aggressive Growth Fund, Class IS Shares | | | | | | | | | 4,734 | | | | 557,708 | *(a) |
Royce Heritage Fund | | | | | | | | | 27,268 | | | | 356,664 | (a) |
Western Asset Funds Inc. — Western Asset Intermediate Bond Portfolio | | | | | | | | | 50,985 | | | | 548,600 | (a) |
Total Investments in Underlying Funds (Cost — $4,042,764) | | | | | | | 3,980,016 | |
| | | | |
| Security | | | | | Expiration
Date | | Contracts | | | | |
| Purchased Options — 0.8% | | | | | | | | | | | | | | |
S&P Index Futures, Put @1050.00 (Cost — $40,000) | | | | | | 12/20/12 | | | 2 | | | | 30,750 | |
Total Investments before Short-Term Investments (Cost — $4,082,764) | | | | 4,010,766 | |
| | | | |
| Security | | Rate | | | Maturity
Date | | Face
Amount | | | | |
| Short-Term Investments — 0.1% | | | | | | | | | | | | | | |
Repurchase Agreements — 0.1% | | | | | | | | | | | | | | |
Interest in $200,000,000 joint tri-party repurchase agreement dated 12/30/11 with RBS Securities Inc.; Proceeds at maturity — $3,000 (Fully collateralized by various U.S. government agency obligations, 1.375% to 4.375% due 11/30/15 to 11/15/39; Market value — $3,060) (Cost — $3,000) | | | 0.050 | % | | 1/3/12 | | $ | 3,000 | | | | 3,000 | |
Total Investments — 100.5% (Cost — $4,085,764#) | | | | 4,013,766 | |
Liabilities in Excess of Other Assets — (0.5)% | | | | (19,110 | ) |
Total Net Assets — 100.0% | | | $ | 3,994,656 | |
| * | Non-income producing security. |
| (a) | Underlying Fund is affiliated with Legg Mason, Inc. |
| # | Aggregate cost for federal income tax purposes is substantially the same. |
See Notes to Financial Statements.
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| 10 | | Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report |
Statement of assets and liabilities
December 31, 2011
| | | | |
| |
| Assets: | | | | |
Investments in affiliated Underlying Funds, at value (Cost — $3,767,068) | | $ | 3,702,467 | |
Investments, at value (Cost — $318,696) | | | 311,299 | |
Cash | | | 4,287 | |
Receivable from investment manager | | | 30,106 | |
Dividends receivable | | | 251 | |
Total Assets | | | 4,048,410 | |
| |
| Liabilities: | | | | |
Payable for offering and organization costs | | | 28,760 | |
Service and/or distribution fees payable | | | 21 | |
Accrued expenses | | | 24,973 | |
Total Liabilities | | | 53,754 | |
| Total Net Assets | | $ | 3,994,656 | |
| |
| Net Assets: | | | | |
Par value (Note 7) | | $ | 4 | |
Paid-in capital in excess of par value | | | 4,046,155 | |
Undistributed net investment income | | | 393 | |
Accumulated net realized gain on sale of Underlying Funds
and capital gain distributions from Underlying Funds | | | 20,102 | |
Net unrealized depreciation on Underlying Funds and Investments | | | (71,998) | |
| Total Net Assets | | $ | 3,994,656 | |
| |
| Shares Outstanding: | | | | |
Class I | | | 394,646 | |
Class II | | | 10,116 | |
| |
| Net Asset Value: | | | | |
Class I | | | $9.87 | |
Class II | | | $9.87 | |
See Notes to Financial Statements.
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| Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report | | | 11 | |
Statement of operations
For the Period Ended December 31, 20111
| | | | |
| |
| Investment Income: | | | | |
Income distributions from affiliated Underlying Funds | | $ | 32,678 | |
Short-term capital gains distributions from affiliated Underlying Funds | | | 13,955 | |
Income distributions from unaffiliated Underlying Funds | | | 1,441 | |
Interest | | | 32 | |
Total Investment Income | | | 48,106 | |
| |
| Expenses: | | | | |
Organization fees | | | 21,200 | |
Audit and tax | | | 15,000 | |
Offering costs | | | 7,560 | |
Shareholder reports | | | 5,000 | |
Legal fees | | | 2,500 | |
Fund accounting fees | | | 34 | |
Investment management fee (Note 2) | | | 1,567 | |
Custody fees | | | 500 | |
Transfer agent fees (Note 5) | | | 24 | |
Service and/or distribution fees (Notes 2 and 5) | | | 22 | |
Miscellaneous expenses | | | 1,916 | |
Total Expenses | | | 55,323 | |
Less: Fee waivers and/or expense reimbursements (Notes 2 and 5) | | | (53,769) | |
Net Expenses | | | 1,554 | |
| Net Investment Income | | | 46,552 | |
| |
Realized and Unrealized Gain (Loss) on Investments and Underlying Funds, Sales of
Underlying Funds and Capital Gain Distributions from Underlying Funds (Notes 1 and 3): | | | | |
Net Realized Gain (Loss) From: | | | | |
Sale of unaffiliated Underlying Funds | | | (4,669) | |
Sale of affiliated Underlying Funds | | | (8,340) | |
Capital gain distributions from affiliated Underlying Funds | | | 33,111 | |
Net Realized Gain | | | 20,102 | |
Change in Net Unrealized Appreciation (Depreciation) From: | | | | |
Affiliated Underlying Funds | | | (64,601) | |
Unaffiliated Underlying Funds | | | (7,397) | |
Change in Net Unrealized Appreciation (Depreciation) | | | (71,998) | |
| Net Loss on Sale of Underlying Funds and Capital Gain Distributions From Underlying Funds | | | (51,896) | |
| Decrease in Net Assets From Operations | | $ | (5,344) | |
| 1 | For the period November 30, 2011 (inception date) to December 31, 2011. |
See Notes to Financial Statements.
| | |
| 12 | | Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report |
Statement of changes in net assets
| | | | |
| For the Period Ended December 31, | | 2011† | |
| |
| Operations: | | | | |
Net investment income | | $ | 46,552 | |
Net realized gain | | | 20,102 | |
Change in net unrealized appreciation (depreciation) | | | (71,998) | |
Decrease in Net Assets From Operations | | | (5,344) | |
| |
| Distributions to Shareholders From (Notes 1 and 6): | | | | |
Net investment income | | | (47,000) | |
Decrease in Net Assets From Distributions to Shareholders | | | (47,000) | |
| |
| Fund Share Transactions (Note 7): | | | | |
Net proceeds from sale of shares | | | 4,000,000 | |
Reinvestment of distributions | | | 47,000 | |
Increase in Net Assets From Fund Share Transactions | | | 4,047,000 | |
Increase in Net Assets | | | 3,994,656 | |
| |
| Net Assets: | | | | |
Beginning of period | | | — | |
End of period* | | $ | 3,994,656 | |
* Includes undistributed net investment income of: | | | $393 | |
| † | For the period November 30, 2011 (inception date) to December 31, 2011. |
See Notes to Financial Statements.
| | | | |
| Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report | | | 13 | |
Financial highlights
| | | | |
For a share of each class of beneficial interest outstanding throughout each year ended December 31,
unless otherwise noted: | |
| Class I Shares | | 20111,2 | |
| |
| Net asset value, beginning of period | | | $10.00 | |
| |
| Income (loss) from operations: | | | | |
Net investment income3 | | | 0.12 | |
Net realized and unrealized loss | | | (0.13) | |
Total loss from operations | | | (0.01) | |
| |
| Less distributions from: | | | | |
Net investment income | | | (0.12) | |
Total distributions | | | (0.12) | |
| |
| Net asset value, end of period | | | $9.87 | |
Total return4 | | | (0.12) | % |
| |
| Net assets, end of period (000s) | | | $3,895 | |
| |
| Ratios to average net assets: | | | | |
Gross expenses5,6 | | | 15.88 | % |
Net expenses5,6,7,8,9 | | | 0.44 | |
Net investment income6 | | | 13.38 | |
| |
| Portfolio turnover rate | | | 15 | % |
| 1 | For the period November 30, 2011 (inception date) to December 31, 2011. |
| 2 | Per share amounts have been calculated using the average shares method. |
| 3 | Net investment income per share includes short-term capital gain distributions from Underlying Funds. |
| 4 | Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Total returns do not reflect expenses associated with 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. Total returns for periods of less than one year are not annualized. |
| 5 | Does not include expenses of the Underlying Funds in which the Fund invests. |
| 7 | The impact of compensating balance arrangements, if any, was less than 0.01%. |
| 8 | As a result of an expense limitation arrangement, the ratio of expenses, other than brokerage, interest, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Class I shares did not exceed 1.10%. This expense limitation arrangement cannot be terminated prior to December 31, 2013 without the Board of Trustees’ consent. |
| 9 | Reflects fee waivers and/or expense reimbursements. |
See Notes to Financial Statements.
| | |
| 14 | | Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report |
Financial highlights (cont’d)
| | | | |
For a share of each class of beneficial interest outstanding throughout each year ended December 31,
unless otherwise noted: | |
| Class II Shares | | 20111,2 | |
| |
| Net asset value, beginning of period | | | $10.00 | |
| |
| Income (loss) from operations: | | | | |
Net investment income3 | | | 0.11 | |
Net realized and unrealized loss | | | (0.13) | |
Total loss from operations | | | (0.02) | |
| |
| Less distributions from: | | | | |
Net investment income | | | (0.11) | |
Total distributions | | | (0.11) | |
| |
| Net asset value, end of period | | | $9.87 | |
Total return4 | | | (0.16) | % |
| |
| Net assets, end of period (000s) | | | $100 | |
| |
| Ratios to average net assets: | | | | |
Gross expenses5,6 | | | 16.27 | % |
Net expenses5,6,7,8,9 | | | 0.69 | |
Net investment income6 | | | 13.13 | |
| |
| Portfolio turnover rate | | | 15 | % |
| 1 | For the period November 30, 2011 (inception date) to December 31, 2011. |
| 2 | Per share amounts have been calculated using the average shares method. |
| 3 | Net investment income per share includes short-term capital gain distributions from Underlying Funds. |
| 4 | Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Total returns do not reflect expenses associated with 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. Total returns for periods of less than one year are not annualized. |
| 5 | Does not include expenses of the Underlying Funds in which the Fund invests. |
| 7 | The impact of compensating balance arrangements, if any, was less than 0.01%. |
| 8 | As a result of an expense limitation arrangement, the ratio of expenses, other than brokerage, interest, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Class II shares did not exceed 1.35%. This expense limitation arrangement cannot be terminated prior to December 31, 2013 without the Board of Trustees’ consent. |
| 9 | Reflects fee waivers and/or expense reimbursements. |
See Notes to Financial Statements.
| | | | |
| Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report | | | 15 | |
Notes to financial statements
1. Organization and significant accounting policies
Legg Mason Dynamic Multi Strategy VIT Portfolio (the “Portfolio”) is a separate diversified investment series of Legg Mason Partners Variable Equity Trust (the “Trust”). The Trust, a Maryland statutory trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Portfolio invests in other mutual funds (“Underlying Funds”) which are affiliated with Legg Mason, Inc. (“Legg Mason”). The financial statements and financial highlights of the Underlying Funds are presented in a separate shareholder report for each respective Underlying Fund.
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. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation. Investments in the Underlying Funds are valued at the closing net asset value per share of each Underlying Fund on the day of 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. The valuations for fixed income securities and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of fair valuation techniques and methodologies. Short-term fixed income securities that will mature in 60 days or less are valued at amortized cost, unless it is determined that using this method would not reflect an investment’s fair value. If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers. When reliable prices are not readily available, 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 values these securities as determined in accordance with procedures approved by the Portfolio’s Board of Trustees.
The Portfolio has adopted Financial Accounting Standards Board Codification Topic 820 (“ASC Topic 820”). ASC Topic 820 establishes a single definition of fair value, creates a three-tier hierarchy as a framework for measuring fair value based on inputs used to value the Portfolio’s investments, and requires additional disclosure about fair value. The hierarchy of inputs is summarized below.
| | |
| 16 | | Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report |
Notes to financial statements (cont’d)
| Ÿ | | Level 1 — quoted prices in active markets for identical investments |
| Ÿ | | Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) |
| Ÿ | | Level 3 — significant unobservable inputs (including the Portfolio’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The Portfolio uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.
The following is a summary of the inputs used in valuing the Portfolio’s assets carried at fair value:
| | | | | | | | | | | | | | | | |
| ASSETS | |
| Description | | Quoted Prices
(Level 1) | | | Other Significant
Observable Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | | | Total | |
| Long-term investments†: | | | | | | | | | | | | | | | | |
Investments in Underlying Funds | | $ | 3,980,016 | | | | — | | | | — | | | $ | 3,980,016 | |
Purchased options | | | 30,750 | | | | — | | | | — | | | | 30,750 | |
| Total long-term investments | | $ | 4,010,766 | | | | — | | | | — | | | $ | 4,010,766 | |
| Short-term investments† | | | — | | | $ | 3,000 | | | | — | | | | 3,000 | |
| Total investments | | $ | 4,010,766 | | | $ | 3,000 | | | | — | | | $ | 4,013,766 | |
| † | See Schedule of Investments for additional detailed categorizations. |
(b) Repurchase agreements. The Portfolio may enter into repurchase agreements with institutions that its investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, the Portfolio acquires a debt security subject to an obligation of the seller to repurchase, and of the Portfolio to resell, the security at an agreed-upon price and time, thereby determining the yield during the Portfolio’s holding period. When entering into repurchase agreements, it is the Portfolio’s policy that its custodian or a third party custodian, acting on the Portfolio’s behalf, 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 maturity exceeds one business day, the value of the collateral is marked-to-market and measured against the value of the agreement in an effort to ensure the adequacy of the collateral. If the counterparty defaults, the Portfolio generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during the period in which the Portfolio
| | | | |
| Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report | | | 17 | |
seeks to assert its rights 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) Fund of funds risk. Your cost of investing in the Portfolio, as funds of funds, may be higher than the cost of investing in a mutual fund that only invests directly in individual securities. An underlying fund may change its investment objective or policies without the Portfolio’s approval, which could force the Portfolio to withdraw its investment from such underlying fund at a time that is unfavorable to the Portfolio. In addition, one underlying fund may buy the same securities that another underlying fund sells. Therefore, the Portfolio would indirectly bear the costs of these trades without accomplishing any investment purpose.
(d) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Net investment income distributions and short-term capital gain distributions, if any, from the Underlying Funds are recorded on the ex-dividend date as investment income. Interest income is recorded on an accrual basis. Long-term capital gain distributions, if any, from the Underlying Funds are recorded on the ex-dividend date as realized gains. The cost of investments sold is determined by use of the specific identification method.
(e) 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.
(f) Share class accounting. Investment income, common expenses and realized/unrealized gains (losses) on investments are allocated to the various classes of the Portfolio on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that share class.
(g) Compensating balance arrangements. The Portfolio has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Portfolio’s cash on deposit with the bank.
(h) 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 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Portfolio intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Portfolio’s financial statements.
Management has analyzed the Portfolio’s tax positions taken on income tax returns for all open tax years and has concluded that as of December 31, 2011, no provision for income tax is required in the Portfolio’s financial statements.
(i) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting.
| | |
| 18 | | Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report |
Notes to financial statements (cont’d)
These reclassifications have no effect on net assets or net asset values per share. During the current period, the following reclassifications have been made:
| | | | | | |
| | | Undistributed Net
Investment Income | | Paid-in
Capital | |
| (a) | | $841 | | $ | (841) | |
| (a) | Reclassifications are primarily due to non-deductible 12b-1 fees and non-deductible offering costs. |
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Portfolio’s investment manager and Legg Mason Global Asset Allocation, LLC (“LMGAA”) is the Portfolio’s subadviser. Western Asset Management Company (“Western Asset”) manages the Portfolio’s cash and short-term instruments. LMPFA, LMGAA and Western Asset 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 0.45% of the Portfolio’s average daily net assets.
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, which is provided by Western Asset.
As a result of expense limitation arrangements between the Portfolio and LMPFA, the ratio of expenses other than brokerage, interest, taxes, extraordinary expenses and acquired fund fees and expenses, to average net assets of Class I and II shares did not exceed 1.10% and 1.35%, respectively. These expense limitation arrangements cannot be terminated prior to December 31, 2013 without the Board of Trustees’ consent.
The investment manager is permitted to recapture amounts previously waived or reimbursed to a class during the same fiscal year if the class’ total annual operating expenses have fallen to a level below the expense limitation (“expense cap”) in effect at the time the fees were earned or the expense incurred. In no case will the investment manager recapture any amount that would result, on any particular business day of the Portfolio, in the class’ total annual operating expenses exceeding the expense cap or any other lower limit then in effect.
During the period ended December 31, 2011, fees waived and/or expenses reimbursed amounted to $53,769.
Legg Mason Investor Services, LLC, a wholly-owned broker-dealer subsidiary of Legg Mason, serves as the Portfolio’s sole and exclusive distributor.
All officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.
As of December 31, 2011, Legg Mason and its affiliates owned 100% of the Portfolio.
| | | | |
| Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report | | | 19 | |
3. Investments
During the period ended December 31, 2011, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
| | | | |
| Purchases | | $ | 4,621,047 | |
| Sales | | | 565,274 | |
At December 31, 2011, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
| | | | |
| Gross unrealized appreciation | | $ | 1,989 | |
| Gross unrealized depreciation | | | (73,987) | |
| Net unrealized depreciation | | $ | (71,998) | |
4. Derivative instruments and hedging activities
Financial Accounting Standards Board Codification Topic 815 requires enhanced disclosure about an entity’s derivative and hedging activities.
Below is a table, grouped by derivative type, that provides information about the fair value and the location of derivatives within the Statement of Assets and Liabilities at December 31, 2011.
| | | | |
| ASSET DERIVATIVES1 | |
| | | Interest
Rate Risk | |
| Purchased options2 | | $ | 30,750 | |
| 1 | Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation (depreciation) and for liability derivatives is payables/net unrealized appreciation (depreciation). |
| 2 | Market value of purchased options is reported in Investments at value in the Statement of Assets and Liabilities. |
The following table provides information about the effect of derivatives and hedging activities on the Portfolio’s Statement of Operations for the year ended December 31, 2011. The table provides additional information about the change in unrealized appreciation (depreciation) resulting from the Portfolio’s derivatives and hedging activities during the period.
| | | | |
| CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED | |
| | | Interest
Rate Risk | |
| Purchased options | | $ | (9,250) | |
During the year ended December 31, 2011, the volume of derivative activity for the Portfolio was as follows:
| | | | |
| | | Average
Market Value | |
| Purchased options | | $ | 30,750 | |
| | |
| 20 | | Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report |
Notes to financial statements (cont’d)
5. Class specific expenses, waivers and/or expense reimbursement
The Portfolio has adopted a Rule 12b-1 distribution plan and under that plan the Portfolio pays a service and/or distribution fee with respect to its Class II shares calculated at the annual rate of 0.25% of the average daily net assets of the class. Service and distribution fees are accrued and paid monthly.
For the period ended December 31, 2011, class specific expenses were as follows:
| | | | | | | | |
| | | Service and/or
Distribution Fees† | | | Transfer Agent
Fees† | |
| Class I | | | — | | | $ | 12 | |
| Class II | | $ | 22 | | | | 12 | |
| Total | | $ | 22 | | | $ | 24 | |
| † | For the period November 30, 2011 (inception date) to December 31, 2011. |
For the period ended December 31, 2011, waivers and/or expense reimbursements by class were as follows:
| | | | | | | | |
| | | Distribution
Fee Waivers† | | | Waivers/Expense
Reimbursements† | |
| Class I | | | — | | | $ | 52,413 | |
| Class II | | $ | 22 | | | | 1,334 | |
| Total | | $ | 22 | | | $ | 53,747 | |
| † | For the period November 30, 2011 (inception date) to December 31, 2011. |
6. Distributions to shareholders by class
| | | | |
| | | Period Ended
December 31, 2011† | |
| Net Investment Income: | | | |
| Class I | | $ | 45,858 | |
| Class II | | | 1,142 | |
| Total | | $ | 47,000 | |
| † | For the period November 30, 2011 (inception date) to December 31, 2011. |
7. Shares of beneficial interest
At December 31, 2011, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share. The Portfolio has the ability to issue multiple classes of shares. Each class of shares represents an identical interest and has the same rights, except that each class bears certain direct expenses, including those specifically related to the distribution of its shares.
| | | | |
| Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 Annual Report | | | 21 | |
Transactions in shares of each class were as follows:
| | | | | | | | |
| | | Period Ended
December 31, 2011† | |
| | | Shares | | | Amount | |
| Class I | | | | | | | | |
| Shares sold | | | 390,000 | | | $ | 3,900,000 | |
| Shares issued on reinvestment | | | 4,646 | | | | 45,858 | |
| Net increase | | | 394,646 | | | $ | 3,945,858 | |
| | |
| Class II | | | | | | | | |
| Shares sold | | | 10,000 | | | $ | 100,000 | |
| Shares issued on reinvestment | | | 116 | | | | 1,142 | |
| Net increase | | | 10,116 | | | $ | 101,142 | |
| † | For the period November 30, 2011 (inception date) to December 31, 2011. |
8. Income tax information and distributions to shareholders
The tax character of distributions paid during the period ended December 31, 2011 was as follows:
| | | | |
| | | 2011 | |
| Distributions Paid From: | | | | |
| Ordinary income | | $ | 47,000 | |
As of December 31, 2011, the components of accumulated earnings on a tax basis were as follows:
| | | | |
| Undistributed ordinary income — net | | $ | 964 | |
| Undistributed long-term capital gains — net | | | 10,852 | |
| Total undistributed earnings | | $ | 11,816 | |
| Other book/tax temporary differences (a) | | | 8,679 | |
| Unrealized appreciation (depreciation) | | | (71,998) | |
| Total accumulated earnings (losses) — net | | $ | (51,503) | |
| (a) | Other book/tax temporary differences are attributable primarily to book/tax differences in the timing of the deductibility of various expenses and the realization for tax purposes of unrealized losses on certain option contracts. |
9. Recent accounting pronouncement
In May 2011, the Financial Accounting Standards Board issued Accounting Standard Update No. 2011-04, Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU No. 2011-04”). ASU No. 2011-04 establishes common requirements for measuring fair value and for disclosing information about fair value measurements. ASU No. 2011-04 is effective during interim and annual periods beginning after December 15, 2011. Management is currently evaluating the impact the adoption of ASU No. 2011-04 will have on the Portfolio’s financial statements and related disclosures.
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| 22 | | Legg Mason Dynamic Multi-Strategy VIT Portfolio 2011 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 of Legg Mason Dynamic Multi-Strategy VIT Portfolio, a series of Legg Mason Partners Variable Equity Trust, including the schedule of investments, as of December 31, 2011, and the related statements of operations, changes in net assets, and the financial highlights for the period from November 30, 2011 (inception date) to December 31, 2011. 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 audit.
We conducted our audit 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 December 31, 2011, by correspondence with the investee funds’ transfer agent and brokers. 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 audit provides 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 Dynamic Multi-Strategy VIT Portfolio as of December 31, 2011, and the results of its operations, the changes in its net assets, and the financial highlights for the period described above, in conformity with U.S. generally accepted accounting principles.
New York, New York
February 15, 2012
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| Legg Mason Dynamic Multi-Strategy VIT Portfolio | | | 23 | |
Board approval of management and subadvisory agreements (unaudited)
At meetings of the Trust’s Board of Trustees, the Board considered the initial approval for a two-year period of the management agreement of Legg Mason Dynamic Multi-Strategy VIT Portfolio (the “Fund”), pursuant to which Legg Mason Partners Fund Advisor, LLC (the “Manager”) provides the Fund with investment advisory and administrative services, the sub-advisory agreement pursuant to which Legg Mason Global Asset Allocation, LLC (“LMGAA”) provides day-to-day management of the Fund’s portfolio, and the sub-advisory agreement pursuant to which Western Asset Management Company (“Western Asset” and, together with LMGAA, the “Sub-Advisers”) provides day-to-day management of the Fund’s assets allocated to the Fund’s Event Risk Management strategy and of the Fund’s cash and short-term instruments. (The management agreement and sub-advisory agreements are collectively referred to as the “Agreements.”) The Manager and the Sub-Advisers are wholly-owned subsidiaries of Legg Mason, Inc. The Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940, as amended (the “Independent Trustees”)) of the Fund were assisted in their review by Fund counsel and independent legal counsel and met with independent legal counsel in executive sessions separate from representatives of the Manager and the Sub-Advisers. The Independent Trustees requested and received information from the Manager and the Sub-Advisers they deemed reasonably necessary for their review of the Agreements and the services to be provided by the Manager and the Sub-Advisers. Included was information about the Manager, the Sub-Advisers and the Fund’s distributor, as well as the management, sub-advisory and distribution arrangements for the Fund and other funds overseen by the Board.
In voting to approve the Agreements, the Independent Trustees considered whether the approval of the Agreements would be in the best interests of the Fund and its prospective shareholders, an evaluation based on several factors including those discussed below.
Nature, Extent and Quality of the Services to be provided to the Fund under the Management Agreement and Sub-Advisory Agreements
The Board received and considered information regarding the nature, extent and quality of services to be provided to the Fund by the Manager and the Sub-Advisers under the Management Agreement and Sub-Advisory Agreements, respectively. The Trustees also considered the Manager’s supervisory activities over the Sub-Advisers. In addition, the Independent Trustees received and considered other information regarding the administrative and other services to be rendered to the Fund and its shareholders by the Manager. The Board noted information received at regular meetings throughout the year related to the services rendered by the Manager in its management of other funds in the Legg Mason fund complex, and the Manager’s role in coordinating the activities of the Sub-Advisers and the Fund’s other service providers. The Board’s evaluation of the services to be provided by the Manager and the Sub-Advisers took into account the Board’s knowledge and familiarity gained as Trustees of funds in the Legg Mason fund complex, including the scope and quality of the investment management and other capabilities of the Manager and the Sub-Advisers and the quality of the Manager’s administrative and
| | |
| 24 | | Legg Mason Dynamic Multi-Strategy VIT Portfolio |
Board approval of management and subadvisory agreements (unaudited) (cont’d)
other services. The Board observed that the scope of services provided by the Manager had expanded over time as a result of regulatory and other developments, including maintaining and monitoring its own expanded compliance programs and the compliance program to be implemented for the Fund. The Board reviewed information received from the Manager and the Fund’s Chief Compliance Officer regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the Investment Company Act of 1940, as amended.
The Board reviewed the qualifications, backgrounds and responsibilities of the Fund’s senior personnel and the portfolio management team that would be primarily responsible for the day-to-day portfolio management of the Fund. The Trustees then discussed with representatives of management the portfolio management strategy of the Fund’s portfolio managers. The Trustees noted that the Manager and the Sub-Advisers were committed to providing the resources necessary to assist the portfolio managers in managing the Fund. The Board also considered, based on its knowledge of the Manager and the Manager’s affiliates, the financial resources available to the Manager’s parent organization, Legg Mason, Inc.
The Board also considered the division of responsibilities among the Manager and the Sub-Advisers and the oversight to be provided by the Manager. The Board also considered the Manager’s and LMGAA’s brokerage policies and practices, the standards applied in seeking best execution, their policies and practices regarding soft dollars, and the existence of quality controls applicable to brokerage allocation procedures. In addition, management also reported to the Board on, among other things, its business plans, recent organizational changes, portfolio manager compensation plan and policy regarding portfolio managers’ ownership of fund shares.
The Board concluded that, overall, it was satisfied with the nature, extent and quality of services expected to be provided under the respective Agreement by the Manager and the Sub-Advisers.
Management Fees and Expense Ratios
The Board reviewed and considered the contractual management fee (the “Contractual Management Fee”) payable by the Fund to the Manager in light of the nature, extent and quality of the management and sub-advisory services expected to be provided by the Manager and the Sub-Advisers, respectively. The Board noted that the Manager, and not the Fund, pays the sub-advisory fees to the Sub-Advisers and, accordingly, that the retention of the Sub-Advisers would not increase the fees and expenses to be incurred by the Fund. The Board also noted that the Manager will provide the Fund with regulatory compliance and administrative services, office facilities and Fund officers (including the Fund’s chief financial, chief legal and chief compliance officers), and that the Manager will coordinate and oversee the provision of services to the Fund by other fund service providers, including the Sub-Advisers. The Board also referred to information regarding the fees the Manager and Sub-Advisers charged any of their respective U.S. clients investing primarily in an asset class similar to that proposed for the Fund including, where
| | | | |
| Legg Mason Dynamic Multi-Strategy VIT Portfolio | | | 25 | |
applicable, institutional separate and commingled accounts and retail managed accounts. The Manager provided information which described the significant differences in the scope of services provided to investment companies, such as the Fund, and to such other clients. The Board considered the fee comparisons in light of the scope of services required to manage these different types of accounts.
The Board received an analysis of complex-wide management fees provided by the Manager, which, among other things, set out a framework of fees based on asset classes. Management also discussed with the Board the Fund’s proposed distribution arrangements, including how amounts to be received by the Fund’s distributor would be expended, and the estimated fees to be received and estimated expenses to be incurred in connection with such arrangements by affiliates of the Manager. Additionally, the Board received and considered information comparing the Fund’s Contractual Management Fee with those of a group of comparable funds, which showed that the Fund’s Contractual Management Fee was competitive with the management fees paid by such other funds. The Board also noted that the Manager had contractually agreed to waive fees and/or reimburse the Fund’s expenses if such expenses exceed certain amounts and that such arrangement would continue until December 31, 2013.
Economies of Scale
The Board noted that to the extent the Fund’s assets increase over time, the Fund and its shareholders should realize economies of scale as certain expenses, such as fixed fund fees, become a smaller percentage of overall assets. The Board noted that it appeared that the benefits of any economies of scale also would be appropriately shared with shareholders through increased investment in fund management and administration resources.
Taking all of the above into consideration, the Board determined that the management fee was reasonable in light of the nature, extent and quality of the services expected to be provided to the Fund under the Agreements.
Other Benefits to the Manager
The Board considered other benefits expected to be received by the Manager and its affiliates, including the Sub-Advisers, as a result of the Manager’s relationship with the Fund, including the opportunity to offer additional products and services to Fund shareholders. In light of the expected costs of providing investment management and other services to the Fund and the Manager’s commitment to the Fund, the other ancillary benefits that the Manager and its affiliates expect to receive were considered reasonable.
Based on their discussions and considerations, including those described above, the Trustees approved the Management Agreement and the Sub-Advisory Agreements.
No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the Management Agreement and the Sub-Advisory Agreements.
| | |
| 26 | | Legg Mason Dynamic Multi-Strategy VIT Portfolio |
Additional information (unaudited)
Information about Trustees and Officers
The business and affairs of Legg Mason Dynamic Multi-Strategy VIT Portfolio (the “Portfolio”) are conducted by management under the supervision and subject to the direction of its Board of Trustees. The business address of each Trustee is c/o R. Jay Gerken, 620 Eighth Avenue, New York, New York 10018. Information pertaining to the Trustees and officers of the Fund is set forth below.
The Statement of Additional Information includes additional information about Trustees and is available, without charge, upon request by calling the Portfolio at 1-877-721-1926.
| | |
| Independent Trustees†: |
| Paul R. Ades |
| Year of birth | | 1940 |
| Position(s) with Trust | | Trustee |
| Term of office1 and length of time served2 | | Since 1983 |
| Principal occupation(s) during past five years | | Paul R. Ades, PLLC (law firm) (since 2000) |
| Number of funds in fund complex overseen by Trustee | | 49 |
| Other board memberships held by Trustee during past five years | | None |
| Andrew L. Breech |
| Year of birth | | 1952 |
| Position(s) with Trust | | 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 funds in fund complex overseen by Trustee | | 49 |
| Other board memberships held by Trustee during past five years | | None |
| Dwight B. Crane |
| Year of birth | | 1937 |
| Position(s) with Trust | | Trustee |
| Term of office1 and length of time served2 | | Since 1981 |
| Principal occupation(s) during past five years | | Professor Emeritus, Harvard Business School (since 2007); formerly, Professor, Harvard Business School (1969 to 2007); Independent Consultant (since 1969) |
| Number of funds in fund complex overseen by Trustee | | 49 |
| Other board memberships held by Trustee during past five years | | None |
| | | | |
| Legg Mason Dynamic Multi-Strategy VIT Portfolio | | | 27 | |
| | |
| Independent Trustees cont’d |
| Frank G. Hubbard |
| Year of birth | | 1937 |
| Position(s) with Trust | | Trustee |
| Term of office1 and length of time served2 | | Since 1993 |
| Principal occupation(s) during past five years | | President, Avatar International Inc. (business development) (since 1998) |
| Number of funds in fund complex overseen by Trustee | | 49 |
| Other board memberships held by Trustee during past five years | | None |
| Howard J. Johnson |
| Year of birth | | 1938 |
| Position(s) with Trust | | Trustee |
| Term of office1 and length of time served2 | | From 1981 to 1998 and since 2000 |
| Principal occupation(s) during past five years | | Chief Executive Officer, Genesis Imaging LLC (technology company) (since 2003) |
| Number of funds in fund complex overseen by Trustee | | 49 |
| Other board memberships held by Trustee during past five years | | None |
| Jerome H. Miller |
| Year of birth | | 1938 |
| Position(s) with Trust | | Trustee |
| Term of office1 and length of time served2 | | Since 1995 |
| Principal occupation(s) during past five years | | Retired |
| Number of funds in fund complex overseen by Trustee | | 49 |
| Other board memberships held by Trustee during past five years | | None |
| Ken Miller |
| Year of birth | | 1942 |
| Position(s) with Trust | | Trustee |
| Term of office1 and length of time served2 | | Since 1983 |
| Principal occupation(s) during past five years | | President, Young Stuff Apparel Group, Inc. (apparel manufacturer), division of Li & Fung (since 1963) |
| Number of funds in fund complex overseen by Trustee | | 49 |
| Other board memberships held by Trustee during past five years | | None |
| | |
| 28 | | Legg Mason Dynamic Multi-Strategy VIT Portfolio |
Additional information (unaudited) (cont’d)
Information about Trustees and Officers
| | |
| Independent Trustees cont’d |
| John J. Murphy |
| Year of birth | | 1944 |
| Position(s) with Trust | | Trustee |
| Term of office1 and length of time served2 | | Since 2002 |
| Principal occupation(s) during past five years | | Founder and Senior Principal, Murphy Capital Management (investment management) (since 1983) |
| Number of funds in fund complex overseen by Trustee | | 49 |
| Other board memberships held by Trustee during past five years | | Trustee, UBS Funds (52 funds) (since 2008); Trustee, Consulting Group Capital Markets Funds (11 funds) (since 2002); formerly, Director, Nicholas Applegate Institutional Funds (12 funds) (2005 to 2010); formerly, Director, Atlantic Stewardship Bank (2004 to 2005); formerly, Director, Barclays International Funds Group Ltd. and affiliated companies (1983 to 2003) |
| Thomas F. Schlafly |
| Year of birth | | 1948 |
| Position(s) with Trust | | Trustee |
| Term of office1 and length of time served2 | | Since 1983 |
| Principal occupation(s) during past five years | | President, The Saint Louis Brewery, Inc. (brewery) (since 1989); Partner, Thompson Coburn LLP (law firm) (since 2009); formerly, Of Counsel, Husch Blackwell Sanders LLP (law firm) and its predecessor firms (1984 to 2009) |
| Number of funds in fund complex overseen by Trustee | | 49 |
| Other board memberships held by Trustee during past five years | | Director, Citizens National Bank of Greater St. Louis (since 2006) |
| Jerry A. Viscione |
| Year of birth | | 1944 |
| Position(s) with Trust | | Trustee |
| Term of office1 and length of time served2 | | Since 1993 |
| Principal occupation(s) during past five years | | Retired |
| Number of funds in fund complex overseen by Trustee | | 49 |
| Other board memberships held by Trustee during past five years | | None |
| | | | |
| Legg Mason Dynamic Multi-Strategy VIT Portfolio | | | 29 | |
| | |
| Interested Trustee and Officer: | | |
| R. Jay Gerken3 | | |
| Year of birth | | 1951 |
| Position(s) with Trust | | 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 & Co., LLC (“Legg Mason & Co.”) (since 2005); Officer and Trustee/Director of 161 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); President and Chief Executive Officer (“CEO”) of LMPFA (since 2006); President and CEO of Smith Barney Fund Management LLC (“SBFM”) (formerly a registered investment adviser) (since 2002) |
| Number of funds in fund complex overseen by Trustee | | 161 |
| Other board memberships held by Trustee during past five years | | None |
| Additional Officers | | |
Ted P. Becker Legg Mason 620 Eighth Avenue, New York, NY 10018 | | |
| Year of birth | | 1951 |
| Position(s) with Trust | | Chief Compliance Officer |
| Term of office1 and length of time served2 | | Since 2007 |
| 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 of Legg Mason & Co. (since 2005); Chief Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006) |
Vanessa A. Williams
Legg Mason 100 First Stamford Place, Stamford, CT 06902 | | |
| Year of birth | | 1979 |
| Position(s) with Trust | | Chief Anti-Money Laundering Compliance Officer and Identity Theft Prevention Officer |
| Term of office1 and length of time served2 | | Since 2011 |
| Principal occupation(s) during past five years | | Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); formerly, Assistant Vice President and Senior Compliance Officer of Legg Mason & Co. (2008 to 2011); formerly, Compliance Analyst of Legg Mason & Co. or its predecessors (2004 to 2008) |
| | |
| 30 | | Legg Mason Dynamic Multi-Strategy VIT Portfolio |
Additional information (unaudited) (cont’d)
Information about Trustees and Officers
| | |
| Additional Officers cont’d | | |
Robert I. Frenkel Legg Mason 100 First Stamford Place, Stamford, CT 06902 | | |
| Year of birth | | 1954 |
| Position(s) with Trust | | Secretary and Chief Legal Officer |
| Term of office1 and length of time served2 | | Since 2007 |
| Principal occupation(s) during past five years | | Vice President and Deputy General Counsel of Legg Mason (since 2006); Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006) |
Thomas C. Mandia Legg Mason 100 First Stamford Place, Stamford, CT 06902 | | |
| Year of birth | | 1962 |
| Position(s) with Trust | | Assistant Secretary |
| Term of office1 and length of time served2 | | Since 2007 |
| Principal occupation(s) during past five years | | Managing Director and Deputy General Counsel of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); Secretary of LMPFA (since 2006); Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); Secretary to SBFM (since 2002) |
Richard F. Sennett Legg Mason 55 Water Street, New York, NY 10041 | | |
| Year of birth | | 1970 |
| Position(s) with Trust | | Principal Financial Officer |
| Term of office1 and length of time served2 | | Since 2011 |
| Principal occupation(s) during past five years | | Principal Financial Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); Managing Director of Legg Mason & Co. and Senior Manager of the Treasury Policy group for Legg Mason & Co.’s Global Fiduciary Platform (since 2011); formerly, Chief Accountant within the SEC’s Division of Investment Management (2007 to 2011); formerly, Assistant Chief Accountant within the SEC’s Division of Investment Management (2002 to 2007) |
| | | | |
| Legg Mason Dynamic Multi-Strategy VIT Portfolio | | | 31 | |
| | |
| Additional Officers cont’d | | |
Albert Laskaj Legg Mason 55 Water Street, New York, NY 10041 | | |
| Year of birth | | 1977 |
| Position(s) with Trust | | Treasurer |
| Term of office1 and length of time served2 | | Since 2010 |
| Principal occupation(s) during past five years | | Vice President of Legg Mason & Co. (since 2008); Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2010); formerly, Controller of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2010); formerly, Assistant Controller of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2007); formerly, Accounting Manager of certain mutual funds associated with Legg Mason & Co. predecessors (prior to 2005) |
Jeanne M. Kelly Legg Mason 620 Eighth Avenue, New York, NY 10018 | | |
| Year of birth | | 1951 |
| Position(s) with Trust | | Senior Vice President |
| Term of office1 and length of time served2 | | Since 2007 |
| Principal occupation(s) during past five years | | Senior Vice President of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006); Managing Director of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005) |
| † | Trustees who are not “interested persons” of the Portfolio within the meaning of Section 2(a)(19) of the 1940 Act. |
| 1 | Each Trustee and officer serves until his or her respective 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 became a board member for a fund in the Legg Mason fund complex or the officer took such office. |
| 3 | Mr. Gerken is an “interested person” of the Portfolio, as defined in the 1940 Act, because of his position with LMPFA and/or certain of its affiliates. |
| | |
| 32 | | Legg Mason Dynamic Multi-Strategy VIT Portfolio |
Important tax information (unaudited)
The following information is provided with respect to the distributions paid during the taxable period ended December 31, 2011:
| | | | |
| Record date: | | | 12/28/2011 | |
| Payable date: | | | 12/29/2011 | |
Dividends qualifying for the dividends | | | | |
received deduction for corporations | | | 47.39 | % |
Please retain this information for your records.
Legg Mason
Dynamic Multi-Strategy VIT Portfolio
Trustees
Paul R. Ades
Andrew L. Breech
Dwight B. Crane
R. Jay Gerken Chairman
Frank G. Hubbard
Howard J. Johnson
Jerome H. Miller
Ken Miller
John J. Murphy
Thomas F. Schlafly
Jerry A. Viscione
Investment manager
Legg Mason Partners Fund Advisor, LLC
Subadviser
Legg Mason Global Asset Allocation, LLC
Distributor
Legg Mason Investor Services, LLC
Custodian
State Street Bank and Trust Company
Transfer agent
Boston Financial Data Services, Inc.
2000 Crown Colony Drive
Quincy, MA 02169
Independent registered public accounting firm
KPMG LLP 345 Park Avenue
New York, NY 10154
Legg Mason Dynamic Multi-Strategy VIT Portfolio
The Portfolio is a separate investment series of Legg Mason Partners Variable Equity Trust, a Maryland statutory trust.
Legg Mason Dynamic Multi-Strategy VIT Portfolio
Legg Mason Funds
55 Water Street
New York, NY 10041
The Portfolio files its complete schedules 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, shareholders can call the Portfolio at 1-877-721-1926.
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 the Portfolio at 1-877-721-1926, (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 general information of the shareholders of Legg Mason Dynamic Multi-Strategy VIT 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 before investing. The prospectus contains this and other important information about the Portfolio. Please read the prospectus carefully before investing.
www.leggmason.com/individualinvestors
©2012 Legg Mason Investor Services, LLC
Member FINRA, SIPC
Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds
This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsored closed-end funds and certain closed-end funds managed or sub-advised by Legg Mason or its affiliates. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:
| Ÿ | | Personal information included on applications or other forms; |
| Ÿ | | Account balances, transactions, and mutual fund holdings and positions; |
| Ÿ | | Online account access user IDs, passwords, security challenge question responses; and |
| Ÿ | | Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt, payment history, etc.). |
How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have authorized or as permitted or required by law. The Funds may disclose information about you to:
| Ÿ | | Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business or comply with obligations to government regulators; |
| Ÿ | | Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform marketing services solely for the Funds; |
| Ÿ | | The Funds’ representatives such as legal counsel, accountants and auditors; and |
| Ÿ | | Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust. |
|
| NOT PART OF THE ANNUAL REPORT |
Legg Mason Funds Privacy and Security Notice (cont’d)
Except as otherwise permitted by applicable law, companies acting on the Funds’ behalf are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to perform.
The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds’ practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.
Keeping You Informed of the Funds’ Privacy and Security Practices
The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.
The Funds’ Security Practices
The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.
In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is incomplete, not accurate or not current, or if you have questions about the Funds’ privacy practices, write the Funds using the contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at www.leggmason.com, or contact the Fund at 1-877-721-1926.
Revised April 2011
|
| NOT PART OF THE ANNUAL REPORT |
www.leggmason.com/individualinvestors
©2012 Legg Mason Investor Services, LLC Member FINRA, SIPC
LMFX014333 2/12 SR12-1598
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 Trustees 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” Trustee 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 previous fiscal years ending December 31, 2010 and December 31, 2011 (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 $301,400 in December 31, 2010 and $330,000 in December 31, 2011.
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 $0 in December 31, 2010 and $0 in December 31, 2011.
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.
(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $57,600 in December 31, 2010 and $61,000 in December 31, 2011. 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 may implement 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 may impair 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 may 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 100% for December 31, 2010 and December 31, 2011; Tax Fees were 100% and 100% for December 31, 2010 and December 31, 2011; and Other Fees were 100% and 100% for December 31, 2010and December 31, 2011.
(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 December 31, 2011.
(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
Frank G. Hubbard
Howard J. Johnson
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 second fiscal quarter of the period covered by this report that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting. |
(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: | | February 28, 2012 |
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: | | February 28, 2012 |
| | |
By: | | /S/ RICHARD F. SENNETT |
| | (Richard F. Sennett) |
| | Principal Financial Officer of |
| | Legg Mason Partners Variable Equity Trust |
| |
Date: | | February 28, 2012 |
