Value Investing in the US Equities

Market

Justin Eede

Richard Gillham

Introduction to Legg Mason

On 1 December 2005, Citigroup Asset Management became part of Legg Mason

Founded in 1899, Legg Mason is a global investment management firm

‘Pure-play’ asset manager with assets under management in excess of $800 billion1

Worldwide investment presence within unique affiliate structure

1 Assets under management as of 31 October 2005 include the combined assets of Legg Mason and Permal plus approximately US$400 billion in managed assets acquired from Citigroup. Managed assets acquired from Citigroup have been reduced by a de minimis level of terminations plus certain assets that were either excluded from the transaction or are not anticipated to be retained long-term. These reductions are not expected to have a material impact on previously announced anticipated operating results.

Global Reach of Seasoned Investment Managers

Focuses exclusively on US equities

One of the world’s largest fixed income managers

Focuses on ‘Classic Value’ investing in US and international equities

and fixed income

Managing US small-cap equities for over 30 years

Global investment house with expertise in UK, US, Europe

and Asia

Broad based excellence across fixed income and equity markets around the world

Looking Through the Rear View Mirror, Investors Are Discouraged…

Source: CS First Boston

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

Jan 1931 Jan 1935 Jan 1939 Jan 1943 Jan 1947Jan 1951 Jan 1955 Jan 1959 Jan 1963Jan 1967 Jan 1971 Jan 1975 Jan 1979 Jan 1983Jan 1987 Jan 1991 Jan 1995 Jan 1999 Jan 2003

t5yr Return

Trailing 5-Year Return of the S&P 500

Preventing Them From Seeing the Better View Through the Front Windshield

5-Years Ended

31/12

Trailing

5-Year

CGR

Subsequent

5-Year

CGR

1931

1932

1933

1934

1941

1974

1977

2002

2003

2004

2005

Average:

-5.10%

-12.47%

-11.24%

-9.93%

-7.51%

-2.36%

-0.21%

-0.59%

-0.57%

-2.30%

+0.54%

-4.70%

22.47%

14.29%

10.67%

10.91%

17.87%

14.76%

14.05%

??

??

??

??

15.00%

Source: Ibbotson Associates

Fundamental: Earnings Growth

Source: FTN Midwest Securities Corp

History suggests S&P 500 catch up

In order to catch up to current earnings growth as happened in the last two cycles, the S&P 500 would need to appreciate more than 20% over the next two years.

Post Recession Period Avg. EPS Growth Avg. S&P 500 Growth

1983-1988 12.50% 12.34%

1992-1997 15.60% 15.83%

2002-current 14.30% 4.00%

Fundamental: Valuations

Source: www.NDR.com - Ned Davis Research, FTN Midwest Securities Corp

S&P 500 Not so Expensive…Especially Relative to Bonds

Overvalued

Undervalued

Extreme equity Overvaluation toBonds

Extreme equity Undervaluation toBonds

Fundamental: Growth

Source: Thomson/Baselime, FTN Midwest Securities Corp

Capital Spending in Early Innings

Capital Spending as a % of GDP acts very much like last cycle…

…and is likely in early innings

Mega Cap Stocks Were Expensive in 2000. Now They Look Cheap

Selected Characteristics 2000 31/12/2005

P/E (2005E) 48.7x 14.9x

Dividend Yield 0.6% 2.4%

Return on Equity 14.5% 21.2%

As of 31 December 2005Source: FactSet Data Systems* Top 10 Companies by Market Value in 2000: MSFT, GE, CSCO, WMT, XOM, INTC, LU, PFE, IBM, T. In 2005: GE, XOM, MSFT, C, PG, WMT, JNJ, BAC, AIG, PFE. Statistics are capitalisation-weighted.

S&P 500 IndexTop 10 Companies*

US Equities: Focus on Mega-caps

Relative P/E of the Largest 25 S&P 500 Companies

Valuations of ‘megacaps’ on 20 year lows Clean balance sheets and powerful FCF to reward shareholders Offer above average dividend yields

Top tickers:  GE, XOM, MSFT, WMT, BAC, JNJ, AIG, PFE, MO, INTC, JPM, PG, CVX, IBM, CSCO, WFC, PEP, AMGN, KO, HD, COP, WB, VZ, UPSSource:   FactSet and Citigroup Investment Research U.S. Equity Strategy

Real GDP Growth Has Become Far Less Volatile

Real GDP: Growth (Bars) vs 10-Year Standard Deviation (line)1890-2003

-15

-10

-5

0

5

10

15

20

1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

-15

-10

-5

0

5

10

15

20

Source: Citigroup Economic & Market Analysis, January 2005

Investment Team Profile

$60 billion* in assets under management

$44 billion* in Value Equity

One team, one philosophy, one process

Continuity of investment managers

– Bill Miller joined Legg Mason in 1981

– Mary Chris Gay joined Legg Mason in 1988

Significant competitive advantages

Investment Professionals** - 44

Total Employees - 100

* As at 31 December 2005.** As at 31 December 2005 - includes investment team members, client service analysts and traders.

Past performance is not an indication of future performance and may not be repeated.

Legg Mason Capital Management

Very Few Active Large Capitalisation Managers Outperform the S&P 500

Source: Lipper Analytical Services1 This chart includes all Lipper Large Capitalisation Mutual Funds (Growth, Core, Value) with the exception of Funds of Funds and Indexed Funds.2 The S&P 500 Index is a market capitailsation weighted index, composed of 500 widely held common stocks, which includes reinvestment of dividends, and is generally considered

representative of the US stock markets.

Investment Process

The Market is Efficient

48.2%

26.6%

19.7%

29.2%

0%

20%

40%

60%

1 Yr. 5 Yrs. 10 Yrs. 15 Yrs.

Periods Ended 31/12/05

% of Actively Managed Large Cap. Funds1 that have Outperformed the S&P 500 Index2

Attributes that Distinguish a Successful Manager

Portfolio Turnover**

 27% turnover; contrast to 112% for all equity funds

Implies average holding period of approximately three years, versus less than one year for the average fund

Portfolio Concentration*

  Long-term outperformers tend to have higher portfolio concentrations than the index

  37% of assets in top-10 holdings, versus 24% for the S&P 500 and a 28% median for all U.S. equity funds

Investment Style

Intrinsic value investment approach

Geographic Location

Alpha-generators predominately based in cities outside of New York and Boston

Investment Process

Source: *Morningstar, **The Bogle Center for Financial Research, over twelve months as of December 2004.

Sustainable Competitive Advantage

“ Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.”

- Keynes

Culture of Excellence - Emphasis on Professional Attributes

Profession Business

Deliver Superior Long Term Results to Clients

Focus on Process

Be Thought Leaders

Construct Portfolios Optimally

Weight Securities by Expected Return

Run Focused Portfolios

Keep Turnover Low

Control Risk by Diversifying Drivers of

Risk and Return

Maximise Revenues

Focus on Marketing

Follow the Crowd

Avoid Controversy in Portfolio Construction

Minimise Tracking Error

Adhere to Style Boxes

Focus on Short-Term

Diversify by Sector/Industry

Research Process

Idea Generation

Idea Generation

CompetitiveStrategyAnalysis

CompetitiveStrategyAnalysis

Valuation(Quantify

Expectations Gaps)

Valuation(Quantify

Expectations Gaps)

DecisionMaking

DecisionMaking

Financial and Managerial Assessment

Research Process

ValuationPhilosophy Process

Understand Market Expectations

Distinguish between fundamentals and expectations

Identify Variant Perception

Indication of margin of safety

Develop Detailed, Long-Term Company Models

Estimate price implied expectations

Do scenario analysis based on key value drivers

Estimate Central Tendency of Value (Sum of Probabilities x Outcomes)

Look for Skewed Distribution

Assess Using Multiple Valuation Methodologies

Research Process

Decision Making

Philosophy Process

Understanding Behavioural Finance is Integral to Making Good Decisions

Avoid Behavioural Pitfalls

Overconfidence

Anchoring and adjusting

Framing effects

Confirmation bias

Legg Mason Value Fund - Total Portfolio Holdings

Consumer Discretionary 29.5%Amazon.com, Inc. 5.8%eBay, Inc. 3.5%Sears Holding Corporation 3.0%Eastman Kodak Company 2.8%The DIRECTV Group, Inc. 2.4%IAC/InterActiveCorp 2.4%The Home Depot, Inc. 2.2%Time Warner, Inc. 2.0%Expedia, Inc. 2.0%WPP Group, Plc. 1.7%Pulte Homes, Inc 0.9%Centex Corporation 0.9%

Cash 1.3%

Consumer Staples 1.0%Albertson’s, Inc. 1.0%

Health Care 17.0%UnitedHealth Group Incorporated 6.8%Aetna, Inc. 3.4%McKesson Corporation 2.9%Health Net, Inc. 2.6%Pfizer, Inc. 1.3%

Industrials 7.4%Tyco International Ltd. 5.2%Waste Management, Inc. 1.9%Masco Corporation 0.3%

Information Technology 13.7%Google, Inc. 3.6%Electronic Arts, Inc. 2.5%Yahoo! Inc. 2.3%Intuit, Inc. 1.5%International Business Machines Corp. 1.3%Seagate Technology 1.1%Cisco Systems, Inc. 0.9%Computer Associated International, Inc 0.2%Hewlett-Packard Company 0.2%Symantec Corporation 0.1%

Financials 15.7%JP Morgan Chase & Co. 3.5%Countrywide Financial Corporation 2.4%Citigroup, Inc. 2.2%MGIC Investment Corporation 2.2%The St. Paul Travelers Companies, Inc. 2.1%Capital One Financial Corp. 2.0%Washington Mutual, Inc. 1.3%

Telecommunication Services 9.6%Sprint Nextel Corporation 7.1%Qwest Communications International, Inc. 2.5%

Utilities 4.7%The AES Corporation 4.7%

Total 100%

As at 30 September 2005

US Equities: Google Inc - still plenty of upside

Valuation still compelling – 2006 EPS $8.80, 49% g rate, 2006 PE 49x, current price $430

Product innovation strong – e.g. Google Earth

Share of advertising spend on internet still low – to increase from 3%-4% to 15% level

Global brand recognition – the search engine of choice

‘Network effects’ - powerful competitive advantage similar to Amazon, EBay and Yahoo!

Source: Bloomburg, as at 27 January 2006 – for the period 18/8/04 to 20/1/06

SecuritiesPrice

ApproxTotal

Return Difference Annual Eq

Google 396.95% 369.95% 351.48% 196.30%

S&P 500 Index

18.47% 18.47% 12.64%

Returns over the period 18/8/04 to 20/1/06

US Equities: Bull Case

Corporate profit growth: S&P500 earnings to grow in low double digits this year

Dividends are rising faster than earnings: dividends are back in style

Valuations: S&P500 is attractive in both absolute terms and relative to alternative asset classes . Room for PE multiples to expand.

Fed policy: close to peak in interest rate cycle as Fed pursues pragmatic, evidence-based approach to monetary policy

Capital expenditure: corporate America is in its best shape in decades, with record cash as a percentage of assets

Important Information

This presentation does not constitute an invitation to invest and the relevant prospectus must be read before an investment is made. Past performance is not a guide to future performance and the value of shares and the income from them can fall as well as rise. Fluctuations in exchange rates can affect the value of any investment and the income from it. The Value Fund may select fewer equities in which to invest – a factor that may increase the risk profile of this sub-fund. Please refer to the prospectus and Simplified Prospectus documentation for a full description of risk factors.

Any views expressed in this presentation reflect those of Legg Mason Capital Management as at the date of this presentation. The information contained herein has been prepared from sources believed reliable but is not guaranteed by Legg Mason Investments and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The Legg Mason Value Fund is a sub-fund of Legg Mason Global Funds plc, an umbrella fund established as an open-ended investment company with variable capital incorporated with limited liability under the laws of Ireland. It qualifies, and is authorised in Ireland by the Financial Regulator as an undertaking for collective investment in transferable securities.

This presentation is solely for the use of the intended recipient and is not to be photocopied or reproduced in any way, or distributed to anyone, without the express written consent of Legg Mason Investments (Europe) Ltd.

Legg Mason Investments is the trading name for Legg Mason Investments (Europe) Ltd and Legg Mason Investment Funds Ltd.

Issued and approved by Legg Mason Investments (Europe) Limited, 32 Harbour Exchange Square, London, E14 9JX. Registered in England and Wales, Company no. 1732037. Authorised and Regulated by the Financial Service Authority. Business Development Desk: 020 7070 7444.

This presentation is not intended for private individuals.