Mutual Funds | Product Brochure

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

Legg Mason Strategic Real Return Fund

Inflation: investors’ silent enemy

Inflation is the reduction of purchasing power as prices of goods and services

rise over time. So as inflation goes up, it reduces the value of money and many

financial assets. For investors, inflation is a silent enemy that won’t go away.

It’s a threat whether markets are up or down.

1 As measured by the U.S. Consumer Price Index, including the costs of food and energy and unadjusted for seasonal factors, in the period 2000 – 2009. Source: Bloomberg.

2 Future values may be lower or higher, depending on the actual annualized rate of inflation during the period.3 Erosion calculation = 100% - 78% = 22%

Source: Bloomberg. As of December 31, 2009.

-5

0

5

10

15

20

20092000199019801970196019501940

% C

hang

e

Consumer Price Index, non-seasonally adjusted

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Today’s value in 10 years in 20 years

Impact of inflation

in 30 years

78%100% 58% 36%

The erosive impact of inflationA simple hypothetical example illustrates the damage that inflation can do. Let’s say you buy a loaf of bread for $1.00 today. Using the 2.5% annualized rate of inflation over the past 10 years1 to project into the future, the same loaf of bread would cost $1.28 in 10 years.2

In other words, today’s dollar would be worth only 78% of a dollar in 10 years — an erosion of 22%.3 Projecting 20 and 30 years ahead yields a dollar currently worth only 58% and 36%, respectively, of its future value.

Imagine what this example means when applied to an investment portfolio. If your portfolio is worth $10,000 today, it would need to grow by 2.5% — the example’s rate of inflation — each year over the next 10 years just to be worth its original $10,000 value in “real” terms (that is, after adjustment for inflation). The size of your portfolio would increase only if its annualized rate of return were to exceed the 2.5% inflation rate.

The challenge of inflation-aware investing

Inflation can have different root causes. There’s no single cause of inflation — a number of factors can account for it. The most likely include the economic cycle, monetary policy, market expectations and external shocks.

Inflation is unpredictable. Historically, the level and persistence of inflation haven’t moved in consistent patterns (see chart on bottom of preceding page). And among professional economic forecasters, there’s typically little consensus on what the inflation outlook is.

Most inflationary periods are different, so different investment sectors may perform better in different inflationary periods. Since inflation can have many different causes, the characteristics of inflationary periods can differ as well. This variability has a direct impact on investment performance, as the top-performing sectors can significantly change from period to period.

The traditional inflation-aware approach is limitedOver the years, investors have usually positioned themselves for inflation by purchasing commodity metals (particularly gold), real estate investment trusts and, since their inception in 1997, inflation-indexed U.S. government bonds known as Treasury Inflation-Protected Securities (TIPS).

But this traditional approach has substantial limita-tions. By holding only one or two asset classes, for instance, it offers little inflation-aware diversifica-tion and is more exposed to risk than a broader asset mix. Because inflationary environments can differ so much, the approach may not benefit during some periods of inflation. And in longer stretches when inflation is mild, metals and TIPS may lose their investment appeal.

The traditional approach also assumes that inves-tors can correctly predict when the inflation outlook will change — something that even professional economic forecasters can seldom get right.

Investors should have a greater choiceIt’s clear that investors should have a greater choice of investments to protect assets against the dangers of inflation. What can you do?

We believe it could be most effective to invest a portion of your assets with inflation in mind on a long-term basis. Maintaining a long-term allocation to inflation-aware investments could spare you the tough decision of when to invest and keep you ready to buy inflation-protecting assets when their prices are relatively low.

We also believe that a well-diversified inflation-aware portfolio could generate potentially better results than the narrower traditional approach, especially in periods of normal or mild inflation.

Fortunately, there’s a new way to meet the challenge of inflation-aware investing. It’s called Legg Mason Strategic Real Return Fund.

Clearly, investors need to build their portfolios with inflation in mind. But inflation-aware

investing is a challenge that’s especially difficult for several key reasons.

Maintaining a long-term allocation to inflation-aware investments could spare you the tough decision of when to invest.

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Legg Mason Strategic Real Return Fund: The next generation of inflation-aware investing

It starts with portfolio construction Understanding how Legg Mason Strategic Real Return Fund works starts with understanding how it’s constructed.

The Fund consists of five separate “sleeves” containing different inflation-aware asset classes that we believe complement each other. Each sleeve is intended to hold a targeted portion of total assets.

Legg Mason Global Asset Allocation (LMGAA), our affiliate specializing in asset allocation, oversees the entire Fund and manages three of its sleeves. LMGAA can increase or reduce each sleeve by up to 50% of the sleeve’s targeted size as it deems appropriate.

The five sleeves of Legg Mason Strategic Real Return Fund

Sleeve Subadvisor Strategic allocation target4 Tactical allocation range

Inflation-Linked Debt SecuritiesPredominantly U.S. inflation-indexed securities (TIPS), plus 20% or less of corporate, agency, mortgage-backed and other types of debt securities selected by Western Asset’s rigorous credit analysis process

Western Asset Management 40%

Global EquitiesInvestment process features unique blend of quanti-tative and fundamental analysis to select securities that tend to appreciate when inflation increases

Batterymarch Financial Management 20%

Commodity-Linked SecuritiesIndex-like exposure through ETFs, swaps and other instruments

Legg Mason Global Asset Allocation 20%

Real Estate Investment TrustsIndex-like exposure through ETFs, swaps and other instruments

Legg Mason Global Asset Allocation 10%

Tactical/DefensiveAims to manage risk within the overall Fund using several asset allocation and investment approaches

Legg Mason Global Asset Allocation 10%

Legg Mason Strategic Real Return Fund takes inflation-aware investing in a new direction.

We’ve designed the Fund to be what traditional inflation-aware investing hasn’t been:

diversified, flexible and a potential source of extra value in your overall portfolio. And the

Fund’s structure delivers the specialized expertise of Legg Mason’s affiliate managers to

you in a single investment.

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4 Allocation targets are approximate and subject to change.

A proactive investment processLMGAA proactively manages the Fund based on its assessment both of inflation indicators and how asset classes are valued compared to each other. It adjusts the asset mix in anticipation of long-term shifts in the inflation environment.

To help identify these shifts, LMGAA uses sophisti-cated quantitative models that analyze numerous economic and financial factors. The models, in turn, are powered by a combination of proprietary and third-party research. Ibbotson Associates — a research-driven thought leader in capital-markets expectations — contributes to LMGAA’s economic forecasting.

How can you benefit?An investment in Legg Mason Strategic Real Return Fund may provide you with multiple benefits. While the benefits are strong individually, they could be even stronger when combined.

At the top of the list is diversification. This isn’t simply about the Fund owning multiple asset classes — it’s about why the Fund does so. Remember that inflation is unpredictable,

The five sleeves of Legg Mason Strategic Real Return Fund

Sleeve Subadvisor Strategic allocation target4 Tactical allocation range

Inflation-Linked Debt SecuritiesPredominantly U.S. inflation-indexed securities (TIPS), plus 20% or less of corporate, agency, mortgage-backed and other types of debt securities selected by Western Asset’s rigorous credit analysis process

Western Asset Management 40% 20%

60%

Global EquitiesInvestment process features unique blend of quanti-tative and fundamental analysis to select securities that tend to appreciate when inflation increases

Batterymarch Financial Management 20%

30%

10%

Commodity-Linked SecuritiesIndex-like exposure through ETFs, swaps and other instruments

Legg Mason Global Asset Allocation 20%

30%

10%

Real Estate Investment TrustsIndex-like exposure through ETFs, swaps and other instruments

Legg Mason Global Asset Allocation 10% 15%

5%

Tactical/DefensiveAims to manage risk within the overall Fund using several asset allocation and investment approaches

Legg Mason Global Asset Allocation 10% 15%

5%

can have a variety of causes and can affect performance among different investment sectors in different periods. All of these are excellent reasons to diversify an inflation-aware portfolio.

The next primary benefit is tactical asset allocation. LMGAA has great flexibility to reallocate assets among the Fund’s sleeves as its own longer-term inflation outlook changes.

Depending on the outlook — and its implications for financial markets — LMGAA may position the Fund to reduce risk or exploit market conditions for poten-tial appreciation. You won’t have to decide when and how to reconfigure your inflation-aware assets.

The Fund’s final major benefit is that it gives you access to the specialized expertise of Legg Mason’s affiliate managers. Three of our affiliates are responsible for portions of the portfolio. In addition to LMGAA, Western Asset Management manages the Inflation-Linked Debt Securities sleeve and Batterymarch Financial Management manages the Global Equities sleeve.

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Meet the managers

Legg Mason Global Asset Allocation

• Manages $4.5 billion5 in asset allocation products for individual and institutional investors

• Develops and implements strategic and tactical asset allocation in risk- and age-based portfolios

• Supports fund-of-funds and manager-of-managers methodologies

Western Asset Management• One of the world’s largest and premier

active fixed-income managers

• Manages $482.2 billion5 for individual and institutional investors, including $19.3 billion in Treasury Inflation-Protected Securities (TIPS)

• Managing TIPS since TIPS inception in 1997

Batterymarch Financial Management

• Pioneer in quantitative equity management across global markets

• Manages $20.3 billion5 for individual and institutional investors

• Investment process emphasizes disciplined security selection that integrates quantitative techniques with fundamental analysis

A sensible investment regardless of where inflation isConsider Legg Mason Strategic Real Return Fund as a long-term piece of your investment puzzle. It can make sense in inflationary and non-inflationary market environments alike.

The Fund is essentially structured like a typical balanced portfolio (that is, about 40% is invested in bonds and the remaining 60% in stocks and other potentially higher-risk/return assets). This suggests that the Fund could perform better than a traditional less-diversified inflation-aware portfolio when inflation is close to its historical norm.

Talk to your financial advisor today about how Legg Mason Strategic Real Return Fund could be a good fit for your portfolio. It could be a rewarding conversation.

Legg Mason Strategic Real Return Fund can make sense in inflationary and non-inflationary market environments alike.

5 As of December 31, 2009.

6 | Mutual Funds | Product Brochure6 | Mutual Funds | Product Brochure

Q. How is inflation measured?A. The standard U.S. measurement is the

Consumer Price Index (CPI), which is compiled by the Department of Labor’s Bureau of Labor Statistics. CPI calculates changes in the prices of a representative basket of goods and services and is typically expressed as an annualized per-centage rate. There are two commonly cited CPIs: “headline,” which includes all goods and services in the calculation, and “core,” which excludes the more-volatile components of food and energy.

Q. What are TIPS and how do they work?A. TIPS stands for Treasury-Inflation Protected

Securities, which are U.S. government bonds whose principal is automatically adjusted for inflation as measured by CPI. While a TIPS issue’s semiannual coupon rate is constant, it generates a different amount of interest when multiplied by the inflation-adjusted principal, thus protecting the investor against inflation. Owning TIPS is among the purest forms of inflation-aware investing.

But using TIPS as your primary inflation-aware investment can have drawbacks as well. Their specific role as an inflation hedge means that they’re out of favor in periods when inflation isn’t a concern. And TIPS prices may fall precipi-tously if inflation expectations decline.

Q. What are the advantages of investing for inflation with a diversified group of asset classes?

A. Traditionally, investors have sought to offset the impact of inflation on their portfolios by buying metals (notably gold) or TIPS. Although both of these have been effective inflation hedges at times, the changing nature of inflation and its underlying causes has rendered their effectiveness inconsistent.

Owning a wider universe of inflation-aware asset classes can offer a better chance to succeed in a variety of inflationary environments. It also may reduce the risk of an inflation-aware portfolio and, depending on the asset classes owned and their portfolio proportions, provide an opportunity to exceed inflation rather than merely keep up with it.

Q. Why should a portfolio that focuses on U.S. inflation invest in global equities?

A. During periods of inflation, companies that can maintain pricing power — because their goods or services enjoy steady demand — typically fare relatively well. These companies are located all over the world. Those that operate globally in sectors such as consumer staples and health care thus can be desirable for an inflation-aware portfolio.

Q. How does Legg Mason Strategic Real Return Fund invest in commodities?

A. Commodities are raw or primary materials. A partial list includes industrial and precious metals, agricultural basics like wheat and corn, and energy components like oil and natural gas. Many commodity sectors have performed well during a variety of inflationary periods.

To gain exposure to the commodities markets, the Fund invests in instruments that may include other mutual funds, exchange-traded funds and notes, master limited partnerships, structured notes, bonds, debentures and total-return swaps.

Q. What is the purpose of Legg Mason Strategic Real Return Fund’s Tactical/Defensive sleeve?

A. The Tactical/Defensive sleeve is designed to help the Fund manage risk. Think of it as a small rudder that can help steer a larger airplane through turbu-lence. Legg Mason Global Asset Allocation, which oversees the Fund, can use the sleeve to adjust the entire Fund’s risk level, serve as a counterweight to the rest of the Fund during difficult market condi-tions and, potentially, generate positive absolute returns in different market environments.

Frequently asked questions

An investor should consider A fund’s investment objectives, risks, chArges And expenses cArefully before investing. for A free prospectus, which contAins this And other informAtion on Any legg mAson fund, visit www.leggmAson.com/individuAlinvestors. An investor should reAd the prospectus cArefully before investing.

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© 2010 Legg Mason Investor Services, LLC, member FINRA/SIPC. Western Asset Management Company, Batterymarch Financial Management, Legg Mason Global Asset Allocation, LLC and Legg Mason Investor Services, LLC are Legg Mason, Inc. subsidiaries. 403599 LMFX012225 3/10 FN1010393

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

What should I know before investing?The Fund is a newly organized, open-end investment company with no history of operations. All investments involve risk, including the possible loss of principal. Diversification does not assure a profit or protect against market loss. There is no assurance that the Fund will meet its investment objective.

The Fund is subject to interest-rate, cred-it, income and inflation risks. As interest rates rise, bond prices fall, reducing the value of a fixed-income investment. Peri-ods of deflation may adversely affect the Fund, and changes in inflation will cause the Fund’s income to fluctuate. Equity securities are subject to price fluctuation and possible loss of principal. The Fund is not diversified, which means that it is permitted to invest a higher percent-age of its assets in any one issuer than a diversified fund. This may magnify the Fund’s losses from events affecting a particular issuer. In addition to the Fund’s operating expenses, you will indi-rectly bear the operating expenses of the underlying funds. Each underlying fund may engage in active and frequent trad-ing, resulting in higher portfolio turnover and transaction costs. Derivatives, such as options and futures, which can be il-liquid, may disproportionately increase losses and have a potentially large im-pact on Fund performance. International investments are subject to special risks including currency fluctuations and social, economic and political uncer-tainties, which could increase volatility. These risks are magnified in emerging markets. The Fund may use leverage, which may increase volatility and possi-bility of loss. The Fund may invest in real

estate investment trusts (REITs), which are closely linked to the performance of the real estate markets. REITs are sub-ject to illiquidity, credit and interest-rate risks, as well as risks associated with small- and mid-cap investments. The model used to manage the Fund’s assets provides no assurance that the recom-mended allocation will either maximize returns or minimize risks. There is no assurance that a recommended alloca-tion will prove the ideal allocation in all circumstances. The Fund and its under-lying ETFs (exchange-traded funds) may engage in short selling, which is a specu-lative 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 secu-rity that is sold short.

Additional risks may include those risks associated with investing in commodi-ties, ETFs, ETNs (exchange-traded notes) and MLPs (master limited partnerships). Please see the prospectus for a more complete discussion of the Fund’s risks.

U.S. Treasury Inflation Protected Securi-ties (TIPS) are U.S. government bonds sold at auction and available in 10- or 30-year maturities. TIPS have a fixed nomi-nal rate of coupon interest. But they also increase their principal by the changes in the CPI-U (the non-seasonally adjusted U.S.-city average all-items consumer price index for all urban consumers, published by the Department of Labor’s Bureau of Labor Statistics). Investors should note that TIPS, like most fixed- income instruments with long maturities, are subject to price risk.

Fund objective

The Fund seeks to provide an attractive “real” return. The Fund defines real return as total return reduced by the impact of inflation.

Portfolio managers

Steven D. Bleiberg and Y. Wayne Lin of Legg Mason Global Asset Allocation

Western Asset Management

Batterymarch Financial Management

Benchmark

40% Barclays Capital U.S. TIPS Index

20% S&P 500 Index

20% S&P GSCI Index

10% Barclays Capital U.S. Aggregate Bond Index

10% FTSE NAREIT All REIT Index

Fund symbols

Class A: LRRAX

Class C: LRRCX

Class I: LRRIX

Fund at a glance