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 | 811-21533 | |||||||
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Western Asset Inflation Management Fund Inc. | ||||||||
(Exact name of registrant as specified in charter) | ||||||||
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55 Water Street, New York, NY |
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(Address of principal executive offices) |
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Robert I. Frenkel, Esq. Legg Mason & Co., LLC 100 First Stamford Place Stamford, CT 06902 | ||||||||
(Name and address of agent for service) | ||||||||
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Registrant’s telephone number, including area code: | (888) 777-0102 |
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Date of fiscal year end: | December 31 |
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Date of reporting period: | December 31, 2010 |
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ITEM 1. REPORT TO STOCKHOLDERS.
The Annual Report to Stockholders is filed herewith.
December 31, 2010 |
Annual Report
Western Asset Inflation Management Fund Inc.
(IMF)
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INVESTMENT PRODUCTS: NOT FDIC INSURED · NO BANK GUARANTEE · MAY LOSE VALUE |
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Fund objectives
The Fund’s primary investment objective is total return. Current income is a secondary investment objective.
What’s inside
Letter from the chairman |
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Investment commentary |
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Fund overview |
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Fund at a glance |
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Spread duration |
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Effective duration |
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Schedule of investments |
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Statement of assets and liabilities |
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Statement of operations |
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Statements of changes in net assets |
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Statement of cash flows |
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Financial highlights |
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Notes to financial statements |
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Report of independent registered public accounting firm |
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Board approval of management and subadvisory agreements |
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Additional information |
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Annual chief executive officer and chief financial officer certifications |
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Dividend reinvestment plan |
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Important tax information |
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Letter from the chairman |
Dear Shareholder,
We are pleased to provide the annual report of Western Asset Inflation Management Fund Inc. for the twelve-month reporting period ended December 31, 2010. Please read on for a detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund 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/cef. Here you can gain immediate access to market and investment information, including:
· Fund prices and performance,
· 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,
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
February 9, 2011
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Investment commentary
Economic review
Despite continued headwinds from high unemployment and issues in the housing market, the U.S. economy continued to expand over the twelve months ended December 31, 2010. Toward the end of the reporting period, fears regarding moderating economic growth were replaced with optimism for a strengthening economy in 2011. With investor sentiment improving, U.S. equities moved sharply higher in the fourth quarter, while rising interest rates negatively impacted some sectors of the fixed-income market. All told, during 2010, investors who took on additional risk in their portfolios were generally rewarded.
In September 2010, the National Bureau of Economic Research (“NBER”), the organization charged with determining when recessions start and end, announced that the recession that began in December 2007 had concluded in June 2009. However, the NBER said, “In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity.” The NBER’s point is well-taken given continued areas of weakness in the U.S. economy.
Although the U.S. Department of Commerce continued to report positive U.S. gross domestic product (“GDP”)i growth, the expansion has moderated since peaking at 5.0% in the fourth quarter of 2009. A slower drawdown in business inventories and renewed consumer spending were contributing factors spurring the economy’s solid growth at the end of 2009. However, the economy grew at a more modest pace in 2010. According to the Commerce Department, GDP growth was 3.7%, 1.7% and 2.6% during the first, second and third quarters of 2010, respectively. The initial estimate for fourth quarter GDP was a 3.2% expansion.
Turning to the job market, while the unemployment rate moved lower in December 2010, it remained elevated throughout the reporting period. While 384,000 new jobs were created during the fourth quarter and the unemployment rate fell from 9.8% in November to 9.4% in December 2010, there continued to be some disturbing trends in the labor market. The unemployment rate has now exceeded 9.0% for twenty consecutive months, the longest period since the government began tracking this data in 1949. In addition, the U.S. Department of Labor reported in December that a total of 14.5 million Americans looking for work have yet to find a job, and 44% of these individuals have been out of work for more than six months.
There was mixed news in the housing market during the period. According to the National Association of Realtors (“NAR”), existing-home sales increased 7.0% and 8.0% in March and April, respectively, after sales had fallen for the period from December 2009 through February 2010. The rebound was largely attributed to people rushing to take advantage of the government’s $8,000 tax credit for first-time home buyers that expired at the end of April. However, with the end of the tax credit, existing-home sales then declined from May through July. Sales then generally rose from August through the end of the year. In total, existing-home sales volume in 2010 was 4.9 million, the lowest amount since 1997. Looking at home prices, the NAR reported that the median existing-home price for all housing types rose a tepid 0.3% in 2010. The
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Investment commentary (cont’d)
inventory of unsold homes was an 8.1 month supply in December at the current sales level, versus a 9.5 month supply in November.
The manufacturing sector was one area of the economy that remained relatively strong during 2010. Based on the Institute for Supply Management’s PMIii, the manufacturing sector has grown seventeen consecutive months since it began expanding in August 2009. After reaching a six-year peak of 60.4 in April 2010 (a reading below 50 indicates a contraction, whereas a reading above 50 indicates an expansion), PMI data indicated somewhat more modest growth through the remainder of the year. However, in December, the manufacturing sector expanded at its fastest pace in seven months, with a reading of 57.0 versus 56.6 in November.
Financial market overview
The financial markets experienced several periods of volatility during the reporting period that tested the resolve of novice and experienced investors alike. During most of the first four months of the reporting period, the financial markets were largely characterized by healthy investor risk appetite and solid results by stocks and lower-quality bonds. The market then experienced sharp sell-offs in late April and in May, and again beginning in mid-November. During those periods, investors tended to favor the relative safety of U.S. Treasury securities. However, these setbacks proved to be only temporary and, in each case, risk aversion was replaced with solid demand for riskier assets.
Due to signs that certain areas of the economy were moderating in the second half of the reporting period, the Federal Reserve Board (“Fed”)iii took further actions to spur the economy. At its August 10th meeting, the Fed announced an ongoing program that calls for using the proceeds from expiring agency debt and agency mortgage-backed securities to purchase longer-dated Treasury securities.
In addition, the Fed remained cautious throughout the reporting period given pockets of weakness in the economy. At its meeting in September 2010, the Fed said, “The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery. . . .” This led to speculation that the Fed may again move to purchase large amounts of agency and Treasury securities in an attempt to avoid a double-dip recession and ward off deflation.
The Fed then took additional action in early November. Citing that “the pace of recovery in output and employment continues to be slow,” the Fed announced another round of quantitative easing to help stimulate the economy, entailing the purchase of $600 billion of long-term U.S. Treasury securities by the end of the second quarter of 2011. This, coupled with the Fed’s previously announced program to use the proceeds of expiring securities to purchase Treasuries, means it could buy a total of $850 billion to $900 billion of Treasury securities by the end of June 2011. At its final meeting of the year in December, the Fed said it “will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.”
Fixed-income market review
Continuing the trend that began in the second quarter of 2009, nearly every
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spread sector (non-Treasury) outperformed equal-durationiv Treasuries during most of the first four months of the reporting period. Over that time, investor confidence was high given encouraging economic data, continued low interest rates, benign inflation and rebounding corporate profits. Robust investor appetite was then replaced with heightened risk aversion toward the end of April and during the month of May. This was due to the escalating sovereign debt crisis in Europe, uncertainties regarding new financial reforms in the U.S. and some worse-than-expected economic data. Most spread sectors then produced positive absolute returns in June and July, as investor demand for these securities again increased. There was another bout of risk aversion in August, given fears that the economy may slip back into a recession. However, with the Fed indicating the possibility of another round of quantitative easing, most spread sectors rallied in September and October. The spread sectors started to weaken again toward the middle of November as financial troubles in Ireland resulted in a re-emergence of the European sovereign debt crisis. While several spread sectors regained their footing in December, others remained weak given ongoing uncertainties in Europe and concerns regarding economic growth in China and its potential impact on the global economy.
Both short- and long-term Treasury yields fluctuated but, overall, moved lower during the twelve months ended December 31, 2010. When the period began, two- and ten-year Treasury yields were 1.14% and 3.85%, respectively. On April 5, 2010, two- and ten-year Treasury yields peaked at 1.18% and 4.01%, respectively. Subsequent to hitting their highs for the period, yields largely declined during much of the next six months, with two-year Treasuries hitting their low for the year of 0.33% on November 4, 2010. Ten-year Treasuries reached their 2010 trough of 2.41% in early October. Yields then moved sharply higher given expectations for stronger growth in 2011 and the potential for rising inflation. When the period ended on December 31, 2010, two-year Treasury yields were 0.61% and ten-year Treasury yields were 3.30%. For the twelve months ended December 31, 2010, the Barclays Capital U.S. A ggregate Indexv returned 6.54%.
Inflation generally remained well-contained during the reporting period. For the twelve months ended December 31, 2010, the seasonally unadjusted rate of inflation, as measured by the Consumer Price Index for All Urban Consumers (“CPI-U”)vi, was 1.5%. The CPI-U less food and energy was 0.8% over the same time frame. Despite tepid inflation, the price of gold, which is often a signal of rising prices, reached an all-time high of $1,421 an ounce in November 2010. Inflation-protected securities generated solid results during the twelve months ended December 31, 2010, with the Barclays Capital Global Real Index: U.S. TIPSvii returning 6.31%.
The U.S. high-yield bond market produced strong results during the reporting period. The asset class posted positive returns during each month, except for May and November 2010 when risk aversion rose sharply. The high-yield market was supported by better-than-expected corporate profits and overall strong investor demand. All told, the Barclays Capital U.S. High Yield — 2% Issuer Cap Indexviii returned 14.94% for the twelve months ended December 31, 2010.
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Investment commentary (cont’d)
As always, thank you for your confidence in our stewardship of your assets.
Sincerely,
R. Jay Gerken, CFA
Chairman, President and
Chief Executive Officer
January 28, 2011
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.
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 Institute for Supply Management’s PMI is based on a survey of purchasing executives who buy the raw materials for manufacturing at more than 350 companies. It offers an early reading on the health of the manufacturing sector.
iii The Federal Reserve Board (“Fed”) is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments.
iv Duration is the measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows.
v The Barclays Capital U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage- and asset-backed issues, rated investment grade or higher, and having at least one year to maturity.
vi The Consumer Price Index for All Urban Consumers (“CPI-U”) is a measure of the average change in prices over time of goods and services purchased by households, which covers approximately 87% of the total population and includes, in addition to wage earners and clerical worker households, groups such as professional, managerial and technical workers, the self-employed, short-term workers, the unemployed and retirees and others not in the labor force.
vii The Barclays Capital Global Real Index: U.S. TIPS represents an unmanaged market index made up of U.S. Treasury Inflation-Linked Index securities.
viii The Barclays Capital U.S. High Yield — 2% Issuer Cap Index is an index of the 2% Issuer Cap component of the Barclays Capital U.S. Corporate High Yield Index, which covers the U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
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Fund overview
Q. What is the Fund’s investment strategy?
A. The Fund’s primary investment objective is total return. Current income is a secondary objective. The Fund invests the majority of its assets in inflation-protected securities issued by U.S. and non-U.S. governments, their agencies or instrumentalities, and corporate securities that are structured to provide protection against inflation. We also have the flexibility to invest in certain other fixed-income securities that we believe will provide protection against inflation. Inflation-protected securities will include U.S. Treasury Inflation-Protected Securities (“TIPS”)i, as well as other bonds issued by U.S. and non-U.S. government agencies or instrumentalities or corporations and derivatives related to these securities.
At Western Asset Management Company (“Western Asset”), the Fund’s subadviser, we utilize a fixed-income team approach, with decisions derived from interaction among various investment management sector specialists. The sector teams are comprised of Western Asset’s senior portfolio managers, research analysts and an in-house economist. Under this team approach, management of client fixed-income portfolios will reflect a consensus of interdisciplinary views within the Western Asset organization. The portfolio managers responsible for development of investment strategy, day-to-day portfolio management, oversight and coordination of the Fund are Stephen A. Walsh, S. Kenneth Leech, Peter H. Stutz and Paul E. Wynn.
Q. What were the overall market conditions during the Fund’s reporting period?
A. During the twelve months ended December 31, 2010, the riskier segments of the fixed-income market produced strong results and outperformed U.S. Treasuries. This was due, in part, to improving economic conditions following the lengthy downturn from mid-2008 through mid-2009. Also supporting the spread sectors (non-U.S. Treasuries) was overall solid demand from investors seeking incremental yields given the low rates available from short-term fixed-income securities.
The spread sectors rallied during most of the reporting period, with notable exceptions being in late April and May 2010, as well as August and November 2010. Starting toward the end of April, there was a “flight to quality,” triggered by concerns regarding the escalating sovereign debt crisis in Europe. In addition, investor sentiment was negatively impacted by uncertainties surrounding financial reform legislation in the U.S. and signs that economic growth was moderating. Collectively, this caused investors to flock to the relative safety of Treasury securities, driving their yields lower and prices higher.
Robust investor risk appetite largely resumed during June and July, and again in September and October. These turnarounds occurred as the situation in Europe appeared to stabilize, the financial reform bill was signed into law and the Federal Reserve Board (“Fed”)ii continued to indicate that it would keep short-term rates low for an extended period. Investor risk aversion briefly returned in November when fears regarding the European debt crisis re-emerged. However, investor sentiment improved in December, given expectations for strengthening economic conditions in 2011.
The yields on two- and ten-year Treasuries began the fiscal year at
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Fund overview (cont’d)
1.14% and 3.85%, respectively. Treasury yields fluctuated during the twelve-month reporting period given mixed signals regarding the economy and uncertainties regarding Fed monetary policy. Yields moved sharply lower in October 2010 in anticipation of additional quantitative easing (“QE2”) by the Fed. Yields then reversed course toward the end of the period as certain economic data were stronger than expected and there were concerns regarding future inflation. During the fiscal year, two-year Treasury yields moved as high as 1.18% and as low as 0.33%, while ten-year Treasuries rose as high as 4.01% and fell as low as 2.41%. On December 31, 2010, yields on two- and ten-year Treasuries were 0.61% and 3.30%, respectively. All told, the Barclays Capital U.S. Aggregate Indexiii returned 6.54% for the twelve months ended December 31, 2010.
When the reporting period began in January 2010, there continued to be concerns regarding future inflation given signs of improving economic conditions in many regions of the world. However, fears of inflation were then replaced with fears of deflation as economic data pointed to a slowdown in developed country growth. There was another turnaround in the expectations for inflation during the latter portion of the period, given the prospect for additional quantitative easing in a number of developed countries, including the U.S. and Japan. This was evident by the solid performance of many inflation-linked bonds, as well as rising oil prices and record-high gold prices. Even though inflation, as measured by the Consumer Price Index for All Urban Consumers (“CPI-U”)iv, was a re latively tepid 1.5% during the twelve-month period ended December 31, 2010, inflation-protected securities produced solid results. Over the reporting period, the Barclays Capital Global Real Index: U.S. TIPSv gained 6.31%.
Q. How did we respond to these changing market conditions?
A. A number of adjustments were made to the Fund during the reporting period. We used leverage to increase our exposure to U.S. TIPS. We reduced the portfolio’s allocation to high-yield bonds and agency mortgage-backed securities (“MBS”) and increased our exposure to investment grade bonds.
The Fund employed U.S. Treasury futures and options and Eurodollar futures during the reporting period to manage yield curvevi positioning and durationvii. We also used currency forwards to hedge our currency exposure. The use of these derivative instruments was a modest detractor from performance.
Performance review
For the twelve months ended December 31, 2010, Western Asset Inflation Management Fund Inc. returned 5.42% based on its net asset value (“NAV”)viii and 13.26% based on its New York Stock Exchange (“NYSE”) market price per share. The Fund’s unmanaged benchmark, the Barclays Capital Global Real Index: U.S. TIPS, returned 6.31% for the same period. The Lipper Corporate Debt BBB-Rated Closed-End Funds Category Averageix returned 12.90% over the same time frame. Please note that Lipper performance returns are based on each fund’s NAV.
During the twelve-month period, the Fund made distributions to shareholders totaling $0.60 per share, which included a return of capital of $0.02 per share. The performance table shows the Fund’s twelve-month total return
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based on its NAV and market price as of December 31, 2010. Past performance is no guarantee of future results.
Performance Snapshot as of December 31, 2010
Price Per Share |
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$18.04 (NAV) |
| 5.42 | % |
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$17.65 (Market Price) |
| 13.26 | % |
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All figures represent past performance and are not a guarantee of future results.
* Total returns are based on changes in NAV or market price, respectively. Total returns assume the reinvestment of all distributions in additional shares.
Q. What were the leading contributors to performance?
A. The largest contributor to the Fund’s relative performance during the reporting period was an overweight to the investment grade bond market. The asset class performed well due to generally better-than-expected corporate profits and overall robust demand. Within the sector, overweights in SLM Corp., Citigroup Inc. and JPMorgan Chase & Co. in Financials were the top contributors.
The Fund’s overweight to high-yield bonds was also rewarded as the sector was among the best-performing fixed-income sectors during the reporting period given declining default rates and solid demand from investors looking to generate incremental yield. Among the Fund’s strongest high-yield holdings were overweight positions in Ally Financial Inc. and Energy Future Holdings Corp.
Elsewhere, an overweight to Australian inflation-linked bonds enhanced results. These securities performed well given the country’s strengthened economy and rising inflation expectations.
The Fund’s use of leverage contributed to results as the leverage amplified the positive performance in the fixed-income market during the reporting period. Finally, an overweight to non-agency MBS was a positive for performance. The combination of the government’s aggressive programs to aid the housing market and signs that housing prices appeared to be stabilizing helped these securities generate strong results. In addition, the sector was supported by ongoing demand from asset managers participating in the Public-Private Investment Program (“PPIP”).
Q. What were the leading detractors from performance?
A. The largest detractor from the Fund’s relative performance for the period was our overweight position in longer-duration U.S. TIPS. After falling during the first nine months of the year, real yields moved up sharply in November and December as the market’s expectations for economic growth in 2011 were revised upward following the Fed’s implementation of additional securities purchases and the administration’s tax law changes.
Also detracting from relative performance for the period was the Fund’s short position in the Japanese yen. This was a drag on results as the yen appreciated versus most other currencies over the twelve months ended December 31, 2010.
Looking for additional information?
The Fund is traded under the symbol “IMF” and its closing market price is available in most newspapers under the NYSE listings. The daily NAV is available on-line under the symbol
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Fund overview (cont’d)
“XIMFX” on most financial websites. Barron’s and the Wall Street Journal’s Monday edition both carry closed-end fund tables that provide additional information. In addition, the Fund issues a quarterly press release that can be found on most major financial websites as well as www.leggmason.com/cef.
In a continuing effort to provide information concerning the Fund, shareholders may call 1-888-777-0102 (toll free), Monday through Friday from 8:00 a.m. to 5:30 p.m. Eastern Time, for the Fund’s current NAV, market price and other information.
Thank you for your investment in Western Asset Inflation Management Fund Inc. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.
Sincerely,
Western Asset Management Company
January 18, 2011
RISKS: If interest rates rise, but the rate of inflation does not, the Fund’s performance will be adversely affected. The Fund is subject to the risks associated with inflation-protected securities (“IPS”). Risks associated with IPS investments include liquidity risk, interest rate risk, prepayment risk, extension risk and deflation risk. Income distributions of the Fund are likely to fluctuate more than those of a conventional bond fund. As interest rates rise, bond prices fall, reducing the value of the Fund’s fixed-income holdings. The Fund is not diversified, which means that it is permitted to invest a higher percentage of its assets in any one issuer than a diversified fund. This may magnify the Fund’s losses from events affecting a particular issuer. Foreign secur ities are subject to certain risks of overseas investing, including currency fluctuations and changes in political and economic conditions. High-yield bonds involve greater credit and liquidity risks than investment grade bonds. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. Leverage may result in greater volatility of NAV and the market price of common shares and increases a shareholder’s risk of loss. There is no assurance that the Fund’s leveraging strategy will be successful.
Portfolio holdings and breakdowns are as of December 31, 2010 and are subject to change and may not be representative of the portfolio managers’ current or future investments. Please refer to pages 9 through 12 for a list and percentage breakdown of the Fund’s holdings.
The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. The Fund’s top five sector holdings (as a percentage of total investments) as of December 31, 2010 were: U.S. Treasury Inflation Protected Securities (91.1%), Corporate Bonds & Notes (2.9%), Non-U.S. Treasury Inflation Protected Securities (2.5%), Mortgage-Backed Securities (1.1%) and Sovereign Bonds (0.7%). The Fund’s portfolio composition is subject to change at any time.
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.
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i U.S. Treasury Inflation-Protected Securities (“TIPS”) are inflation-indexed securities issued by the U.S. Treasury in five-year, ten-year and twenty-year maturities. The principal is adjusted to the Consumer Price Index, the commonly used measure of inflation. The coupon rate is constant, but generates a different amount of interest when multiplied by the inflation-adjusted principal.
ii The Federal Reserve Board (“Fed”) is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments.
iii The Barclays Capital U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage- and asset-backed issues, rated investment grade or higher, and having at least one year to maturity.
iv The Consumer Price Index for All Urban Consumers (“CPI-U”) is a measure of the average change in prices over time of goods and services purchased by households, which covers approximately 87% of the total population and includes, in addition to wage earners and clerical worker households, groups such as professional, managerial and technical workers, the self-employed, short-term workers, the unemployed and retirees and others not in the labor force.
v The Barclays Capital Global Real Index: U.S. TIPS represents an unmanaged market index made up of U.S. Treasury Inflation-Linked Index securities.
vi The yield curve is the graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities.
vii Duration is the measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows.
viii Net asset value (“NAV”) is calculated by subtracting total liabilities and outstanding preferred stock (if any) from the closing value of all securities held by the Fund (plus all other assets) and dividing the result (total net assets) by the total number of the common shares outstanding. The NAV fluctuates with changes in the market prices of securities in which the Fund has invested. However, the price at which an investor may buy or sell shares of the Fund is the Fund’s market price as determined by supply of and demand for the Fund’s shares.
ix Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the twelve-month period ended December 31, 2010, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 26 funds in the Fund’s Lipper category.
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Fund at a glance† (unaudited)
Investment breakdown (%) as a percent of total investments
† The bar graph above represents the composition of the Fund’s investments as of December 31, 2010 and December 31, 2009 and does not include derivatives such as options, forward foreign currency contracts and futures contracts. The Fund is actively managed. As a result, the composition of the Fund’s investments is subject to change at any time.
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Spread duration (unaudited)
Economic Exposure — December 31, 2010
Spread duration measures the sensitivity to changes in spreads. The spread over Treasuries is the annual risk-premium demanded by investors to hold non-Treasury securities. Spread duration is quantified as the % change in price resulting from a 100 basis points change in spreads. For a security with positive spread duration, an increase in spreads would result in a price decline and a decline in spreads would result in a price increase. This chart highlights the market sector exposure of the Fund’s sectors relative to the selected benchmark sectors as of the end of the reporting period.
HY | — High Yield |
IMF | — Western Asset Inflation Management Fund Inc. |
IG Credit | — Investment Grade Credit |
MBS | — Mortgage-Backed |
BA U.S. TIPS | — Barclays Capital U.S. Treasury: U.S. TIPS |
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Effective duration (unaudited)
Interest Rate Exposure — December 31, 2010
Effective duration measures the sensitivity to changes in relevant interest rates. Effective duration is quantified as the % change in price resulting from a 100 basis points change in interest rates. For a security with positive effective duration, an increase in interest rates would result in a price decline and a decline in interest rates would result in a price increase. This chart highlights the interest rate exposure of the Fund’s sectors relative to the selected benchmark sectors as of the end of the reporting period.
HY | — High Yield |
IMF | — Western Asset Inflation Management Fund Inc. |
IG Credit | — Investment Grade Credit |
MBS | — Mortgage-Backed |
BA U.S. TIPS | — Barclays Capital U.S. Treasury: U.S. TIPS |
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Schedule of investments
December 31, 2010
Western Asset Inflation Management Fund Inc.
Security |
| Rate |
| Maturity |
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| Face |
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| Value |
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U.S. Treasury Inflation Protected Securities — 91.1% |
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U.S. Treasury Bonds, Inflation Indexed |
| 1.875 | % | 7/15/13 |
| 5,870,496 |
| $ 6,264,459 |
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U.S. Treasury Bonds, Inflation Indexed |
| 2.375 | % | 1/15/25 |
| 13,789,452 |
| 15,379,556 |
| ||
U.S. Treasury Bonds, Inflation Indexed |
| 2.000 | % | 1/15/26 |
| 13,641,522 |
| 14,518,631 |
| ||
U.S. Treasury Bonds, Inflation Indexed |
| 1.750 | % | 1/15/28 |
| 6,816,928 |
| 6,956,464 | (a) | ||
U.S. Treasury Bonds, Inflation Indexed |
| 2.500 | % | 1/15/29 |
| 1,151,063 |
| 1,309,695 |
| ||
U.S. Treasury Bonds, Inflation Indexed |
| 3.875 | % | 4/15/29 |
| 3,166,257 |
| 4,256,390 | (a) | ||
U.S. Treasury Bonds, Inflation Indexed |
| 2.125 | % | 2/15/40 |
| 5,069,419 |
| 5,385,466 |
| ||
U.S. Treasury Notes, Inflation Indexed |
| 2.375 | % | 4/15/11 |
| 6,159,342 |
| 6,218,046 | (b) | ||
U.S. Treasury Notes, Inflation Indexed |
| 0.625 | % | 4/15/13 |
| 3,590,444 |
| 3,701,805 |
| ||
U.S. Treasury Notes, Inflation Indexed |
| 2.000 | % | 1/15/14 |
| 12,759,424 |
| 13,710,396 | (b) | ||
U.S. Treasury Notes, Inflation Indexed |
| 1.250 | % | 4/15/14 |
| 3,162,204 |
| 3,328,466 |
| ||
U.S. Treasury Notes, Inflation Indexed |
| 2.000 | % | 7/15/14 |
| 1,601,131 |
| 1,732,349 |
| ||
U.S. Treasury Notes, Inflation Indexed |
| 1.625 | % | 1/15/15 |
| 6,723,322 |
| 7,177,671 |
| ||
U.S. Treasury Notes, Inflation Indexed |
| 0.500 | % | 4/15/15 |
| 1,009,180 |
| 1,032,833 |
| ||
U.S. Treasury Notes, Inflation Indexed |
| 1.875 | % | 7/15/15 |
| 1,113,136 |
| 1,207,231 |
| ||
U.S. Treasury Notes, Inflation Indexed |
| 2.000 | % | 1/15/16 |
| 7,889,604 |
| 8,600,899 |
| ||
U.S. Treasury Notes, Inflation Indexed |
| 2.500 | % | 7/15/16 |
| 2,523,250 |
| 2,835,109 |
| ||
U.S. Treasury Notes, Inflation Indexed |
| 2.375 | % | 1/15/17 |
| 7,157,634 |
| 7,985,235 |
| ||
U.S. Treasury Notes, Inflation Indexed |
| 1.625 | % | 1/15/18 |
| 6,785,610 |
| 7,269,614 |
| ||
U.S. Treasury Notes, Inflation Indexed |
| 1.375 | % | 7/15/18 |
| 3,286,008 |
| 3,467,507 |
| ||
U.S. Treasury Notes, Inflation Indexed |
| 2.125 | % | 1/15/19 |
| 916,776 |
| 1,015,759 |
| ||
U.S. Treasury Notes, Inflation Indexed |
| 1.250 | % | 7/15/20 |
| 8,824,904 |
| 9,048,289 |
| ||
Total U.S. Treasury Inflation Protected Securities (Cost — $125,259,368) |
|
|
|
|
|
|
| 132,401,870 |
| ||
Asset-Backed Securities — 0.2% |
|
|
|
|
|
|
|
|
| ||
Asset-Backed Funding Certificates, 2004-FF1 M2 |
| 2.436 | % | 1/25/34 |
| 289,958 |
| 110,677 | (c) | ||
Finance America Net Interest Margin Trust, 2004-1 A |
| 5.250 | % | 6/27/34 |
| 73,417 |
| 1 | (d)(e)(f) | ||
GSAMP Trust, 2004-OPT M3 |
| 1.411 | % | 11/25/34 |
| 119,295 |
| 50,344 | (c) | ||
Renaissance Home Equity Loan Trust, 2003-4 M3 |
| 2.161 | % | 3/25/34 |
| 340,515 |
| 155,391 | (c) | ||
SACO I Trust, 2005-2 A |
| 0.461 | % | 4/25/35 |
| 8,853 |
| 3,711 | (c)(d) | ||
Sail Net Interest Margin Notes, 2004-2A A |
| 5.500 | % | 3/27/34 |
| 71,380 |
| 1 | (d)(e)(f) | ||
Total Asset-Backed Securities (Cost — $909,262) |
|
|
|
|
|
|
| 320,125 |
| ||
Collateralized Mortgage Obligations — 0.4% |
|
|
|
|
|
|
|
|
| ||
Federal National Mortgage Association (FNMA), STRIPS, IO, 339 30 |
| 5.500 | % | 7/1/18 |
| 2,455,924 |
| 285,980 | (c) | ||
Merit Securities Corp., 11PA B2 |
| 1.761 | % | 9/28/32 |
| 133,664 |
| 120,359 | (c)(d) | ||
Structured Asset Securities Corp., 1998-2 M1 |
| 1.361 | % | 2/25/28 |
| 31,650 |
| 30,831 | (c) | ||
Structured Asset Securities Corp., 1998-3 M1 |
| 1.261 | % | 3/25/28 |
| 152,335 |
| 141,271 | (c) | ||
Total Collateralized Mortgage Obligations (Cost — $331,020) |
|
|
|
|
|
|
| 578,441 |
|
See Notes to Financial Statements.
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
Schedule of investments (cont’d)
December 31, 2010
Western Asset Inflation Management Fund Inc.
Security |
| Rate |
| Maturity |
|
| Face |
|
| Value |
|
Corporate Bonds & Notes — 2.9% |
|
|
|
|
|
|
|
|
| ||
Consumer Staples — 0.5% |
|
|
|
|
|
|
|
|
| ||
Beverages — 0.1% |
|
|
|
|
|
|
|
|
| ||
Anheuser-Busch InBev Worldwide Inc., Senior Notes |
| 3.625 | % | 4/15/15 |
| 190,000 |
| $ 196,307 |
| ||
Food Products — 0.4% |
|
|
|
|
|
|
|
|
| ||
Kraft Foods Inc., Senior Notes |
| 4.125 | % | 2/9/16 |
| 550,000 |
| 578,009 |
| ||
Total Consumer Staples |
|
|
|
|
|
|
| 774,316 |
| ||
Energy — 0.2% |
|
|
|
|
|
|
|
|
| ||
Oil, Gas & Consumable Fuels — 0.2% |
|
|
|
|
|
|
|
|
| ||
Pemex Project Funding Master Trust, Senior Bonds |
| 6.625 | % | 6/15/35 |
| 29,000 |
| 29,652 |
| ||
Petrobras International Finance Co., Senior Notes |
| 5.750 | % | 1/20/20 |
| 180,000 |
| 187,662 |
| ||
Total Energy |
|
|
|
|
|
|
| 217,314 |
| ||
Financials — 1.7% |
|
|
|
|
|
|
|
|
| ||
Capital Markets — 0.3% |
|
|
|
|
|
|
|
|
| ||
Goldman Sachs Group Inc., Senior Notes |
| 4.750 | % | 7/15/13 |
| 440,000 |
| 469,001 |
| ||
Kaupthing Bank HF, Subordinated Notes |
| 7.125 | % | 5/19/16 |
| 1,050,000 |
| 0 | (d)(e)(f)(g)(h) | ||
Total Capital Markets |
|
|
|
|
|
|
| 469,001 |
| ||
Commercial Banks — 0.1% |
|
|
|
|
|
|
|
|
| ||
Glitnir Banki HF, Subordinated Notes |
| 6.693 | % | 6/15/16 |
| 550,000 |
| 0 | (d)(e)(f)(g)(h) | ||
ICICI Bank Ltd., Subordinated Bonds |
| 6.375 | % | 4/30/22 |
| 170,000 |
| 162,228 | (c)(d) | ||
Total Commercial Banks |
|
|
|
|
|
|
| 162,228 |
| ||
Consumer Finance — 0.5% |
|
|
|
|
|
|
|
|
| ||
Ally Financial Inc., Senior Notes |
| 7.500 | % | 12/31/13 |
| 92,000 |
| 99,590 |
| ||
Ally Financial Inc., Subordinated Notes |
| 8.000 | % | 12/31/18 |
| 111,000 |
| 118,492 |
| ||
SLM Corp., Medium-Term Notes |
| 8.000 | % | 3/25/20 |
| 310,000 |
| 314,819 |
| ||
SLM Corp., Medium-Term Notes, Senior Notes |
| 5.375 | % | 5/15/14 |
| 170,000 |
| 170,968 |
| ||
Total Consumer Finance |
|
|
|
|
|
|
| 703,869 |
| ||
Diversified Financial Services — 0.6% |
|
|
|
|
|
|
|
|
| ||
Bank of America Corp., Senior Notes |
| 4.500 | % | 4/1/15 |
| 310,000 |
| 315,366 |
| ||
Citigroup Inc., Senior Notes |
| 6.010 | % | 1/15/15 |
| 430,000 |
| 472,146 |
| ||
Total Diversified Financial Services |
|
|
|
|
|
|
| 787,512 |
| ||
Insurance — 0.2% |
|
|
|
|
|
|
|
|
| ||
Berkshire Hathaway Inc., Senior Notes |
| 3.200 | % | 2/11/15 |
| 280,000 |
| 289,203 |
| ||
Total Financials |
|
|
|
|
|
|
| 2,411,813 |
|
See Notes to Financial Statements.
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
Western Asset Inflation Management Fund Inc.
Security |
| Rate |
| Maturity |
|
| Face |
|
| Value |
|
Materials — 0.2% |
|
|
|
|
|
|
|
|
| ||
Metals & Mining — 0.2% |
|
|
|
|
|
|
|
|
| ||
Vale Overseas Ltd., Notes |
| 8.250 | % | 1/17/34 |
| 160,000 |
| $ 199,793 |
| ||
Vedanta Resources PLC, Senior Notes |
| 8.750 | % | 1/15/14 |
| 140,000 |
| 149,800 | (d) | ||
Total Materials |
|
|
|
|
|
|
| 349,593 |
| ||
Telecommunication Services — 0.1% |
|
|
|
|
|
|
|
|
| ||
Wireless Telecommunication Services — 0.1% |
|
|
|
|
|
|
|
|
| ||
America Movil SAB de CV, Senior Notes |
| 5.625 | % | 11/15/17 |
| 90,000 |
| 98,564 |
| ||
America Movil SAB de CV, Senior Notes |
| 5.000 | % | 3/30/20 |
| 100,000 |
| 104,445 |
| ||
Total Telecommunication Services |
|
|
|
|
|
|
| 203,009 |
| ||
Utilities — 0.2% |
|
|
|
|
|
|
|
|
| ||
Independent Power Producers & Energy Traders — 0.2% |
|
|
|
|
|
|
|
|
| ||
Energy Future Holdings Corp., Senior Notes |
| 11.250 | % | 11/1/17 |
| 86,360 |
| 52,248 | (g) | ||
Energy Future Intermediate Holding Co. LLC/EFIH Finance Inc., Senior Secured Notes |
| 10.000 | % | 12/1/20 |
| 195,000 |
| 202,073 |
| ||
Total Utilities |
|
|
|
|
|
|
| 254,321 |
| ||
Total Corporate Bonds & Notes (Cost — $5,705,286) |
|
|
|
|
|
|
| 4,210,366 |
| ||
Mortgage-Backed Securities — 1.1% |
|
|
|
|
|
|
|
|
| ||
FHLMC — 0.9% |
|
|
|
|
|
|
|
|
| ||
Federal Home Loan Mortgage Corp. (FHLMC), Gold |
| 7.000 | % | 6/1/17 |
| 47,018 |
| 49,457 |
| ||
Federal Home Loan Mortgage Corp. (FHLMC), Gold |
| 8.500 | % | 9/1/24 |
| 1,026,792 |
| 1,187,952 |
| ||
Total FHLMC |
|
|
|
|
|
|
| 1,237,409 |
| ||
FNMA — 0.2% |
|
|
|
|
|
|
|
|
| ||
Federal National Mortgage Association (FNMA) |
| 5.500 | % | 1/1/14 |
| 23,763 |
| 25,567 |
| ||
Federal National Mortgage Association (FNMA) |
| 7.000 | % | 10/1/18 - 6/1/32 |
| 248,440 |
| 280,859 |
| ||
Total FNMA |
|
|
|
|
|
|
| 306,426 |
| ||
Total Mortgage-Backed Securities (Cost — $1,438,138) |
|
|
|
|
|
|
| 1,543,835 |
| ||
Non-U.S. Treasury Inflation Protected Securities — 2.5% |
|
|
|
|
|
|
|
|
| ||
Australia — 2.5% |
|
|
|
|
|
|
|
|
| ||
Australia Government, Bonds |
| 4.000 | % | 8/20/20 |
| 1,260,000 | AUD | 2,086,389 |
| ||
Australia Government, Bonds |
| 3.000 | % | 9/20/25 |
| 1,430,000 | AUD | 1,562,223 |
| ||
Total Non-U.S. Treasury Inflation Protected Securities (Cost — $3,084,608) |
|
|
|
|
|
|
| 3,648,612 |
| ||
Sovereign Bonds — 0.7% |
|
|
|
|
|
|
|
|
| ||
Mexico — 0.2% |
|
|
|
|
|
|
|
|
| ||
United Mexican States, Medium-Term Notes |
| 6.750 | % | 9/27/34 |
| 266,000 |
| 300,580 |
| ||
United Mexican States, Medium-Term Notes |
| 6.050 | % | 1/11/40 |
| 44,000 |
| 45,210 |
| ||
Total Mexico |
|
|
|
|
|
|
| 345,790 |
|
See Notes to Financial Statements.
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
Schedule of investments (cont’d)
December 31, 2010
Western Asset Inflation Management Fund Inc.
Security |
| Rate |
| Maturity |
|
| Face |
|
| Value |
|
Russia — 0.5% |
|
|
|
|
|
|
|
|
| ||
RSHB Capital, Loan Participation Notes, Senior Secured Bonds |
| 6.299 | % | 5/15/17 |
| 160,000 |
| $ 161,600 | (d) | ||
Russian Foreign Bond-Eurobond, Senior Bonds |
| 7.500 | % | 3/31/30 |
| 501,200 |
| 580,891 | (d) | ||
Total Russia |
|
|
|
|
|
|
| 742,491 |
| ||
Total Sovereign Bonds (Cost — $1,072,137) |
|
|
|
|
|
|
| 1,088,281 |
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
| Expiration |
|
| Contracts |
|
|
| |
Purchased Options — 0.0% |
|
|
|
|
|
|
|
|
| ||
U.S. Dollar/Euro, Call @ $1.33 (Cost — $70,571) |
|
|
| 1/5/11 |
| 5,170,000 |
| 13,804 | (h) | ||
Total Investments before Short-Term Investments (Cost — $137,870,390) |
|
|
|
|
|
|
| 143,805,334 |
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
| Maturity |
|
| Face |
|
|
| |
Short-Term Investments — 1.1% |
|
|
|
|
|
|
|
|
| ||
Repurchase Agreements — 1.1% |
|
|
|
|
|
|
|
|
| ||
Morgan Stanley tri-party repurchase agreement dated 12/31/10; Proceeds at maturity — $1,528,015; (Fully collateralized by U.S. government agency obligations, 3.200% due 9/21/20; Market value — $1,560,249) (Cost — $1,528,000) |
| 0.120 | % | 1/3/11 |
| 1,528,000 |
| 1,528,000 |
| ||
Total Investments — 100.0% (Cost — $139,398,390#) |
|
|
|
|
|
|
| $145,333,334 |
|
† Face amount denominated in U.S. dollars, unless otherwise noted.
(a) All or a portion of this security is held at the broker as collateral for open futures contracts.
(b) All or a portion of this security is held by the counterparty as collateral for open reverse repurchase agreements.
(c) Variable rate security. Interest rate disclosed is as of the most recent information available.
(d) Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Directors, unless otherwise noted.
(e) Illiquid security (unaudited).
(f) The coupon payment on these securities is currently in default as of December 31, 2010.
(g) Payment-in-kind security for which part of the income earned may be paid as additional principal.
(h) Security is valued in good faith at fair value in accordance with procedures approved by the Board of Directors (See Note 1).
# Aggregate cost for federal income tax purposes is $140,081,148.
Abbreviations used in this schedule:
AUD | — Australian Dollar |
IO | — Interest Only |
STRIPS | — Separate Trading of Registered Interest and Principal Securities |
See Notes to Financial Statements.
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
Statement of assets and liabilities
December 31, 2010
Assets: |
|
|
|
Investments, at value (Cost — $139,398,390) |
| $ 145,333,334 |
|
Foreign currency, at value (Cost — $714,010) |
| 750,730 |
|
Cash |
| 389 |
|
Interest receivable |
| 1,127,273 |
|
Unrealized appreciation on forward foreign currency contracts |
| 58,473 |
|
Receivable from broker — variation margin on open futures contracts |
| 2,708 |
|
Prepaid expenses |
| 5,933 |
|
Total Assets |
| 147,278,840 |
|
|
|
|
|
Liabilities: |
|
|
|
Payable for open reverse repurchase agreements (Note 3) |
| 19,471,711 |
|
Unrealized depreciation on forward foreign currency contracts |
| 251,538 |
|
Investment management fee payable |
| 74,633 |
|
Interest payable (Note 3) |
| 2,215 |
|
Directors’ fees payable |
| 416 |
|
Accrued expenses |
| 93,435 |
|
Total Liabilities |
| 19,893,948 |
|
Total Net Assets |
| $127,384,892 |
|
|
|
|
|
Net Assets: |
|
|
|
Par value ($0.001 par value; 7,062,862 shares issued and outstanding; 100,000,000 shares authorized) |
| $ 7,063 |
|
Paid-in capital in excess of par value |
| 137,664,290 |
|
Overdistributed net investment income |
| (284,735) |
|
Accumulated net realized loss on investments, futures contracts, written options and foreign currency transactions |
| (15,778,495) |
|
Net unrealized appreciation on investments, futures contracts and foreign currencies |
| 5,776,769 |
|
Total Net Assets |
| $127,384,892 |
|
|
|
|
|
Shares Outstanding |
| 7,062,862 |
|
|
|
|
|
Net Asset Value |
| $18.04 |
|
See Notes to Financial Statements.
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
Statement of operations
For the Year Ended December 31, 2010
Investment Income: |
|
|
|
Interest |
| $ 3,847,647 |
|
Dividends |
| 11,171 |
|
Total Investment Income |
| 3,858,818 |
|
|
|
|
|
Expenses: |
|
|
|
Investment management fee (Note 2) |
| 846,885 |
|
Audit and tax |
| 65,950 |
|
Transfer agent fees |
| 38,969 |
|
Interest expense (Note 3) |
| 36,403 |
|
Shareholder reports |
| 34,294 |
|
Legal fees |
| 30,773 |
|
Directors’ fees |
| 26,399 |
|
Stock exchange listing fees |
| 20,971 |
|
Insurance |
| 4,067 |
|
Custody fees |
| 3,294 |
|
Miscellaneous expenses |
| 2,339 |
|
Total Expenses |
| 1,110,344 |
|
Less: Compensating balance arrangements (Note 1) |
| (355) |
|
Net Expenses |
| 1,109,989 |
|
Net Investment Income |
| 2,748,829 |
|
|
|
|
|
Realized and Unrealized Gain (Loss) on Investments, Futures Contracts, Written Options and Foreign Currency Transactions (Notes 1, 3 and 4): |
|
|
|
Net Realized Gain (Loss) From: |
|
|
|
Investment transactions |
| (960,193) |
|
Futures contracts |
| (178,356) |
|
Written options |
| 57,300 |
|
Foreign currency transactions |
| (488,156) |
|
Net Realized Loss |
| (1,569,405) |
|
Change in Net Unrealized Appreciation (Depreciation) From: |
|
|
|
Investments |
| 5,651,303 |
|
Futures contracts |
| 53,625 |
|
Foreign currencies |
| (183,949) |
|
Change in Net Unrealized Appreciation (Depreciation) |
| 5,520,979 |
|
Net Gain on Investments, Futures Contracts, Written Options and Foreign Currency Transactions |
| 3,951,574 |
|
Increase in Net Assets from Operations |
| $ 6,700,403 |
|
See Notes to Financial Statements.
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
Statements of changes in net assets
For the Year Ended December 31, 2010, |
| 2010 |
| 2009† |
| 2009 |
|
|
|
|
|
|
|
|
|
Operations: |
|
|
|
|
|
|
|
Net investment income |
| $ 2,748,829 |
| $ 427,467 |
| $ 1,129,486 |
|
Net realized gain (loss) |
| (1,569,405) |
| 596,165 |
| (2,633,644) |
|
Change in net unrealized appreciation (depreciation) |
| 5,520,979 |
| (239,635) |
| 23,736,059 |
|
Increase in Net Assets From Operations |
| 6,700,403 |
| 783,997 |
| 22,231,901 |
|
|
|
|
|
|
|
|
|
Distributions to Shareholders From (Note 1): |
|
|
|
|
|
|
|
Net investment income |
| (4,096,866) |
| (706,116) |
| (5,366,481) |
|
Return of capital |
| (139,830) |
| — |
| — |
|
Decrease in Net Assets From Distributions to Shareholders |
| (4,236,696) |
| (706,116) |
| (5,366,481) |
|
|
|
|
|
|
|
|
|
Fund Share Transactions: |
|
|
|
|
|
|
|
Reinvestment of distributions (1,702, 0 and 0 shares issued, respectively) |
| 29,957 |
| — |
| — |
|
Increase in Net Assets From Fund Share Transactions |
| 29,957 |
| — |
| — |
|
Increase in Net Assets |
| 2,493,664 |
| 77,881 |
| 16,865,420 |
|
|
|
|
|
|
|
|
|
Net Assets: |
|
|
|
|
|
|
|
Beginning of year |
| 124,891,228 |
| 124,813,347 |
| 107,947,927 |
|
End of year* |
| $127,384,892 |
| $124,891,228 |
| $124,813,347 |
|
* Includes (overdistributed) undistributed net investment income, respectively, of: |
| $(284,735) |
| $24,771 |
| $325,978 |
|
† For the period November 1, 2009 through December 31, 2009.
See Notes to Financial Statements.
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
Statement of cash flows
For the Year Ended December 31, 2010
Cash Flows Provided (Used) by Operating Activities: |
|
|
|
Interest and dividends received |
| $ 3,130,454 |
|
Operating expenses paid |
| (1,095,017) |
|
Interest paid |
| (34,188) |
|
Net purchases of short-term investments |
| (1,325,571) |
|
Realized loss on futures contracts |
| (178,356) |
|
Realized loss on options |
| (34,347) |
|
Realized loss on foreign currency transactions |
| (488,156) |
|
Net change in unrealized appreciation on futures contracts |
| 53,625 |
|
Net change in unrealized depreciation on foreign currencies |
| (183,949) |
|
Purchases of long-term investments |
| (81,667,557) |
|
Proceeds from disposition of long-term investments |
| 66,948,110 |
|
Change in receivable from broker — variation margin |
| (27,075) |
|
Change in receivable/payable for open forward currency contracts |
| 217,311 |
|
Cash deposits with brokers for futures contracts |
| 82,147 |
|
Net Cash Used By Operating Activities |
| (14,602,569) |
|
|
|
|
|
Cash Flows Provided (Used) by Financing Activities: |
|
|
|
Cash distributions paid on Common Stock |
| (4,206,739) |
|
Proceeds from reverse repurchase agreements |
| 19,471,711 |
|
Net Cash Provided By Financing Activities |
| 15,264,972 |
|
Net Increase in Cash |
| 662,403 |
|
Cash, Beginning of year |
| 88,716 |
|
Cash, End of year |
| $ 751,119 |
|
|
|
|
|
Reconciliation of Increase in Net Assets from Operations to Net Cash Flows Provided (Used) by Operating Activities: |
|
|
|
Increase in Net Assets From Operations |
| $ 6,700,403 |
|
Accretion of discount on investments |
| (1,644,566) |
|
Amortization of premium on investments |
| 982,384 |
|
Increase in investments, at value |
| (20,827,775) |
|
Increase in interest and dividends receivable |
| (66,182) |
|
Increase in payable for open forward currency contracts |
| 217,311 |
|
Decrease in payable to broker — variation margin |
| (27,075) |
|
Decrease in deposits with brokers for swap contracts and futures contracts |
| 82,147 |
|
Increase in prepaid expenses |
| (525) |
|
Increase in interest payable |
| 2,215 |
|
Decrease in accrued expenses |
| (20,906) |
|
Total Adjustments |
| (21,302,972) |
|
Net Cash Flows Used by Operating Activities |
| $(14,602,569) |
|
|
|
|
|
Non-Cash Financing Activities: |
|
|
|
Proceeds from reinvestment of dividends |
| $ 29,957 |
|
See Notes to Financial Statements.
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
Financial highlights
For a share of capital stock outstanding throughout each year ended December 31, unless otherwise noted:
|
| 20101 |
| 20091,2 |
| 20091,3 |
| 20081,3 |
| 20071,3 |
| 20061,3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year |
| $17.69 |
| $17.68 |
| $15.29 |
| $18.15 |
| $17.89 |
| $19.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
| 0.39 |
| 0.06 |
| 0.16 |
| 1.32 |
| 0.66 |
| 0.86 |
|
Net realized and unrealized gain (loss) |
| 0.56 |
| 0.05 |
| 2.99 |
| (3.39) |
| 0.28 |
| (0.55) |
|
Total income (loss) from operations |
| 0.95 |
| 0.11 |
| 3.15 |
| (2.07) |
| 0.94 |
| 0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less distributions from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
| (0.58) |
| (0.10) |
| (0.76) |
| (0.83) |
| (0.72) |
| (1.26) |
|
Net realized gains |
| — |
| — |
| — |
| — |
| — |
| (0.38) |
|
Return of capital |
| (0.02) |
| — |
| — |
| — |
| — |
| (0.04) |
|
Total distributions |
| (0.60) |
| (0.10) |
| (0.76) |
| (0.83) |
| (0.72) |
| (1.68) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Net Asset Value due to shares repurchased in tender offer |
| — |
| — |
| — |
| 0.04 |
| 0.04 |
| 0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year |
| $18.04 |
| $17.69 |
| $17.68 |
| $15.29 |
| $18.15 |
| $17.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of year |
| $17.65 |
| $16.15 |
| $15.99 |
| $13.49 |
| $16.16 |
| $15.87 |
|
Total return, based on NAV 4,5 |
| 5.42 | % | 0.62 | % | 21.09 | % | (11.87) | % | 5.65 | % | 1.98 | % |
Total return, based on Market Price5 |
| 13.26 | % | 1.62 | % | 24.67 | % | (12.15) | % | 6.51 | % | 2.96 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of year (000s) |
| $127,385 |
| $124,891 |
| $124,813 |
| $107,948 |
| $142,003 |
| $155,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to average net assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses |
| 0.87 | % | 1.04 | %6 | 1.09 | % | 1.40 | % | 1.45 | %7 | 3.64 | % |
Gross expenses, excluding interest expense |
| 0.84 |
| 1.04 | 6 | 0.99 |
| 1.03 |
| 0.95 | 7 | 1.17 |
|
Net expenses8 |
| 0.87 |
| 1.04 | 6 | 1.09 |
| 1.40 |
| 1.45 | 7,9 | 3.64 | 9 |
Net expenses, excluding interest expense8 |
| 0.84 |
| 1.04 | 6 | 0.99 |
| 1.03 |
| 0.94 | 7,9 | 1.17 | 9 |
Net investment income |
| 2.15 |
| 2.03 | 6 | 0.97 |
| 7.16 |
| 3.69 |
| 4.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate |
| 48 | % | 2 | % | 45 | %10 | 70 | %10 | 39 | %10 | 33 | % |
1 |
| Per share amounts have been calculated using the average shares method. |
2 |
| For the period November 1, 2009 through December 31, 2009. |
3 |
| For the year ended October 31. |
4 |
| Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
5 |
| The total return calculation assumes that distributions are reinvested in accordance with the Fund’s dividend reinvestment plan. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
6 |
| Annualized. |
7 |
| Included in the expense ratios are certain non-recurring restructuring (and reorganization, if applicable) fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would not have changed. |
8 |
| The impact of compensating balance arrangements, if any, was less than 0.01%. |
9 |
| Reflects fee waivers and/or expense reimbursements. |
10 |
| Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 55%, 122% and 55% for the years ended October 31, 2009, 2008 and 2007, respectively. |
See Notes to Financial Statements.
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
Notes to financial statements
1. Organization and significant accounting policies
Western Asset Inflation Management Fund Inc. (the “Fund”) was incorporated in Maryland on March 16, 2004 and is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Board of Directors authorized 100 million shares of $0.001 par value common stock. The Fund’s primary investment objective is total return. Current income is a secondary objective.
The following are significant accounting policies consistently followed by the Fund 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. Debt securities are valued at the mean between the last quoted bid and asked prices provided by an independent pricing service, which are based on transactions in debt obligations, quotations from bond dealers, market transactions in comparable securities and various other relationships between securities. Publicly traded foreign government debt securities are typically traded internationally in the over-the-counter market, and are valued at the mean between the last quoted bid and asked prices as of the close of business of that market. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the primary m arket or exchange on which they trade. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Directors. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates fair value.
The Fund has adopted Financial Accounting Standards Board Codification Topic 820 (“ASC Topic 820”). ASC Topic 820 establishes a single definition of fair value, creates a three-tier hierarchy as a framework for measuring fair value based on inputs used to value the Fund’s investments, and requires additional disclosure about fair value. The hierarchy of inputs is summarized 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.) |
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
· | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.
The following is a summary of the inputs used in valuing the Fund’s assets and liabilities carried at fair value:
ASSETS
Description |
| Quoted Prices |
| Other Significant |
| Significant |
| Total |
| ||
Long-term investments†: |
|
|
|
|
|
|
|
|
| ||
U.S. treasury inflation protected securities |
| — |
| $132,401,870 |
|
| — |
|
| $132,401,870 |
|
Asset-backed securites |
| — |
| 320,125 |
|
| — |
|
| 320,125 |
|
Collateralized mortgage obligations |
| — |
| 578,441 |
|
| — |
|
| 578,441 |
|
Corporate bonds & notes |
| — |
| 4,210,366 |
|
| $ 0 | * |
| 4,210,366 |
|
Mortgage-backed securities |
| — |
| 1,543,835 |
|
| — |
|
| 1,543,835 |
|
Non-U.S. treasury inflation protected securities |
| — |
| 3,648,612 |
|
| — |
|
| 3,648,612 |
|
Sovereign bonds |
| — |
| 1,088,281 |
|
| — |
|
| 1,088,281 |
|
Purchased options |
| — |
| 13,804 |
|
| — |
|
| 13,804 |
|
Total long-term investments |
| — |
| $143,805,334 |
|
| $ 0 | * |
| $143,805,334 |
|
Short-term investments† |
| — |
| 1,528,000 |
|
| — |
|
| 1,528,000 |
|
Total investments |
| — |
| $145,333,334 |
|
| $ 0 | * |
| $145,333,334 |
|
Other financial instruments: |
|
|
|
|
|
|
|
|
|
|
|
Forward foreign currency contracts |
| — |
| $ 58,473 |
|
| — |
|
| $ 58,473 |
|
Total |
| — |
| $145,391,807 |
|
| $ 0 | * |
| $145,391,807 |
|
LIABILITIES
Description |
| Quoted Prices |
| Other Significant |
| Significant |
| Total |
| ||||
Other financial instruments: |
|
|
|
|
|
|
|
|
|
|
|
| |
Futures contracts |
| $2,059 |
|
| — |
|
| — |
|
| $ 2,059 |
|
|
Forward foreign currency contracts |
| — |
|
| $251,538 |
|
| — |
|
| 251,538 |
|
|
Total |
| $2,059 |
|
| $251,538 |
|
| — |
|
| $253,597 |
|
|
† | See Schedule of Investments for additional detailed categorizations. |
* | Value is less than $1. |
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
Notes to financial statements (cont’d)
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value:
Investments In Securities |
| Asset- |
| Corporate |
| Total |
| |||
Balance as of December 31, 2009 |
| $ 35 |
|
| — |
|
| $ 35 |
|
|
Accrued premiums/discounts |
| — |
|
| — |
|
| — |
|
|
Realized gain(loss)1 |
| — |
|
| — |
|
| — |
|
|
Change in unrealized appreciation (depreciation)2 |
| (34 | ) |
| — |
|
| (34 | ) |
|
Net purchases (sales) |
| — |
|
| — |
|
| — |
|
|
Transfers into Level 3 |
| — |
|
| $ 0 | * |
| 0 | * |
|
Transfers out of Level 3 |
| (1 | ) |
| — |
|
| (1 | ) |
|
Balance as of December 31, 2010 |
| — |
|
| $ 0 | * |
| $ 0 | * |
|
Net change in unrealized appreciation (depreciation) for investments in securities still held at December 31, 20102 |
| — |
|
| — |
|
| — |
|
|
* | Value is less than $1. |
1 | This amount is included in net realized gain (loss) from investment transactions in the accompanying Statement of Operations. |
2 | This amount is included in the change in net unrealized appreciation (depreciation) in the accompanying Statement of Operations. Change in unrealized appreciation (depreciation) includes net unrealized appreciation (depreciation) resulting from changes in investment values during the reporting period and the reversal of previously recorded unrealized appreciation (depreciation) when gains or losses are realized. |
(b) Repurchase agreements. The Fund may enter into repurchase agreements with institutions that its investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, the Fund acquires a debt security subject to an obligation of the seller to repurchase, and of the Fund to resell, the security at an agreed-upon price and time, thereby determining the yield during the Fund’s holding period. When entering into repurchase agreements, it is the Fund’s policy that its custodian or a third party custodian, acting on the Fund’s behalf, take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that a ny repurchase transaction maturity exceeds one business day, the value of the collateral is marked-to-market and measured against the value of the agreement in an effort to ensure the adequacy of the collateral. If the counterparty defaults, the Fund generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during the period in which the Fund seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.
(c) Reverse repurchase agreements. The Fund enters into reverse repurchase agreements. Under the terms of a typical reverse repurchase agreement, a Fund sells a security subject to an obligation to repurchase the security from the buyer at an agreed-upon time and price. In the event the buyer of securities
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the fund’s use of the proceeds of the agreement may be restricted pending a determination by the counterparty, or its trustee or receiver, whether to enforce the Fund’s obligation to repurchase the securities. In entering into reverse repurchase agreements, the Fund will maintain cash, U.S. government securities or other liquid debt obligations at least equal in value to its obligations with respect to reverse repurchase agreements or will take other actions permitted by law to cover its obligations.
(d) Futures contracts. The Fund uses futures contracts to gain exposure to, or hedge against, changes in the value of interest rates or foreign currencies. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
Upon entering into a futures contract, the Fund is required to deposit cash or cash equivalents with a broker in an amount equal to a certain percentage of the contract amount. This is known as the “initial margin” and subsequent payments (“variation margin”) are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. For certain futures, including foreign denominated futures, variation margin is not settled daily, but is recorded as a net variation margin payable or receivable. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. The daily changes in contract value are recorded as unrealized gains or losses in the Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.
Futures contracts involve, to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
(e) Written options. When the Fund writes an option, an amount equal to the premium received by the Fund is recorded as a liability, the value of which is marked-to-market daily to reflect the current market value of the option written. If the option expires, the premium received is recorded as a realized gain. When a written call option is exercised, the difference between the premium received plus the option exercise price and the Fund’s basis in the underlying security (in the case of a covered written call option), or the cost to purchase the underlying security (in the case of an uncovered written call option), including brokerage commission, is recognized as a realized gain or loss. When a written put option is exercised, the amount of the premium received is subtracted from the cost of the security purchased by the Fund fro m the exercise of the written put option to form the Fund’s basis in the underlying security purchased. The writer or buyer of an option traded on an exchange can liquidate the position before the exercise of the option by entering into a closing transaction. The cost of a closing transaction is deducted from the original premium received resulting in a realized gain or loss to the Fund.
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
Notes to financial statements (cont’d)
The risk in writing a covered call option is that the Fund may forego the opportunity of profit if the market price of the underlying security increases and the option is exercised. The risk in writing a put option is that the Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. The risk in writing a call option is that the Fund is exposed to the risk of loss if the market price of the underlying security increases. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
(f) Stripped securities. The Fund invests in “Stripped Securities,” a term used collectively for components, or strips, of fixed income securities. Stripped securities can be principal only securities (“PO”), which are debt obligations that have been stripped of unmatured interest coupons or, interest only securities (“IO”), which are unmatured interest coupons that have been stripped from debt obligations. The market value of Stripped Securities will fluctuate in response to changes in economic conditions, rates of pre-payment, interest rates and the market’s perception of the securities. However, fluctuations in response to interest rates may be greater in Stripped Securities than for debt obligations of comparable maturities that pay interest currently. The amount of fluctuation may increase with a longer period of maturity.
The yield to maturity on IO’s is sensitive to the rate of principal repayments (including prepayments) on the related underlying debt obligation and principal payments may have a material effect on yield to maturity. If the underlying debt obligation experiences greater than anticipated prepayments of principal, the Fund may not fully recoup its initial investment in IO’s.
(g) Forward foreign currency contracts. The Fund enters into forward foreign currency contracts to hedge against foreign currency exchange rate risk on its non-U.S. dollar denominated securities or to facilitate settlement of a foreign currency denominated portfolio transaction. A forward foreign currency contract is an agreement between two parties to buy and sell a currency at a set price with delivery and settlement at a future date. The contract is marked-to-market daily and the change in value is recorded by the Fund as an unrealized gain or loss. When a forward foreign currency contract is closed, through either delivery or offset by entering into another forward foreign currency contract, the Fund recognizes a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it is closed.
Forward foreign currency contracts involve elements of market risk in excess of the amounts reflected on the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rate underlying the forward foreign currency contract. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
(h) Foreign currency translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting from fluctuations in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.
Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the values of assets and liabilities, other than investments in securities, on the date of valuation, resulting from changes in exchange rates.
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.
(i) Inflation-indexed bonds. Inflation-indexed bonds are fixed-income securities whose principal value or interest rate is periodically adjusted according to the rate of inflation. As the index measuring inflation changes, the principal value or interest rate of inflation-indexed bonds will be adjusted accordingly. Inflation adjustments to the principal amount of inflation-indexed bonds are reflected as an increase or decrease to investment income on the Statement of Operations. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
(j) Loan participations. The Fund may invest in loans arranged through private negotiation between one or more financial institutions. The Fund’s investment in any such loan may be in the form of a participation in or an assignment of the loan. In connection with purchasing participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement related to the loan, or any rights of
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
Notes to financial statements (cont’d)
off-set against the borrower and the Fund may not benefit directly from any collateral supporting the loan in which it has purchased the participation.
The Fund assumes the credit risk of the borrower, the lender that is selling the participation and any other persons interpositioned between the Fund and the borrower. In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor of the lender and may not benefit from any off-set between the lender and the borrower.
(k) Cash flow information. The Fund invests in securities and distributes dividends from net investment income and net realized gains, which are paid in cash and may be reinvested at the discretion of shareholders. These activities are reported in the Statement of Changes in Net Assets and additional information on cash receipts and cash payments are presented in the Statement of Cash Flows.
(l) Credit and market risk. The Fund invests in high-yield and emerging market instruments that are subject to certain credit and market risks. The yields of high-yield and emerging market debt obligations reflect, among other things, perceived credit and market risks. The Fund’s investment in securities rated below investment grade typically involve risks not associated with higher rated securities including, among others, greater risk related to timely and ultimate payment of interest and principal, greater market price volatility and less liquid secondary market trading. The consequences of political, social, economic or diplomatic changes may have disruptive effects on the market prices of investments held by the Fund. The Fund’s investment in non-U.S. dollar denominated securities may also result in foreign currency loss es caused by devaluations and exchange rate fluctuations.
(m) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.
(n) Distributions to shareholders. Distributions from net investment income for the Fund, if any, are declared quarterly and paid on a monthly basis. Distributions of net realized gains, if any, are declared at least annually. Distributions are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(o) Compensating balance arrangements. The Fund has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash on deposit with the bank. This amount is shown as a reduction of expenses on the Statement of Operations.
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
(p) Federal and other taxes. It is the Fund’s policy to comply with the federal income tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and realized gains, if any, to shareholders in accordance with the requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.
However, due to the timing of when distributions are made by the Fund, the Fund may be subject to an excise tax of 4% of the amount by which 98% of the Fund’s annual taxable income and net realized gains exceed the distributions from such taxable income and realized gains for the calendar year. The Fund paid $9,274 of Federal excise taxes attributable to calendar year 2009. Under the recently enacted Regulated Investment Company Modernization Act of 2010, the minimum distribution requirement for capital gains that must be met in order to avoid the imposition of excise tax has been raised from 98% to 98.2% for calendar years beginning after December 22, 2010.
(q) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. During the current year, the following reclassifications have been made:
|
| Overdistributed Net |
| Accumulated Net |
|
(a) |
| $1,038,531 |
| $(1,038,531) |
|
(b) | Reclassifications are primarily due to foreign currency transactions treated as ordinary income for tax purposes, differences between book and tax amortization of premium on fixed income securities and losses from mortgage backed securities treated as capital losses for tax purposes. |
(r) Counterparty risk and credit-risk-related contingent features of derivative instruments. The Fund may invest in certain securities or engage in other transactions, where the Fund is exposed to counterparty credit risk in addition to broader market risks. The Fund may invest in securities of issuers, which may also be considered counterparties as trading partners in other transactions. This may increase the risk of loss in the event of default or bankruptcy by the counterparty or if the counterparty otherwise fails to meet its contractual obligations. The Fund’s investment manager attempts to mitigate counterparty risk by (i) periodically assessing the creditworthiness of its trading partners, (ii) monitoring and/or limiting the amount of its net exposure to each individual counterparty based on its assessment and (ii i) requiring collateral from the counterparty for certain transactions. Market events and changes in overall economic conditions may impact the assessment of such counterparty risk by the investment manager. In addition, declines in the values of underlying collateral received may expose the Fund to increased risk of loss.
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
Notes to financial statements (cont’d)
The Fund has entered into master agreements with certain of its derivative counterparties that provide for general obligations, representations, agreements, collateral, events of default or termination and credit related contingent features. The credit related contingent features include, but are not limited to, a percentage decrease in the Fund’s net assets or NAV over a specified period of time. If these credit related contingent features were triggered, the derivatives counterparty could terminate the positions and demand payment or require additional collateral.
As of December 31, 2010, the Fund held forward foreign currency contracts with credit related contingent features which had a liability position of $251,538. If a contingent feature in the Master Agreements would have been triggered, the Fund would have been required to pay this amount to its derivatives counterparties.
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager. Western Asset Management Company (“Western Asset”), Western Asset Management Company Limited (“Western Asset Limited”) and Western Asset Management Company Pte. Ltd. (“Western Singapore”) are the Fund’s subadvisers. LMPFA, Western Asset, Western Asset Limited and Western Singapore are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).
LMPFA provides administrative and certain oversight services to the Fund. The Fund pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.60% of the Fund’s average daily net assets plus the proceeds of any outstanding borrowings, used for leverage.
LMPFA delegates to Western Asset the day-to-day portfolio management of the Fund. Western Asset Limited and Western Singapore provide certain advisory services to the Fund relating to currency transactions and investment in non-U.S. dollar denominated securities. Western Asset Limited and Western Singapore do not receive any compensation from the Fund. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Fund. In turn, Western Asset pays Western Asset Limited and Western Singapore a subadvisory fee of 0.30% on the assets managed by Western Asset Limited and Western Singapore, respectively.
All officers and one Director of the Fund are employees of Legg Mason or its affiliates and do not receive compensation from the Fund.
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
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|
3. Investments
During the year ended December 31, 2010, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) and U.S Government & Agency Obligations were as follows:
|
| Investments |
| U.S. Government & |
| ||
Purchases |
| $ 5,492,038 |
|
| $76,175,519 |
|
|
Sales |
| 11,465,702 |
|
| 55,443,282 |
|
|
At December 31, 2010, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
Gross unrealized appreciation |
| $ 8,355,966 |
|
|
Gross unrealized depreciation |
| (3,103,780 | ) |
|
Net unrealized appreciation |
| $ 5,252,186 |
|
|
At December 31, 2010, the Fund had the following open futures contracts:
|
| Number of |
| Expiration |
| Basis |
| Market |
| Unrealized |
| ||||
Contracts to Sell: |
|
|
|
|
|
|
|
|
|
|
|
| |||
90-Day Eurodollar |
| 7 |
|
| 3/11 |
| $1,742,277 |
|
| $1,743,613 |
|
| $(1,336 | ) |
|
U.S. Treasury 5-Year Notes |
| 11 |
|
| 3/11 |
| 1,294,183 |
|
| 1,294,906 |
|
| (723 | ) |
|
Net unrealized loss on open futures contracts |
|
|
|
|
|
|
|
|
|
|
|
| $(2,059 | ) |
|
Transactions in reverse repurchase agreements for the Fund during the year ended December 31, 2010 were as follows:
Average Daily |
| Weighted Average |
| Maximum Amount |
|
$17,472,691 |
| 0.267% |
| $22,648,990 |
|
* Average based on the number of days that the Fund had reverse repurchase agreements outstanding.
Interest rates on reverse repurchase agreements ranged from 0.210% to 0.300% during the year ended December 31, 2010. Interest expense incurred on reverse repurchase agreements totaled $36,403.
At December 31, 2010, the Fund had the following open reverse repurchase agreements:
Security |
| Value |
| |
Reverse Repurchase Agreement with Deutsche Bank, dated 12/16/10 bearing 0.280% to be repurchased at $13,358,992 on 1/6/11, collateralized by: $10,700,000 United States Treasury Inflation Indexed Note, 2.000% due 1/15/14; Market value (including accrued interest) $11,596,340 |
| $13,356,810 |
|
|
Reverse Repurchase Agreement with Deutsche Bank, dated 12/16/10 bearing 0.280% to be repurchased at $6,115,900 on 1/6/11, collateralized by: $5,590,000 United States Treasury Inflation Indexed Note, 2.375% due 4/15/11; Market value (including accrued interest) $5,671,727 |
| 6,114,901 |
|
|
Total reverse repurchase agreements (Proceeds — $19,471,711) |
| $19,471,711 |
|
|
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
Notes to financial statements (cont’d)
During the year ended December 31, 2010, written option transactions for the Fund were as follows:
|
| Number of Contracts |
| Premiums |
| ||
Written options, outstanding December 31, 2009 |
| — |
|
| — |
|
|
Options written |
| 86 |
|
| $ 60,799 |
|
|
Options closed |
| (43 | ) |
| (20,689 | ) |
|
Options exercised |
| (10 | ) |
| (15,280 | ) |
|
Options expired |
| (33 | ) |
| (24,830 | ) |
|
Written options, outstanding December 31, 2010 |
| — |
|
| — |
|
|
At December 31, 2010, the Fund had the following open forward foreign currency contracts:
Foreign Currency |
| Counterparty |
| Local |
| Market |
| Settlement |
| Unrealized |
| |||
Contracts to Buy: |
|
|
|
|
|
|
|
|
|
|
| |||
Canadian Dollar |
| Citibank |
| 1,316,414 |
|
| $1,322,880 |
|
| 2/14/11 |
| $ 24,718 |
|
|
Euro |
| Credit Suisse |
| 920,000 |
|
| 1,229,272 |
|
| 2/14/11 |
| (23,970 | ) |
|
Euro |
| UBS AG |
| 98,461 |
|
| 131,560 |
|
| 2/14/11 |
| (3,592 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| (2,844 | ) |
|
Contracts to Sell: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australian Dollar |
| Credit Suisse |
| 4,101,370 |
|
| 4,174,099 |
|
| 2/14/11 |
| (175,263 | ) |
|
Canadian Dollar |
| Citibank |
| 1,316,414 |
|
| 1,322,880 |
|
| 2/14/11 |
| (31,962 | ) |
|
Euro |
| JPMorgan Chase |
| 120,000 |
|
| 160,340 |
|
| 2/14/11 |
| 3,069 |
|
|
Euro |
| Citibank |
| 900,414 |
|
| 1,203,102 |
|
| 2/14/11 |
| 30,686 |
|
|
Japanese Yen |
| Citibank |
| 114,251,760 |
|
| 1,407,809 |
|
| 2/14/11 |
| (16,751 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| (190,221 | ) |
|
Net unrealized loss on open forward foreign currency contracts |
|
|
|
| $(193,065 | ) |
|
4. Derivative instruments and hedging activities
Financial Accounting Standards Board Codification Topic 815 requires enhanced disclosure about an entity’s derivative and hedging activities.
Below is a table, grouped by derivative type that provides information about the fair value and the location of derivatives within the Statement of Assets and Liabilities at December 31, 2010.
ASSET DERIVATIVES1
|
| Foreign |
| |
Purchased options2 |
| $13,804 |
|
|
Forward foreign currency contracts |
| 58,473 |
|
|
Total |
| $72,277 |
|
|
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
LIABILITY DERIVATIVES1
|
| Interest Rate |
| Foreign |
| Total |
| |||
Futures contracts3 |
| $2,059 |
|
| — |
|
| $ 2,059 |
|
|
Forward foreign currency contracts |
| — |
|
| $251,538 |
|
| 251,538 |
|
|
Total |
| $2,059 |
|
| $251,538 |
|
| $253,597 |
|
|
1 | Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation (depreciation) and for liability derivatives is payables/net unrealized appreciation (depreciation). |
2 | Market value of purchased options is reported in Investments at value in the Statement of Assets and Liabilities. |
3 | Includes cumulative appreciation (depreciation) of futures contracts as reported in the footnotes. Only variation margin is reported within the receivables and/or payables of the Statement of Assets and Liabilities. |
The following tables provide information about the effect of derivatives and hedging activities on the Fund’s Statement of Operations for the year ended December 31, 2010. The first table provides additional detail about the amounts and sources of gains (losses) realized on derivatives during the period. The second table provides additional information about the change in unrealized appreciation (depreciation) resulting from the Fund’s derivatives and hedging activities during the period.
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED
|
| Interest Rate |
| Foreign |
| Total |
| |||
Purchased options |
| $ (63,530 | ) |
| $(28,116 | ) |
| $ (91,646 | ) |
|
Written options |
| 57,300 |
|
| — |
|
| 57,300 |
|
|
Futures contracts |
| (178,356 | ) |
| — |
|
| (178,356 | ) |
|
Forward foreign currency contracts |
| — |
|
| (19,425 | ) |
| (19,425 | ) |
|
Total |
| $(184,586 | ) |
| $(47,541 | ) |
| $(232,127 | ) |
|
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED
|
| Interest Rate |
| Foreign |
| Total |
| |||
Purchased options |
| — |
|
| $ (56,767 | ) |
| $ (56,767 | ) |
|
Futures contracts |
| $53,625 |
|
| — |
|
| 53,625 |
|
|
Forward foreign currency contracts |
| — |
|
| (217,311 | ) |
| (217,311 | ) |
|
Total |
| $53,625 |
|
| $(274,078 | ) |
| $(220,453 | ) |
|
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
Notes to financial statements (cont’d)
During the year ended December 31, 2010, the volume of derivative activity for the Fund was as follows:
|
| Average |
| |
Purchased options |
| $ 16,864 |
|
|
Written options† |
| 4,924 |
|
|
Forward foreign currency contracts (to buy) |
| 2,118,003 |
|
|
Forward foreign currency contracts (to sell) |
| 6,508,278 |
|
|
Futures contracts (to buy)† |
| 1,799,240 |
|
|
Futures contracts (to sell) |
| 5,161,940 |
|
|
† At December 31, 2010, there were no open positions held in this derivative.
5. Distributions subsequent to December 31, 2010
On November 15, 2010, the Board of Directors (the “Board”) of the Fund declared two dividends, each in the amount of $0.0500 per share, payable on January 28, 2011 and February 25, 2011 to shareholders of record on January 21, 2011 and February 18, 2011, respectively.
On February 14, 2011, the Board declared three distributions, each in the amount of $0.0500 per share, payable on March 25, 2011, April 29, 2011 and May 27, 2011 to shareholders of record on March 18, 2011, April 21, 2011 and May 20, 2011, respectively.
6. Income tax information and distributions to shareholders
The tax character of distributions paid during the fiscal year ended December 31, 2010, the fiscal period ended December 31, 2009 and the fiscal year ended October 31, 2009 were as follows:
|
| December 31, |
| December 31, |
| October 31, |
|
Distributions Paid From: |
|
|
|
|
|
|
|
Ordinary income |
| $4,236,696 |
| $706,116 |
| $5,366,481 |
|
† For the period November 1, 2009 to December 31, 2009.
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
As of December 31, 2010, the components of accumulated earnings on a tax basis were as follows:
Capital loss carryforward* |
| $(14,126,457 | ) |
Other book/tax temporary differences(a) |
| (1,254,015 | ) |
Unrealized appreciation (depreciation)(b) |
| 5,094,011 |
|
Total accumulated earnings (losses) — net |
| $(10,286,461 | ) |
* As of December 31, 2010, the Fund had the following net capital loss carryforward remaining:
Year of Expiration |
| Amount |
| |
12/31/2013 |
| $ (3,569,321 | ) |
|
12/31/2014 |
| (5,900,240 | ) |
|
12/31/2016 |
| (2,444,775 | ) |
|
12/31/2018 |
| (2,212,121 | ) |
|
|
| $(14,126,457 | ) |
|
These amounts will be available to offset future taxable capital gains. Under the recently enacted Regulated Investment Company Modernization Act of 2010, the Fund will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. However, any losses incurred during those future years will be required to be utilized prior to the losses incurred in pre-enactment taxable years. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital losses that are carried forward will retain their character as either short-term or long-term capital losses rather than being considered all short-term as under previous law.
(a) | Other book/tax temporary differences are attributable primarily to the tax deferral of losses on straddles, the realization for tax purposes of unrealized losses on certain futures and foreign currency contracts, the deferral of post-October currency losses for tax purposes, differences between book/tax accrual of interest income on securities in default and 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 primarily to the difference between book and tax amortization methods for premiums on fixed income securities. |
7. Other tax information
On December 22, 2010, President Obama signed into law the Regulated Investment Company Modernization Act of 2010 (the “Act”). The Act updates certain tax rules applicable to regulated investment companies (“RICs”). The various provisions of the Act will generally be effective for RICs with taxable years beginning after December 22, 2010. Additional information regarding the impact of the Act on the Fund, if any, will be contained within the relevant sections of the notes to the financial statements for the fiscal year ending December 31, 2011.
|
| Western Asset Inflation Management Fund Inc. 2010 Annual Report |
|
|
Report of independent registered public accounting firm
The Board of Directors and Shareholders
Western Asset Inflation Management Fund Inc.:
We have audited the accompanying statement of assets and liabilities of Western Asset Inflation Management Fund Inc., including the schedule of investments, as of December 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for the year then ended, the period from November 1, 2009 to December 31, 2009, and the year ended October 31, 2009, the statement of cash flows for the year then ended, and the financial highlights for the year then ended, the period from November 1, 2009 to December 31, 2009, and each of the years in the four-year period ended October 31, 2009. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2010, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Western Asset Inflation Management Fund Inc. as of December 31, 2010, the results of its operations, the changes in its net assets, its cash flows, and the financial highlights for the periods described above, in conformity with U.S. generally accepted accounting principles.
New York, New York
February 18, 2011
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| Western Asset Inflation Management Fund Inc. |
|
|
Board approval of management and subadvisory agreements (unaudited)
Background
The Investment Company Act of 1940, as amended (the “1940 Act”) requires that the Board of Directors (the “Board”) of Western Asset Inflation Management Fund, Inc.(the “Fund”), including a majority of its members that are not considered to be “interested persons” under the 1940 Act (the “Independent Directors”) voting separately, approve on an annual basis the continuation of the investment management contract (the “Management Agreement”) with the Fund’s manager, Legg Mason Partners Fund Advisor, LLC (the “Manager”), and the sub-advisory agreements (individually, a “Sub-Advisory Agreement” and, collectively, the “Sub-Advisory Agreements”) with the Manager’s affiliates, Western Asset Management Company (“Western Asset”), Western Asset Management Company Pte. Ltd. in Singapore (“Western Asset Si ngapore”) and Western Asset Management Company Limited in London (“Western Asset London”). Western Asset, Western Asset Singapore and Western Asset London collectively are hereinafter referred to as the “Sub-Advisers” and Western Asset Singapore and Western Asset London together are hereinafter referred to as the “Non-U.S. Sub-Advisers.” At a meeting (the “Contract Renewal Meeting”) held in-person on November 10 and 11, 2009, the Board, including the Independent Directors, considered and approved the continuation of each of the Management Agreement and Sub-Advisory Agreements for an additional one-year term. To assist in its consideration of the renewals of the Management Agreement and Sub-Advisory Agreements, the Board received and considered a variety of information (together with the information provided at the Contract Renewal Meeting, the “Contract Renewal Information”) about the Manager and Sub-Advisers, as well as the management and sub-advis ory arrangements for the Fund and the other closed-end funds in the same complex under the Board’s supervision (collectively, the “Legg Mason Closed-end Funds”), certain portions of which are discussed below. A presentation made by the Manager and Western Asset to the Board at the Contract Renewal Meeting in connection with its evaluations of the Management Agreement and the Sub-Advisory Agreements encompassed the Fund and the other Legg Mason Closed-end Funds. In addition to the Contract Renewal Information, the Board received performance and other information throughout the year related to the respective services rendered by the Manager and the Sub-Advisers to the Fund. The Board’s evaluation took into account the information received throughout the year and also reflected the knowledge and familiarity gained as members of the Board of the Fund and the other Legg Mason Closed-end Funds with respect to the services provided to the Fund by the Manager and the Sub-Advisers.
The Manager provides the Fund with investment advisory and administrative services pursuant to the Management Agreement and the Sub-Advisers provide, or in the case of the Non-U.S. Sub-Advisers help to provide, the Fund with certain investment sub-advisory services pursuant to the Sub-Advisory
|
| Western Asset Inflation Management Fund Inc. |
|
|
Board approval of management and subadvisory agreements (unaudited) (cont’d)
Agreements. The discussion below covers the advisory and administrative functions being rendered by the Manager, each such function being encompassed by the Management Agreement, and the investment sub-advisory functions being rendered by the Sub-Advisers.
Board approval of management agreement and sub-advisory agreements
In its deliberations regarding renewal of the Management Agreement and the Sub-Advisory Agreements, the Board, including the Independent Directors, considered the factors below.
Nature, extent and quality of the services under the management agreement and sub-advisory agreements
The Board received and considered Contract Renewal 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 the Sub-Advisory Agreements, respectively, during the past year. The Board also reviewed Contract Renewal Information regarding the Fund’s compliance policies and procedures established pursuant to the 1940 Act.
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 also considered, based on its knowledge of the Manager and its affiliates, the Contract Renewal Information and the Board’s discussions with the Manager and Western Asset at the Contract Renewal Meeting, the general reputation and investment records of the Manager, Western Asset and their affiliates and the financial resources available to the corporate parent of the Manager and the Sub-Advisers, Legg Mason, Inc. (“Legg Mason”), to support their activities in respect of the Fund and the other Legg Mason Closed-end Funds.
The Board considered the responsibilities of the Manager and the Sub-Advisers under the Management Agreement and the Sub-Advisory Agreements, respectively, including the Manager’s coordination and oversight of services provided to the Fund by the Sub-Advisers and others and Western Asset’s coordination and oversight of services provided to the Fund by the Non-U.S. Sub-Advisers. The Management Agreement permits the Manager to delegate certain of its responsibilities, including its advisory duties thereunder, provided that the Manager, in each case, will supervise the activities of the delegee. Pursuant to this provision of the Management Agreement, the Manager does not provide day-to-day portfolio management services to the Fund. Rather, portfolio management services for the Fund are provided by Western Asset pursuant to the Sub-Advisory Agreement (the “Western Asset Sub-Advisory Agreement”) between the Manager and Western Asset. The Western Asset Sub-Advisory Agreement permits Western Asset to delegate certain of its responsibilities, including its sub-advisory
|
| Western Asset Inflation Management Fund Inc. |
|
|
duties thereunder, provided that Western Asset, in each case, will supervise the activities of the delegee. Pursuant to this provision of the Western Asset Sub-Advisory Agreement, each Non-U.S. Sub-Adviser helps to provide certain sub-advisory services to the Fund pursuant to a separate Sub-Advisory Agreement with Western Asset.
In reaching its determinations regarding continuation of the Management Agreement and Sub-Advisory Agreements, the Board took into account that Fund shareholders, in pursuing their investment goals and objectives, likely purchased their shares based upon the reputation and the investment style, philosophy and strategy of the Manager and Western Asset, as well as the resources available to the Manager and the Sub-Advisers.
The Board concluded that, overall, the nature, extent and quality of the investment advisory and other services provided to the Fund under the Management Agreement and the Sub-Advisory Agreements have been satisfactory under the circumstances.
Fund performance
The Board received and considered performance information and analyses (the “Lipper Performance Information”) for the Fund, as well as for a group of funds (the “Performance Universe”) selected by Lipper, Inc. (“Lipper”), an independent provider of investment company data. The Board was provided with a description of the methodology Lipper used to determine the similarity of the Fund with the funds included in the Performance Universe. The Performance Universe consisted of the Fund and all leveraged BBB-rated corporate debt closed-end funds, as classified by Lipper, regardless of asset size. The Performance Universe consisted of fourteen funds, including the Fund, for each of the 1- and 3-year periods ended June 30, 2010 and of twelve funds for the 5-year period ended such date. The Board noted that it had received and discussed with the Manager and Western Asset informat ion throughout the year at periodic intervals comparing the Fund’s performance against its benchmarks and its peer funds as selected by Lipper.
The Lipper Performance Information comparing the Fund’s performance to that of the Performance Universe based on net asset value per share showed, among other things, that the Fund’s performance for the 1-year period ended June 30, 2010 was ranked thirteenth among the funds in the Performance Universe for that period and the Fund’s performance for the 3- and 5-year periods ended that date was ranked tenth and ninth, respectively, among the funds in the Performance Universe for these periods. The Fund’s performance for each period was worse than the Performance Universe median for that period. The Board considered the Manager’s explanation for the Fund’s relative underperformance, particularly for the 3- and 5-year periods, and noted that the small number of funds in the Performance Universe made meaningful comparisons difficult. The Board also considered the volatile market
|
| Western Asset Inflation Management Fund Inc. |
|
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Board approval of management and subadvisory agreements (unaudited) (cont’d)
conditions during 2008 and the Fund’s performance in relation to its benchmarks and in absolute terms. In explaining the Fund’s performance relative to its Performance Universe, the Manager noted that high yield and emerging market corporate securities generally performed poorly [during 2008] and that the fund’s exposure to lower tier bank and agency securities also detracted from performance. In 2008, Treasury Inflation-Protected Securities (TIPS) underperformed severely, hurting the Fund’s performance.
Based on its review, which included consideration of all of the factors noted above, the Board concluded that, under the circumstances, continuation of the Management Agreement and the Sub-Advisory Agreements for an additional period not to exceed one year would be in the interests of the Fund and its shareholders, notwithstanding the Fund’s relative underperformance.
Management fees and expense ratios
The Board reviewed and considered the management fee (the “Management Fee”) payable by the Fund to the Manager under the Management Agreement and the sub-advisory fees (the “Sub-Advisory Fees”) payable to the Sub-Advisers under the Sub-Advisory Agreements in light of the nature, extent and overall quality of the management, sub-advisory and other services provided by the Manager and the Sub-Advisers. The Board noted that the Sub-Advisory Fees payable to Western Asset under the Western Asset Sub-Advisory Agreement are paid by the Manager, not the Fund, and, accordingly, that the retention of Western Asset does not increase the fees or expenses otherwise incurred by the Fund’s shareholders. Similarly, the Board noted that the Sub-Advisory Fees payable to each of the Non-U.S. Sub-Advisers under its Sub-Advisory Agreement with Western Asset are paid by Western Asset, not the Fund, and, acco rdingly, that the retention of such Non-U.S. Sub-Adviser does not increase the fees or expenses otherwise incurred by the Fund’s shareholders.
Additionally, the Board received and considered information and analyses prepared by Lipper (the “Lipper Expense Information”) comparing the Management Fee and the Fund’s overall expenses with those of funds in an expense universe (the “Expense Universe”) selected and provided by Lipper. The comparison was based upon the constituent funds’ latest fiscal years. The Expense Universe consisted of the Fund and nine other leveraged BBB-rated corporate debt closed-end funds, as classified by Lipper. The Expense Universe funds had average net assets ranging from $71.3 million to $1.915 billion. Eight of the other funds in the Expense Universe were larger than the Fund and one was smaller.
The Lipper Expense Information comparing the Management Fee as well as the Fund’s actual total expenses to the Fund’s Expense Universe showed, among other things, that the Fund’s contractual Management Fee was ranked in the first quintile of the Expense Universe — second among the ten
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| Western Asset Inflation Management Fund Inc. |
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Expense Universe funds; the Fund’s actual Management Fee (i.e., giving effect to any voluntary fee waivers implemented by the Manager with respect to the Fund and by the managers of the other Expense Universe funds) and the Fund’s actual total expenses each were ranked in the third quintile of the Expense Universe, whether compared on the basis of common assets only or on common and leveraged assets. Among these expense components, only the Fund’s actual total expenses, compared on the basis of common and leveraged assets, were worse than the Expense Universe median. The Manager also noted the small number and varying sizes of funds in the Expense Universe, making meaningful comparisons difficult.
At the Contract Renewal Meeting, the Board considered and approved a request (the “Cost Allocation Request”) from the Manager to allocate to the Fund certain fund accounting and financial reporting costs, previously paid by the Manager on a voluntary basis, in line with industry practice and the terms of the Management Agreement. In doing so, the Board reviewed supporting information and analyses provided by the Manager, including information and analyses as to the impact of the Cost Allocation Request on Fund expenses.
The Board also reviewed Contract Renewal Information regarding fees charged by the Manager to other U.S. clients investing primarily in an asset class similar to that of the Fund, including, where applicable, separate accounts. The Board was advised that the fees paid by such other clients generally are lower, and may be significantly lower, than the Management Fee. The Contract Renewal Information discussed the significant differences in scope of services provided to the Fund and to these other clients, noting that the Fund is provided with administrative services, office facilities, Fund officers (including the Fund’s chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other fund service providers. The Contract Renewal Information included an analysis of complex-wide management fees provided by the Manager . At the Contract Renewal Meeting, the Board noted that the Contract Renewal Information included information regarding management fees paid by open-end mutual funds in the same complex (the “Legg Mason Open-end Funds”) and that such information indicated that the management fees paid by the Legg Mason Closed-end Funds generally were higher than those paid by the Legg Mason Open-end Funds. The Manager, in response, discussed differences between the services provided to the Fund and the other Legg Mason Closed-end Funds and services provided to the Legg Mason Open-end Funds. The Board considered the fee comparisons in light of the different services provided in managing these other types of clients and funds.
Taking all of the above into consideration, the Board determined that the Management Fee and the Sub-Advisory Fees were reasonable in light of the
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| Western Asset Inflation Management Fund Inc. |
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Board approval of management and subadvisory agreements (unaudited) (cont’d)
nature, extent and overall quality of the investment advisory and other services provided to the Fund under the Management Agreement and the Sub-Advisory Agreements.
Manager profitability
The Board, as part of the Contract Renewal Information, received an analysis of the profitability to the Manager and its affiliates in providing services to the Fund for the Manager’s fiscal years ended March 31, 2010 and March 31, 2009. The Board also received profitability information with respect to the Legg Mason fund complex as a whole. In addition, the Board received Contract Renewal Information with respect to the Manager’s revenue and cost allocation methodologies used in preparing such profitability data. In 2007, the Board received a report from an outside consultant that had reviewed the Manager’s methodologies and the Board was assured by the Manager at the Contract Renewal Meeting that there had been no significant changes in those methodologies since the report was rendered. The profitability to each of the Sub-Advisers was not considered to be a material factor in the Boa rd’s considerations since Western Asset’s Sub-Advisory Fees are paid by the Manager and the Sub-Advisory Fees for the Non-U.S. Sub-Advisers, in each case, are paid by Western Asset. The profitability analysis presented to the Board as part of the Contract Renewal Information indicated that profitability to the Manager in providing services to the Fund had decreased by 7 percent over the period covered by the analysis. The Manager presented information to the Board showing that the Cost Allocation Request would increase profitability slightly. However, the Board did not consider profitability to the Manager in providing services to the Fund to be excessive in light of the nature, extent and overall quality of the investment advisory and other services provided to the Fund by the Manager and the Sub-Advisers.
Economies of scale
The Board received and discussed Contract Renewal Information concerning whether the Manager realizes economies of scale if the Fund’s assets grow. The Board noted that because the Fund is a closed-end fund with no current plans to seek additional assets beyond maintaining its dividend reinvestment plan, any significant growth in its assets generally will occur through appreciation in the value of the Fund’s investment portfolio, rather than sales of additional shares in the Fund. The Board determined that the Management Fee structure was appropriate under present circumstances.
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Other benefits to the manager and the sub-advisers
The Board considered other benefits received by the Manager, the Sub-Advisers and their affiliates as a result of their relationship with the Fund and did not regard such benefits as excessive.
* * *
In light of all of the foregoing and other relevant factors, the Board determined that, under the circumstances, continuation of the Management Agreement and the Sub-Advisory Agreements would be in the interests of the Fund and its shareholders and unanimously voted to continue each Agreement for a period of one additional year.
No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve continuation of the Management Agreement and the Sub-Advisory Agreements, and each Board member attributed different weights to the various factors. The Independent Directors were advised by separate independent legal counsel throughout the process. Prior to the Contract Renewal Meeting, the Board received a memorandum prepared by the Manager discussing its responsibilities in connection with the proposed continuation of the Management Agreement and the Sub-Advisory Agreements as part of the Contract Renewal Information and the Independent Directors separately received a memorandum discussing such responsibilities from their independent counsel. Prior to voting, the Independent Directors also discussed the proposed continuation of the Management Agreement and the Sub-Advisory Agreements i n private sessions with their independent legal counsel at which no representatives of the Manager were present.
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| Western Asset Inflation Management Fund Inc. |
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Additional information (unaudited)
Information about Directors and Officers
The business and affairs of Western Asset Inflation Management Fund Inc. (the “Fund”) are conducted by management under the supervision and subject to the direction of its Board of Directors. The business address of each Director is c/o R. Jay Gerken, 620 Eighth Avenue, New York, New York 10018. Information pertaining to the Directors and officers of the Fund is set forth below.
Independent Directors†:
Carol L. Colman |
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Year of birth |
| 1946 |
Position(s) held with Fund1 |
| Director and Member of the Nominating and Audit Committees, Class I |
Term of office1 and length of time served |
| Since 2004 |
Principal occupation(s) during past five years |
| President, Colman Consulting Company (consulting) |
Number of portfolios in fund complex overseen by |
| 24 |
Other board memberships held by Director |
| None |
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Daniel P. Cronin |
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Year of birth |
| 1946 |
Position(s) held with Fund1 |
| Director and Member of the Nominating and Audit Committees, Class I |
Term of office1 and length of time served |
| Since 2004 |
Principal occupation(s) during past five years |
| Retired; formerly, Associate General Counsel, Pfizer Inc. (prior to and including 2004) |
Number of portfolios in fund complex overseen by |
| 24 |
Other board memberships held by Director |
| None |
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Paolo M. Cucchi |
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|
Year of birth |
| 1941 |
Position(s) held with Fund1 |
| Director and Member of the Nominating and Audit Committees, Class I |
Term of office1 and length of time served |
| Since 2007 |
Principal occupation(s) during past five years |
| Professor of French and Italian at Drew University; formerly, Vice President and Dean of College of Liberal Arts at Drew University (1984 to 2009) |
Number of portfolios in fund complex overseen by |
| 24 |
Other board memberships held by Director |
| None |
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| Western Asset Inflation Management Fund Inc. |
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Independent Directors cont’d
Leslie H. Gelb |
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Year of birth |
| 1937 |
Position(s) held with Fund1 |
| Director and Member of the Nominating and Audit Committees, Class II |
Term of office1 and length of time served |
| Since 2004 |
Principal occupation(s) during past five years |
| President Emeritus and Senior Board Fellow (since 2003), The Council on Foreign Relations; formerly, President, (prior to 2003), The Council on Foreign Relations; formerly, Columnist, Deputy Editorial Page Editor and Editor, Op-Ed Page, The New York Times |
Number of portfolios in fund complex overseen by |
| 24 |
Other board memberships held by Director |
| Director of two registered investment companies advised by Blackstone Asia Advisors LLC: India Fund, Inc. and Asia Tigers Fund, Inc. (since 1994) |
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William R. Hutchinson |
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Year of birth |
| 1942 |
Position(s) held with Fund1 |
| Director and Member of the Nominating and Audit Committees, Class II |
Term of office1 and length of time served |
| Since 2004 |
Principal occupation(s) during past five years |
| President, W.R. Hutchinson & Associates Inc. (Consulting) (since 2001) |
Number of portfolios in fund complex overseen by |
| 24 |
Other board memberships held by Director |
| Director (Non-Executive Chairman of the Board (since December 1, 2009)), Associated Banc Corp. (banking) (since 1994) |
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Riordan Roett |
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Year of birth |
| 1938 |
Position(s) held with Fund1 |
| Director and Member of the Nominating and Audit Committees, Class III |
Term of office1 and length of time served |
| Since 2004 |
Principal occupation(s) during past five years |
| The Sarita and Don Johnston Professor of Political Science and Director of Western Hemisphere Studies, Paul H. Nitze School of Advanced International Studies, The John Hopkins University (since 1973) |
Number of portfolios in fund complex overseen by |
| 24 |
Other board memberships held by Director |
| None |
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| Western Asset Inflation Management Fund Inc. |
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Additional information (unaudited) (cont’d)
Information about Directors and Officers
Independent Directors cont’d
Jeswald W. Salacuse |
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|
Year of birth |
| 1938 |
Position(s) held with Fund1 |
| Director and Member of the Nominating and Audit Committees, Class III |
Term of office1 and length of time served |
| Since 2004 |
Principal occupation(s) during past five years |
| Henry J. Braker Professor of Commercial Law, The Fletcher School of Law and Diplomacy, Tufts University (since 1986); President and Member, Arbitration Tribunal, World Bank/ICSID (since 2004) |
Number of portfolios in fund complex overseen by |
| 24 |
Other board memberships held by Director |
| Director of two registered investment companies advised by Blackstone Asia Advisors LLC; India Fund, Inc. and Asia Tigers Fund, Inc. (since 1993) |
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Interested Director and Officer: |
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R. Jay Gerken, CFA2 |
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Year of birth |
| 1951 |
Position(s) held with Fund1 |
| Director, Chairman, President and Chief Executive Officer, Class II |
Term of office1 and length of time served |
| Since 2004 |
Principal occupation(s) during past five years |
| Managing Director of Legg Mason & Co., LLC (“Legg Mason & Co.”) (since 2005); Officer and Trustee/Director of 149 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); President and Chief Executive Officer (“CEO”) of LMPFA (since 2006); President and CEO of Smith Barney Fund Management LLC (“SBFM”) and Citi Fund Management Inc. (“CFM”) (formerly registered investment advisers) (since 2002); formerly, Chairman, President and CEO, Travelers Investment Adviser Inc. (prior to 2005) |
Number of portfolios in fund complex overseen by |
| 136 |
Other board memberships held by Director |
| Former Trustee, Consulting Group Capital Markets Funds (11 funds) (prior to 2006) |
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Additional Officers:
Ted P. Becker |
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Legg Mason 620 Eighth Avenue, New York, NY 10018 | ||
Year of birth |
| 1951 |
Position(s) held with Fund1 |
| Chief Compliance Officer |
Term of office1 and length of time served |
| Since 2006 |
Principal occupation(s) during past five years |
| Director of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance of Legg Mason & Co. (since 2005); Chief Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006) |
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John Chiota |
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Legg Mason 100 First Stamford Place, Stamford, CT 06902 | ||
Year of birth |
| 1968 |
Position(s) with Fund1 |
| Identity Theft Prevention Officer |
Term of office1 and length of time served |
| Since 2008 |
Principal occupation(s) during past five years |
| Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2008); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006); Vice President of Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (prior to 2006); formerly, Chief Anti-Money Laundering Compliance Officer of TD Waterhouse (prior to 2004) |
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Robert I. Frenkel |
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Legg Mason 100 First Stamford Place, Stamford, CT 06902 | ||
Year of birth |
| 1954 |
Position(s) held with Fund1 |
| Secretary and Chief Legal Officer |
Term of office1 and length of time served |
| Since 2004 |
Principal occupation(s) during past five years |
| Vice President and Deputy General Counsel of Legg Mason (since 2006); Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006) |
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Additional information (unaudited) (cont’d)
Information about Directors and Officers
Additional Officers cont’d
Thomas C. Mandia |
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Legg Mason 100 First Stamford Place, Stamford, CT 06902 | ||
Year of birth |
| 1962 |
Position(s) held with Fund1 |
| Assistant Secretary |
Term of office1 and length of time served |
| Since 2006 |
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 SBFM and CFM (since 2002) |
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Kaprel Ozsolak |
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Legg Mason 55 Water Street, New York, NY 10041 | ||
Year of birth |
| 1965 |
Position(s) held with Fund1 |
| Chief Financial Officer |
Term of office1 and length of time served |
| Since 2007 |
Principal occupation(s) during past five years |
| Director of Legg Mason & Co. (since 2005); Chief Financial Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007) and Legg Mason & Co. predecessors (prior to 2007); formerly, Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2010) and Legg Mason & Co. predecessors (prior to 2005); formerly, Controller of certain mutual funds associated with Legg Mason & Co. predecessors (prior to 2004) |
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Steven Frank |
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Legg Mason 55 Water Street, New York, NY 10041 | ||
Year of birth |
| 1967 |
Position(s) held with Fund1 |
| Treasurer |
Term of office1 and length of time served |
| Since 2010 |
Principal occupation(s) during past five years |
| Vice President of Legg Mason & Co. and Legg Mason & Co. predecessors (since 2002); Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2010); formerly, Controller of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2010); formerly, Assistant Controller of certain mutual funds associated with Legg Mason & Co. predecessors (prior to 2005) |
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Additional Officers cont’d
Jeanne M. Kelly |
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Legg Mason 620 Eighth Avenue, New York, NY 10018 | ||
Year of birth |
| 1951 |
Position(s) with Fund1 |
| Senior Vice President |
Term of office1 and length of time served |
| Since 2007 |
Principal occupation(s) during past five years |
| Senior Vice President of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006); Managing Director of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005) |
† | Directors who are not “interested persons” of the Fund within the meaning of Section 2(a)(19) of the 1940 Act. |
1 | The Fund’s Board of Directors is divided into three classes: Class I, Class II and Class III. The terms of office of the Class I, II and III Directors expire at the Annual Meetings of Stockholders in the year 2012, year 2013 and year 2011, respectively, or thereafter in each case when their respective successors are duly elected and qualified. The Fund’s executive officers are chosen each year at the first meeting of the Fund’s Board of Directors following the Annual Meeting of Stockholders, to hold office until the meeting of the Board following the next Annual Meeting of Stockholders and until their successors are duly elected and qualified. |
2 | Mr. Gerken is an “interested person” of the Fund as defined in the 1940 Act because Mr. Gerken is an officer of LMPFA and certain of its affiliates. |
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Annual chief executive officer and chief financial officer certifications (unaudited)
The Fund’s Chief Executive Officer (“CEO”) has submitted to the NYSE the required annual certification and the Fund also has included the certifications of the Fund’s CEO and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act in the Fund’s Form N-CSR filed with the SEC for the period of this report.
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| Western Asset Inflation Management Fund Inc. |
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Dividend reinvestment plan (unaudited)
Unless you elect to receive distributions in cash (i.e., opt-out), all distributions on your Common Shares will be automatically reinvested by American Stock Transfer and Trust Company, as agent for the Common Shareholders (the “Plan Agent”), in additional Common Shares under the Dividend Reinvestment Plan (the “Plan”). You may elect not to participate in the Plan by contacting the Plan Agent.
If you do not participate, you will receive all cash distributions paid by check mailed directly to you by American Stock Transfer and Trust Company, as dividend paying agent.
If you participate in the Plan, the number of Common Shares you will receive will be determined as follows:
(1) If the market price of the Common Shares on the record date (or, if the record date is not a New York Stock Exchange trading day, the immediately preceding trading day) for determining shareholders eligible to receive the relevant distribution (the “determination date”) is equal to or exceeds 98% of the net asset value per share of the Common Shares, the Fund will issue new Common Shares at a price equal to the greater of (a) 98% of the net asset value per share at the close of trading on the Exchange on the determination date or (b) 95% of the market price per share of the Common Shares on the determination date.
(2) If 98% of the net asset value per share of the Common Shares exceeds the market price of the Common Shares on the determination date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Shares in the open market, on the Exchange or elsewhere, for your account as soon as practicable commencing on the trading day following the determination date and terminating no later than the earlier of (a) 30 days after the distribution payment date, or (b) the record date for the next succeeding distribution to be made to the Common Shareholders; except when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price rises so that it equals or exceeds 98% of the net asset value per share of the Common Shares at the close of trading on the Exchange on the determination date before the Plan Agent has c ompleted the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases, the Plan Agent will cease purchasing Common Shares in the open market and the Fund shall issue the remaining Common Shares at a price per share equal to the greater of (a) 98% of the net asset value per share at the close of trading on the Exchange on the determination date or (b) 95% of the then current market price per share.
The Plan Agent maintains all participants’ accounts in the Plan and gives written confirmation of all transactions in the accounts, including information you
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| Western Asset Inflation Management Fund Inc. |
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Dividend reinvestment plan (unaudited) (cont’d)
may need for tax records. Common Shares in your account will be held by the Plan Agent in non-certificated form. Any proxy you receive will include all Common Shares you have received under the Plan.
You may withdraw from the Plan by notifying the Plan Agent in writing at 59 Maiden Lane, New York, New York 10038 or by calling the Plan Agent at 1-888-888-0151 or by accessing the Plan Agent’s website at www.amstock.com. Such withdrawal will be effective immediately if notice is received by the Plan Agent not less than ten business days prior to any distribution record date; otherwise such withdrawal will be effective as soon as practicable after the Plan Agent’s investment of the most recently declared distribution on the Common Shares. The Plan may be terminated by the Fund upon notice in writing mailed to Common Shareholders at least 30 days prior to the record date for the payment of any distribution by the Fund for which the termination is to be effective. Upon any termination, you will be sent a certificate or certificates for the full Common Shares held for you under the Plan and cash for any fractional Common Shares. You may elect to notify the Plan Agent in advance of such termination to have the Plan Agent sell part or all of your shares on your behalf. You will be charged a service charge and the Plan Agent is authorized to deduct brokerage charges actually incurred for this transaction from the proceeds.
There is no service charge for reinvestment of your distributions in Common Shares. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions will be automatically reinvested in additional Common Shares, this allows you to add to your investment through dollar cost averaging, which may lower the average cost of your Common Shares over time. Dollar cost averaging is a technique for lowering the average cost per share over time if the Fund’s net asset value declines. While dollar cost averaging has definite advantages, it cannot assure profit or protect against loss in declining markets. Investors will be subject to income tax on amounts reinvested under the plan.
Automatically reinvesting distributions does not mean that you do not have to pay income taxes due upon receiving distributions.
The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of Directors, the change is warranted. There is no direct service charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants. Additional information about the Plan and your account may be obtained from the Plan Agent at 1-888-888-0151.
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Important tax information (unaudited)
The following information is provided with respect to the distributions paid during the taxable period ended December 31, 2010:
Record date: |
| Monthly |
| Monthly |
Payable date: |
| January 2010 |
| February 2010 through |
Ordinary income: |
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Qualified dividend income for individuals |
| 0.05% |
| 0.11% |
Dividends qualifying for the dividends received deduction for corporations |
| 0.05% |
| 0.11% |
Interest from Federal Obligations* |
| 59.72% |
| 82.24% |
Tax return of capital |
| 0.49% |
| 3.56% |
* This Fund has met the quarterly asset requirements for California, Connecticut and New York Resident Shareholders.
The law varies in each state as to whether and what percentage of dividend income attributable to Federal obligations is exempt from state income tax. We recommend that you consult with your tax adviser to determine if any portion of the dividends you received is exempt from state income taxes.
Please retain this information for your records.
Western Asset
Inflation Management Fund Inc.
Directors |
| Western Asset Inflation Management Fund Inc. |
| Independent registered public accounting firm |
Carol L. Colman |
| 55 Water Street |
| KPMG LLP |
Daniel P. Cronin |
| New York, NY 10041 |
| 345 Park Avenue |
Paolo M. Cucchi |
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| New York, NY 10154 |
Leslie H. Gelb |
| Investment manager |
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R. Jay Gerken, CFA |
| Legg Mason Partners Fund Advisor, LLC |
| Legal counsel |
Chairman |
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| Simpson Thacher & Bartlett LLP |
William R. Hutchinson |
| Subadvisers |
| 425 Lexington Avenue |
Riordan Roett |
| Western Asset Management Company |
| New York, NY 10017 |
Jeswald W. Salacuse |
| Western Asset Management Company Limited |
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| Western Asset Management Company Pte. Ltd. |
| New York Stock Exchange Symbol |
Officers |
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| IMF |
R. Jay Gerken, CFA |
| Custodian |
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President and Chief Executive Officer |
| State Street Bank and Trust Company |
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Kaprel Ozsolak |
| 1 Lincoln Street |
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Chief Financial Officer |
| Boston, MA 02111 |
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Ted P. Becker |
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Chief Compliance Officer |
| Transfer agent |
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John Chiota |
| American Stock Transfer & Trust Company |
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Identity Theft Prevention Officer |
| 59 Maiden Lane |
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Robert I. Frenkel |
| New York, NY 10038 |
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Secretary and Chief Legal Officer |
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Thomas C. Mandia |
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Assistant Secretary |
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Steven Frank |
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Treasurer |
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Jeanne M. Kelly |
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Senior Vice President |
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Privacy policy
We are committed to keeping nonpublic personal information about you secure and confidential. This notice is intended to help you understand how we fulfill this commitment. From time to time, we may collect a variety of personal information about you, including:
· Information we receive from you on applications and forms, via the telephone, and through our websites;
· Information about your transactions with us, our affiliates, or others (such as your purchases, sales, or account balances); and
· Information we receive from consumer reporting agencies.
We do not disclose nonpublic personal information about our customers or former customers, except to our affiliates (such as broker-dealers or investment advisers within the Legg Mason family of companies) or as is otherwise permitted by applicable law or regulation. For example, we may share this information with others in order to process your transactions or service an account. We may also provide this information to companies that perform marketing services on our behalf, such as printing and mailing, or to other financial institutions with whom we have joint marketing agreements. When we enter into such agreements, we will require these companies to protect the confidentiality of this information and to use it only to perform the services for which we hired them.
With respect to our internal security procedures, we maintain physical, electronic, and procedural safeguards to protect your nonpublic personal information, and we restrict access to this information.
If you decide at some point either to close your account(s) or become an inactive customer, we will continue to adhere to our privacy policies and practices with respect to your nonpublic personal information.
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| NOT PART OF THE ANNUAL REPORT |
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Western Asset Inflation Management Fund Inc.
Western Asset Inflation Management Fund Inc.
55 Water Street
New York, NY 10041
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time, the Fund may purchase, at market prices, shares of its common stock in the open market.
The Fund files its 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 Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Fund, shareholders can call 1-888-777-0102.
Information on how the Fund 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 Fund uses to determine how to vote proxies relating to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102, (2) on the Fund’s website at www.leggmason.com/cef and (3) on the SEC’s website at www.sec.gov.
This report is transmitted to the shareholders of Western Asset Inflation Management Fund Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or any securities mentioned in the report.
American Stock
Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
WAS0021 2/11 SR11-1308
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 Directors of the registrant has determined that William R. Hutchinson, the chairman of the Board’s Audit Committee, possesses the attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert,” and has designated Mr. Hutchinson as the audit committee financial expert. Mr. Hutchinson is an “independent” Director pursuant to paragraph (a)2) of Item 3 to Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
a) Audit Fees. The aggregate fees billed in the previous fiscal years ending December 31, 2009 and December 31, 2010 (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 $ 59,200 December 31, 2009 and $29,600 in December 31, 2010.
b) Audit-Related Fees. There were no fees billed in the Reporting Periods for assurance and related services by the Auditor that are reasonably related to the performance of the audit of the Registrant’s financial statements were $19 in 2009 and $0 in 2010.
In addition, there were no Audit-Related Fees billed in the Reporting Period for assurance and related services by the Auditor to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Western Asset Inflation Management Fund Inc. (“service affiliates”), that were reasonably related to the performance of the annual audit of the service affiliates. Accordingly, there were no such fees that required pre-approval by the Audit Committee for the Reporting Periods.
(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $3,100 in December 31 2009 and $3,100 in December 31, 2010. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.
There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee.
d) All Other Fees. There were no other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item 4 for the Western Asset Inflation Management Fund Inc.
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 Western Asset Inflation Management Fund Inc. 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 Western Asset Inflation Management Fund Inc., the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 100% for December 31, 2009 and December 31, 2010; Tax Fees were 100% and 100% for December 31, 2009 and December 31, 2010; and Other Fees were 100% and 100% for December 31, 2009 and December 31, 2010.
(f) N/A
(g) Non-audit fees billed by the Auditor for services rendered to Western Asset Inflation Management Fund Inc., LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Western Asset Inflation Management Fund Inc. during the reporting period were $0 in 2010.
(h) Yes. Western Asset Inflation Management Fund Inc.’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 Western Asset Inflation Management Fund Inc. or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a)Registrant has a separately-designated standing Audit Committee established in accordance with Section 3(a)58(A) of the Exchange Act. The Audit Committee consists of the following Board members:
William R. Hutchinson
Paolo M. Cucchi
Daniel P. Cronin
Carol L. Colman
Leslie H. Gelb
Dr. Riordan Roett
Jeswald W. Salacuse
b) Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Included herein under Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING PLICIES AND PROCDURES FOR CLOSE-END MANAGEMENT INVESTMENT COMPANIES.
Proxy Voting Guidelines and Procedures
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) delegates the responsibility for voting proxies for the fund to the subadviser through its contracts with the subadviser. The subadviser will use its own proxy voting policies and procedures to vote proxies. Accordingly, LMPFA does not expect to have proxy-voting responsibility for the fund. Should LMPFA become responsible for voting proxies for any reason, such as the inability of the subadviser to provide investment advisory services, LMPFA shall utilize the proxy voting guidelines established by the most recent subadviser to vote proxies until a new subadviser is retained.
The subadviser’s Proxy Voting Policies and Procedures govern in determining how proxies relating to the fund’s portfolio securities are voted and are provided below. Information regarding how each fund voted proxies (if any) relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge (1) by calling 888-425-6432, (2) on the fund’s website at http://www.leggmason.com/individualinvestors and (3) on the SEC’s website at http://www.sec.gov.
Background
Western Asset Management Company (“WA”), Western Asset Management Company Limited (“WAML”) and Western Asset Management Company Pte. Ltd. (“WAMC”) (together “Western Asset”) have adopted
and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). Our authority to vote the proxies of our clients is established through investment management agreements or comparable documents, and our proxy voting guidelines have been tailored to reflect these specific contractual obligations. In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.
In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (except that WA, WAML and WAMC may so consult and agree with each other) regarding the voting of any securities owned by its clients.
Policy
Western Asset’s proxy voting procedures are designed and implemented in a way that is reasonably expected to ensure that proxy matters are handled in the best interest of our clients. While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on a case-by-case basis, taking into consideration Western Asset’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent Western Asset deems appropriate).
Procedures
Responsibility and Oversight
The Western Asset Compliance Department (“Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.
Client Authority
Prior to August 1, 2003, all existing client investment management agreements (“IMAs”) will be reviewed to determine whether Western Asset has authority to vote client proxies. At account start-up, or upon amendment of an IMA, the applicable client IMA are similarly reviewed. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Client Account Transition Team maintains a matrix of proxy voting authority.
Proxy Gathering
Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Prior to August 1, 2003, Proxy Recipients of existing clients will be reminded of the appropriate routing to Corporate Actions for proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than
Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.
Proxy Voting
Once proxy materials are received by Corporate Actions, they are forwarded to the Compliance Department for coordination and the following actions:
a. Proxies are reviewed to determine accounts impacted.
b. Impacted accounts are checked to confirm Western Asset voting authority.
c. Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.)
d. If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party.
e. Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Compliance Department.
f. Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials.
Timing
Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.
Recordkeeping
Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:
a. A copy of Western Asset’s policies and procedures.
b. Copies of proxy statements received regarding client securities.
c. A copy of any document created by Western Asset that was material to making a decision how to vote proxies.
d. Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests.
e. A proxy log including:
1. Issuer name;
2. Exchange ticker symbol of the issuer’s shares to be voted;
3. Council on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted;
4. A brief identification of the matter voted on;
5. Whether the matter was proposed by the issuer or by a shareholder of the issuer;
6. Whether a vote was cast on the matter;
7. A record of how the vote was cast; and
8. Whether the vote was cast for or against the recommendation of the issuer’s management team.
Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.
Disclosure
Part II of the WA Form ADV, the WAML Form ADV and WAMC Form ADV, each, contain a description of Western Asset’s proxy policies. Prior to August 1, 2003, Western Asset will deliver Part II of its revised Form ADV to all existing clients, along with a letter identifying the new disclosure. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.
Conflicts of Interest
All proxies are reviewed by the Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:
1. Whether Western Asset (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company;
2. Whether Western Asset or an officer or director of Western Asset or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and
3. Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders.
Voting Guidelines
Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.
Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.
I. Board Approved Proposals
The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:
1. Matters relating to the Board of Directors
Western Asset votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:
a. Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors.
b. Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director.
c. Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences.
d. Votes are cast on a case-by-case basis in contested elections of directors.
2. Matters relating to Executive Compensation
Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:
a. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution.
b. Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options.
c. Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price.
d. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares
purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less.
3. Matters relating to Capitalization
The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.
a. Western Asset votes for proposals relating to the authorization of additional common stock.
b. Western Asset votes for proposals to effect stock splits (excluding reverse stock splits).
c. Western Asset votes for proposals authorizing share repurchase programs.
4. Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions
Western Asset votes these issues on a case-by-case basis on board-approved transactions.
5. Matters relating to Anti-Takeover Measures
Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:
a. Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans.
b. Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions.
6. Other Business Matters
Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.
a. Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or bylaws.
b. Western Asset votes against authorization to transact other unidentified, substantive business at the meeting.
II. Shareholder Proposals
SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:
1. Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans.
2. Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals.
3. Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors.
III. Voting Shares of Investment Companies
Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.
1. Western Asset votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios.
2. Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided.
IV. Voting Shares of Foreign Issuers
In the event Western Asset is required to vote on securities held in foreign issuers — i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.
1. Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management.
2. Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees.
3. Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated.
4. Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1):
NAME AND |
| LENGTH OF |
| PRINCIPAL OCCUPATION(S) DURING |
|
|
|
|
|
S. Kenneth Leech Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 |
| Since 2006 |
| Co-portfolio manager of the fund; Chief Investment Officer of Western Asset from 1998 to 2008; Senior Advisor/Chief Investment Officer Emeritus of Western Asset. |
|
|
|
|
|
Stephen A. Walsh Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 |
| Since 2006 |
| Co-portfolio manager of the fund; Deputy Chief Investment Officer of Western Asset from 2000 to 2008; Chief Investment Officer of Western Asset since 2008. |
|
|
|
|
|
Paul Wynn Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 |
| Since 2010 |
| Co-portfolio manager of the fund; portfolio manager at Western Asset Management Company Limited for more than five years. |
|
|
|
|
|
Peter H. Stutz Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 |
| Since 2006 |
| Co-portfolio manager of the fund; portfolio manager at Western Asset since 1997. |
(a)(2): DATA TO BE PROVIDED BY FINANCIAL CONTROL
The following tables set forth certain additional information with respect to the fund’s portfolio managers for the fund. Unless noted otherwise, all information is provided as of December 31, 2010.
Other Accounts Managed by Portfolio Managers
The table below identifies the number of accounts (other than the fund) for which the fund’s portfolio managers have day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles, and other
accounts. For each category, the number of accounts and total assets in the accounts where fees are based on performance is also indicated.
|
| Registered |
| Other Pooled |
|
|
Portfolio |
| Investment |
| Investment |
| Other |
Manager(s) |
| Companies |
| Vehicles |
| Accounts |
|
|
|
|
|
|
|
S. Kenneth Leech‡ |
| 103 registered investment companies with $169.5 billion in total assets under management |
| 215 Other pooled investment vehicles with $109.3 billion in assets under management* |
| 780 Other accounts with $175.0 on in total assets under management** |
|
|
|
|
|
|
|
Stephen A. Walsh‡ |
| 103 registered investment companies with $169.5 billion in total assets under management |
| 215 Other pooled investment vehicles with $109.3 billion in assets under management* |
| 780 Other accounts with $175.0 billion in total assets under management** |
|
|
|
|
|
|
|
Paul Wynn‡ |
| 5 registered investment Companies with $1.8 billion in total assets Under management |
| 2 Other pooled investment vehicles with $0.1 billion in assets under management |
| 9 Other accounts with $3.2 billion in total assets under management*** |
|
|
|
|
|
|
|
Peter H. Stutz‡ |
| 5 registered investment Companies with $1.8 billion in total assets Under management |
| 2 Other pooled investment vehicles with $30 million in assets under management |
| 14 Other accounts with $3.0 billion in total assets under management**** |
* | Includes 7 accounts managed, totaling $1.2 billion, for which advisory fee is performance based. |
** | Includes 81 accounts managed, totaling $19.4 billion, for which advisory fee is performance based. |
*** | Includes 1 account managed, totaling $0.4 billion, for which advisory fee is performance based. |
**** | Includes 1 account managed, totaling $0.2 billion, for which advisory fee is performance based. |
‡ The numbers above reflect the overall number of portfolios managed by employees of Western Asset Management Company (“Western Asset”). Mr. Leech and Mr. Walsh are involved in the management of all the Firm’s portfolios, but they are not solely responsible for particular portfolios. Western Asset’s investment discipline emphasizes a team approach that combines the efforts of groups of specialists working in different market sectors. They are responsible for overseeing implementation of Western Asset’s overall investment ideas and coordinating the work of the various sector teams. This structure ensures that client portfolios benefit from a consensus that draws on the expertise of all team members.
(a)(3): Portfolio Manager Compensation
With respect to the compensation of the portfolio managers, Western Asset’s compensation system assigns each employee a total compensation range, which is derived from annual market surveys that benchmark each role with its job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market value of their skills, experience, and ability to produce desired results. Standard compensation includes competitive base salaries, generous employee benefits, and a retirement plan.
In addition, the subadviser’s employees are eligible for bonuses. These are structured to closely align the interests of employees with those of the subadviser, and are determined by the professional’s job
function and pre-tax performance as measured by a formal review process. All bonuses are completely discretionary. The principal factor considered is a portfolio manager’s investment performance versus appropriate peer groups and benchmarks (e.g., a securities index and with respect to a fund, the benchmark set forth in the fund’s Prospectus to which the fund’s average annual total returns are compared or, if none, the benchmark set forth in the fund’s annual report). Performance is reviewed on a 1, 3 and 5 year basis for compensation—with 3 years having the most emphasis. The subadviser may also measure a portfolio manager’s pre-tax investment performance against other benchmarks, as it determines appropriate. Because portfolio managers are generally responsible for multiple accounts (including the funds) with similar investment strategies, they are generally compensated on the performance of the aggregate group of similar accounts, rather than a specific account. Other factors that may be considered when making bonus decisions include client service, business development, length of service to the subadviser, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to the subadviser’s business.
Finally, in order to attract and retain top talent, all professionals are eligible for additional incentives in recognition of outstanding performance. These are determined based upon the factors described above and include Legg Mason stock options and long-term incentives that vest over a set period of time past the award date.
Potential Conflicts of Interest
Conflicts of Interest
The manager, subadvisers and portfolio managers have interests which conflict with the interests of the fund. There is no guarantee that the policies and procedures adopted by the manager, the subadvisers and the fund will be able to identify or mitigate these conflicts of interest.
Some examples of material conflicts of interest include:
Allocation of Limited Time and Attention. A portfolio manager who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds and/or accounts. A portfolio manager may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those funds and accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. Such a portfolio manager may make general determinations across multiple funds, rather than tailoring a unique approach for each fund. The effects of this conflict may be more pronounced where funds and/or accounts overseen by a particular portfolio manager have different investment strategies.
Allocation of Limited Investment Opportunities; Aggregation of Orders. If a portfolio manager identifies a limited investment opportunity that may be suitable for multiple funds and/or accounts, the opportunity may be allocated among these several funds or accounts, which may limit the fund’s ability to take full advantage of the investment opportunity. Additionally, a subadviser may aggregate transaction orders for multiple accounts for purpose of execution. Such aggregation may cause the price or brokerage costs to be less favorable to a particular client than if similar transactions were not being executed concurrently for other accounts. In addition, a subadviser’s trade allocation policies may result in the fund’s orders not being fully executed or being delayed in execution.
Pursuit of Differing Strategies. At times, a portfolio manager may determine that an investment opportunity may be appropriate for only some of the funds and/or accounts for which he or she exercises investment responsibility, or may decide that certain of the funds and/or accounts should take differing positions with respect to a particular security. In these cases, the portfolio manager may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and/or accounts.
For example, a portfolio manager may determine that it would be in the interest of another account to sell a security that the fund holds long, potentially resulting in a decrease in the market value of the security held by the fund.
Cross Trades. Portfolio managers may manage funds that engage in cross trades, where one of the manager’s funds or accounts sells a particular security to another fund or account managed by the same manager. Cross trades may pose conflicts of interest because of, for example, the possibility that one account sells a security to another account at a higher price than an independent third party would pay or otherwise enters into a transaction that it would not enter into with an independent party, such as the sale of a difficult-to-obtain security.
Selection of Broker/Dealers. Portfolio managers may select or influence the selection of the brokers and dealers that are used to execute securities transactions for the funds and/or accounts that they supervise. In addition to executing trades, some brokers and dealers provide subadvisers with brokerage and research services, These services may be taken into account in the selection of brokers and dealers whether a broker is being selected to effect a trade on an agency basis for a commission or (as is normally the case for the funds) whether a dealer is being selected to effect a trade on a principal basis. This may result in the payment of higher brokerage fees and/or execution at a less favorable price than might have otherwise been available. The services obtained may ultimately be more beneficial to certain of the manager’s funds or accounts than to others (but not necessarily to the funds that pay the increased commission or incur the less favorable execution). A decision as to the selection of brokers and dealers could therefore yield disproportionate costs and benefits among the funds and/or accounts managed.
Variation in Financial and Other Benefits. A conflict of interest arises where the financial or other benefits available to a portfolio manager differ among the funds and/or accounts that he or she manages. If the amount or structure of the investment manager’s management fee and/or a portfolio manager’s compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the portfolio manager might be motivated to help certain funds and/or accounts over others. Similarly, the desire to maintain assets under management or to enhance the portfolio manager’s performance record or to derive other rewards, financial or otherwise, could influence the portfolio manager in affording preferential treatment to those funds and/or accounts that could most significantly benefit the portfolio manager. A portfolio manager may, for example, have an incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor such funds and/or accounts. Also, a portfolio manager’s or the manager’s or a subadviser’s desire to increase assets under management could influence the portfolio manager to keep a fund open for new investors without regard to potential benefits of closing the fund to new investors. Additionally, the portfolio manager might be motivated to favor funds and/or accounts in which he or she has an ownership interest or in which the investment manager and/or its affiliates have ownership interests. Conversely, if a portfolio manager does not personally hold an investment in the fund, the portfolio manager’s conflicts of interest with respect to the fund may be more acute.
Related Business Opportunities. The investment manager or its affiliates may provide more services (such as distribution or recordkeeping) for some types of funds or accounts than for others. In such cases, a portfolio manager may benefit, either directly or indirectly, by devoting disproportionate attention to the management of funds and/or accounts that provide greater overall returns to the investment manager and its affiliates.
(a)(4): Portfolio Manager Securities Ownership
The table below identifies the dollar range of securities beneficially owned by each portfolio managers as of December 31, 2010.
Portfolio Manager(s) |
| Dollar Range of |
S. Kenneth Leech |
| A |
Stephen A. Walsh |
| A |
Peter H. Stutz |
| A |
Paul Wynn |
| A |
Dollar Range ownership is as follows:
A: none
B: $1 - $10,000
C: 10,001 - $50,000
D: $50,001 - $100,000
E: $100,001 - $500,000
F: $500,001 - $1 million
G: over $1 million
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 registrant’s last fiscal half-year (the registrant’s second fiscal half-year in the case of an annual 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.
Western Asset Inflation Management Fund Inc.
By: | /s/ R. Jay Gerken |
|
| (R. Jay Gerken) |
|
| Chief Executive Officer of |
|
| Western Asset Inflation Management Fund Inc. |
|
|
|
|
Date: | March 1, 2011 |
|
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: | /s/ R. Jay Gerken |
|
| (R. Jay Gerken) |
|
| Chief Executive Officer of |
|
| Western Asset Inflation Management Fund Inc. |
|
|
|
|
Date: | March 1, 2011 |
|
By: | /s/ Kaprel Ozsolak |
|
| (Kaprel Ozsolak) |
|
| Chief Financial Officer of |
|
| Western Asset Inflation Management Fund Inc. |
|
|
|
|
Date: | March 1, 2011 |
|