20 Jul 2016 ClearBridge Value Trust Q2 2016 Portfolio Commentary ( Portfolio )

The market has clustered assets into two correlating blocks: volatile “risk-on” assets that are deemed highly sensitive to economic risks, and low-volatility “risk-off” assets that correlate directly with bond yields. This binary state would be manageable, except that the trade-off between volatility and value has never been higher. This un-nuanced pricing behavior has driven the valuation gap between the equity risk premium and the riskfree rate to historic highs. Essentially, it has never been more expensive to hedge equity price volatility with bonds or bondproxy stocks. The resulting valuation risk in the so-called riskfree rate leaves us uncomfortable and at odds with the asset allocation machine that is dominating the marginal pricing of assets. As we survey the widening gap between real and perceived risks, we think long-term investors must stay focused on absolute value and accept the price volatility that is an inherent part of harvesting a valuation driven risk premium.