QS Variable Moderate Growth

N-CSR 1 d644645dncsr.htm QS VARIABLE MODERATE GROWTH QS Variable Moderate Growth

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)

620 Eighth Avenue, 49^th Floor, New York, NY 10018

(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, 2018

ITEM 1.

REPORT TO STOCKHOLDERS.

The Annual Report to Stockholders is filed herewith.

December 31, 2018

LOGO

Annual Repor t

Variable Asset Allocation Series

QS Variable Growth

QS Variable Moderate Growth

QS Variable Conservative Growth

LOGO

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

QS Variable Asset Allocation Series

QS Variable Asset Allocation Series (“Variable Asset Allocation Series”) consists of separate investment Portfolios, each with its own investment objective and policies. Each Portfolio is a “fund of funds,” investing in other mutual funds and exchange-traded funds (ETFs), and is managed as an asset allocation program.

The Portfolios are separate investment series of Legg Mason Partners Variable Equity Trust, a Maryland statutory trust.


What’s inside
Letter from the president			II
Investment commentary			III
Portfolios overview			1
Portfolios at a glance			7
Portfolios expenses			10
Portfolios performance			13
Schedules of investments			19
Statements of assets and liabilities			22
Statements of operations			23
Statements of changes in net assets			24
Financial highlights			27
Notes to financial statements			31
Report of independent registered public accounting firm			40
Board approval of management and subadvisory agreements			41
Additional information			50
Important tax information			55


Letter from the president

Dear Shareholder,

We are pleased to provide the annual report of QS Variable Asset Allocation Series for the twelve-month reporting period ended December 31, 2018. Please read on for a detailed look at prevailing economic and market conditions during the Portfolios’ reporting period and to learn how those conditions have affected each Portfolio’s 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. Here you can gain immediate access to market and investment information, including:

•

Market insights and commentaries from our portfolio managers and

•

A host of educational resources.

We look forward to helping you meet your financial goals.

Sincerely,

LOGO

Jane Trust, CFA

President and Chief Executive Officer

January 31, 2019



II		QS Variable Asset Allocation Series

Investment commentary

Economic review

Economic activity in the U.S. was mixed during the twelve months ended December 31, 2018 (the “reporting period”). Looking back, the U.S. Department of Commerce reported that first quarter 2018 U.S. gross domestic product (“GDP”)ⁱ growth was 2.2%. GDP growth then accelerated to 4.2% during the second quarter of 2018 — the strongest reading since the third quarter of 2014. Third quarter 2018 GDP growth was 3.4%. The deceleration in GDP growth in the third quarter of 2018 reflected a downturn in exports and decelerations in nonresidential fixed investment and personal consumption expenditures. Imports increased in the third quarter after decreasing in the second. These movements were partly offset by an upturn in private inventory investment. Finally, the U.S. Department of Commerce’s initial reading for fourth quarter 2018 GDP growth was delayed due to the partial shutdown of the U.S. government.

Job growth in the U.S. was solid overall and supported the economy during the reporting period. As reported by the U.S. Department of Labor, when the reporting period ended on December 31, 2018, the unemployment rate was 3.9%, versus 4.1% when the period began. The percentage of longer-term unemployed also declined during the reporting period. In December 2018, 20.5% of Americans looking for a job had been out of work for more than six months, versus 21.5% when the period began.

Turning to the global economy, in its January 2019 World Economic Outlook Update — released after the reporting period ended — the International Monetary Fund (“IMF”)ⁱⁱ said, “The global expansion has weakened. Global growth for 2018 is estimated at 3.7 percent, as in the October 2018 World Economic Outlook forecast, despite weaker performance in some economies, notably Europe and Asia…. Risks to global growth tilt to the downside. An escalation of trade tensions beyond those already incorporated in the forecast remains a key source of risk to the outlook.” From a regional perspective, the IMF projects 2019 growth in the Eurozone will be 1.6%, versus 1.8% in 2018. Japan’s economy is expected to expand 1.1% in 2019, compared to 0.9% in 2018. Elsewhere, the IMF projects that overall growth in emerging market countries will decelerate to 4.5% in 2019, versus 4.6% in 2018.

The Federal Reserve Board (the “Fed”)ⁱⁱⁱ continued tightening monetary policy during the reporting period, as it raised interest rates four times in 2018 and further reduced its balance sheet. As widely expected, the Fed raised the federal funds rate^iv at its meetings that ended on March 21, 2018 (to a range between 1.50% and 1.75%),

June 13, 2018 (to a range between 1.75% and 2.00%), September 26, 2018 (to a range between 2.00% and 2.25%) and December 19, 2018 (to a range between 2.25% and 2.50%). At its meeting that concluded on January 30, 2019, after the reporting period ended, the Fed kept interest rates on hold and said, “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.…”

Central banks outside the U.S. took different approaches to monetary policy during the reporting period. Looking back, in December 2016, the European Central Bank (“ECB”)^v extended its bond buying program until December 2017. From April 2017 through December 2017, the ECB purchased €60 billion-per-month of bonds. In October 2017, the ECB announced that it would continue to buy bonds through September 2018, but after December 2017, it would pare its purchases to €30 billion-per-month. In December 2018, the ECB ended its bond buying program, and again affirmed that it did not anticipate raising interest rates “at least through the summer of 2019”. In other developed countries, on November 2, 2017, the Bank of England^vi raised rates from 0.25% to 0.50% — the first increase since July 2007. It then raised rates to 0.75% at its meeting on August 2, 2018. After holding rates steady at 0.10% for more than five years, in January 2016, the Bank of Japan^vii announced that it cut the rate on current accounts that commercial banks hold with it to -0.10% and kept rates on hold during the reporting period. Elsewhere, the People’s Bank of China^viii kept rates steady at 4.35% during the reporting period.

As always, thank you for your confidence in our stewardship of your assets.

Sincerely,

LOGO

Jane Trust, CFA

President and Chief Executive Officer

January 31, 2019

All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. Forecasts and predictions are inherently limited and should not be relied upon as an indication of actual or future performance.



QS Variable Asset Allocation Series		III

Investment commentary (cont’d)

ⁱ	Gross domestic product (“GDP”) is the market value of all final goods and services produced within a country in a given period of time.

ⁱⁱ	The International Monetary Fund (“IMF”) is an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

ⁱⁱⁱ	The Federal Reserve Board (the “Fed”) is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

^iv	The federal funds rate is the rate charged by one depository institution on an overnight sale of immediately available funds (balances at the Federal Reserve) to another depository institution; the rate may vary from depository institution to depository institution and from day to day.

^v	The European Central Bank (“ECB”) is responsible for the monetary system of the European Union and the euro currency.

^vi	The Bank of England (“BoE”), formally the Governor and Company of the BoE, is the central bank of the United Kingdom. The BoE’s purpose is to maintain monetary and financial stability.

^vii	The Bank of Japan is the central bank of Japan. The bank is responsible for issuing and handling currency and treasury securities, implementing monetary policy, maintaining the stability of the Japanese financial system and the yen currency.

^viii

The People’s Bank of China is the central bank of the People’s Republic of China with the power to carry out monetary policy and regulate financial institutions in mainland China.



IV		QS Variable Asset Allocation Series

Portfolios overview

QS Variable Asset Allocation Series (the “Variable Asset Allocation Series”) consists of three portfolio investment options (the “Portfolios”), each of which is a “fund of funds” that invests in other mutual funds and exchange-traded funds (“ETFs”). The Variable Asset Allocation Series offers a mix of equity funds categorized according to average market capitalization (size), investing style (e.g., value, core or growth) and global exposure (e.g., U.S. and/or international stocks). The various options within the Variable Asset Allocation Series also offer a mix of bond asset classes such as U.S. and foreign government debt, corporate bonds, high-yield debt and emerging market debt — each of which carries a varying degree of risk/reward potential. Each Portfolio is managed as an asset allocation program and seeks to achieve its investment objective by allocating its assets among the funds and ETFs managed by Legg Mason and its affiliates and ETFs managed by unaffiliated investment advisers (“underlying funds”).

Q. What were the overall market conditions during the Portfolios’ reporting period?

A. After a robust decade of global equity performance, 2018 was a sharp reversal. The twelve-month reporting period ended December 31, 2018, with all major equity indices — global, U.S., international-developed and emerging markets — substantially lower. The year began strong, with global equities as measured by the MSCI All Country World Index (“MSCI ACWI”)ⁱ up 4.14% in January 2018. However, February and March 2018 presented a radically different market environment, accompanied by a sharp and quick increase in volatility. The VIX Index (“VIX”)ⁱⁱ ended the first quarter of 2018 at 19.97%, a vast difference from 2017 where it averaged 11.04% on a month-end basis, reflecting one of the least volatile equity markets in history. This increase in volatility was driven in part by U.S. inflation beating consensus estimates and leading to concern that the Federal Reserve Board (the “Fed”)ⁱⁱⁱ would accelerate their rate tightening schedule.

Equity market performance in the second calendar quarter of 2018 was divided across geographic lines — developed markets performed well, while emerging markets struggled. Geopolitical events dominated headlines, with the yield for the U.S. ten-year Treasury breaching 3%, the U.S. pulling out of the Iran nuclear accord, and political instability in Spain and Italy.

Global equity growth resumed in the third quarter of 2018, with the MSCI ACWI gaining 4.79%, driven by U.S. equities, which surged 7.71% in that quarter, as measured by the S&P 500 Index^iv. U.S. equity performance was driven by strong consumer spending, consumer sentiment and employment data coupled with moderate inflation. Emerging market equities continued to struggle and returns were roughly flat for the third quarter, an improvement over the second quarter loss. Global stock and bond performance reflected the market preference to remain “risk on”, in spite of the concern around the longevity of the U.S. market’s bull run. This sentiment was amplified in the performance of gold, which declined 5% in the third quarter.

Markets took a sharp turn in the fourth quarter of 2018, where global equities saw their worst quarterly performance since the global financial crisis ten years earlier. U.S. small caps took the brunt of the decline, with the Russell 2000 Index^v dropping 20.20%, while emerging markets had the strongest performance amongst the major equity regions. The VIX ended the reporting period at 25.42%, the highest month-end level since August 2015, as volatility was elevated with the U.S. government entering a partial shutdown over the last nine days of the year.

Throughout the reporting period, trade war chatter disrupted markets and led to mini market sell-offs. This was kicked off on March 1, 2018, with President Donald Trump announcing tariffs on steel and aluminum imports and then accelerated in June, when President Trump imposed further tariffs on China in the form of a 25% tax on a range of imported goods. The escalation of the trade war continued into September of 2018, when President Trump announced a new round of tariffs on $200 billion of Chinese goods.

U.S. Treasury rates were highly volatile throughout the reporting period, as the Fed provided mixed signals on their policy rate going forward. The yield for the U.S. ten-year Treasury dropped thirty basis points^vi during December 2018, as the Fed’s dot plot suggested two rate hikes in 2019, versus the expectations of three in the prior quarter.

Despite lackluster performance, global bonds as measured by the Bloomberg Barclays Global Aggregate Index^vii, still outperformed global equities, returning -1.19% for the reporting period. U.S. bond markets, as measured by the Bloomberg Barclays U.S. Aggregate Index^viii, returned 0.01%.

Crude oil had a highly volatile year, reaching a high of $77 at the beginning of October 2018. However, the fourth quarter brought major market concerns around oversupply, and prices declined 38.0% during the reporting period.

Q. How did we respond to these changing market conditions?

A. For all three Portfolios, we employ a quantitative tactical strategy that over- and underweights certain allocations in the Portfolios in response to various market, economic and valuation conditions. These tactical views are generally updated on a quarterly basis. Throughout the reporting period, we were generally overweight equities versus investment grade fixed income, as valuations measures and our in-house index of leading economic indicators favored equities.

Throughout the reporting period, the Portfolios were overweight international-developed equities versus. U.S. equities. This was largely driven by relative valuation between the two asset classes and an observation of steeper yield curves^ix in international-developed countries; steeper yield curves are generally indicative of positive economic growth. This position was moderated by a factor that measures the price momentum of the U.S. stock market.



QS Variable Asset Allocation Series 2018 Annual Report		1

Portfolios overview (cont’d)

QS Variable Growth¹

QS Variable Growth seeks capital appreciation. The Portfolio organizes its investments in underlying funds into two main asset classes: the equity class (equity securities of all types) and the fixed income class (fixed income securities of all types). The portfolio managers may invest across all asset classes and strategies. The portfolio managers will allocate between 70% to 100% of the Portfolio’s assets to underlying funds that invest in equity and equity-like strategies and between 0% to 30% to underlying funds that invest in fixed-income strategies. The portfolio managers may, however, allocate assets to any underlying funds in varying amounts in a manner consistent with the Portfolio’s investment objective. The Portfolio’s allocation to each asset class will be measured at the time of purchase and may vary thereafter as a result of market movements.

Performance review

For the twelve months ended December 31, 2018, Class I shares of QS Variable Growth¹ returned -8.05%. The Portfolio’s unmanaged benchmarks, the Bloomberg Barclays U.S. Aggregate Index and the Russell 3000 Index^x, and the Variable Growth Composite Benchmark^xi returned 0.01%, -5.24% and -7.08%, respectively, over the same time frame. The Lipper Variable Mixed-Asset Target Allocation Aggressive Growth Funds Category Average² returned -8.87% for the same period.


Performance Snapshot as of December 31, 2018 (unaudited)
	6 months			12 months
QS Variable Growth¹:
Class I		-9.03	%		-8.05	%
Bloomberg Barclays U.S. Aggregate Index		1.65	%		0.01	%
Russell 3000 Index		-8.20	%		-5.24	%
Variable Growth Composite Benchmark		-9.02	%		-7.08	%
Lipper Variable Mixed-Asset Target Allocation Aggressive Growth Funds Category Average²		-9.37	%		-8.87	%

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.

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.

The portfolio managers periodically adjust the allocation of the Portfolio’s assets among different Legg Mason-affiliated mutual funds and ETFs and ETFs that are managed by unaffiliated investment advisers, depending upon the portfolio managers’ outlook for the equity and bond markets in general, particular sectors of such markets and the performance outlook for the underlying funds. In assessing the equity and bond markets, the portfolio managers consider a broad range of market and economic trends and quantitative factors.

Total Annual Operating Expenses† (unaudited)

As of the Portfolio’s current prospectus dated May 1, 2018, the gross total annual fund operating expense ratio for Class I shares was 0.85%.

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.

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses (fees and expenses of underlying funds), to average net assets will not exceed 0.20%. This expense limitation arrangement cannot be terminated prior to December 31, 2020 without the Board of Trustees’ consent.

The manager is permitted to recapture amounts waived and/or reimbursed to a class during the same fiscal year if the Portfolio’s 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 expenses incurred. In no case will the 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.

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.

Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the period ended December 31, 2018, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 69 funds for the six-month period and among the 67 funds for the twelve-month period in the Portfolio’s Lipper category.

†	Includes expenses of the underlying funds in which the Portfolio invests.



2		QS Variable Asset Allocation Series 2018 Annual Report

QS Variable Moderate Growth¹

QS Variable Moderate Growth seeks long-term growth of capital. The Portfolio organizes its investments in underlying funds into two main asset classes: the equity class (equity securities of all types) and the fixed income class (fixed income securities of all types). The portfolio managers may invest across all asset classes and strategies. The portfolio managers will allocate between 55% to 85% of the Portfolio’s assets to underlying funds that invest in equity and equity-like strategies and between 15% to 45% to underlying funds that invest in fixed-income strategies. The portfolio managers may, however, allocate assets to any underlying funds in varying amounts in a manner consistent with the Portfolio’s investment objective. The Portfolio’s allocation to each asset class will be measured at the time of purchase and may vary thereafter as a result of market movements.

Performance review

For the twelve months ended December 31, 2018, Class I shares of QS Variable Moderate Growth¹ returned -6.28%. The Portfolio’s unmanaged benchmarks, the Bloomberg Barclays U.S. Aggregate Index and the Russell 3000 Index, and the Variable Moderate Growth Composite Benchmark^xii returned 0.01%, -5.24% and -5.54%, respectively, over the same time frame. The Lipper Variable Mixed-Asset Target Allocation Growth Funds Category Average² returned -6.64% for the same period.


Performance Snapshot as of December 31, 2018 (unaudited)
	6 months			12 months
QS Variable Moderate Growth¹:
Class I		-6.91	%		-6.28	%
Bloomberg Barclays U.S. Aggregate Index		1.65	%		0.01	%
Russell 3000 Index		-8.20	%		-5.24	%
Variable Moderate Growth Composite Benchmark		-6.95	%		-5.54	%
Lipper Variable Mixed-Asset Target Allocation Growth Funds Category Average²		-6.85	%		-6.64	%

Portfolio performance figures reflect fee waivers and/or expense reimbursements, without which the performance would have been lower.

Total Annual Operating Expenses† (unaudited)

As of the Portfolio’s current prospectus dated May 1, 2018, the gross total annual fund operating expense ratio for Class I shares was 0.98%.

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses (fees and expenses of underlying funds), to average net assets will not exceed 0.20% for Class I shares. This expense limitation arrangement cannot be terminated prior to December 31, 2020 without the Board of Trustees’ consent.

The manager is permitted to recapture amounts waived and/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 expenses incurred. In no case will the 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.

Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the period ended December 31, 2018, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 250 funds for the six-month period and among the 247 funds for the twelve-month period in the Portfolio’s Lipper category.

†	Includes expenses of the underlying funds in which the Portfolio invests.



QS Variable Asset Allocation Series 2018 Annual Report		3

Portfolios overview (cont’d)

QS Variable Conservative Growth¹

QS Variable Conservative Growth seeks balance of growth of capital and income. The Portfolio organizes its investments in underlying funds into two main asset classes: the equity class (equity securities of all types) and the fixed income class (fixed income securities of all types). The portfolio managers may invest across all asset classes and strategies. The portfolio managers will allocate between 35% to 65% of the Portfolio’s assets to underlying funds that invest in equity and equity-like strategies and between 35% to 65% to underlying funds that invest in fixed-income strategies. The portfolio managers may, however, allocate assets to any underlying funds in varying amounts in a manner consistent with the Portfolio’s investment objective. The Portfolio’s allocation to each asset class will be measured at the time of purchase and may vary thereafter as a result of market movements.

Performance review

For the twelve months ended December 31, 2018, Class I shares of QS Variable Conservative Growth¹ returned -4.40%. The Portfolio’s unmanaged benchmarks, the Bloomberg Barclays U.S. Aggregate Index and the Russell 1000 Index^xiii, and the Variable Conservative Growth Composite Benchmark^xiv returned 0.01%, -4.78% and -3.95%, respectively, over the same time frame. The Lipper Variable Mixed-Asset Target Allocation Moderate Funds Category Average² returned -5.08% for the same period.


Performance Snapshot as of December 31, 2018 (unaudited)
	6 months			12 months
QS Variable Conservative Growth¹:
Class I		-4.65	%		-4.40	%
Class II		-4.67	%		-4.55	%
Bloomberg Barclays U.S. Aggregate Index		1.65	%		0.01	%
Russell 1000 Index		-7.42	%		-4.78	%
Variable Conservative Growth Composite Benchmark		-4.71	%		-3.95	%
Lipper Variable Mixed-Asset Target Allocation Moderate Funds Category Average²		-4.93	%		-5.08	%

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.

Total Annual Operating Expenses† (unaudited)

As of the Portfolio’s current prospectus dated May 1, 2018, the gross total annual fund operating expense ratio for Class I and Class II shares were 0.76% and 1.05%, respectively.

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses (fees and expenses of underlying funds), to average net assets will not exceed 0.20% for Class I shares and 0.45% for Class II shares. This expense limitation arrangement cannot be terminated prior to December 31, 2020 without the Board of Trustees’ consent.

Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the period ended December 31, 2018, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 280 funds for the six-month period and among the 276 funds for the twelve-month period in the Portfolio’s Lipper category.

†	Includes expenses of the underlying funds in which the Portfolio invests.



4		QS Variable Asset Allocation Series 2018 Annual Report

Q. What were the leading contributors to performance?

A. Taking into account both the underlying fund returns and their weightings within the Portfolios, the leading contributor to absolute performance during the reporting period was the allocation to fixed income, especially Western Asset Intermediate Bond Fund. ClearBridge Small Cap Growth Fund was also a contributor to results. Where included, an allocation to U.S. Treasury Inflation-Protected Securities (“TIPS”) as an asset class benefited the portfolios.

In relative terms (i.e., relative to each underlying fund’s specific benchmark), the leading contributors to performance were ClearBridge Large Cap Growth Fund, ClearBridge Small Cap Growth Fund and ClearBridge Appreciation Fund.

Q. What were the leading detractors from performance?

A. On an absolute basis, international equities were the leading detractors from performance during the reporting period, followed by U.S. large cap equities. In the latter space, the leading detractor from absolute return was BrandywineGLOBAL — Dynamic US Large Cap Value Fund.

In relative terms (i.e., relative to each underlying fund’s specific benchmark), the leading detractors from performance were BrandywineGLOBAL — Dynamic US Large Cap Value Fund, QS U.S. Small Capitalization Equity Fund and QS International Equity Fund.

Q. Were there any significant changes to the Portfolios during the reporting period?

A. In 2018, no new underlying funds were added or removed from the Portfolios.

Thank you for your investment in the Variable Asset Allocation Series. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Portfolios’ investment goals.

Sincerely,

LOGO

Adam J. Petryk, CFA

Portfolio Manager

QS Investors, LLC

LOGO

Thomas Picciochi, CAIA

Portfolio Manager

QS Investors, LLC

LOGO

Ellen Tesler

Portfolio Manager

QS Investors, LLC

January 24, 2019

RISKS: Equity securities are subject to price and market fluctuations. Fixed-income securities are subject to interest rate and credit risks. Foreign securities are subject to certain risks of overseas investing including currency fluctuations and political, social and economic uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in small- and mid-capitalization companies may involve a higher degree of risk and volatility than investments in larger, more established companies. As interest rates rise, bond prices fall, reducing the value of the Portfolios’ share prices. High-yield bonds (commonly known as “junk” bonds) involve greater credit and liquidity risks than investment grade bonds. There are additional risks and other expenses associated with investing in other mutual funds and exchange-traded funds (“ETFs”), rather than directly in portfolio securities. Certain underlying funds may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses and have a potentially large impact on Portfolio performance. The Portfolios pay brokerage commissions in connection with the purchase and sale of shares of ETFs. In addition, each Portfolio indirectly bears its pro rata share of the fees and expenses incurred by the underlying funds it invests in, including management fees and other expenses. These expenses are in addition to the expenses that each Portfolio bears directly in connection with its own operation. Also, the portfolio managers may invest in underlying funds that have a limited performance history. Please see the Portfolios’ prospectus for a more complete discussion of these and other risks and the Portfolios’ 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.



QS Variable Asset Allocation Series 2018 Annual Report		5

Portfolios overview (cont’d)

ⁱ	The MSCI All Country World Index (“MSCI ACWI”) is a market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 45 country indices comprising 24 developed and 21 emerging market country indices

ⁱⁱ	The Chicago Board Options Exchange (“CBOE”) Volatility Index (“VIX”) is a measure of market expectations of near-term volatility as conveyed by S&P 500 stock index option prices.

ⁱⁱⁱ	The Federal Reserve Board (the “Fed”) is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments.

^iv	The S&P 500 Index is an unmanaged index of 500 stocks and is generally representative of the performance of larger companies in the U.S.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.

^vi	A basis point is one-hundredth (1/100 or 0.01) of one percent.

^vii	The Bloomberg Barclays Global Aggregate Index is an index comprised of several other Bloomberg Barclays indices that measure fixed-income performance of regions around the world.

^viii

The Bloomberg Barclays 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.

^ix	The yield curve is the graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities.

^x	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.

^xi

The Variable Growth Composite Benchmark is a hypothetical representation of the performance of the Portfolio’s major asset classes. It consists of 45% Russell 1000 Index, 20% Russell 2000 Index, 20% MSCI EAFE Index, 10% Bloomberg Barclays U.S. Aggregate Index and 5% Bloomberg Barclays U.S. Corporate High Yield — 2% Issuer Cap Index. The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 90% of the U.S. market. The MSCI EAFE Index is a free float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The Bloomberg Barclays U.S. Corporate High Yield — 2% Issuer Cap Index is an index of the 2% Issuer Cap component of the Bloomberg Barclays U.S. Corporate High Yield Index, which covers the U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond market.

^xii

The Variable Moderate Growth Composite Benchmark is a hypothetical representation of the performance of the Portfolio’s major asset classes. It consists of 40% Russell 1000 Index, 15% Russell 2000 Index, 15% MSCI EAFE Index, 25% Bloomberg Barclays U.S. Aggregate Index and 5% Bloomberg Barclays U.S. Corporate High Yield — 2% Issuer Cap Index.

^xiii

The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 90% of the U.S. market.

^xiv

The Variable Conservative Growth Composite Benchmark is a hypothetical representation of the performance of the Portfolio’s major asset classes. It consists of 28% Russell 1000 Index, 12% Russell 2000 Index, 10% MSCI EAFE Index, 43% Bloomberg Barclays U.S. Aggregate Index and 7% Bloomberg Barclays U.S. Corporate High Yield — 2% Issuer Cap Index.



6		QS Variable Asset Allocation Series 2018 Annual Report

Portfolios at a glance (unaudited)

QS Variable Growth Breakdown† as of — December 31, 2018

As a Percent of Total Long-Term Investments

LOGO


% of Total Long-Term Investments		Top 5 Sectors
	22.6 Legg Mason Global Asset Management Trust — QS International Equity Fund, Class IS Shares	Financials Industrials Consumer Discretionary Health Care Consumer Staples
	20.3 Legg Mason Global Asset Management Trust — BrandywineGLOBAL — Dynamic US Large Cap Value Fund, Class IS Shares	Financials Information Technology Consumer Discretionary Industrials Health Care
	14.9 Legg Mason Global Asset Management Trust — QS U.S. Small Capitalization Equity Fund, Class IS Shares	Financials Information Technology Health Care Industrials Consumer Discretionary
	9.5 Legg Mason Partners Equity Trust — ClearBridge Large Cap Growth Fund, Class IS Shares	Information Technology Health Care Communication Services Consumer Discretionary Industrials
	8.4 Western Asset Funds, Inc. — Western Asset Intermediate Bond Fund, Class IS Shares	U.S. Government & Agency Obligations Investment Grade Corporate Bonds Mortgage-Backed Securities Emerging Markets Asset-Backed Securities
	8.1 Legg Mason Partners Equity Trust — ClearBridge Appreciation Fund, Class IS Shares	Information Technology Health Care Financials Communication Services Industrials
	6.2 Legg Mason Global Asset Management Trust — BrandywineGLOBAL — Diversified US Large Cap Value Fund, Class IS Shares	Financials Health Care Information Technology Energy Industrials
	5.6 Western Asset Funds, Inc. — Western Asset Core Bond Fund, Class IS Shares	Mortgage-Backed Securities Investment Grade Corporate Bonds U.S. Government & Agency Obligations Emerging Markets Asset-Backed Securities
	4.4 Legg Mason Partners Equity Trust — ClearBridge Small Cap Growth Fund, Class IS Shares	Information Technology Health Care Industrials Consumer Discretionary Financials

†	Subject to change at any time.



QS Variable Asset Allocation Series 2018 Annual Report		7

Portfolios at a glance (unaudited) (cont’d)

QS Variable Moderate Growth Breakdown† as of — December 31, 2018

As a Percent of Total Long-Term Investments

LOGO


% of Total Long-Term Investments		Top 5 Sectors
	18.5 Western Asset Funds, Inc. — Western Asset Intermediate Bond Fund, Class IS Shares	U.S. Government & Agency Obligations Investment Grade Corporate Bonds Mortgage-Backed Securities Emerging Markets Asset-Backed Securities
	17.3 Legg Mason Global Asset Management Trust — QS International Equity Fund, Class IS Shares	Financials Industrials Consumer Discretionary Health Care Consumer Staples
	16.2 Legg Mason Global Asset Management Trust — BrandywineGLOBAL — Dynamic US Large Cap Value Fund, Class IS Shares	Financials Information Technology Consumer Discretionary Industrials Health Care
	12.3 Western Asset Funds, Inc. — Western Asset Core Bond Fund, Class IS Shares	Mortgage-Backed Securities Investment Grade Corporate Bonds U.S. Government & Agency Obligations Emerging Markets Asset-Backed Securities
	11.1 Legg Mason Global Asset Management Trust — QS U.S. Small Capitalization Equity Fund, Class IS Shares	Financials Information Technology Health Care Industrials Consumer Discretionary
	9.9 Legg Mason Partners Equity Trust — ClearBridge Appreciation Fund, Class IS Shares	Information Technology Health Care Financials Communication Services Industrials
	7.9 Legg Mason Partners Equity Trust — ClearBridge Large Cap Growth Fund, Class IS Shares	Information Technology Health Care Communication Services Consumer Discretionary Industrials
	3.8 Legg Mason Global Asset Management Trust — BrandywineGLOBAL — Diversified US Large Cap Value Fund, Class IS Shares	Financials Health Care Information Technology Energy Industrials
	3.0 Legg Mason Partners Equity Trust — ClearBridge Small Cap Growth Fund, Class IS Shares	Information Technology Health Care Industrials Consumer Discretionary Financials

†	Subject to change at any time.



8		QS Variable Asset Allocation Series 2018 Annual Report

QS Variable Conservative Growth Breakdown† as of — December 31, 2018

As a Percent of Total Long-Term Investments

LOGO


% of Total Long-Term Investments		Top 5 Sectors
	30.9 Western Asset Funds, Inc. — Western Asset Intermediate Bond Fund, Class IS Shares	U.S. Government & Agency Obligations Investment Grade Corporate Bonds Mortgage-Backed Securities Emerging Markets Asset-Backed Securities
	20.7 Western Asset Funds, Inc. — Western Asset Core Bond Fund, Class IS Shares	Mortgage-Backed Securities Investment Grade Corporate Bonds U.S. Government & Agency Obligations Emerging Markets Asset-Backed Securities
	11.7 Legg Mason Global Asset Management Trust — QS International Equity Fund, Class IS Shares	Financials Industrials Consumer Discretionary Health Care Consumer Staples
	11.2 Legg Mason Global Asset Management Trust — BrandywineGLOBAL — Dynamic US Large Cap Value Fund, Class IS Shares	Financials Information Technology Consumer Discretionary Industrials Health Care
	8.9 Legg Mason Global Asset Management Trust — QS U.S. Small Capitalization Equity Fund, Class IS Shares	Financials Information Technology Health Care Industrials Consumer Discretionary
	8.8 Legg Mason Partners Equity Trust — ClearBridge Appreciation Fund, Class IS Shares	Information Technology Health Care Financials Communication Services Industrials
	5.7 Legg Mason Partners Equity Trust — ClearBridge Large Cap Growth Fund, Class IS Shares	Information Technology Health Care Communication Services Consumer Discretionary Industrials
	2.1 Legg Mason Partners Equity Trust — ClearBridge Small Cap Growth Fund, Class IS Shares	Information Technology Health Care Industrials Consumer Discretionary Financials

†	Subject to change at any time.



QS Variable Asset Allocation Series 2018 Annual Report		9

Portfolios expenses (unaudited)

Example

As a shareholder of the Portfolio, you may incur two types of costs: (1) transaction costs and (2) ongoing costs, including 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, 2018 and held for the six months ended December 31, 2018.

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 portfolios. 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.


Based on actual total return¹													Based on hypothetical total return¹
QS Variable Growth	Actual Total Return²			Beginning Account Value		Ending Account Value		Annualized Expense Ratio³			Expenses Paid During the Period⁴		QS Variable Growth	Hypothetical Annualized Total Return			Beginning Account Value		Ending Account Value		Annualized Expense Ratio³			Expenses Paid During the Period⁴
Class I		-9.03	%	$	1,000.00	$	909.70		0.11	%	$	0.53	Class I		5.00	%	$	1,000.00	$	1,024.65		0.11	%	$	0.56

¹	For the six months ended December 31, 2018.

Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value. Total return is not annualized, as it may not be representative of the total return for the year. Total returns do not reflect expenses associated with 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. Past performance is no guarantee of future results.

³	Does not include fees and expenses of the Underlying Funds in which the Portfolio invests.

⁴	Expenses (net of compensating balance arrangements, fee waivers and/or expense reimbursements) are equal to the class’ 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.



10		QS Variable Asset Allocation Series 2018 Annual Report

Example

This example is based on an investment of $1,000 invested on July 1, 2018 and held for the six months ended December 31, 2018.

Actual expenses

Hypothetical example for comparison purposes


Based on actual total return¹													Based on hypothetical total return¹
QS Variable Moderate Growth	Actual Total Return²			Beginning Account Value		Ending Account Value		Annualized Expense Ratio³			Expenses Paid During the Period⁴		QS Variable Moderate Growth	Hypothetical Annualized Total Return			Beginning Account Value		Ending Account Value		Annualized Expense Ratio³			Expenses Paid During the Period⁴
Class I		-6.91	%	$	1,000.00	$	930.90		0.20	%	$	0.97	Class I		5.00	%	$	1,000.00	$	1,024.20		0.20	%	$	1.02

¹	For the six months ended December 31, 2018.

³	Does not include fees and expenses of the Underlying Funds in which the Portfolio invests.

⁴	Expenses (net of compensating balance arrangements, fee waivers and/or expense reimbursements) are equal to the class’ 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.



QS Variable Asset Allocation Series 2018 Annual Report		11

Portfolios expenses (unaudited) (cont’d)

Example

As a shareholder of the Portfolio, you may incur two types of costs: (1) transaction costs and (2) ongoing costs, including 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, 2018 and held for the six months ended December 31, 2018.

Actual expenses

Hypothetical example for comparison purposes


Based on actual total return¹													Based on hypothetical total return¹
QS Variable Conservative Growth	Actual Total Return²			Beginning Account Value		Ending Account Value		Annualized Expense Ratio³			Expenses Paid During the Period⁴		QS Variable Conservative Growth	Hypothetical Annualized Total Return			Beginning Account Value		Ending Account Value		Annualized Expense Ratio³			Expenses Paid During the Period⁴
Class I		-4.65	%	$	1,000.00	$	953.50		0.13	%	$	0.64	Class I		5.00	%	$	1,000.00	$	1,024.55		0.13	%	$	0.66
Class II		-4.67			1,000.00		953.30		0.37			1.82	Class II		5.00			1,000.00		1,023.34		0.37			1.89

¹	For the six months ended December 31, 2018.

³	Does not include fees and expenses of the Underlying Funds in which the Portfolio invests.

⁴

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.



12		QS Variable Asset Allocation Series 2018 Annual Report

Portfolios performance (unaudited)

QS Variable Growth


Average annual total returns¹
	Class I
Twelve Months Ended 12/31/18		-8.05	%
Five Years Ended 12/31/18		4.03
Ten Years Ended 12/31/18		10.34


Cumulative total returns¹
Class I (12/31/08 through 12/31/18)	167.47	%

All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect expenses associated with 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.



QS Variable Asset Allocation Series 2018 Annual Report		13

Portfolios performance (unaudited) (cont’d)

QS Variable Growth

Historical performance

Value of $10,000 invested in

Class I Shares of QS Variable Growth vs. Benchmark Indices† — December 2008 - December 2018

LOGO

†

Hypothetical illustration of $10,000 invested in Class I shares of QS Variable Growth on December 31, 2008, assuming the reinvestment of all distributions, including returns of capital, if any, at net asset value through December 31, 2018. The hypothetical illustration also assumes a $10,000 investment in the Bloomberg Barclays U.S. Aggregate Index, the Russell 3000 Index and the Variable Growth Composite Benchmark. The Bloomberg Barclays 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. 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. The Variable Growth Composite Benchmark is a hypothetical representation of the performance of the Portfolio’s major asset classes. It consists of 45% Russell 1000 Index, 20% Russell 2000 Index, 20% MSCI EAFE Index, 10% Bloomberg Barclays U.S. Aggregate Index and 5% Bloomberg Barclays U.S. Corporate High Yield – 2% Issuer Cap Index. The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 90% of the U.S. market. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The MSCI EAFE Index is a free float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The Bloomberg Barclays U.S. Corporate High Yield – 2% Issuer Cap Index is an index of the 2% Issuer Cap component of the Bloomberg Barclays U.S. Corporate High Yield Index, which covers the U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond market. The indices are unmanaged and are not subject to the same management and trading expenses as a fund. Please note that an investor cannot invest directly in an index.

Prior to May 1, 2015, the Portfolio followed different investment policies and strategies under the name QS Legg Mason Variable Lifestyle Allocation 85%.



14		QS Variable Asset Allocation Series 2018 Annual Report

QS Variable Moderate Growth


Average annual total returns¹
	Class I
Twelve Months Ended 12/31/18		-6.28	%
Five Years Ended 12/31/18		4.01
Ten Years Ended 12/31/18		9.95


Cumulative total returns¹
Class I (12/31/08 through 12/31/18)	158.23	%

¹	Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value.



QS Variable Asset Allocation Series 2018 Annual Report		15

Portfolios performance (unaudited) (cont’d)

QS Variable Moderate Growth

Historical performance

Value of $10,000 invested in

Class I Shares of QS Variable Moderate Growth vs. Benchmark Indices† — December 2008 - December 2018

LOGO

†

Hypothetical illustration of $10,000 invested in Class I shares of QS Variable Moderate Growth on December 31, 2008, assuming the reinvestment of all distributions, including returns of capital, if any, at net asset value through December 31, 2018. The hypothetical illustration also assumes a $10,000 investment in the Bloomberg Barclays U.S. Aggregate Index, the Russell 3000 Index and the Variable Moderate Growth Composite Benchmark. The Bloomberg Barclays 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. 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. The Variable Moderate Growth Composite Benchmark is a hypothetical representation of the performance of the Portfolio’s major asset classes. It consists of 40% Russell 1000 Index, 15% Russell 2000 Index, 15% MSCI EAFE Index, 25% Bloomberg Barclays U.S. Aggregate Index and 5% Bloomberg Barclays U.S. Corporate High Yield – 2% Issuer Cap Index. The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 90% of the U.S. market. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The MSCI EAFE Index is a free float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The Bloomberg Barclays U.S. Corporate High Yield – 2% Issuer Cap Index is an index of the 2% Issuer Cap component of the Bloomberg Barclays U.S. Corporate High Yield Index, which covers the U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond market. The indices are unmanaged and are not subject to the same management and trading expenses as a fund. Please note that an investor cannot invest directly in an index.

Prior to May 1, 2015, the Portfolio followed different investment policies and strategies under the name QS Legg Mason Variable Lifestyle Allocation 70%.



16		QS Variable Asset Allocation Series 2018 Annual Report

QS Variable Conservative Growth


Average annual total returns¹
	Class I			Class II
Twelve Months Ended 12/31/18		-4.40	%		-4.55	%
Five Years Ended 12/31/18		3.87			N/A
Ten Years Ended 12/31/18		9.21			N/A
Inception* through 12/31/18		—			0.89


Cumulative total returns¹
Class I (12/31/08 through 12/31/18)	141.40	%
Class II (Inception date of 6/23/17 through 12/31/18)	1.35

¹	Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value.

*	Inception dates for Class I and Class II shares of QS Variable Conservative Growth are February 5, 1997 and June 23, 2017, respectively.



QS Variable Asset Allocation Series 2018 Annual Report		17

Portfolios performance (unaudited) (cont’d)

QS Variable Conservative Growth

Historical performance

Value of $10,000 invested in

Class I Shares of QS Variable Conservative Growth vs. Benchmark Indices†—December 2008 - December 2018

LOGO

†

Hypothetical illustration of $10,000 invested in Class I shares of QS Variable Conservative Growth on December 31, 2008, assuming the reinvestment of all distributions, including returns of capital, if any, at net asset value through December 31, 2018. The hypothetical illustration also assumes a $10,000 investment in the Bloomberg Barclays U.S. Aggregate Index, the Russell 1000 Index and the Variable Conservative Growth Composite Benchmark. The Bloomberg Barclays 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. The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 90% of the U.S. market. 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. The Variable Conservative Growth Composite Benchmark is a hypothetical representation of the performance of the Portfolio’s major asset classes. It consists of 28% Russell 1000 Index, 12% Russell 2000 Index, 10% MSCI EAFE Index, 43% Bloomberg Barclays U.S. Aggregate Index and 7% Bloomberg Barclays U.S. Corporate High Yield – 2% Issuer Cap Index. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The MSCI EAFE Index is a free float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The Bloomberg Barclays U.S. Corporate High Yield – 2% Issuer Cap Index is an index of the 2% Issuer Cap component of the Bloomberg Barclays U.S. Corporate High Yield Index, which covers the U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond market. The indices are unmanaged and are not subject to the same management and trading expenses as a fund. Please note that an investor cannot invest directly in an index.

Prior to May 1, 2015, the Portfolio followed different investment policies and strategies under the name QS Legg Mason Variable Lifestyle Allocation 50%.



18		QS Variable Asset Allocation Series 2018 Annual Report

Schedules of investments

December 31, 2018

QS Variable Growth


Description				Shares		Value
Investments in Underlying Funds^(a) — 99.9%
Legg Mason Global Asset Management Trust:
BrandywineGLOBAL — Diversified US Large Cap Value Fund, Class IS Shares					341,614	$	5,868,932
BrandywineGLOBAL — Dynamic US Large Cap Value Fund, Class IS Shares					1,890,501		19,169,680
QS International Equity Fund, Class IS Shares					1,523,883		21,395,317
QS U.S. Small Capitalization Equity Fund, Class IS Shares					1,373,498		14,092,090
Legg Mason Partners Equity Trust:
ClearBridge Appreciation Fund, Class IS Shares					353,175		7,635,639
ClearBridge Large Cap Growth Fund, Class IS Shares					208,135		9,028,896
ClearBridge Small Cap Growth Fund, Class IS Shares					128,056		4,152,859
Western Asset Funds, Inc.:
Western Asset Core Bond Fund, Class IS Shares					432,974		5,295,273
Western Asset Intermediate Bond Fund, Class IS Shares					743,595		7,934,160
Total Investments in Underlying Funds before Short-Term Investments (Cost — $92,385,054)							94,572,846

	Rate
Short-Term Investments — 0.2%
Invesco Government & Agency Portfolio, Institutional Class (Cost — $209,616)		2.476	%		209,616		209,616
Total Investments — 100.1% (Cost — $92,594,670)							94,782,462
Liabilities in Excess of Other Assets — (0.1)%							(67,484	)
Total Net Assets — 100.0%						$	94,714,978

^(a)	Underlying Funds are affiliated with Legg Mason, Inc. and more information about the Underlying Funds is available at www.leggmason.com/mutualfunds.

See Notes to Financial Statements.



QS Variable Asset Allocation Series 2018 Annual Report		19

Schedules of investments (cont’d)

December 31, 2018

QS Variable Moderate Growth


Description				Shares		Value
Investments in Underlying Funds^(a) — 99.8%
Legg Mason Global Asset Management Trust:
BrandywineGLOBAL — Diversified US Large Cap Value Fund, Class IS Shares					69,354	$	1,191,506
BrandywineGLOBAL — Dynamic US Large Cap Value Fund, Class IS Shares					501,491		5,085,113
QS International Equity Fund, Class IS Shares					385,856		5,417,418
QS U.S. Small Capitalization Equity Fund, Class IS Shares					341,092		3,499,605
Legg Mason Partners Equity Trust:
ClearBridge Appreciation Fund, Class IS Shares					144,492		3,123,923
ClearBridge Large Cap Growth Fund, Class IS Shares					56,852		2,466,232
ClearBridge Small Cap Growth Fund, Class IS Shares					28,863		936,033
Western Asset Funds, Inc.:
Western Asset Core Bond Fund, Class IS Shares					317,165		3,878,921
Western Asset Intermediate Bond Fund, Class IS Shares					543,072		5,794,581
Total Investments in Underlying Funds before Short-Term Investments (Cost — $30,616,726)							31,393,332

	Rate
Short-Term Investments — 0.3%
Invesco Government & Agency Portfolio, Institutional Class (Cost — $113,260)		2.476	%		113,260		113,260
Total Investments — 100.1% (Cost — $30,729,986)							31,506,592
Liabilities in Excess of Other Assets — (0.1)%							(38,765	)
Total Net Assets — 100.0%						$	31,467,827

^(a)	Underlying Funds are affiliated with Legg Mason, Inc. and more information about the Underlying Funds is available at www.leggmason.com/mutualfunds.

See Notes to Financial Statements.



20		QS Variable Asset Allocation Series 2018 Annual Report

QS Variable Conservative Growth


Description				Shares		Value
Investments in Underlying Funds^(a) — 99.4%
Legg Mason Global Asset Management Trust:
BrandywineGLOBAL — Dynamic US Large Cap Value Fund, Class IS Shares					916,577	$	9,294,089
QS International Equity Fund, Class IS Shares					688,620		9,668,233
QS U.S. Small Capitalization Equity Fund, Class IS Shares					716,282		7,349,052
Legg Mason Partners Equity Trust:
ClearBridge Appreciation Fund, Class IS Shares					339,537		7,340,785
ClearBridge Large Cap Growth Fund, Class IS Shares					108,287		4,697,471
ClearBridge Small Cap Growth Fund, Class IS Shares					53,874		1,747,144
Western Asset Funds, Inc.:
Western Asset Core Bond Fund, Class IS Shares					1,405,169		17,185,220
Western Asset Intermediate Bond Fund, Class IS Shares					2,405,941		25,671,392
Total Investments in Underlying Funds before Short-Term Investments (Cost — $82,079,654)							82,953,386

	Rate
Short-Term Investments — 0.7%
Invesco Government & Agency Portfolio, Institutional Class (Cost — $588,438)		2.476	%		588,438		588,438
Total Investments — 100.1% (Cost — $82,668,092)							83,541,824
Liabilities in Excess of Other Assets — (0.1)%							(120,418	)
Total Net Assets — 100.0%						$	83,421,406

^(a)	Underlying Funds are affiliated with Legg Mason, Inc. and more information about the Underlying Funds is available at www.leggmason.com/mutualfunds.

See Notes to Financial Statements.



QS Variable Asset Allocation Series 2018 Annual Report		21

Statements of assets and liabilities

December 31, 2018


	QS Variable Growth		QS Variable Moderate Growth		QS Variable Conservative Growth

Assets:
Investments in affiliated Underlying Funds, at cost	$	92,385,054	$	30,616,726	$	82,079,654
Short-term investments, at cost		209,616		113,260		588,438
Investments in affiliated Underlying Funds, at value	$	94,572,846	$	31,393,332	$	82,953,386
Short-term investments, at value		209,616		113,260		588,438
Distributions receivable from affiliated Underlying Funds		32,729		23,407		103,700
Interest receivable		595		178		679
Receivable for Portfolio shares sold		60		—		—
Prepaid expenses		1,560		762		1,295
*Total Assets*		*94,817,406*		*31,530,939*		*83,647,498*

Liabilities:
Payable for investments in affiliated Underlying Funds		33,836		24,217		107,289
Payable for Portfolio shares repurchased		30,822		4,817		78,328
Trustees’ fees payable		1,222		378		973
Payable to investment manager		—		2,674		—
Service and/or distribution fees payable		—		—		974
Accrued expenses		36,548		31,026		38,528
*Total Liabilities*		*102,428*		*63,112*		*226,092*
Total Net Assets	$	94,714,978	$	31,467,827	$	83,421,406

Net Assets:
Par value (Note 7)	$	78	$	26	$	63
Paid-in capital in excess of par value		90,660,172		30,604,581		81,999,696
Total distributable earnings (loss)		4,054,728		863,220		1,421,647
Total Net Assets	$	94,714,978	$	31,467,827	$	83,421,406

Net Assets:
Class I		$94,714,978		$31,467,827		$78,533,808
Class II		—		—		$4,887,598

Shares Outstanding:
Class I		7,765,804		2,588,088		5,934,059
Class II		—		—		370,052

Net Asset Value:
Class I		$12.20		$12.16		$13.23
Class II		—		—		$13.21

See Notes to Financial Statements.



22		QS Variable Asset Allocation Series 2018 Annual Report

Statements of operations

For the Year Ended December 31, 2018


	QS Variable Growth		QS Variable Moderate Growth		QS Variable Conservative Growth

Investment Income:
Income distributions from affiliated Underlying Funds	$	1,662,512	$	625,853	$	1,888,819
Interest		6,257		2,091		6,677
*Total Investment Income*		*1,668,769*		*627,944*		*1,895,496*

Expenses:
Audit and tax fees		41,496		41,222		41,443
Fund accounting fees		28,325		27,857		28,192
Legal fees		24,117		23,621		26,882
Shareholder reports		22,343		7,344		20,536
Trustees’ fees		7,597		2,390		6,111
Insurance		2,324		1,143		1,952
Transfer agent fees (Note 5)		774		581		785
Custody fees		526		551		520
Interest expense		57		14		86
Service and/or distribution fees (Notes 2 and 5)		—		—		7,218
Miscellaneous expenses		2,267		2,126		1,939
*Total Expenses*		*129,826*		*106,849*		*135,664*
Less: Fee waivers and/or expense reimbursements (Notes 2 and 5)		—		(35,325)		—
*Net Expenses*		*129,826*		*71,524*		*135,664*
Net Investment Income		1,538,943		556,420		1,759,832

Realized and Unrealized Gain (Loss) on Affiliated Underlying Funds and Capital Gain Distributions from Affiliated Underlying Funds (Notes 1 and 3):
Net Realized Gain From:
Sale of affiliated Underlying Funds		2,331,525		743,878		723,108
Capital gain distributions from affiliated Underlying Funds		4,852,354		1,284,624		2,386,698
*Net Realized Gain*		*7,183,879*		*2,028,502*		*3,109,806*
*Change in Net Unrealized Appreciation (Depreciation) on Affiliated Underlying Funds*		*(16,904,402)*		*(4,679,234)*		*(8,656,229)*
Net Loss on Affiliated Underlying Funds and Capital Gain Distributions From Affiliated Underlying Funds		(9,720,523)		(2,650,732)		(5,546,423)
Decrease in Net Assets From Operations	$	(8,181,580)	$	(2,094,312)	$	(3,786,591)

See Notes to Financial Statements.



QS Variable Asset Allocation Series 2018 Annual Report		23

Statements of changes in net assets

QS Variable Growth


For the Years Ended December 31,	2018		2017

Operations:
Net investment income	$	1,538,943	$	1,601,944
Net realized gain		7,183,879		23,544,671
Change in net unrealized appreciation (depreciation)		(16,904,402)		(4,928,640)
*Increase (Decrease) in Net Assets From Operations*		*(8,181,580)*		*20,217,975*

Distributions to Shareholders From (Notes 1 and 6):
Total distributable earnings^(a)		(8,867,772)		(20,162,953)
*Decrease in Net Assets From Distributions to Shareholders*		*(8,867,772)*		*(20,162,953)*

Portfolio Share Transactions (Note 7):
Net proceeds from sale of shares		724,936		477,306
Reinvestment of distributions		8,867,772		20,162,953
Cost of shares repurchased		(15,954,179)		(13,372,869)
*Increase (Decrease) in Net Assets From Portfolio Share Transactions*		*(6,361,471)*		*7,267,390*
*Increase (Decrease) in Net Assets*		*(23,410,823)*		*7,322,412*

Net Assets:
Beginning of year		118,125,801		110,803,389
End of year^(b)	$	94,714,978	$	118,125,801

^(a)	Distributions from net investment income and from realized gains are no longer required to be separately disclosed. See Note 10. For the year ended December 31, 2017, distributions from net investment income and net realized gains were $2,045,010 and $18,117,943, respectively.

^(b)	Parenthetical disclosure of undistributed net investment income is no longer required. See Note 10. For the year ended December 31, 2017, end of year net assets included undistributed net investment income of $308,018.

See Notes to Financial Statements.



24		QS Variable Asset Allocation Series 2018 Annual Report

QS Variable Moderate Growth


For the Years Ended December 31,	2018		2017

Operations:
Net investment income	$	556,420	$	576,332
Net realized gain		2,028,502		7,745,979
Change in net unrealized appreciation (depreciation)		(4,679,234)		(2,451,128)
*Increase (Decrease) in Net Assets From Operations*		*(2,094,312)*		*5,871,183*

Distributions to Shareholders From (Notes 1 and 6):
Total distributable earnings^(a)		(2,308,758)		(6,959,721)
*Decrease in Net Assets From Distributions to Shareholders*		*(2,308,758)*		*(6,959,721)*

Portfolio Share Transactions (Note 7):
Net proceeds from sale of shares		411,862		124,844
Reinvestment of distributions		2,308,758		6,959,721
Cost of shares repurchased		(4,295,259)		(6,728,074)
*Increase (Decrease) in Net Assets From Portfolio Share Transactions*		*(1,574,639)*		*356,491*
*Decrease in Net Assets*		*(5,977,709)*		*(732,047)*

Net Assets:
Beginning of year		37,445,536		38,177,583
End of year^(b)	$	31,467,827	$	37,445,536

^(a)	Distributions from net investment income and from realized gains are no longer required to be separately disclosed. See Note 10. For the year ended December 31, 2017, distributions from net investment income and net realized gains were $770,003 and $6,189,718, respectively.

^(b)	Parenthetical disclosure of undistributed net investment income is no longer required. See Note 10. For the year ended December 31, 2017, end of year net assets included overdistributed net investment income of $(32,451).

See Notes to Financial Statements.



QS Variable Asset Allocation Series 2018 Annual Report		25

Statements of changes in net assets (cont’d)

QS Variable Conservative Growth


For the Years Ended December 31,	2018		2017

Operations:
Net investment income	$	1,759,832	$	1,686,814
Net realized gain		3,109,806		16,138,740
Change in net unrealized appreciation (depreciation)		(8,656,229)		(5,855,582)
*Increase (Decrease) in Net Assets From Operations*		*(3,786,591)*		*11,969,972*

Distributions to Shareholders From (Notes 1 and 6):
Total distributable earnings^(a)		(4,780,864)		(12,130,989)
*Decrease in Net Assets From Distributions to Shareholders*		*(4,780,864)*		*(12,130,989)*

Portfolio Share Transactions (Note 7):
Net proceeds from sale of shares		4,973,192		1,668,291
Reinvestment of distributions		4,780,864		12,130,989
Cost of shares repurchased		(13,231,969)		(11,934,245)
*Increase (Decrease) in Net Assets From Portfolio Share Transactions*		*(3,477,913)*		*1,865,035*
*Increase (Decrease) in Net Assets*		*(12,045,368)*		*1,704,018*

Net Assets:
Beginning of year		95,466,774		93,762,756
End of year^(b)	$	83,421,406	$	95,466,774

^(a)	Distributions from net investment income and from realized gains are no longer required to be separately disclosed. See Note 10. For the year ended December 31, 2017, distributions from net investment income and net realized gains were $2,216,010 and $9,914,979, respectively.

^(b)	Parenthetical disclosure of undistributed net investment income is no longer required. See Note 10. For the year ended December 31, 2017, end of year net assets included overdistributed net investment income of $(35,126).

See Notes to Financial Statements.



26		QS Variable Asset Allocation Series 2018 Annual Report

Financial highlights

QS Variable Growth


For a share of each class of beneficial interest outstanding throughout each year ended December 31:
Class I Shares^1,2	2018			2017			2016			2015			2014

Net asset value, beginning of year		$14.46			$14.55			$14.12			$16.45			$16.51

Income (loss) from operations:
Net investment income		0.20			0.22			0.20			0.19			0.19
Net realized and unrealized gain (loss)		(1.30)			2.56			0.98			(0.52)			0.59
*Total income (loss) from operations*		*(1.10)*			*2.78*			*1.18*			*(0.33)*			*0.78*

Less distributions from:
Net investment income		(0.38)			(0.29)			(0.21)			(0.21)			(0.30)
Net realized gains		(0.78)			(2.58)			(0.54)			(1.79)			(0.54)
*Total distributions*		*(1.16)*			*(2.87)*			*(0.75)*			*(2.00)*			*(0.84)*

Net asset value, end of year		$12.20			$14.46			$14.55			$14.12			$16.45
*Total return³*		*(8.05)*	%		*19.33*	%		*8.50*	%		*(2.23)*	%		*4.69*	%

Net assets, end of year (000s)		$94,715			$118,126			$110,803			$111,372			$124,452

Ratios to average net assets:
Gross expenses⁴		0.11	%		0.12	%		0.11	%		0.12	%		0.08	%
Net expenses^4,5		0.11			0.12			0.11			0.12			0.08
Net investment income		1.36			1.40			1.44			1.17			1.12

Portfolio turnover rate		15	%		88	%⁶		20	%		54	%⁶		19	%

¹	Effective May 1, 2017, the existing single class shares were renamed Class I shares.

²	Per share amounts have been calculated using the average shares method.

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.

⁴	Does not include fees and expenses of the Underlying Funds in which the Portfolio invests.

⁵

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses (fees and expenses of Underlying Funds), to average net assets of Class I shares did not exceed 0.20%. This expense limitation arrangement cannot be terminated prior to December 31, 2020 without the Board of Trustees’ consent.

⁶	Excludes the value of securities received in lieu of cash proceeds from the sale of Underlying Funds and the subsequent sale of those securities.

See Notes to Financial Statements.



QS Variable Asset Allocation Series 2018 Annual Report		27

Financial highlights (cont’d)

QS Variable Moderate Growth


For a share of each class of beneficial interest outstanding throughout each year ended December 31:
Class I Shares^1,2	2018			2017			2016			2015			2014

Net asset value, beginning of year		$13.93			$14.57			$13.95			$14.46			$14.05

Income (loss) from operations:
Net investment income		0.22			0.24			0.24			0.21			0.21
Net realized and unrealized gain (loss)		(1.07)			2.18			0.87			(0.46)			0.48
*Total income (loss) from operations*		*(0.85)*			*2.42*			*1.11*			*(0.25)*			*0.69*

Less distributions from:
Net investment income		(0.35)			(0.34)			(0.30)			(0.26)			(0.28)
Net realized gains		(0.57)			(2.72)			(0.19)			—			—
*Total distributions*		*(0.92)*			*(3.06)*			*(0.49)*			*(0.26)*			*(0.28)*

Net asset value, end of year		$12.16			$13.93			$14.57			$13.95			$14.46
*Total return³*		*(6.28)*	%		*16.73*	%		*7.99*	%		*(1.79)*	%		*4.91*	%

Net assets, end of year (000s)		$31,468			$37,446			$38,178			$39,620			$47,643

Ratios to average net assets:
Gross expenses⁴		0.30	%		0.30	%		0.23	%		0.27	%		0.16	%
Net expenses^4,5		0.20	⁶		0.20	⁶		0.20	⁶		0.20	⁶		0.16
Net investment income		1.56			1.52			1.70			1.43			1.44

Portfolio turnover rate		16	%		87	%⁷		21	%		57	%⁷		17	%

¹	Effective May 1, 2017, the existing single class shares were renamed Class I shares.

²	Per share amounts have been calculated using the average shares method.

⁴	Does not include fees and expenses of the Underlying Funds in which the Portfolio invests.

⁵

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses (fees and expenses of Underlying Funds), to average net assets of Class I shares did not exceed 0.20%. This expense limitation arrangement cannot be terminated prior to December 31, 2020 without the Board of Trustees’ consent.

⁶	Reflects fee waivers and/or expense reimbursements.

⁷	Excludes the value of securities received in lieu of cash proceeds from the sale of Underlying Funds and the subsequent sale of those securities.

See Notes to Financial Statements.



28		QS Variable Asset Allocation Series 2018 Annual Report

QS Variable Conservative Growth


For a share of each class of beneficial interest outstanding throughout each year ended December 31:
Class I Shares^1,2	2018			2017			2016			2015			2014

Net asset value, beginning of year		$14.64			$14.76			$14.07			$14.54			$14.22

Income (loss) from operations:
Net investment income		0.28			0.28			0.31			0.29			0.31
Net realized and unrealized gain (loss)		(0.91)			1.73			0.73			(0.46)			0.39
*Total income (loss) from operations*		*(0.63)*			*2.01*			*1.04*			*(0.17)*			*0.70*

Less distributions from:
Net investment income		(0.38)			(0.39)			(0.35)			(0.30)			(0.38)
Net realized gains		(0.40)			(1.74)			—			—			—
*Total distributions*		*(0.78)*			*(2.13)*			*(0.35)*			*(0.30)*			*(0.38)*

Net asset value, end of year		$13.23			$14.64			$14.76			$14.07			$14.54
*Total return³*		*(4.40)*	%		*13.55*	%		*7.43*	%		*(1.19)*	%		*4.91*	%

Net assets, end of year (000s)		$78,534			$94,355			$93,763			$98,024			$114,198

Ratios to average net assets:
Gross expenses⁴		0.14	%		0.14	%		0.13	%		0.14	%		0.10	%
Net expenses^4,5		0.14			0.14			0.13			0.14			0.10
Net investment income		1.90			1.78			2.18			1.98			2.09

Portfolio turnover rate		11	%		86	%⁶		18	%		58	%⁶		17	%

¹	Effective May 1, 2017, the existing single class shares were renamed Class I shares.

²	Per share amounts have been calculated using the average shares method.

⁴	Does not include fees and expenses of the Underlying Funds in which the Portfolio invests.

⁵

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses (fees and expenses of Underlying Funds), to average net assets of Class I shares did not exceed 0.20%. This expense limitation arrangement cannot be terminated prior to December 31, 2020 without the Board of Trustees’ consent.

⁶	Excludes the value of securities received in lieu of cash proceeds from the sale of Underlying Funds and the subsequent sale of those securities.

See Notes to Financial Statements.



QS Variable Asset Allocation Series 2018 Annual Report		29

Financial highlights (cont’d)

QS Variable Conservative Growth


For a share of each class of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:
Class II Shares¹	2018			2017²

Net asset value, beginning of year		$14.62			$15.72

Income (loss) from operations:
Net investment income		0.33			0.32
Net realized and unrealized gain (loss)		(0.98)			0.66
*Total income (loss) from operations*		*(0.65)*			*0.98*

Less distributions from:
Net investment income		(0.36)			(0.34)
Net realized gains		(0.40)			(1.74)
*Total distributions*		*(0.76)*			*(2.08)*

Net asset value, end of year		$13.21			$14.62
*Total return³*		*(4.55)*	%		*6.18*	%

Net assets, end of year (000s)		$4,888			$1,111

Ratios to average net assets:
Gross expenses⁴		0.38	%		0.43	%⁵
Net expenses^4,6		0.38			0.43	⁵
Net investment income		2.32			3.905

Portfolio turnover rate		11	%		86	%^7,8

¹	Per share amounts have been calculated using the average shares method.

²	For the period June 23, 2017 (inception date) to December 31, 2017.

⁴	Does not include fees and expenses of the Underlying Funds in which the Portfolio invests.

⁵	Annualized.

⁶

As a result of an expense limitation arrangement, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses (fees and expenses of Underlying Funds), to average net assets of Class II shares did not exceed 0.45%. This expense limitation arrangement cannot be terminated prior to December 31, 2020 without the Board of Trustees’ consent.

⁷	Excludes the value of securities received in lieu of cash proceeds from the sale of Underlying Funds and the subsequent sale of those securities.

⁸	For the year ended December 31, 2017.

See Notes to Financial Statements.



30		QS Variable Asset Allocation Series 2018 Annual Report

Notes to financial statements

1. Organization and significant accounting policies

QS Variable Growth (“Variable Growth”), QS Variable Moderate Growth (“Variable Moderate Growth”) and QS Variable Conservative Growth (“Variable Conservative Growth”) (the “Portfolios”) are separate non-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 Portfolios invest in other mutual funds and exchange-traded funds (“ETFs”) which are affiliated with Legg Mason, Inc. (“Legg Mason”) and ETFs managed by unaffiliated investment advisers (“Underlying Funds”). Shares of the Portfolios are offered to separate accounts sponsored by certain life insurance companies and qualified pension and retirement plans, including affiliates of the investment manager.

The following are significant accounting policies consistently followed by the Portfolios 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, excluding ETFs, 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 (which may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed 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 valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Investments in open-end funds are valued at the closing net asset value per share of each fund on the day of valuation. When the Portfolios hold securities or other assets that are denominated in a foreign currency, the Portfolios will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). 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 or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. 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 each Portfolio calculates its net asset value, the Portfolios value these securities as determined in accordance with procedures approved by the Portfolios’ Board of Trustees.

The Board of Trustees is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North Atlantic Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Trustees, is responsible for making fair value determinations, evaluating the effectiveness of the Portfolios’ pricing policies, and reporting to the Board of Trustees. When determining the reliability of third party pricing information for investments owned by the Portfolios, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.

The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities. Additionally, if the closing net asset value per share for an Underlying Fund is not available on the day of valuation, the Valuation Committee may adjust the Underlying Fund’s last available net asset value per share to account for significant events that have occurred subsequent to the Underlying Fund’s last net asset value per share calculation but prior to the day of valuation.

For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Trustees, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Trustees quarterly.



QS Variable Asset Allocation Series 2018 Annual Report		31

Notes to financial statements (cont’d)

The Portfolios use 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.

GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:

•

Level 1 — quoted prices in active markets for identical investments

•

Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

•

Level 3 — significant unobservable inputs (including the Portfolios’ own assumptions in determining the fair value of investments)

The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used in valuing the Portfolios’ assets carried at fair value:

Variable Growth


ASSETS
Description	Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Investments in underlying funds†	$	94,572,846		—		—	$	94,572,846
Short-term investments†		209,616		—		—		209,616
Total investments	$	94,782,462		—		—	$	94,782,462

†	See Schedule of Investments for additional detailed categorizations.

Variable Moderate Growth


ASSETS
Description	Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Investments in underlying funds†	$	31,393,332		—		—	$	31,393,332
Short-term investments†		113,260		—		—		113,260
Total investments	$	31,506,592		—		—	$	31,506,592

†	See Schedule of Investments for additional detailed categorizations.

Variable Conservative Growth


ASSETS
Description	Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Investments in underlying funds†	$	82,953,386		—		—	$	82,953,386
Short-term investments†		588,438		—		—		588,438
Total investments	$	83,541,824		—		—	$	83,541,824

†	See Schedule of Investments for additional detailed categorizations.

(b) Fund of funds risk. The cost of investing in the Portfolios, 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 Portfolios’ approval, which could force the Portfolios to withdraw their investments from such Underlying Fund at a time that is unfavorable to the Portfolios. In addition, one Underlying Fund may buy the same securities that another Underlying Fund sells. Therefore, the Portfolios would indirectly bear the costs of these trades without accomplishing any investment purpose.

(c) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Net investment income distributions, if any, from the Underlying Funds are recorded on the ex-dividend date as investment income. Interest income



32		QS Variable Asset Allocation Series 2018 Annual Report

is recorded on an accrual basis. Short-term and long-term capital gain distributions, if any, from the Underlying Funds are recorded on the ex-dividend date as realized gains. The character of certain distributions received from the Underlying Funds may represent a return of capital. The Portfolios determine the components of these distributions subsequent to the ex-dividend date, based on the actual tax character reported by the Underlying Funds. These distributions are recorded by adjusting the cost basis of the related Underlying Fund. The cost of investments sold is determined by use of the specific identification method.

(d) 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 Portfolios are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.

(e) Share class accounting. Investment income, common expenses and realized/unrealized gains (losses) on investments are allocated to the various classes of the Portfolios on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that share class.

(f) Compensating balance arrangements. The Portfolios have an arrangement with their custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Portfolios’ cash on deposit with the bank.

(g) Federal and other taxes. It is the Portfolios’ 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 Portfolios intend to distribute their 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 Portfolios’ financial statements.

Management has analyzed the Portfolios’ tax positions taken on income tax returns for all open tax years and has concluded that as of December 31, 2018, no provision for income tax is required in the Portfolios’ financial statements. The Portfolios’ federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

(h) Reclassification. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. During the current year, the Portfolios had no reclassifications.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is each Portfolio’s investment manager and QS Investors, LLC ( “QS Investors”) is each Portfolio’s subadviser. Western Asset Management Company, LLC (formerly Western Asset Management Company) (“Western Asset”) manages the portion of each Portfolio’s cash and short-term instruments allocated to it. LMPFA, QS Investors and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”). Under the investment management agreements, the Portfolios do not pay a management fee.

LMPFA provides administrative and certain oversight services to the Portfolios. LMPFA delegates to the subadviser the day-to-day portfolio management of the Portfolios, except for the management of the portion of each Portfolio’s cash and short-term instruments allocated to Western Asset.

As a result of expense limitation arrangements between the Portfolios and LMPFA, the ratio of total annual fund operating expenses, other than interest, brokerage, taxes, extraordinary expenses and acquired fund fees and expenses (fees and expenses of Underlying Funds), to average net assets of Class I shares of Variable Growth, Variable Moderate Growth and Variable Conservative Growth and Class II shares of Variable Conservative Growth did not exceed 0.20% and 0.45%, respectively. These expense limitation arrangements cannot be terminated prior to December 31, 2020 without the Board of Trustees’ consent.

During the year ended December 31, 2018, fees waived and/or reimbursed were as follows:


Variable Growth		—
Variable Moderate Growth	$	35,325
Variable Conservative Growth		—

LMPFA is permitted to recapture amounts waived and/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 expenses incurred. In no case will LMPFA recapture any amount that would result, on any particular business day of the Portfolios, in the class’ total annual operating expenses exceeding the expense cap or any other lower limit then in effect.



QS Variable Asset Allocation Series 2018 Annual Report		33

Notes to financial statements (cont’d)

In addition, the Portfolios indirectly pay management and/or administration fees to LMPFA and other wholly-owned subsidiaries of Legg Mason as a shareholder in the Underlying Funds. These management and/or administration fees ranged from 0.40% to 0.75% of the average daily net assets of the Underlying Funds.

Legg Mason Investor Services, LLC, a wholly-owned broker-dealer subsidiary of Legg Mason, serves as the Portfolios’ 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.

3. Investments

During the year ended December 31, 2018, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:


	Purchases		Sales
Variable Growth	$	17,300,702	$	25,975,000
Variable Moderate Growth		5,806,202		7,935,000
Variable Conservative Growth		10,258,900		14,800,000

At December 31, 2018, the aggregate cost of investments and the aggregrate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:


	Variable Growth
	Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Net Unrealized Depreciation
Securities	$	95,546,296	$	7,788,492	$	(8,552,326)	$	(763,834)


	Variable Moderate Growth
	Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Net Unrealized Depreciation
Securities	$	31,816,661	$	1,321,438	$	(1,631,507)	$	(310,069)


	Variable Conservative Growth
	Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Net Unrealized Depreciation
Securities	$	84,028,144	$	3,018,783	$	(3,505,103)	$	(486,320)

4. Derivative instruments and hedging activities

During the year ended December 31, 2018, the Portfolios did not invest in derivative instruments.

5. Class specific expenses, waivers and/or expense reimbursements

Variable Conservative Growth has adopted a Rule 12b-1 shareholder services and distribution plan and under that plan the Portfolio pays service and/or distribution fees 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/or distribution fees are accrued daily and paid monthly.

For the year ended December 31, 2018, class specific expenses were as follows:


	Service and/or Distribution Fees		Transfer Agent Fees

Variable Growth
Class I		—	$	774

Variable Moderate Growth
Class I		—	$	581

Variable Conservative Growth
Class I		—	$	693
Class II	$	7,218		92
Total	$	7,218	$	785



34		QS Variable Asset Allocation Series 2018 Annual Report

For the year ended December 31, 2018, waivers and/or expense reimbursements by class were as follows:


	Waivers/Expense Reimbursements

Variable Moderate Growth
Class I	$	35,325
Total	$	35,325

6. Distributions to shareholders by class


	Year Ended December 31, 2018		Year Ended December 31, 2017

Variable Growth

Net Investment Income:
Class I†	$	2,860,004	$	2,045,010

Net Realized Gains:
Class I†	$	6,007,768	$	18,117,943

Variable Moderate Growth

Net Investment Income:
Class I†	$	870,004	$	770,003

Net Realized Gains:
Class I†	$	1,438,754	$	6,189,718

Variable Conservative Growth

Net Investment Income:
Class I†	$	2,186,489	$	2,193,264
Class II		123,518		22,746	‡
Total	$	2,310,007	$	2,216,010

Net Realized Gains:
Class I†	$	2,378,114	$	9,799,177
Class II		92,743		115,802	‡
Total	$	2,470,857	$	9,914,979

†	Effective May 1, 2017, the existing single class shares were renamed Class I shares.

‡	For the period June 23, 2017 (inception date) to December 31, 2017.

7. Shares of beneficial interest

At December 31, 2018, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share. The Portfolios have 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.

Transactions in shares of each class were as follows:


	Year Ended December 31, 2018				Year Ended December 31, 2017
	Shares		Amount		Shares		Amount

Variable Growth
Class I†
Shares sold		49,677	$	724,936		29,859	$	477,306
Shares issued on reinvestment		671,417		8,867,772		1,377,285		20,162,953
Shares repurchased		(1,125,347)		(15,954,179)		(853,636)		(13,372,869)
Net increase (decrease)		(404,253)	$	(6,361,471)		553,508	$	7,267,390



QS Variable Asset Allocation Series 2018 Annual Report		35

Notes to financial statements (cont’d)


	Year Ended December 31, 2018				Year Ended December 31, 2017
	Shares		Amount		Shares			Amount

Variable Moderate Growth
Class I†
Shares sold		29,070	$	411,862		7,988		$	124,844
Shares issued on reinvestment		181,261		2,308,758		492,566			6,959,721
Shares repurchased		(309,854)		(4,295,259)		(433,052)			(6,728,074)
Net increase (decrease)		(99,523)	$	(1,574,639)		67,502		$	356,491

Variable Conservative Growth

Class I†
Shares sold		49,320	$	714,187		34,799		$	552,142
Shares issued on reinvestment		334,518		4,564,604		816,470			11,992,441
Shares repurchased		(896,681)		(12,989,761)		(755,020)			(11,898,238)
Net increase (decrease)		(512,843)	$	(7,710,970)		96,249		$	646,345

Variable Conservative Growth

Class II
Shares sold		294,659	$	4,259,005		68,828	‡	$	1,116,149	‡
Shares issued on reinvestment		16,079		216,260		9,457	‡		138,548	‡
Shares repurchased		(16,698)		(242,208)		(2,273)	‡		(36,007)	‡
Net increase		294,040	$	4,233,057		76,012		$	1,218,690

†	Effective May 1, 2017, the existing single class shares were renamed Class I shares.

‡	For the period June 23, 2017 (inception date) to December 31, 2017.

8. Transactions with affiliated companies

As defined by the 1940 Act, an affiliated company is one in which the Portfolios own 5% or more of the outstanding voting securities, or a company which is under common ownership or control. Legg Mason, through sub-advisory agreements with its wholly owned subsidiaries, also provides investment management services to certain of the Underlying Funds held by the Portfolios. Based on the Portfolios’ relative ownership, the following Underlying Funds were considered affiliated companies for all or some portion of the year ended December 31, 2018. The following transactions were effected in shares of such Underlying Funds for the year ended December 31, 2018.


	Affiliate Value at December 31, 2017		Purchased				Sold				Realized Gain (Loss) from Sale of Affiliated Underlying Funds		Income Distributions from Affiliated Underlying Funds		Capital Gain Distributions from Affiliated Underlying Funds		Net Increase (Decrease) in Unrealized Appreciation (Depreciation)		Affiliate Value at December 31, 2018
Variable Growth	Affiliate Value at December 31, 2017		Cost		Shares		Cost		Shares				Income Distributions from Affiliated Underlying Funds		Capital Gain Distributions from Affiliated Underlying Funds				Affiliate Value at December 31, 2018
Legg Mason Global Asset Management Trust — BrandywineGLOBAL — Diversified US Large Cap Value Fund, Class IS Shares	$	7,926,656	$	617,284		33,223	$	1,200,115		71,784	$	289,884	$	116,167	$	501,117	$	(1,474,893)	$	5,868,932
Legg Mason Global Asset Management Trust — BrandywineGLOBAL — Dynamic US Large Cap Value Fund, Class IS Shares		26,058,774		2,497,935		225,252		4,817,380		441,362		632,620		350,494		1,702,440		(4,569,649)		19,169,680
Legg Mason Global Asset Management Trust — QS International Equity Fund, Class IS Shares		24,453,101		2,786,928		180,187		1,456,157		85,474		(46,157)		606,927		—		(4,388,555)		21,395,317
Legg Mason Global Asset Management Trust — QS U.S. Small Capitalization Equity Fund, Class IS Shares		19,073,988		1,904,670		173,568		2,983,931		208,784		(53,931)		76,288		1,403,383		(3,902,637)		14,092,090
Legg Mason Partners Equity Trust — ClearBridge Appreciation Fund, Class IS Shares		9,941,189		519,889		22,545		1,448,201		92,399		816,798		114,090		405,799		(1,377,238)		7,635,639



36		QS Variable Asset Allocation Series 2018 Annual Report


	Affiliate Value at December 31, 2017		Purchased				Sold				Realized Gain (Loss) from Sale of Affiliated Underlying Funds		Income Distributions from Affiliated Underlying Funds		Capital Gain Distributions from Affiliated Underlying Funds		Net Increase (Decrease) in Unrealized Appreciation (Depreciation)		Affiliate Value at December 31, 2018
Variable Growth (cont’d)	Affiliate Value at December 31, 2017		Cost		Shares		Cost		Shares				Income Distributions from Affiliated Underlying Funds		Capital Gain Distributions from Affiliated Underlying Funds				Affiliate Value at December 31, 2018
Legg Mason Partners Equity Trust — ClearBridge Large Cap Growth Fund, Class IS Shares	$	11,734,753	$	349,707		7,711	$	2,494,061		60,232	$	405,941	$	35,890	$	313,816	$	(561,503)	$	9,028,896
Legg Mason Partners Equity Trust — ClearBridge Small Cap Growth Fund, Class IS Shares		10,023,937		525,799		15,437		6,004,936		171,667		350,065		—		525,799		(391,941)		4,152,859
Western Asset Funds, Inc. — Western Asset Core Bond Fund, Class IS Shares		3,448,337		3,257,075		264,504		1,294,718		103,481		(24,719)		144,976		—		(115,421)		5,295,273
Western Asset Funds, Inc. — Western Asset Intermediate Bond Fund, Class IS Shares		5,159,286		4,841,415		450,766		1,943,976		178,339		(38,976)		217,680		—		(122,565)		7,934,160
	$	117,820,021	$	17,300,702			$	23,643,475			$	2,331,525	$	1,662,512	$	4,852,354	$	(16,904,402)	$	94,572,846


	Affiliate Value at December 31, 2017		Purchased				Sold				Realized Gain (Loss) from Sale of Affiliated Underlying Funds		Income Distributions from Affiliated Underlying Funds		Capital Gain Distributions from Affiliated Underlying Funds		Net Increase (Decrease) in Unrealized Appreciation (Depreciation)		Affiliate Value at December 31, 2018
Variable Moderate Growth	Affiliate Value at December 31, 2017		Cost		Shares		Cost		Shares				Income Distributions from Affiliated Underlying Funds		Capital Gain Distributions from Affiliated Underlying Funds				Affiliate Value at December 31, 2018
Legg Mason Global Asset Management Trust — BrandywineGLOBAL — Diversified US Large Cap Value Fund, Class IS Shares	$	1,748,889	$	127,526		6,863	$	356,689		21,389	$	88,311	$	24,000	$	103,527	$	(328,220)	$	1,191,506
Legg Mason Global Asset Management Trust — BrandywineGLOBAL — Dynamic US Large Cap Value Fund, Class IS Shares		7,560,207		714,798		64,217		1,910,215		173,899		244,785		94,720		460,079		(1,279,677)		5,085,113
Legg Mason Global Asset Management Trust — QS International Equity Fund, Class IS Shares		6,206,774		803,677		52,519		501,781		29,420		8,219		153,677		—		(1,091,252)		5,417,418
Legg Mason Global Asset Management Trust — QS U.S. Small Capitalization Equity Fund, Class IS Shares		4,914,822		492,460		44,441		947,497		66,334		(27,496)		18,945		348,514		(960,180)		3,499,605
Legg Mason Partners Equity Trust — ClearBridge Appreciation Fund, Class IS Shares		4,410,615		265,179		11,502		1,062,763		54,696		267,237		47,221		167,958		(489,108)		3,123,923
Legg Mason Partners Equity Trust — ClearBridge Large Cap Growth Fund, Class IS Shares		3,426,569		95,873		2,114		874,395		21,374		145,604		9,840		86,034		(181,815)		2,466,232
Legg Mason Partners Equity Trust — ClearBridge Small Cap Growth Fund, Class IS Shares		1,670		1,333,512		37,494		309,987		8,678		40,013		—		118,512		(89,162)		936,033
Western Asset Funds, Inc. — Western Asset Core Bond Fund, Class IS Shares		3,681,305		802,605		65,041		478,852		38,200		(8,853)		112,280		—		(126,137)		3,878,921
Western Asset Funds, Inc. — Western Asset Intermediate Bond Fund, Class IS Shares		5,506,635		1,170,572		108,827		748,943		68,644		(13,942)		165,170		—		(133,683)		5,794,581
	$	37,457,486	$	5,806,202			$	7,191,122			$	743,878	$	625,853	$	1,284,624	$	(4,679,234)	$	31,393,332



QS Variable Asset Allocation Series 2018 Annual Report		37

Notes to financial statements (cont’d)


	Affiliate Value at December 31, 2017		Purchased				Sold				Realized Gain (Loss) from Sale of Affiliated Underlying Funds		Income Distributions from Affiliated Underlying Funds		Capital Gain Distributions from Affiliated Underlying Funds		Net Increase (Decrease) in Unrealized Appreciation (Depreciation)		Affiliate Value at December 31, 2018
Variable Conservative Growth	Affiliate Value at December 31, 2017		Cost		Shares		Cost		Shares				Income Distributions from Affiliated Underlying Funds		Capital Gain Distributions from Affiliated Underlying Funds				Affiliate Value at December 31, 2018
Legg Mason Global Asset Management Trust — BrandywineGLOBAL — Dynamic US Large Cap Value Fund, Class IS Shares	$	13,269,700	$	1,368,684		122,748	$	3,064,079		278,903	$	340,921	$	176,479	$	857,205	$	(2,280,216)	$	9,294,089
Legg Mason Global Asset Management Trust — QS International Equity Fund, Class IS Shares		10,310,712		1,874,403		122,483		596,790		36,476		23,210		274,403		—		(1,920,092)		9,668,233
Legg Mason Global Asset Management Trust — QS U.S. Small Capitalization Equity Fund, Class IS Shares		10,015,439		1,026,651		92,809		1,660,205		116,220		(40,204)		39,784		731,867		(2,032,833)		7,349,052
Legg Mason Partners Equity Trust — ClearBridge Appreciation Fund, Class IS Shares		9,935,661		702,362		30,469		2,572,443		113,726		172,557		113,535		403,826		(724,795)		7,340,785
Legg Mason Partners Equity Trust — ClearBridge Large Cap Growth Fund, Class IS Shares		6,303,485		186,636		4,116		1,490,562		35,844		214,437		19,154		167,481		(302,088)		4,697,471
Legg Mason Partners Equity Trust — ClearBridge Small Cap Growth Fund, Class IS Shares		2,390,502		226,319		6,645		719,428		20,567		90,572		—		226,319		(150,249)		1,747,144
Western Asset Funds, Inc. — Western Asset Core Bond Fund, Class IS Shares		17,310,983		1,958,802		158,095		1,478,878		118,145		(28,878)		512,956		—		(605,687)		17,185,220
Western Asset Funds, Inc. — Western Asset Intermediate Bond Fund, Class IS Shares		25,891,125		2,915,043		270,268		2,494,507		228,813		(49,507)		752,508		—		(640,269)		25,671,392
	$	95,427,607	$	10,258,900			$	14,076,892			$	723,108	$	1,888,819	$	2,386,698	$	(8,656,229)	$	82,953,386

9. Distributions

The tax character of distributions paid during the fiscal year ended December 31, 2018 was as follows:


	Variable Growth		Variable Moderate Growth		Variable Conservative Growth

Distributions Paid From:
Ordinary income	$	4,448,370	$	1,320,118	$	2,828,475
Net long-term capital gains		4,419,402		988,640		1,952,389
Total distributions paid	$	8,867,772	$	2,308,758	$	4,780,864

The tax character of distributions paid during the fiscal year ended December 31, 2017 was as follows:


	Variable Growth		Variable Moderate Growth		Variable Conservative Growth

Distributions Paid From:
Ordinary income	$	2,762,066	$	901,049	$	2,216,010
Net long-term capital gains		17,400,887		6,058,672		9,914,979
Total distributions paid	$	20,162,953	$	6,959,721	$	12,130,989



38		QS Variable Asset Allocation Series 2018 Annual Report

As of December 31, 2018, the components of accumulated earnings on a tax basis were as follows:


	Variable Growth			Variable Moderate Growth			Variable Conservative Growth
Undistributed ordinary income — net	$	91,571			—		$	49,930
Undistributed long-term capital gains — net		4,741,029		$	1,182,465			1,873,457
Total undistributed earnings	$	4,832,600		$	1,182,465		$	1,923,387
Other book/tax temporary differences		(14,038)	^(a)		(9,176)	^(a)		(15,420)	^(a)
Unrealized appreciation (depreciation)		(763,834)	^(b)		(310,069)	^(b)		(486,320)	^(b)
Total accumulated earnings (losses) — net	$	4,054,728		$	863,220		$	1,421,647

^(a)	Other book/tax temporary differences are attributable to the book/tax differences in the timing of the deductibility of various expenses.

^(b)	The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable to the tax deferral of losses on wash sales.

10. Recent accounting pronouncement

In August 2018, the Securities and Exchange Commission released its Final Rule on Disclosure Update and Simplification (the “Final Rule”) which is intended to simplify an issuer’s disclosure compliance efforts by removing redundant or outdated disclosure requirements without significantly altering the mix of information provided to investors. Effective with the current reporting period, the Portfolios adopted the Final Rule with the most notable impacts being that the Portfolios are no longer required to present the components of distributable earnings on the Statements of Assets and Liabilities or the sources of distributions to shareholders and the amount of undistributed net investment income on the Statements of Changes in Net Assets. The tax components of distributable earnings and distributions to shareholders continue to be disclosed within the Notes to Financial Statements.



QS Variable Asset Allocation Series 2018 Annual Report		39

Report of independent registered public accounting firm

To the Board of Trustees of Legg Mason Partners Variable Equity Trust and Shareholders of QS Variable Growth, QS Variable Moderate Growth and QS Variable Conservative Growth

Opinions on the financial statements

We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of QS Variable Growth, QS Variable Moderate Growth and QS Variable Conservative Growth (three of the funds constituting Legg Mason Partners Variable Equity Trust, hereafter collectively referred to as the “Funds”) as of December 31, 2018, the related statements of operations for the year ended December 31, 2018, the statements of changes in net assets for each of the two years in the period ended December 31, 2018, including the related notes, and the financial highlights for the year ended December 31, 2018 and for periods ended December 31, 2017 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of each of the Funds as of December 31, 2018, the results of each of their operations for the year then ended, and the changes in each of their net assets for each of the two years in the period ended December 31, 2018 and each of the financial highlights for the year ended December 31, 2018 and for the periods ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.

The financial statements of the Funds as of and for the year ended December 31, 2016 and the financial highlights for each of the periods ended on or prior to December 31, 2016 (not presented herein, other than the financial highlights) were audited by other auditors whose report dated February 15, 2017 expressed an unqualified opinion on those financial statements and financial highlights.

Basis for opinion

These financial statements are the responsibility of the Funds’ management. Our responsibility is to express an opinion on the Funds’ financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Funds in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2018 by correspondence with the custodian and transfer agent of the investee fund. We believe that our audits provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP

Baltimore, Maryland

February 13, 2019

We have served as the auditor of one or more investment companies in Legg Mason investment company group since at least 1973. We have not been able to determine the specific year we began serving as auditor.



40		QS Variable Asset Allocation Series 2018 Annual Report

Board approval of management and subadvisory agreements (unaudited)

Legg Mason Partners Variable Equity Trust

— QS Variable Growth

At a meeting of the Trust’s Board of Trustees, the Board considered the re-approval for an annual period of the management agreement of QS Variable Growth 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 QS Investors, LLC (“QS”) provides day-to-day management of the Fund’s portfolio, and the sub-advisory agreement pursuant to which Western Asset Management Company, LLC (“Western Asset” and, together with QS, the “Sub-Advisers”) provides day-to-day management of the Fund’s cash and short-term instruments allocated to it by the Manager. (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 performance of 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 and services provided to the Fund and other funds overseen by the Board. This information was initially reviewed by a special committee of the Independent Trustees and then by the full 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 shareholders, an evaluation based on several factors including those discussed below.

Nature, extent and quality of the services 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 provided to the Fund by the Manager and the Sub-Advisers under the Management Agreement and Sub-Advisory Agreements, respectively, during the past year. 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 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 the Fund’s affairs 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 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 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 and the Fund’s compliance programs. 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 primarily responsible for the day-to-day portfolio management of the Fund. The Board considered the services provided to the Legg Mason fund complex and the Manager’s commitment to continue to provide effective and efficient investment management and shareholder services. 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 considered the division of responsibilities among the Manager and the Sub-Advisers and the oversight provided by the Manager. The Board also considered the Manager’s and QS’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 provided (and expected to be provided) under the respective Agreement by the Manager and the Sub-Advisers.

Fund performance

The Board received and reviewed performance information for the Fund and for all mixed-asset target allocation aggressive growth funds (i.e., funds that maintain at least 80% of assets in equity securities, with the remainder invested in bonds, cash and cash equivalents)



QS Variable Asset Allocation Series		41

Board approval of management and subadvisory agreements (unaudited) (cont’d)

underlying variable insurance products (the “Performance Universe”) selected by Broadridge Financial Solutions Inc. (“Broadridge”), an independent provider of investment company data. The Board was provided with a description of the methodology Broadridge used to determine the similarity of the Fund with the funds included in the Performance Universe. The Trustees noted that they also had received and discussed with management at periodic intervals information on the investment performance of the Fund in comparison to similar mutual funds and benchmark performance indices. The information comparing the Fund’s performance to that of the Performance Universe was for the one-, three-, five- and ten-year periods ended June 30, 2018. The Fund performed better than the median performance of the funds in the Performance Universe for the one-, three- and ten-year periods, and was ranked in the first quintile of the funds in the Performance Universe for the ten-year period, but performed slightly below the median performance of the funds in the Performance Universe for the five-year period. The Board reviewed performance information provided by the Manager for periods ended September 30, 2018, which showed that the Fund’s performance was better than the Broadridge category average during the third quarter. The Board also reviewed information prepared by Broadridge comparing the Fund’s annualized total return for the three-year period ended June 30, 2018 in relation to the Fund’s standard deviation to that of the funds in the Performance Universe. The Trustees noted that the Manager and QS were committed to providing the resources necessary to assist the Fund’s portfolio managers. Based on its review, the Board generally was satisfied with the Fund’s performance. The Board determined to continue to evaluate the Fund’s performance and directed the Independent Trustees’ performance committee to continue to periodically review Fund performance with the Manager and report to the full Board during periods between Board meetings.

Expense ratios

The Board noted that the Fund bears indirectly its pro rata share of the expenses of the underlying funds in which it invests, including management fees payable by such underlying funds to the Manager or its affiliates. The Board noted that there is no management fee payable by the Fund to the Manager or sub-investment advisory fees payable by the Fund to the Sub-Advisers.

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 distribution arrangements, including how amounts received by the Fund’s distributor are expended, and the fees received and expenses incurred in connection with such arrangements by affiliates of the Manager.

Additionally, the Board received and considered information comparing the Fund’s overall expense ratio with those of a group of actively managed affiliated funds of funds underlying variable insurance products consisting of four mixed-asset target allocation aggressive growth funds selected by Broadridge as comparable to the Fund (the “Expense Group”), and a broader group of funds selected by Broadridge consisting of all actively managed affiliated mixed-asset target allocation aggressive growth funds of funds underlying variable insurance products (the “Expense Universe”). This information showed that the Fund’s total expense ratio was lower than the median of the total expense ratios of the funds in the Expense Group (before and after including underlying fund expenses) and the funds in the Expense Universe (including underlying fund expenses).

Manager profitability

The Board received and considered a profitability analysis of the Manager and its affiliates in providing services to the Fund. The Board also received profitability information with respect to the Legg Mason fund complex as a whole. In addition, the Board received information with respect to the Manager’s allocation methodologies used in preparing this profitability data as well as a report from an outside consultant that had reviewed the Manager’s methodology. The Board noted the profitability percentage ranges determined by appropriate court cases to be reasonable given the services rendered to investment companies. The Board determined that the Manager’s profitability was not excessive in light of the nature, extent and quality of the services provided to the Fund.

Economies of scale

The Board received and considered information regarding whether there have been economies of scale with respect to the management of the Fund as the Fund’s assets grow, whether the Fund has appropriately benefited from any economies of scale, and whether there is potential for realization of any further economies of scale. The Board considered whether economies of scale in the provision of services to the Fund were being passed along to the shareholders.

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.



42		QS Variable Asset Allocation Series

Taking all of the above into consideration, the Board determined that the Fund’s expense ratio was reasonable in light of the comparative performance and expense information and the nature, extent and quality of the services provided to the Fund under the Agreements.

Other benefits to the manager

The Board considered other benefits 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 such as 529 College Savings Plans and retail managed accounts.

In light of the costs of providing investment management and other services to the Fund and the Manager’s ongoing commitment to the Fund, the profits and other ancillary benefits that the Manager and its affiliates received were considered reasonable.

Based on their discussions and considerations, including those described above, the Trustees approved the Management Agreement and the Sub-Advisory Agreements to continue for another year.

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.



QS Variable Asset Allocation Series		43

Board approval of management and subadvisory agreements (unaudited) (cont’d)

Legg Mason Partners Variable Equity Trust

— QS Variable Moderate Growth

At a meeting of the Trust’s Board of Trustees, the Board considered the re-approval for an annual period of the management agreement of QS Variable Moderate Growth 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 QS Investors, LLC (“QS”) provides day-to-day management of the Fund’s portfolio, and the sub-advisory agreement pursuant to which Western Asset Management Company, LLC (“Western Asset” and, together with QS, the “Sub-Advisers”) provides day-to-day management of the Fund’s cash and short-term instruments allocated to it by the Manager. (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 performance of 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 and services provided to the Fund and other funds overseen by the Board. This information was initially reviewed by a special committee of the Independent Trustees and then by the full Board.

Nature, extent and quality of the services provided to the Fund under the management agreement and sub-advisory agreements

Fund performance

The Board received and reviewed performance information for the Fund and for all mixed-asset target allocation growth funds (i.e., funds that maintain a mix of between 60%-80% equity securities, with the remainder invested in bonds, cash and cash equivalents) underlying



44		QS Variable Asset Allocation Series

variable insurance products (the “Performance Universe”) selected by Broadridge Financial Solutions Inc. (“Broadridge”), an independent provider of investment company data. The Board was provided with a description of the methodology Broadridge used to determine the similarity of the Fund with the funds included in the Performance Universe. The Trustees noted that they also had received and discussed with management at periodic intervals information on the investment performance of the Fund in comparison to similar mutual funds and benchmark performance indices. The information comparing the Fund’s performance to that of the Performance Universe was for the one-, three-, five- and ten-year periods ended June 30, 2018. The Fund performed better than the median performance of the funds in the Performance Universe for each period, and was ranked in the first quintile of the funds in the Performance Universe for the one-year period. The Board reviewed performance information provided by the Manager for periods ended September 30, 2018, which showed that the Fund’s performance was better than the Broadridge category average during the third quarter. The Board also reviewed information prepared by Broadridge comparing the Fund’s annualized total return for the three-year period ended June 30, 2018 in relation to the Fund’s standard deviation to that of the funds in the Performance Universe. The Trustees noted that the Manager and QS were committed to providing the resources necessary to assist the Fund’s portfolio managers. Based on its review, the Board was satisfied with the Fund’s performance. The Board determined to continue to evaluate the Fund’s performance and directed the Independent Trustees’ performance committee to continue to periodically review Fund performance with the Manager and report to the full Board during periods between Board meetings.

Expense ratios

Additionally, the Board received and considered information comparing the Fund’s overall expense ratio with those of a group of actively managed affiliated funds of funds underlying variable insurance products consisting of eight mixed-asset target allocation growth funds selected by Broadridge as comparable to the Fund (the “Expense Group”), and a broader group of funds selected by Broadridge consisting of all actively managed affiliated mixed-asset target allocation growth funds of funds underlying variable insurance products (the “Expense Universe”). This information showed that the Fund’s total expense ratio was higher before including underlying fund expenses and was slightly lower after including underlying fund expenses than the median of the total expense ratios of the funds in the Expense Group and was higher after including underlying fund expenses than the median of the total expense ratios of the funds in the Expense Universe.

Manager profitability

Economies of scale



QS Variable Asset Allocation Series		45

Board approval of management and subadvisory agreements (unaudited) (cont’d)

Other benefits to the manager

Based on their discussions and considerations, including those described above, the Trustees approved the Management Agreement and the Sub-Advisory Agreements to continue for another year.

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.



46		QS Variable Asset Allocation Series

Legg Mason Partners Variable Equity Trust

— QS Variable Conservative Growth

At a meeting of the Trust’s Board of Trustees, the Board considered the re-approval for an annual period of the management agreement of QS Variable Conservative Growth 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 QS Investors, LLC (“QS”) provides day-to-day management of the Fund’s portfolio, and the sub-advisory agreement pursuant to which Western Asset Management Company, LLC (“Western Asset” and, together with QS, the “Sub-Advisers”) provides day-to-day management of the Fund’s cash and short-term instruments allocated to it by the Manager. (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 performance of 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 and services provided to the Fund and other funds overseen by the Board. This information was initially reviewed by a special committee of the Independent Trustees and then by the full Board.

Nature, extent and quality of the services provided to the fund under the management agreement and sub-advisory agreements

Fund performance

The Board received and reviewed performance information for the Fund and for all mixed-asset target allocation moderate funds (i.e., funds that maintain a mix of between 40%-60% equity securities, with the remainder invested in bonds, cash and cash equivalents)



QS Variable Asset Allocation Series		47

Board approval of management and subadvisory agreements (unaudited) (cont’d)

underlying variable insurance products (the “Performance Universe”) selected by Broadridge Financial Solutions Inc. (“Broadridge”), an independent provider of investment company data. The Board was provided with a description of the methodology Broadridge used to determine the similarity of the Fund with the funds included in the Performance Universe. The Trustees noted that they also had received and discussed with management at periodic intervals information on the investment performance of the Fund in comparison to similar mutual funds and benchmark performance indices. The information comparing the Fund’s performance to that of the Performance Universe was for the one-, three-, five- and ten-year periods ended June 30, 2018. The Fund performed better than the median performance of the funds in the Performance Universe for each period. The Board reviewed performance information provided by the Manager for periods ended September 30, 2018, which showed that the Fund’s performance was better than the Broadridge category average during the third quarter. The Board also reviewed information prepared by Broadridge comparing the Fund’s annualized total return for the three-year period ended June 30, 2018 in relation to the Fund’s standard deviation to that of the funds in the Performance Universe. 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 QS were committed to providing the resources necessary to assist the Fund’s portfolio managers. Based on its review, the Board was satisfied with the Fund’s performance. The Board determined to continue to evaluate the Fund’s performance and directed the Independent Trustees’ performance committee to continue to periodically review Fund performance with the Manager and report to the full Board during periods between Board meetings.

Expense ratios

Additionally, the Board received and considered information comparing the Fund’s overall expense ratio with those of a group of actively managed affiliated funds of funds underlying variable insurance products consisting of five mixed-asset target allocation moderate funds selected by Broadridge as comparable to the Fund (the “Expense Group”), and a broader group of funds selected by Broadridge consisting of all actively managed affiliated mixed-asset target allocation moderate funds of funds underlying variable insurance products (the “Expense Universe”). This information showed that the Fund’s total expense ratio was slightly higher before including underlying fund expenses and was slightly lower after including underlying fund expenses than the median of the total expense ratios of the funds in the Expense Group and was higher after including underlying fund expenses than the median of the total expense ratios of the funds in the Expense Universe.

Manager profitability

Economies of scale



48		QS Variable Asset Allocation Series

Other benefits to the manager

Based on their discussions and considerations, including those described above, the Trustees approved the Management Agreement and the Sub-Advisory Agreements to continue for another year.

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.



QS Variable Asset Allocation Series		49

Additional information (unaudited)

Information about Trustees and Officers

The business and affairs of QS Variable Asset Allocation Series (the “Portfolios”) 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 Jane Trust, Legg Mason, 100 International Drive, 11th Floor, Baltimore, Maryland 21202. Information pertaining to the Trustees and officers of the Portfolios are set forth below.

The Statement of Additional Information includes additional information about Trustees and is available, without charge, upon request by calling the Portfolios 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		48
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		48
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		48
Other board memberships held by Trustee during past five years		None

Althea L. Duersten

Year of birth		1951
Position(s) with Trust		Trustee
Term of office¹ and length of time served²		Since 2014
Principal occupation(s) during past five years		Retired (since 2011); formerly, Chief Investment Officer, North America, JPMorgan Chase (investment bank) and member of JPMorgan Executive Committee (2007 to 2011)
Number of funds in fund complex overseen by Trustee		48
Other board memberships held by Trustee during past five years		None



50		QS Variable Asset Allocation Series


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, Fealds, Inc. (business development) (since 2016); formerly, President, Avatar International Inc. (business development) (1998 to 2015)
Number of funds in fund complex overseen by Trustee		48
Other board memberships held by Trustee during past five years		None

Howard J. Johnson

Year of birth		1938
Position(s) with Trust		Trustee and Chairman
Term of office¹ and length of time served²		From 1981 to 1998 and since 2000 (Chairman since 2013)
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		48
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		48
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		Retired; formerly, President, Young Stuff Apparel Group, Inc. (apparel manufacturer), division of Li & Fung (1963 to 2012)
Number of funds in fund complex overseen by Trustee		48
Other board memberships held by Trustee during past five years		None

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		Chairman, The Saint Louis Brewery, LLC (brewery) (since 2012); formerly, President, The Saint Louis Brewery, Inc. (1989 to 2012); Senior Counsel (since 2017) and formerly, Partner (2009 to 2016), Thompson Coburn LLP (law firm)
Number of funds in fund complex overseen by Trustee		48
Other board memberships held by Trustee during past five years		Director, Citizens National Bank of Greater St. Louis (since 2006)



QS Variable Asset Allocation Series		51

Additional information (unaudited) (cont’d)

Information about Trustees and Officers


Interested Trustee and Officer

Jane Trust, CFA³

Year of birth		1962
Position(s) with Trust		Trustee, President and Chief Executive Officer
Term of office¹ and length of time served²		Since 2015
Principal occupation(s) during past five years		Senior Managing Director of Legg Mason & Co., LLC (“Legg Mason & Co.”) (since 2018); Managing Director of Legg Mason & Co. (2016 to 2018); Officer and/or Trustee/Director of 146 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) or its affiliates (since 2015); President and Chief Executive Officer of LMPFA (since 2015); formerly, Senior Vice President of LMPFA (2015); Director of ClearBridge, LLC (formerly, Legg Mason Capital Management, LLC) (2007 to 2014); Managing Director of Legg Mason Investment Counsel & Trust Co. (2000 to 2007)
Number of funds in fund complex overseen by Trustee		137
Other board memberships held by Trustee during past five years		None

Additional Officers

Ted P. Becker Legg Mason 620 Eighth Avenue, 49th Floor, 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)

Susan Kerr Legg Mason 620 Eighth Avenue, 49th Floor, New York, NY 10018

Year of birth		1949
Position(s) with Trust		Chief Anti-Money Laundering Compliance Officer
Term of office¹ and length of time served²		Since 2013
Principal occupation(s) during past five years		Assistant Vice President of Legg Mason & Co. and Legg Mason Investor Services, LLC (“LMIS”) (since 2010); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2013) and Anti-Money Laundering Compliance Officer of LMIS (since 2012); Senior Compliance Officer of LMIS (since 2011); formerly, AML Consultant, DTCC (2010); AML Consultant, Rabobank Netherlands, (2009); First Vice President, Director of Marketing & Advertising Compliance and Manager of Communications Review Group at Citigroup Inc. (1996 to 2008)

Jenna Bailey Legg Mason 100 First Stamford Place, 5th Floor, Stamford, CT 06902

Year of birth		1978
Position(s) with Trust		Identity Theft Prevention Officer
Term of office¹ and length of time served²		Since 2015
Principal occupation(s) during past five years		Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2015); Compliance Officer of Legg Mason & Co. (since 2013); Assistant Vice President of Legg Mason & Co. (since 2011); formerly, Associate Compliance Officer of Legg Mason & Co. (2011 to 2013)



52		QS Variable Asset Allocation Series


Additional Officers (cont’d)

Robert I. Frenkel Legg Mason 100 First Stamford Place, 6th Floor, 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 — U.S. 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, 6th Floor, 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 of LM Asset Services, LLC (“LMAS”) (since 2002) and Legg Mason Fund Asset Management, Inc. (“LMFAM”) (since 2013) (formerly registered investment advisers)

Richard F. Sennett Legg Mason 100 International Drive, Baltimore, MD 21202

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 and Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011 and since 2013); 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); Assistant Chief Accountant within the SEC’s Division of Investment Management (2002 to 2007)

Christopher Berarducci Legg Mason 620 Eighth Avenue, 49th Floor, New York, NY 10018

Year of birth		1974
Position(s) with Trust		Treasurer
Term of office¹ and length of time served²		Since 2014
Principal occupation(s) during past five years		Director of Legg Mason & Co. (since 2015); Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2010); formerly, Vice President of Legg Mason & Co. (2011 to 2015); Assistant Controller of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2010)



QS Variable Asset Allocation Series		53

Additional information (unaudited) (cont’d)

Information about Trustees and Officers


Additional Officers (cont’d)

Jeanne M. Kelly Legg Mason 620 Eighth Avenue, 49th Floor, 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); President and Chief Executive Officer of LMAS and LMFAM (since 2015); Managing Director of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); formerly, Senior Vice President of LMFAM (2013 to 2015)

†	Trustees who are not “interested persons” of the Portfolio within the meaning of Section 2(a)(19) of the Investment Company Act of 1940, as amended (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	Ms. Trust is an “interested person” of the Portfolios, as defined in the 1940 Act, because of her position with LMPFA and/or certain of its affiliates.



54		QS Variable Asset Allocation Series

Important tax information (unaudited)

The following information is provided with respect to the distributions paid during the taxable year ended December 31, 2018:


	Variable Growth
Record date:		6/20/2018		12/26/2018
Payable date:		6/21/2018		12/27/2018
Dividends qualifying for the dividends
received deduction for corporations*		24.02	%	27.40	%
Foreign source income*		15.47	%	17.00	%
Foreign taxes paid per share		—		$0.008926
Long-term capital gains per share		$0.497290		$0.073690

	Variable Moderate Growth
Record date:		6/20/2018		12/26/2018
Payable date:		6/21/2018		12/27/2018
Dividends qualifying for the dividends
received deduction for corporations*		32.29	%	22.05	%
Foreign source income*		13.72	%	12.03	%
Foreign taxes paid per share		—		$0.006811
Long-term capital gains per share		$0.305200		$0.071600

	Variable Conservative Growth
Record date:		6/20/2018		12/26/2018
Payable date:		6/21/2018		12/27/2018
Dividends qualifying for the dividends
received deduction for corporations*		23.41	%	16.36	%
Foreign source income*		10.30	%	8.86	%
Foreign taxes paid per share		—		$0.004959
Long-term capital gains per share		$0.289410		$0.022660

*	Expressed as a percentage of the cash distribution grossed-up for foreign taxes.

Additionally, Variable Moderate Growth designates $34,578 of the distributions paid on December 27, 2018 as long-term capital gains.

Please retain this information for your records.



QS Variable Asset Allocation Series		55

Variable Asset Allocation Series

Trustees

Paul R. Ades

Andrew L. Breech

Dwight B. Crane

Althea L. Duersten

Frank G. Hubbard

Howard J. Johnson

Chairman

Jerome H. Miller

Ken Miller

Thomas F. Schlafly

Jane Trust

Investment manager

Legg Mason Partners Fund Advisor, LLC

Subadviser

QS Investors, LLC

Distributor

Legg Mason Investor Services, LLC

Custodian

The Bank of New York Mellon (“BNY”)*

Transfer agent

BNY Mellon Investment Servicing (US) Inc.

4400 Computer Drive

Westborough, MA 01581

*	Effective June 11, 2018, BNY became custodian.

Independent registered public accounting firm

PricewaterhouseCoopers LLP

Baltimore, MD

QS Variable Asset Allocation Series

QS Variable Growth

QS Variable Moderate Growth

QS Variable Conservative Growth

The Portfolios are separate investment series of Legg Mason Partners Variable Equity Trust, a Maryland statutory trust.

QS Variable Asset Allocation Series

Legg Mason Funds

620 Eighth Avenue, 49th Floor

New York, NY 10018

The Portfolios file their complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Portfolios’ Forms N-Q are available on the SEC’s website at www.sec.gov. To obtain information on Form N-Q, shareholders can call the Portfolios at 1-877-721-1926.

Information on how the Portfolios 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 Portfolios use to determine how to vote proxies relating to portfolio transactions are available (1) without charge, upon request, by calling the Portfolios at 1-877-721-1926, (2) at www.leggmason.com/variablefunds and (3) on the SEC’s website at www.sec.gov.

This report is submitted for the general information of the shareholders of QS Variable Growth, QS Variable Moderate Growth and QS Variable Conservative Growth. This report is not authorized for distribution to prospective investors in the Portfolios unless preceded or accompanied by a current prospectus.

Investors should consider each Portfolio’s investment objectives, risks, charges and expenses carefully before investing. Each prospectus contains this and other important information about the Portfolios. Please read the prospectuses carefully before investing.

www.leggmason.com

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. 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:

•

Personal information included on applications or other forms;

•

Account balances, transactions, and mutual fund holdings and positions;

•

Bank account information, legal documents, and identify verification documentation;

•

Online account access user IDs, passwords, security challenge question responses; and

•

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:

•

Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business or to comply with obligations to government regulators;

•

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 statistical analysis, market research and marketing services solely for the Funds;

•

Permit access to transfer, whether in the United States or countries outside of the United States to such Funds’ employees, agents and affiliates and service providers as required to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators;

•

The Funds’ representatives such as legal counsel, accountants and auditors to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators;

•

Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.

Except as otherwise permitted by applicable law, companies acting on the Funds’ behalf, including those outside the United States, 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.

NOT PART OF THE ANNUAL REPORT

Legg Mason Funds Privacy and Security Notice (cont’d)

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, if you have questions about the Funds’ privacy practices, or our use of your nonpublic personal information, 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 Funds at 1-877-721-1926.

Revised April 2018

NOT PART OF THE ANNUAL REPORT

www.leggmason.com

FD01436 2/19 SR19-3544

ITEM 2.

CODE OF ETHICS.

The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.

ITEM 3.

AUDIT COMMITTEE FINANCIAL EXPERT.

The Board of Trustees of the registrant has determined that Dwight B. Crane, possess the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as “audit committee financial experts,” and have designated Dwight B. Crane as the Audit Committee’s financial experts. Dwight B. Crane is an “independent” Trustees pursuant to paragraph (a) (2) of Item 3 to Form N-CSR.

ITEM 4.

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

a) Audit Fees. The aggregate fees billed in the last two fiscal years ending December 31, 2017 and December 31, 2018 (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 $298,780 in December 31, 2017 and $537,805 in December 31, 2018.

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, 2017 and $0 in December 31, 2018.

(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 $46,420 in December 31, 2017 and $0 in December 31, 2018. 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. The aggregate fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) for the Item 4 for the Legg Mason Partners Variable Equity Trust., were $0 in December 31, 2017 and $33,000 in December 31, 2018

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, 2017 and December 31, 2018; Tax Fees were 100% and 100% for December 31, 2017 and December 31, 2018; and Other Fees were 100% and 100% for December 31, 2017 and December 31, 2018.

(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 $160,000 in December 31, 2017 and $678,000 in December 31, 2018.

(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.

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

Althea L. Duersten

Frank G. Hubbard

Howard J. Johnson

Jerome H.Miller

Ken Miller

Thomas F. Schlafly

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.

ITEM 12.

EXHIBITS.

(a) (1) Code of Ethics attached hereto.

Exhibit 99.CODE ETH

(a) (2) Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto.

Exhibit 99.CERT

(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto.

Exhibit 99.906CERT

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.

Legg Mason Partners Variable Equity Trust


By:		/s/ Jane Trust
		Jane Trust
		Chief Executive Officer

Date:		February 22, 2019

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/ Jane Trust
		Jane Trust
		Chief Executive Officer

Date:		February 22, 2019

By:		/s/ Richard F. Sennett
		Richard F. Sennett
		Principal Financial Officer

Date:		February 22, 2019