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: 811-05029
Name of Fund: Legg Mason Income Trust, Inc.
Address of Principal Executive Offices: 100 Light Street, Baltimore, MD 21202
Name and address of agent for service:
Richard M. Wachterman, Esq.
Legg Mason Wood Walker, Incorporated
100 Light Street
Baltimore, MD 21202
Registrant’s telephone number, including area code: (410) 539-0000
Date of fiscal year end: December 31, 2004
Date of reporting period: December 31, 2004
Annual Report to Shareholders |
Legg Mason | |
Income Trust, Inc. |
December 31, 2004 | |
To Our Shareholders,
We are pleased to provide you with Legg Mason Income Trust’s annual report, combining reports for the Legg Mason Core Bond Fund, High Yield Portfolio, Investment Grade Income Portfolio, Limited Duration Bond Portfolio and the U.S. Government Money Market Portfolio.
Net Asset Value | ||||||||||||
SEC YieldA | Average Life | Per Share | ||||||||||
Core Bond | 2.50% | 5.85 years | $ | 9.95 | ||||||||
High Yield | 5.87% | 5.42 years | $ | 9.39 | ||||||||
Investment Grade | 4.06% | 9.23 years | $ | 10.81 | ||||||||
Limited DurationB | 2.44% | 3.23 years | $ | 10.36 | ||||||||
U.S. Government Money MarketC | 1.38% | 51 days | $ | 1.00 |
For the year ended December 31, 2004, total returns for the Primary Class of shares of the High Yield, Investment Grade and Limited Duration Portfolios were +10.51%, +6.29%, and +1.89%, respectively. Total returns for the Institutional Class of shares were +11.15%, +6.85%, and +2.41%, respectively. The Core Bond Fund’s Primary Class of Shares, which commenced operations on February 27, 2004, had a total return of +1.90% for the period from its inception to December 31, 2004. (Total return measures investment performance in terms of appreciation or depreciation in a portfolio’s net asset value per share, plus dividends and any capital gain distributions.)
PricewaterhouseCoopers LLP, Income Trust’s independent registered public accounting firm, has completed its annual examination, and audited financial statements for the fiscal year ended December 31, 2004, are included in this report.
Many of our shareholders regularly add to their Primary Class Fund holdings by authorizing automatic, monthly transfers from their bank checking or Legg Mason accounts. Your Legg Mason Financial Advisor will be happy to help you make these arrangements if you would like to purchase additional shares in this convenient way.
Sincerely, |
John F. Curley, Jr. Chairman | Mark R. Fetting President |
February 11, 2005
Management’s Discussion of Fund Performance
Core Bond Fund
The cumulative total return for the Core Bond Fund for the period from its inception (February 27, 2004) to December 31, 2004, is presented below, along with the total return of its benchmark:
Since | |||||
Inception | |||||
Core Bond Fund | |||||
Primary Class | +1.90% | ||||
Lehman Aggregate Bond IndexA | +2.40% |
The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.leggmasonfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. |
Stronger-than-expected economic activity, higher-than-expected inflation, and a moderate tightening of monetary policy drove short- and intermediate-term yields substantially higher this past year, while bond yields were steady to somewhat lower. The yield curve flattened significantly in the process. Considering that both core and headline consumer price inflation rates roughly doubled from the levels of 2003, and the economy enjoyed a second year of above-trend growth, the bond market’s stability in the face of these pressures was remarkable. Non-U.S. fixed-income markets generally performed better and with substantially less volatility, thanks to slower growth and subdued inflation. Japanese rates were relatively stable, and deflationary pressures eased. The Bank of England raised its target rate four times during the period, while the European Central Bank (“ECB”) remained on hold. Monetary conditions in the U.K. are now tight enough to have inverted both the nominal and real yield curves. Bolstered by a stronger economy and generally accommodative monetary policies, investment grade spreads tightened, with spreads on lower-quality issuers and emerging market bonds narrowing significantly as yield-starved investors found them increasingly attractive against a backdrop of excellent economic and policy fundamentals.
A | A market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed rate, publicly placed, dollar-denominated, and nonconvertible investment grade debt issues with at least $100 million par amount outstanding and with at least one year to final maturity. It is not possible to invest in an index. |
The Core Bond Fund was challenged by this environment, with strategies producing mixed results. From its inception on February 27, 2004, the total return (appreciation or depreciation in the Fund’s net asset value per share, plus dividends and any capital gain distributions) of the Primary Class lagged the performance of its benchmark, the Lehman Aggregate Bond Index, delivering 1.90% vs. 2.40%. The Fund benefited from an emphasis on BBB-rated bonds, thanks to a general tightening of credit spreads. An overweight exposure to U.S. Treasury Inflation-Protected Securities (“TIPS”) for most of the period also contributed to performance, since real yields rose by less than their nominal counterparts, and inflation proved to be somewhat higher than expected. Modestly overweight exposure to the mortgage-backed sector for most of the period added to performance as spreads tightened, but this was largely offset later in the period as mortgage exposure was reduced to underweight yet the sector continued to perform well. Duration exposure was neutral to somewhat short for the period, and this detracted from performance since most yields rose by less than forward rates had anticipated. A barbelled exposure to maturities had a positive impact on performance, since the yield curve flattened.
Western Asset Management Company
January 28, 2005
Expense Example
Core Bond Fund
As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Each example is based on an investment of $1,000 invested on July 1, 2004, and held through December 31, 2004.
Actual Expenses
The first line for each class in the table below provides information about actual account values and actual expenses for the Fund. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line in the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning | Ending | Expenses PaidA | Annualized | |||||||||||||
Account Value | Account Value | During the Period | Expense | |||||||||||||
7/1/04 | 12/31/04 | 7/1/04 to 12/31/04 | Ratio | |||||||||||||
Actual | $ | 1,000.00 | $ | 1,040.80 | $ | 5.14 | 1.00% | |||||||||
Hypothetical (5% return before expenses) | 1,000.00 | 1,020.16 | 5.09 |
A | These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365. |
Performance Information
Core Bond Fund
The following graph compares the Fund’s total returns against that of a closely matched broad-based securities market index. The graph illustrates the cumulative total return of an initial $10,000 investment in the Fund’s Primary Class shares, for the periods indicated. The line for the Fund represents the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The line representing the securities market index does not include any transaction costs associated with buying and selling securities in the index or other administrative expenses. Both the Fund’s and the index’s results assume reinvestment of all dividends and distributions.
Growth of a $10,000 Investment — Primary Class
Period Ended December 31, 2004
Cumulative | ||||||
Total Return | ||||||
Life of Class* | +1.90% | |||||
* Inception date — February 27, 2004 |
The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.leggmasonfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.
The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
A | A market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed rate, publicly placed, dollar-denominated, and nonconvertible investment grade debt issues with at least $100 million par amount outstanding and with at least one year to final maturity. |
Debt RatingsB (As a percentage of the portfolio)
Maturity Schedule (As a percentage of the portfolio)
B | Source: Standard & Poor’s |
Portfolio of Investments
Core Bond Fund
(Amounts in Thousands)
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Long-Term Securities — 75.4% | |||||||||||||||||
Corporate Bonds and Notes — 14.5% | |||||||||||||||||
Aerospace/Defense — 0.1% | |||||||||||||||||
Northrop Grumman Corporation | 4.079% | 11/16/06 | $ | 40 | $ | 41 | |||||||||||
Banking and Finance — 1.5% | |||||||||||||||||
Ford Motor Credit Company | 6.875% | 2/1/06 | 240 | 248 | |||||||||||||
Ford Motor Credit Company | 7.375% | 10/28/09 | 130 | 140 | |||||||||||||
Ford Motor Credit Company | 7.000% | 10/1/13 | 70 | 74 | |||||||||||||
General Motors Acceptance Corporation | 5.625% | 5/15/09 | 285 | 285 | |||||||||||||
Household Finance Corporation | 4.625% | 1/15/08 | 225 | 230 | |||||||||||||
977 | |||||||||||||||||
Banks — 0.7% | |||||||||||||||||
Bank of America Corporation | 3.875% | 1/15/08 | 210 | 211 | |||||||||||||
Bank One Corporation | 6.500% | 2/1/06 | 220 | 228 | |||||||||||||
439 | |||||||||||||||||
Cable — 0.5% | |||||||||||||||||
Comcast Corporation | 6.500% | 1/15/15 | 240 | 267 | |||||||||||||
Cox Communications, Inc. | 3.875% | 10/1/08 | 70 | 69 | |||||||||||||
336 | |||||||||||||||||
Diversified Financial Services — 1.1% | |||||||||||||||||
CIT Group Inc. | 4.000% | 5/8/08 | 5 | 5 | |||||||||||||
Citigroup Inc. | 4.250% | 7/29/09 | 230 | 232 | |||||||||||||
General Electric Capital Corporation | 4.250% | 1/15/08 | 230 | 234 | |||||||||||||
Wells Fargo & Company | 3.500% | 4/4/08 | 215 | 214 | |||||||||||||
685 | |||||||||||||||||
Electric — 0.7% | |||||||||||||||||
Dominion Resources, Inc. | 5.700% | 9/17/12 | 115 | 122 | |||||||||||||
FirstEnergy Corp. | 7.375% | 11/15/31 | 235 | 268 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Electric — Continued | |||||||||||||||||
Oncor Electric Delivery Company | 6.375% | 1/15/15 | $ | 30 | $ | 33 | |||||||||||
The Cleveland Electric Illuminating Company | 5.650% | 12/15/13 | 20 | 21 | |||||||||||||
444 | |||||||||||||||||
Energy — 1.3% | |||||||||||||||||
Duke Energy Corporation | 5.625% | 11/30/12 | 140 | 147 | |||||||||||||
Pacific Gas and Electric Company | 2.720% | 4/3/06 | 20 | 20 | A | ||||||||||||
Pacific Gas and Electric Company | 6.050% | 3/1/34 | 65 | 68 | |||||||||||||
TXU Energy Co. | 2.838% | 1/17/06 | 25 | 25 | A,B | ||||||||||||
TXU Energy Co. | 7.000% | 3/15/13 | 500 | 558 | |||||||||||||
818 | |||||||||||||||||
Environmental Services — 0.1% | |||||||||||||||||
Waste Management, Inc. | 6.375% | 11/15/12 | 85 | 94 | |||||||||||||
Food, Beverage and Tobacco — 0.7% | |||||||||||||||||
Altria Group, Inc. | 7.000% | 11/4/13 | 155 | 168 | |||||||||||||
Anheuser-Busch Companies, Inc. | 4.950% | 1/15/14 | 165 | 169 | |||||||||||||
Kraft Foods Inc. | 5.625% | 11/1/11 | 135 | 143 | |||||||||||||
480 | |||||||||||||||||
Investment Banking/Brokerage — 1.3% | |||||||||||||||||
J.P. Morgan Chase & Co. | 3.625% | 5/1/08 | 335 | 332 | |||||||||||||
Lehman Brothers Holdings Inc. | 4.000% | 1/22/08 | 115 | 116 | |||||||||||||
Morgan Stanley | 3.625% | 4/1/08 | 190 | 189 | |||||||||||||
The Goldman Sachs Group, Inc. | 4.125% | 1/15/08 | 160 | 162 | |||||||||||||
799 | |||||||||||||||||
Media — 0.3% | |||||||||||||||||
Time Warner Inc. | 6.875% | 5/1/12 | 75 | 85 | |||||||||||||
Time Warner Inc. | 7.700% | 5/1/32 | 75 | 92 | |||||||||||||
177 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Medical Care Facilities — 1.1% | |||||||||||||||||
HCA, Inc. | 5.750% | 3/15/14 | $ | 700 | $ | 678 | |||||||||||
Oil and Gas — 1.2% | |||||||||||||||||
Amerada Hess Corporation | 7.300% | 8/15/31 | 130 | 145 | |||||||||||||
Apache Corporation | 6.250% | 4/15/12 | 65 | 73 | |||||||||||||
Conoco Inc. | 6.950% | 4/15/29 | 225 | 266 | |||||||||||||
ConocoPhillips | 4.750% | 10/15/12 | 40 | 41 | |||||||||||||
Devon Energy Corporation | 7.950% | 4/15/32 | 140 | 179 | |||||||||||||
XTO Energy, Inc. | 7.500% | 4/15/12 | 15 | 17 | |||||||||||||
XTO Energy, Inc. | 6.250% | 4/15/13 | 20 | 22 | |||||||||||||
743 | |||||||||||||||||
Paper and Forest Products — 0.5% | |||||||||||||||||
International Paper Company | 5.500% | 1/15/14 | 70 | 72 | |||||||||||||
MeadWestvaco Corporation | 6.850% | 4/1/12 | 45 | 51 | |||||||||||||
Weyerhaeuser Company | 6.750% | 3/15/12 | 190 | 214 | |||||||||||||
337 | |||||||||||||||||
Photo Equipment and Supplies — 0.5% | |||||||||||||||||
Eastman Kodak Company | 7.250% | 11/15/13 | 300 | 323 | |||||||||||||
Retail — 0.5% | |||||||||||||||||
Target Corporation | 5.400% | 10/1/08 | 155 | 164 | |||||||||||||
Wal-Mart Stores, Inc. | 3.375% | 10/1/08 | 190 | 188 | |||||||||||||
352 | |||||||||||||||||
Special Purpose — 1.3% | |||||||||||||||||
Anadarko Finance Company | 6.750% | 5/1/11 | 125 | 141 | |||||||||||||
ChevronTexaco Capital Company | 3.500% | 9/17/07 | 140 | 141 | |||||||||||||
DaimlerChrysler NA Holding Corporation | 4.050% | 6/4/08 | 95 | 95 | |||||||||||||
DaimlerChrysler NA Holding Corporation | 7.200% | 9/1/09 | 50 | 55 | |||||||||||||
Sprint Capital Corporation | 4.780% | 8/17/06 | 15 | 15 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Special Purpose — Continued | |||||||||||||||||
Sprint Capital Corporation | 6.000% | 1/15/07 | $ | 270 | $ | 283 | |||||||||||
Verizon Global Funding Corp. | 7.375% | 9/1/12 | 75 | 88 | |||||||||||||
818 | |||||||||||||||||
Telecommunications — 0.2% | |||||||||||||||||
BellSouth Corporation | 4.750% | 11/15/12 | 30 | 30 | |||||||||||||
SBC Communications Inc. | 5.100% | 9/15/14 | 70 | 71 | |||||||||||||
101 | |||||||||||||||||
Transportation — 0.9% | |||||||||||||||||
JetBlue Airways Corporation | 2.665% | 8/15/16 | 300 | 301 | A | ||||||||||||
JetBlue Airways Corporation | 2.740% | 11/15/16 | 300 | 301 | A | ||||||||||||
602 | |||||||||||||||||
Total Corporate Bonds and Notes (Identified Cost — $9,222) | 9,244 | ||||||||||||||||
Asset-Backed Securities — 3.0% | |||||||||||||||||
Fixed Rate Securities — 2.1% | |||||||||||||||||
BankAmerica Manufactured Housing Contract 1997-2 | 6.790% | 12/10/22 | 135 | 137 | |||||||||||||
Bank One Issuance Trust 2003-C1 | 4.540% | 9/15/10 | 200 | 203 | |||||||||||||
Citibank Credit Card Issuance Trust 2000-B1 | 7.050% | 9/17/07 | 200 | 206 | |||||||||||||
Citibank Credit Card Issuance Trust 2001-C3 | 6.650% | 5/15/08 | 200 | 208 | |||||||||||||
Conseco Finance Home Equity Loan Trust 2001-A | 7.440% | 3/15/32 | 200 | 200 | |||||||||||||
Green Tree Home Improvement Loan Trust 1999-E | 9.450% | 10/15/24 | 152 | 154 | |||||||||||||
MMCA Automobile Owner Trust 2002-4 | 3.050% | 11/16/09 | 200 | 200 | |||||||||||||
1,308 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Asset-Backed Securities — Continued | |||||||||||||||||
Indexed SecuritiesA — 0.9% | |||||||||||||||||
Citibank Credit Card Issuance Trust 2000-C2 | 2.720% | 10/15/07 | $ | 200 | $ | 200 | |||||||||||
EQCC Trust 2002-1 | 2.718% | 11/25/31 | 22 | 22 | |||||||||||||
Merrill Lynch Mortgage Investors, Inc. 2002-NC1 | 2.738% | 5/25/33 | 11 | 11 | |||||||||||||
Residential Asset Mortgage Product, Inc 2004-RPIA | 2.718% | 11/25/42 | 165 | 165 | |||||||||||||
Wachovia Asset Securitization, Inc. 2002-HE1 | 2.788% | 9/27/32 | 195 | 195 | |||||||||||||
593 | |||||||||||||||||
Total Asset-Backed Securities (Identified Cost — $1,914) | 1,901 | ||||||||||||||||
Mortgage-Backed Securities — 1.2% | |||||||||||||||||
Fixed Rate Securities — 1.0% | |||||||||||||||||
Asset Securitization Corporation 1996-D2 | 6.920% | 2/14/29 | 66 | 69 | |||||||||||||
Bear Stearns ARM Trust, Mortgage Pass-Through Certificates, Series 2004-4 | 3.516% | 6/25/34 | 400 | 391 | |||||||||||||
Washington Mutual Mortgage Securities Corporation 2004-RA1 | 7.000% | 3/25/34 | 174 | 178 | |||||||||||||
638 | |||||||||||||||||
Stripped Securities — 0.1% | |||||||||||||||||
Mach One Trust, Commercial Mortgage-Backed Securities 2004-1A | 1.636% | 5/28/40 | 1,296 | 83 | B,C1 | ||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Mortgage-Backed Securities — Continued | |||||||||||||||||
Variable Rate SecuritiesD — 0.1% | |||||||||||||||||
Credit-Based Asset Servicing and Security 1999-3 | 5.922% | 1/3/29 | $ | 57 | $ | 55 | B | ||||||||||
Total Mortgage-Backed Securities (Identified Cost — $779) | 776 | ||||||||||||||||
U.S. Government and Agency Obligations — 43.7% | |||||||||||||||||
Fixed Rate Securities — 34.9% | |||||||||||||||||
Fannie Mae | 1.650% | 5/16/05 | 305 | 304 | |||||||||||||
Fannie Mae | 3.000% | 4/26/19 | 140 | 139 | |||||||||||||
United States Treasury Bonds | 6.250% | 8/15/23 | 150 | 176 | |||||||||||||
United States Treasury Bonds | 2.375% | 1/15/25 | 415 | 444 | |||||||||||||
United States Treasury Bonds | 5.250% | 11/15/28 | 20 | 21 | |||||||||||||
United States Treasury Bonds | 5.250% | 2/15/29 | 200 | 210 | |||||||||||||
United States Treasury Bonds | 6.250% | 5/15/30 | 10 | 12 | |||||||||||||
United States Treasury Bonds | 5.375% | 2/15/31 | 3,620 | 3,914 | |||||||||||||
United States Treasury Notes | 1.500% | 7/31/05 | 110 | 109 | |||||||||||||
United States Treasury Notes | 1.500% | 3/31/06 | 40 | 39 | |||||||||||||
United States Treasury Notes | 2.750% | 6/30/06 | 5,780 | �� | 5,764 | ||||||||||||
United States Treasury Notes | 2.875% | 11/30/06 | 740 | 738 | |||||||||||||
United States Treasury Notes | 3.000% | 12/31/06 | 720 | 719 | |||||||||||||
United States Treasury Notes | 3.125% | 5/15/07 | 100 | 100 | |||||||||||||
United States Treasury Notes | 3.000% | 11/15/07 | 3,050 | 3,031 | |||||||||||||
United States Treasury Notes | 4.000% | 6/15/09 | 1,290 | 1,315 | |||||||||||||
United States Treasury Notes | 3.625% | 7/15/09 | 40 | 40 | |||||||||||||
United States Treasury Notes | 3.500% | 8/15/09 | 430 | 429 | |||||||||||||
United States Treasury Notes | 3.375% | 10/15/09 | 240 | 238 | |||||||||||||
United States Treasury Notes | 3.500% | 12/15/09 | 2,650 | 2,637 | |||||||||||||
United States Treasury Notes | 4.250% | 11/15/13 | 20 | 20 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
U.S. Government and Agency Obligations — Continued | |||||||||||||||||
Fixed Rate Securities — Continued | |||||||||||||||||
United States Treasury Notes | 4.250% | 8/15/14 | $ | 1,860 | $ | 1,864 | |||||||||||
United States Treasury Notes | 4.250% | 11/15/14 | 20 | 20 | |||||||||||||
22,283 | |||||||||||||||||
Indexed SecuritiesE — 8.7% | |||||||||||||||||
United States Treasury Inflation-Protected Security | 3.375% | 1/15/07 | 2,614 | 2,769 | |||||||||||||
United States Treasury Inflation-Protected Security | 3.875% | 1/15/09 | 175 | 196 | |||||||||||||
United States Treasury Inflation-Protected Security | 0.875% | 4/15/10 | 1,723 | 1,706 | |||||||||||||
United States Treasury Inflation-Protected Security | 3.375% | 1/15/12 | 75 | 86 | |||||||||||||
United States Treasury Inflation-Protected Security | 2.000% | 1/15/14 | 243 | 251 | |||||||||||||
United States Treasury Inflation-Protected Security | 2.000% | 7/15/14 | 354 | 365 | |||||||||||||
United States Treasury Inflation-Protected Security | 3.875% | 4/15/29 | 151 | 207 | |||||||||||||
5,580 | |||||||||||||||||
Stripped Securities — 0.1% | |||||||||||||||||
United States Treasury Bonds | 0.000% | 2/15/23 | 50 | 20 | C2 | ||||||||||||
United States Treasury Bonds | 0.000% | 11/15/27 | 50 | 16 | C2 | ||||||||||||
36 | |||||||||||||||||
Total U.S. Government and Agency Obligations (Identified Cost — $27,819) | 27,899 | ||||||||||||||||
U.S. Government Agency Mortgage-Backed Securities — 8.1% | |||||||||||||||||
Fixed Rate Securities — 8.1% | |||||||||||||||||
Fannie Mae | 6.000% | 8/1/17 to 5/1/34 | 935 | 974 | |||||||||||||
Fannie Mae | 5.500% | 12/1/17 to 5/1/34 | 647 | 660 | |||||||||||||
Freddie Mac | 4.500% | 4/1/19 | 376 | 375 | |||||||||||||
Government National Mortgage Association | 6.000% | 11/15/28 to 12/15/33 | 1,362 | 1,413 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
U.S. Government Agency Mortgage-Backed Securities — Continued | |||||||||||||||||
Fixed Rate Securities — Continued | |||||||||||||||||
Government National Mortgage Association | 6.500% | 2/15/32 | $ | 611 | $ | 644 | |||||||||||
Government National Mortgage Association | 5.000% | 8/15/33 to 5/15/34 | 1,076 | 1,077 | |||||||||||||
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost — $5,144) | 5,143 | ||||||||||||||||
Yankee BondsF — 4.4% | |||||||||||||||||
Cable — 0.1% | |||||||||||||||||
Rogers Cable Inc. | 5.500% | 3/15/14 | 90 | 85 | |||||||||||||
Foreign Governments — 3.0% | |||||||||||||||||
Russian Federation | 5.000% | 3/31/30 | 860 | 890 | |||||||||||||
United Mexican States | 8.375% | 1/14/11 | 220 | 258 | |||||||||||||
United Mexican States | 7.500% | 4/8/33 | 688 | 743 | |||||||||||||
1,891 | |||||||||||||||||
Manufacturing (Diversified) — 0.6% | |||||||||||||||||
Tyco International Group SA | 6.375% | 10/15/11 | 45 | 50 | |||||||||||||
Tyco International Group SA | 6.000% | 11/15/13 | 100 | 109 | |||||||||||||
Tyco International Group SA | 6.875% | 1/15/29 | 195 | 223 | |||||||||||||
382 | |||||||||||||||||
Special Purpose — 0.4% | |||||||||||||||||
Apache Finance Canada Corp. | 4.375% | 5/15/15 | 60 | 58 | |||||||||||||
Banagricola DPR Funding Ltd. | 3.453% | 3/15/10 | 175 | 175 | A,B | ||||||||||||
Deutsche Telekom International Finance BV | 5.250% | 7/22/13 | 40 | 41 | |||||||||||||
274 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Yankee Bonds — Continued | |||||||||||||||||
Telecommunications — 0.3% | |||||||||||||||||
British Telecommunications plc | 8.375% | 12/15/10 | $ | 100 | $ | 120 | |||||||||||
INTELSAT | 6.500% | 11/1/13 | 10 | 9 | |||||||||||||
Telecom Italia S.p.A | 4.950% | 9/30/14 | 70 | 69 | B | ||||||||||||
198 | |||||||||||||||||
Total Yankee Bonds (Identified Cost — $2,708) | 2,830 | ||||||||||||||||
Preferred Stocks — 0.5% | |||||||||||||||||
Fannie Mae | 7.000% | 4 | shs | 204 | A | ||||||||||||
Fannie Mae | 5.375% | 1 | 106 | G | |||||||||||||
Total Preferred Stocks (Identified Cost — $286) | 310 | ||||||||||||||||
Total Long-Term Securities (Identified Cost — $47,872) | 48,103 | ||||||||||||||||
Short-Term Securities — 22.2% | |||||||||||||||||
Corporate Bonds and Notes — 0.5% | |||||||||||||||||
Bank of America NA | 2.300% | 2/16/05 | $ | 300 | 300 | A | |||||||||||
U.S. Government and Agency Obligations — 0.6% | |||||||||||||||||
Fannie Mae | 0.000% | 4/1/05 | 380 | 378 | H,I | ||||||||||||
Options PurchasedJ — 0.2% | |||||||||||||||||
Eurodollar Futures Call, April 2005, Strike Price $96.75 | 7 | K | 6 | ||||||||||||||
Eurodollar Futures Call, July 2005, Strike Price $96.00 | 6 | 12 | |||||||||||||||
Eurodollar Futures Call, October 2005, Strike Price $95.50 | 5 | 14 | |||||||||||||||
Eurodollar Futures Call, October 2005, Strike Price $96.00 | 25 | 41 | |||||||||||||||
Eurodollar Futures Put, April 2005, Strike Price $97.50 | 4 | 4 | |||||||||||||||
Eurodollar Futures Put, April 2005, Strike Price $97.75 | 13 | 21 |
Par/ | ||||||||||||||
Shares | Value | |||||||||||||
Options Purchased — Continued | ||||||||||||||
Eurodollar Futures Put, October 2005, Strike Price $95.00 | 63 | K | 2 | |||||||||||
Eurodollar Futures Put, October 2005, Strike Price $96.50 | 1 | 1 | ||||||||||||
U. S. Treasury Bond Futures Call, March 2005, Strike Price $112.00 | 3 | 5 | ||||||||||||
U. S. Treasury Bond Futures Call, March 2005, Strike Price $114.00 | 4 | 3 | ||||||||||||
109 | ||||||||||||||
Repurchase Agreements — 20.9% | ||||||||||||||
Deutsche Bank AG | ||||||||||||||
2.20%, dated 12/31/04, to be repurchased at $6,800 on 1/3/05 (Collateral: $6,955 Federal Home Loan Bank notes, 2.375%, due 4/5/06, value $6,980) | $6,800 | 6,800 | ||||||||||||
Nomura Securities Co. Ltd. | ||||||||||||||
2.26%, dated 12/31/04, to be repurchased at $6,562 on 1/3/05 (Collateral: $6,655 Federal Home Loan Bank notes, 6.00%, due 11/15/24, value $6,747) | 6,562 | 6,562 | ||||||||||||
13,362 | ||||||||||||||
Total Short-Term Securities (Identified Cost — $14,144) | 14,149 | |||||||||||||
Total Investments — 97.6% (Identified Cost — $62,016) | 62,252 | |||||||||||||
Other Assets Less Liabilities — 2.4% | 1,521 | |||||||||||||
Net Assets — 100.0% | $ | 63,773 | ||||||||||||
Actual | Appreciation/ | ||||||||||||
Expiration | Contracts | (Depreciation) | |||||||||||
Futures Contracts PurchasedJ | |||||||||||||
Eurodollar Futures | June 2005 | 4 | $ | — | |||||||||
Eurodollar Futures | September 2005 | 94 | (46 | ) | |||||||||
Eurodollar Futures | December 2005 | 1 | — | ||||||||||
Eurodollar Futures | March 2005 | 31 | (26 | ) | |||||||||
U.S. Treasury Note Futures | March 2005 | 18 | 6 | ||||||||||
$ | (66 | ) | |||||||||||
Futures Contracts WrittenJ | |||||||||||||
U.S. Treasury Bond Futures | March 2005 | 5 | $ | 2 | |||||||||
U.S. Treasury Note Futures | March 2005 | 37 | (23 | ) | |||||||||
$ | (21 | ) | |||||||||||
Options WrittenJ | |||||||||||||
U.S. Treasury Bond Futures Put, Strike Price $108.00 | March 2005 | 27 | $ | 14 | |||||||||
U.S. Treasury Bond Futures Put, Strike Price $111.00 | March 2005 | 15 | 8 | ||||||||||
U.S. Treasury Bond Futures Put, Strike Price $108.00 | June 2005 | 3 | 1 | ||||||||||
U.S. Treasury Note Futures Call, Strike Price $112.00 | February 2005 | 1 | — | ||||||||||
U.S. Treasury Note Futures Call, Strike Price $114.00 | March 2005 | 45 | 27 | ||||||||||
U.S. Treasury Note Futures Call, Strike Price $116.00 | March 2005 | 14 | 9 | ||||||||||
U.S. Treasury Note Futures Call, Strike Price $113.00 | March 2005 | 14 | 1 | ||||||||||
U.S. Treasury Note Futures Call, Strike Price $114.00 | June 2005 | 2 | — | ||||||||||
U.S. Treasury Note Futures Put, Strike Price $102.00 | March 2005 | 3 | 2 | ||||||||||
U.S. Treasury Note Futures Put, Strike Price $111.00 | March 2005 | 18 | 7 | ||||||||||
U.S. Treasury Note Futures Put, Strike Price $108.00 | March 2005 | 13 | 5 | ||||||||||
U.S. Treasury Note Futures Put, Strike Price $109.00 | March 2005 | 15 | 6 | ||||||||||
U.S. Treasury Note Futures Put, Strike Price $110.00 | March 2005 | 11 | 4 | ||||||||||
$ | 84 | ||||||||||||
�� |
A | Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (’LIBOR”) or the one year Treasury Bill Constant Maturity Rate. The coupon rates are the rates as of December 31, 2004. |
B | Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities represent 0.64% of net assets. |
C | Stripped security — Security with interest-only or principal-only payment streams, denoted by a 1 or 2 respectively. For interest-only securities, the amount shown as principal is the notional balance used to calculate the amount of interest due. |
D | The coupon rates shown on variable securities are the rates at December 31, 2004. These rates vary with the weighted average coupon of the underlying loans. |
E | Inflation-Protected Securities — Security whose principal value is adjusted daily or monthly in accordance with changes to the Consumer Price Index for All Urban Consumers. Interest is calculated on the basis of the current adjusted principal value. |
F | Yankee Bond — A dollar-denominated bond issued in the U.S. by foreign entities. |
G | Convertible Security — Security may be converted into issuer’s common stock. |
H | Zero coupon bond — A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity. |
I | Collateral to cover options and futures contracts. |
J | Options and futures are described in more detail in the notes to financial statements. |
K | Represents actual number of contracts. |
See notes to financial statements.
Statement of Assets and Liabilities
Core Bond Fund
Assets: | |||||||||||
Investment securities at market value (Identified Cost — $47,872) | $ | 48,103 | |||||||||
Repurchase Agreements, at cost | 13,362 | ||||||||||
Short-term securities at value (Identified Cost — $782) | 787 | ||||||||||
Total investments | $ | 62,252 | |||||||||
Receivable for: | |||||||||||
Securities sold | 1,020 | ||||||||||
Fund shares sold | 642 | ||||||||||
Interest | 419 | ||||||||||
64,333 | |||||||||||
Liabilities: | |||||||||||
Options proceeds (Identified Cost — $154) | 70 | ||||||||||
Payable for: | |||||||||||
Securities purchased | 112 | ||||||||||
Fund shares repurchased | 174 | ||||||||||
Futures variation margin | 2 | ||||||||||
Income distribution | 5 | ||||||||||
Due to: | |||||||||||
Manager | 24 | ||||||||||
Distributor | 35 | ||||||||||
Accrued expenses | 64 | ||||||||||
Other liabilities | 74 | ||||||||||
560 | |||||||||||
Net Assets | $ | 63,773 | |||||||||
Net assets consist of: | |||||||||||
Accumulated paid-in capital applicable to | |||||||||||
6,408 Primary Class shares outstanding | $ | 63,534 | |||||||||
Accumulated net realized gain/(loss) on investments, options, futures, and swaps | 6 | ||||||||||
Unrealized appreciation/(depreciation) of investments, options and futures | 233 | ||||||||||
Net Assets | $ | 63,773 | |||||||||
Net Asset Value Per Share: | |||||||||||
Primary Class | $9.95 | ||||||||||
See notes to financial statements.
Statement of Operations
Core Bond Fund
Investment Income: | ||||||||||||
Interest | $ | 1,331 | ||||||||||
Expenses: | ||||||||||||
Management fees | $ | 171 | ||||||||||
Distribution and service fees | 190 | |||||||||||
Audit and legal fees | 62 | |||||||||||
Custodian fees | 75 | |||||||||||
Directors’ fees and expenses | 12 | |||||||||||
Registration fees | 15 | |||||||||||
Reports to shareholders | 24 | |||||||||||
Transfer agent and shareholder servicing expense | 27 | |||||||||||
Organization expense | 13 | |||||||||||
Other expenses | 4 | |||||||||||
593 | ||||||||||||
Less: Fees waived | (212 | ) | ||||||||||
Compensating balance credits | (1 | ) | ||||||||||
Total expenses, net of waivers and compensating balance credits | 380 | |||||||||||
Net Investment Income | 951 | |||||||||||
Net Realized and Unrealized Gain/(Loss) on Investments: | ||||||||||||
Realized gain/(loss) on: | ||||||||||||
Investments | 238 | |||||||||||
Options | 65 | |||||||||||
Futures | (82 | ) | ||||||||||
Swaps | 17 | |||||||||||
238 | ||||||||||||
Increase in unrealized appreciation/(depreciation) of investments, options and futures | 233 | |||||||||||
Net Realized and Unrealized Gain/(Loss) on Investments | 471 | |||||||||||
Increase in Net Assets Resulting From Operations | $ | 1,422 | ||||||||||
See notes to financial statements.
Statement of Changes in Net Assets
Core Bond Fund
For the Period | ||||||
Ended | ||||||
12/31/04A | ||||||
Increase in Net Assets: | ||||||
Net investment income | $ | 951 | ||||
Net realized gain/(loss) on investments, options, futures and swaps | 238 | |||||
Increase in unrealized appreciation/(depreciation) of investments, options, futures and swaps | 233 | |||||
Increase in net assets resulting from operations | 1,422 | |||||
Distributions to shareholders: | ||||||
From net investment income: | ||||||
Primary Class | (1,051 | ) | ||||
From net realized gain on investments: | ||||||
Primary Class | (132 | ) | ||||
Increase in net assets from Fund share transactions: | ||||||
Primary Class | 63,534 | |||||
Increase in net assets | 63,773 | |||||
Net Assets: | ||||||
Beginning of period | — | |||||
End of period | $ | 63,773 | ||||
Under/(over) distributed net investment income | $ | — | ||||
See notes to financial statements.
Financial Highlights
Core Bond Fund
Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.
Primary Class:
Period Ended | |||||
December 31, 2004A | |||||
Net asset value, beginning of period | $ | 10.00 | |||
Investment operations: | |||||
Net investment income | .18 | B | |||
Net realized and unrealized gain/(loss) on investments | N.M. | ||||
Total from investment operations | .18 | ||||
Distributions: | |||||
From net investment income | (.21 | ) | |||
From net realized gain on investments | (.02 | ) | |||
Total distributions | (.23 | ) | |||
Net asset value, end of period | $ | 9.95 | |||
Ratios/supplemental data: | |||||
Total return | 1.90% | C | |||
Expenses to average net assets | 1.00% | B,D | |||
Net investment income to average net assets | 2.50% | B,D | |||
Portfolio turnover rate | 234% | C | |||
Net assets, end of period (in thousands) | $63,773 | ||||
A | For the period February 27, 2004 (commencement of operations) to December 31, 2004. |
B | Net of fees waived by LMFA for expenses in excess of the voluntary expense limitation of 1.00% until April 30, 2005. If no fees had been waived by LMFA, the annualized ratio of expenses to daily average net assets for the period ended December 31, 2004 would have been 1.56%. |
C | Not annualized. |
D | Annualized. |
N.M. — Not meaningful.
See notes to financial statements.
Management’s Discussion of Fund Performance
High Yield Portfolio
Average annual total returns for the High Yield Portfolio and its benchmark for various periods ended December 31, 2004, are presented below:
One | Five | Ten | Since | ||||||||||||||
Year | Years | Years | InceptionA | ||||||||||||||
High Yield | |||||||||||||||||
Primary Class | +10.51% | +1.45% | +6.08% | +5.28% | |||||||||||||
Institutional Class | +11.15% | +1.84% | N/A | +1.60% | |||||||||||||
Lehman High Yield IndexB | +11.13% | +6.97% | +8.13% | +7.11% |
The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information for the primary class please visit www.leggmasonfunds.com; for the Institutional Class please call 1-888-425-6432. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. |
For the calendar year 2004, the Primary Class of the Fund returned 10.51% versus 11.13% for the Fund’s benchmark, the Lehman High Yield Index (“Index”). The option-adjusted spread of the Index narrowed from +394 basis points (bps)C on December 31, 2003, to +288 bps on December 31, 2004. The portfolio’s underperformance is primarily attributable to the portfolio manager’s decision to underweight the top performing industries: natural gas pipelines, and chemicals which were up 14.04% and 15.72%, respectively in 2004. Duration exposure was neutral to somewhat short for the period, and this detracted from performance since most yields rose by less than forward rates had anticipated. Once again, lower-rated issuers in the Index drove performance in the high yield sector. CCC rated issues returned 15.77% vs. BB rated issues, which returned just 9.61%.
A | The inception date of the Primary Class is February 1, 1994. The inception date of the Institutional Class is May 5, 1998. Index returns are for periods beginning January 31, 1994. |
B | A market value-weighted index that tracks the daily price-only, coupon, and total return performance of non-investment grade, fixed rate, publicly placed, dollar-denominated, and non-convertible debt registered with the U.S. Securities and Exchange Commission. |
C | 100 basis points = 1%. |
Western Asset Management Company
January 28, 2005
High Yield Portfolio
As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Each example is based on an investment of $1,000 invested on July 1, 2004, and held through December 31, 2004.
Actual Expenses
The first line for each class in the table below provides information about actual account values and actual expenses for each class. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each class in the table below provides information about hypothetical account values and hypothetical expenses based on the relevant class’s actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the class’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples for the relevant class that appear in the shareholder reports of other funds.
Beginning | Ending | Expenses PaidA | |||||||||||||||
Account | Account | During the | Annualized | ||||||||||||||
Value | Value | Period | Expense | ||||||||||||||
7/1/04 | 12/31/04 | 7/1/04 to 12/31/04 | Ratio | ||||||||||||||
Primary Class: | |||||||||||||||||
Actual | $ | 1,000.00 | $ | 1,095.90 | $ | 7.18 | 1.36% | ||||||||||
Hypothetical (5% return before expenses) | 1,000.00 | 1,018.35 | 6.92 | ||||||||||||||
Institutional Class: | |||||||||||||||||
Actual | $ | 1,000.00 | $ | 1,099.00 | $ | 4.23 | 0.80% | ||||||||||
Hypothetical (5% return before expenses) | 1,000.00 | 1,021.17 | 4.08 |
A | These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365. |
Performance Information
High Yield Portfolio
The following graphs compare the Fund’s total returns against that of a closely matched broad-based securities market index. The graphs illustrate the cumulative total return of an initial $10,000 investment in the Primary Class and an initial $1,000,000 investment in the Institutional Class of the Fund, for the periods indicated. The lines for the Fund represent the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The line representing the securities market index does not include any transaction costs associated with buying and selling securities in the index or other administrative expenses. Both the Fund’s results and the index’s results assume reinvestment of all dividends and distributions.
Growth of a $10,000 Investment — Primary Class
Periods Ended December 31, 2004
Cumulative | Average Annual | |||||||||
Total Return | Total Return | |||||||||
One Year | +10.51% | +10.51% | ||||||||
Five Years | +7.48% | +1.45% | ||||||||
Ten Years | +80.48% | +6.08% |
The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.leggmasonfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.
The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
A | A market value-weighted index that tracks the daily price-only, coupon, and total return performance of non-investment grade, fixed rate, publicly placed, dollar-denominated, and non-convertible debt registered with the U.S. Securities and Exchange Commission. |
Growth of a $1,000,000 Investment — Institutional Class
Periods Ended December 31, 2004
Cumulative | Average Annual | |||||||||
Total Return | Total Return | |||||||||
One Year | +11.15% | +11.15% | ||||||||
Five Years | +9.52% | +1.84% | ||||||||
Life of Class* | +11.15% | +1.60% | ||||||||
*Inception date: May 5, 1998 |
The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please call 1-888-425-6432. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.
The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
B | Index returns are for periods beginning April 30, 1998. |
Debt RatingsC (As a percentage of the portfolio)
Maturity Schedule (As a percentage of the portfolio)
C | Source: Standard & Poor’s |
Portfolio of Investments
High Yield Portfolio
December 31, 2004
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Long-Term Securities — 97.6% | |||||||||||||||||
Corporate Bonds and Notes — 88.7% | |||||||||||||||||
Advertising — 0.7% | |||||||||||||||||
Vertis Inc. | 10.875% | 6/15/09 | $ | 1,385 | $ | 1,503 | |||||||||||
Aerospace/ Defense — 1.7% | |||||||||||||||||
Armor Holdings, Inc. | 8.250% | 8/15/13 | 1,450 | 1,624 | |||||||||||||
Esterline Technologies Corporation | 7.750% | 6/15/13 | 943 | 1,030 | |||||||||||||
Hexcel Corporation | 9.875% | 10/1/08 | 966 | 1,072 | |||||||||||||
3,726 | |||||||||||||||||
Animal Hospitals — 0.5% | |||||||||||||||||
Vicar Operating, Inc. | 9.875% | 12/1/09 | 915 | 1,002 | |||||||||||||
Apparel — 1.8% | |||||||||||||||||
Levi Strauss & Co. | 9.750% | 1/15/15 | 470 | 465 | A | ||||||||||||
Oxford Industries, Inc. | 8.875% | 6/1/11 | 1,161 | 1,247 | |||||||||||||
Russell Corporation | 9.250% | 5/1/10 | 998 | 1,070 | |||||||||||||
The William Carter Company | 10.875% | 8/15/11 | 917 | 1,027 | |||||||||||||
3,809 | |||||||||||||||||
Auto and Automotive Parts — 1.2% | |||||||||||||||||
Keystone Automotive Operations Inc. | 9.750% | 11/1/13 | �� | 1,560 | 1,669 | ||||||||||||
TRW Automotive Inc. | 9.375% | 2/15/13 | 839 | 973 | |||||||||||||
2,642 | |||||||||||||||||
Automotive Retailer — 0.9% | |||||||||||||||||
Asbury Automotive Group Inc. | 9.000% | 6/15/12 | 1,896 | 1,991 | |||||||||||||
Banking and Finance — 0.8% | |||||||||||||||||
Refco Finance Holdings | 9.000% | 8/1/12 | 1,480 | 1,621 | A | ||||||||||||
Building Materials — 2.3% | |||||||||||||||||
Associated Materials Incorporated | 0.000% | 3/1/14 | 1,990 | 1,433 | B | ||||||||||||
Interface, Inc. | 7.300% | 4/1/08 | 553 | 565 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Building Materials — Continued | |||||||||||||||||
Interface, Inc. | 10.375% | 2/1/10 | $ | 1,373 | $ | 1,579 | |||||||||||
Nortek, Inc. | 8.500% | 9/1/14 | 1,370 | 1,432 | A | ||||||||||||
5,009 | |||||||||||||||||
Cable — 4.2% | |||||||||||||||||
Charter Communications Holdings, LLC | 9.625% | 11/15/09 | 1,250 | 1,097 | |||||||||||||
Charter Communications Holdings, LLC | 10.250% | 9/15/10 | 2,535 | 2,687 | |||||||||||||
CSC Holdings Inc. | 7.625% | 4/1/11 | 990 | 1,067 | |||||||||||||
CSC Holdings Inc. | 6.750% | 4/15/12 | 170 | 175 | A | ||||||||||||
CSC Holdings Inc. | 7.875% | 2/15/18 | 430 | 464 | |||||||||||||
CSC Holdings Inc. | 7.625% | 7/15/18 | 946 | 1,000 | |||||||||||||
Insight Communications Company, Inc. | 0.000% | 2/15/11 | 1,140 | 1,109 | B | ||||||||||||
LodgeNet Entertainment Corporation | 9.500% | 6/15/13 | 1,152 | 1,273 | |||||||||||||
8,872 | |||||||||||||||||
Casino Resorts — 2.1% | |||||||||||||||||
Inn of The Mountain Gods Resort | 12.000% | 11/15/10 | 1,610 | 1,884 | |||||||||||||
Isle of Capri Casinos, Inc. | 9.000% | 3/15/12 | 570 | 628 | |||||||||||||
Premier Entertainment Biloxi LLC | 10.750% | 2/1/12 | 747 | 816 | |||||||||||||
River Rock Entertainment | 9.750% | 11/1/11 | 990 | 1,110 | |||||||||||||
Station Casinos, Inc. | 6.875% | 3/1/16 | 90 | 94 | |||||||||||||
4,532 | |||||||||||||||||
Chemicals — 2.8% | |||||||||||||||||
Georgia Gulf Corporation | 7.625% | 11/15/05 | 6 | 6 | |||||||||||||
Huntsman International LLC | 10.125% | 7/1/09 | 766 | 806 | |||||||||||||
Lyondell Chemical Company | 9.625% | 5/1/07 | 1,558 | 1,714 | |||||||||||||
Lyondell Chemical Company | 10.500% | 6/1/13 | 400 | 476 | |||||||||||||
MacDermid, Incorporated | 9.125% | 7/15/11 | 22 | 25 | |||||||||||||
Millennium America Inc. | 9.250% | 6/15/08 | 892 | 1,015 | |||||||||||||
Nalco Company | 8.875% | 11/15/13 | 640 | 702 | |||||||||||||
Westlake Chemical Corporation | 8.750% | 7/15/11 | 1,032 | 1,166 | |||||||||||||
5,910 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Coal — 0.7% | |||||||||||||||||
Alpha Natural Resources LLC | 10.000% | 6/1/12 | $ | 1,360 | $ | 1,550 | A | ||||||||||
Containers and Packaging — 3.3% | |||||||||||||||||
Graham Packaging Company, Inc. | 9.875% | 10/15/14 | 1,410 | 1,505 | A | ||||||||||||
Graphic Packaging International Corp. | 9.500% | 8/15/13 | 1,160 | 1,319 | |||||||||||||
Owens Brockway Glass Containers | 8.750% | 11/15/12 | 1,040 | 1,172 | |||||||||||||
Owens-Illinois, Inc. | 7.500% | 5/15/10 | 420 | 446 | |||||||||||||
Jefferson Smurfit Corporation (U.S.) | 8.250% | 10/1/12 | 840 | 916 | |||||||||||||
Solo Cup Company | 8.500% | 2/15/14 | 1,670 | 1,737 | |||||||||||||
7,095 | |||||||||||||||||
Electric — 2.2% | |||||||||||||||||
Orion Power Holdings, Inc. | 12.000% | 5/1/10 | 1,270 | 1,613 | |||||||||||||
The AES Corporation | 9.000% | 5/15/15 | 2,743 | 3,141 | A | ||||||||||||
4,754 | |||||||||||||||||
Electronics — 0.5% | |||||||||||||||||
Rayovac Corporation | 8.500% | 10/1/13 | 960 | 1,066 | |||||||||||||
Energy — 3.9% | |||||||||||||||||
Calpine Corporation | 7.625% | 4/15/06 | 1,200 | 1,179 | |||||||||||||
Calpine Generating Co., LLC | 11.169% | 4/1/11 | 1,280 | 1,251 | C | ||||||||||||
Calpine Generating Co., LLC | 11.500% | 4/1/11 | 1,730 | 1,644 | |||||||||||||
Midwest Generation LLC | 8.560% | 1/2/16 | 750 | 832 | |||||||||||||
Midwest Generation LLC | 8.750% | 5/1/34 | 1,000 | 1,135 | |||||||||||||
NRG Energy, Inc. | 8.000% | 12/15/13 | 1,402 | 1,528 | A | ||||||||||||
Reliant Energy Inc. | 6.750% | 12/15/14 | 750 | 745 | |||||||||||||
8,314 | |||||||||||||||||
Entertainment — 0.8% | |||||||||||||||||
Cinemark, Inc. | 0.000% | 3/15/14 | 1,390 | 1,050 | B | ||||||||||||
Loews Cineplex Entertainment Corporation | 9.000% | 8/1/14 | 680 | 736 | A | ||||||||||||
1,786 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Environmental Services — 1.8% | |||||||||||||||||
Allied Waste North America Incorporated | 7.625% | 1/1/06 | $ | 69 | $ | 71 | |||||||||||
Allied Waste North America Incorporated | 8.875% | 4/1/08 | 508 | 544 | |||||||||||||
Allied Waste North America Incorporated | 8.500% | 12/1/08 | 1,364 | 1,446 | |||||||||||||
Capital Environment Resource, Inc. | 9.500% | 4/15/14 | 1,790 | 1,781 | A | ||||||||||||
3,842 | |||||||||||||||||
Food, Beverage and Tobacco — 1.3% | |||||||||||||||||
Cott Beverages Incorporated | 8.000% | 12/15/11 | 950 | 1,034 | |||||||||||||
Domino’s, Inc. | 8.250% | 7/1/11 | 1,014 | 1,108 | |||||||||||||
Stater Bros. Holdings Inc. | 5.990% | 6/15/10 | 640 | 658 | C | ||||||||||||
2,800 | |||||||||||||||||
Gaming — 0.8% | |||||||||||||||||
Argosy Gaming Company | 9.000% | 9/1/11 | 1,432 | 1,597 | |||||||||||||
Gas and Pipeline Utilities — 3.3% | |||||||||||||||||
ANR Pipeline, Inc. | 8.875% | 3/15/10 | 322 | 361 | |||||||||||||
ANR Pipeline, Inc. | 9.625% | 11/1/21 | 477 | 600 | |||||||||||||
Dynegy Holdings Inc. | 8.750% | 2/15/12 | 1,010 | 1,058 | |||||||||||||
Dynegy Holdings Inc. | 10.125% | 7/15/13 | 1,260 | 1,443 | A | ||||||||||||
Northwest Pipelines Corporation | 8.125% | 3/1/10 | 481 | 532 | |||||||||||||
Sonat Inc. | 6.875% | 6/1/05 | 700 | 709 | |||||||||||||
Southern Natural Gas Company | 8.875% | 3/15/10 | 678 | 759 | |||||||||||||
The Williams Companies, Inc. | 8.750% | 3/15/32 | 1,471 | 1,690 | |||||||||||||
7,152 | |||||||||||||||||
Health Care — 3.2% | |||||||||||||||||
Ardent Health Services | 10.000% | 8/15/13 | 2,000 | 2,100 | |||||||||||||
Community Health Systems Inc. | 6.500% | 12/15/12 | 590 | 594 | A | ||||||||||||
Equinox Holdings Inc | 9.000% | 12/15/09 | 940 | 1,001 | |||||||||||||
Tenet Healthcare Corporation | 9.875% | 7/1/14 | 2,887 | 3,147 | A | ||||||||||||
6,842 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Homebuilding — 0.3% | |||||||||||||||||
KB HOME | 5.875% | 1/15/15 | $ | 730 | $ | 723 | |||||||||||
Lodging/ Hotels — 0.1% | |||||||||||||||||
La Quinta Inns, Inc. | 8.875% | 3/15/11 | 70 | 78 | |||||||||||||
Starwood Hotels & Resorts Worldwide, Inc. | 7.875% | 5/1/12 | 100 | 114 | |||||||||||||
192 | |||||||||||||||||
Machinery — 2.3% | |||||||||||||||||
Case New Holland Incorporated | 9.250% | 8/1/11 | 848 | 943 | A | ||||||||||||
Case New Holland Incorporated | 9.250% | 8/1/11 | 152 | 169 | A | ||||||||||||
Grant Prideco, Inc. | 9.000% | 12/15/09 | 877 | 971 | |||||||||||||
Joy Global Inc. | 8.750% | 3/15/12 | 1,125 | 1,260 | |||||||||||||
Terex Corporation | 7.375% | 1/15/14 | 1,430 | 1,534 | |||||||||||||
4,877 | |||||||||||||||||
Manufacturing (Diversified) — 3.5% | |||||||||||||||||
Ames True Temper | 10.000% | 7/15/12 | 1,000 | 1,025 | |||||||||||||
Jacuzzi Brands Incorporated | 9.625% | 7/1/10 | 2,304 | 2,557 | |||||||||||||
KI Holdings Incorporated | 0.000% | 11/15/14 | 1,140 | 730 | B | ||||||||||||
Koppers Inc. | 9.875% | 10/15/13 | 920 | 1,049 | |||||||||||||
MMI Products, Inc. | 11.250% | 4/15/07 | 1,030 | 1,045 | |||||||||||||
Samsonite Corporation | 8.875% | 6/1/11 | 960 | 1,039 | |||||||||||||
7,445 | |||||||||||||||||
Media — 2.8% | |||||||||||||||||
EchoStar DBS Corporation | 5.256% | 10/1/08 | 1,090 | 1,129 | C | ||||||||||||
Lamar Media Corporation | 7.250% | 1/1/13 | 650 | 702 | |||||||||||||
Paxson Communications Corporation | 10.750% | 7/15/08 | 645 | 677 | |||||||||||||
Paxson Communications Corporation | 0.000% | 1/15/09 | 25 | 24 | B | ||||||||||||
PRIMEDIA Inc. | 7.665% | 5/15/10 | 940 | 997 | C | ||||||||||||
PRIMEDIA Inc. | 8.875% | 5/15/11 | 300 | 317 | |||||||||||||
Sinclair Broadcast Group, Inc. | 8.750% | 12/15/11 | 990 | 1,078 | |||||||||||||
Warner Music Group | 7.375% | 4/15/14 | 1,040 | 1,066 | A | ||||||||||||
5,990 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Medical Care Facilities — 0.9% | |||||||||||||||||
HCA Inc. | 7.875% | 2/1/11 | $ | 510 | $ | 562 | |||||||||||
HCA Inc. | 9.000% | 12/15/14 | 970 | 1,145 | |||||||||||||
HCA, Inc. | 8.750% | 9/1/10 | 246 | 281 | |||||||||||||
1,988 | |||||||||||||||||
Medical Products — 0.1% | |||||||||||||||||
Fresenius Medical Care Capital Trust II | 7.875% | 2/1/08 | 89 | 97 | D | ||||||||||||
Medical Supplies and Services — 0.4% | |||||||||||||||||
AmeriPath Inc. | 10.500% | 4/1/13 | 838 | 890 | |||||||||||||
Metals — 0.2% | |||||||||||||||||
Century Aluminum Company | 7.500% | 8/15/14 | 490 | 522 | A | ||||||||||||
Oil and Gas — 7.0% | |||||||||||||||||
Amerigas Partners LP | 8.875% | 5/20/11 | 806 | 879 | |||||||||||||
Belden Blake Corporation | 8.750% | 7/15/12 | 1,230 | 1,248 | A | ||||||||||||
Chesapeake Energy Corporation | 9.000% | 8/15/12 | 1,083 | 1,237 | |||||||||||||
Chesapeake Energy Corporation | 7.500% | 9/15/13 | 40 | 44 | |||||||||||||
El Paso CGP Co. | 7.750% | 6/15/10 | 1,180 | 1,233 | |||||||||||||
El Paso Corporation | 6.950% | 12/15/07 | 838 | 878 | |||||||||||||
El Paso Corporation | 7.875% | 6/15/12 | 750 | 785 | |||||||||||||
El Paso Corporation | 7.800% | 8/1/31 | 730 | 701 | |||||||||||||
El Paso Corporation | 7.750% | 1/15/32 | 670 | 641 | |||||||||||||
El Paso Production Holding Company | 7.750% | 6/1/13 | 330 | 346 | |||||||||||||
Ferrellgas LP | 6.750% | 5/1/14 | 510 | 524 | |||||||||||||
KCS Energy, Inc. | 7.125% | 4/1/12 | 930 | 976 | |||||||||||||
Pacific Energy Partners | 7.125% | 6/15/14 | 460 | 490 | |||||||||||||
Parker Drilling Company | 7.150% | 9/1/10 | 1,060 | 1,110 | A,C | ||||||||||||
Plains Exploration & Production Company | 7.125% | 6/15/14 | 810 | 883 | |||||||||||||
Pride International, Inc. | 7.375% | 7/15/14 | 920 | 1,005 | |||||||||||||
Suburban Propane Partners LP | 6.875% | 12/15/13 | 1,000 | 1,020 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Oil and Gas — Continued | |||||||||||||||||
Vintage Petroleum, Inc. | 7.875% | 5/15/11 | $ | 722 | $ | 769 | |||||||||||
Vintage Petroleum, Inc. | 8.250% | 5/1/12 | 250 | 276 | |||||||||||||
15,045 | |||||||||||||||||
Paper and Forest Products — 1.0% | |||||||||||||||||
Georgia-Pacific Corp. | 9.500% | 12/1/11 | 902 | 1,112 | |||||||||||||
Georgia-Pacific Corp. | 9.375% | 2/1/13 | 887 | 1,033 | |||||||||||||
2,145 | |||||||||||||||||
Pharmaceuticals — 0.5% | |||||||||||||||||
Leiner Health Products Inc. | 11.000% | 6/1/12 | 940 | 1,027 | |||||||||||||
Publishing — 0.4% | |||||||||||||||||
Dex Media East LLC | 9.875% | 11/15/09 | 19 | 22 | |||||||||||||
Dex Media East LLC | 12.125% | 11/15/12 | 641 | 781 | |||||||||||||
803 | |||||||||||||||||
Real Estate — 0.7% | |||||||||||||||||
Forest City Enterprises, Inc. | 7.625% | 6/1/15 | 140 | 149 | |||||||||||||
Ventas Realty, Limited Partnership | 8.750% | 5/1/09 | 695 | 779 | |||||||||||||
Ventas Realty, Limited Partnership | 9.000% | 5/1/12 | 408 | 476 | |||||||||||||
1,404 | |||||||||||||||||
Rental and Lease Services (Commercial) — 0.7% | |||||||||||||||||
NationsRent Inc. | 9.500% | 10/15/10 | 1,390 | 1,557 | |||||||||||||
Retail — 1.2% | |||||||||||||||||
Norcraft Companies | 9.000% | 11/1/11 | 1,470 | 1,587 | |||||||||||||
Toys “R” Us, Inc. | 7.875% | 4/15/13 | 980 | 973 | |||||||||||||
2,560 | |||||||||||||||||
Special Purpose — 11.5% | |||||||||||||||||
AAC Group Holding Corporation | 0.000% | 10/1/12 | 1,510 | 1,015 | A,B | ||||||||||||
Alamosa Incorporated | 11.000% | 7/31/10 | 444 | 523 | |||||||||||||
Alamosa Incorporated | 8.500% | 1/31/12 | 640 | 699 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Special Purpose — Continued | |||||||||||||||||
Dennys Corp. Holdings, Inc. | 10.000% | 10/1/12 | $ | 1,010 | $ | 1,087 | A | ||||||||||
Goodman Global Holding Company, Inc. | 7.875% | 12/15/12 | 1,090 | 1,079 | A | ||||||||||||
H & E Equipment Services LLC | 11.125% | 6/15/12 | 1,434 | 1,577 | |||||||||||||
H Lines Finance Holding Corporation | 0.000% | 4/1/13 | 1,580 | 1,138 | A,B | ||||||||||||
Huntsman Advanced Materials LLC | 10.000% | 7/15/08 | 10 | 11 | A,C | ||||||||||||
Huntsman Advanced Materials LLC | 11.000% | 7/15/10 | 370 | 440 | A | ||||||||||||
Jostens IH Corporation | 7.625% | 10/1/12 | 1,520 | 1,581 | A | ||||||||||||
K&F Acquisition Incorporated | 7.750% | 11/15/14 | 608 | 628 | A | ||||||||||||
Milacron Escrow Corporation | 11.500% | 5/15/11 | 1,295 | 1,373 | |||||||||||||
Norcraft Holdings LP | 0.000% | 9/1/12 | 670 | 502 | B | ||||||||||||
Qwest Capital Funding Incorporated | 7.900% | 8/15/10 | 1,253 | 1,266 | |||||||||||||
Rainbow National Services LLC | 8.750% | 9/1/12 | 510 | 560 | A | ||||||||||||
Rainbow National Services LLC | 10.375% | 9/1/14 | 1,000 | 1,127 | A | ||||||||||||
Sensus Metering Systems Inc. | 8.625% | 12/15/13 | 1,481 | 1,518 | |||||||||||||
Sithe Independence Funding Corporation | 9.000% | 12/30/13 | 930 | 1,044 | |||||||||||||
Texas Genco LLC | 6.875% | 12/15/14 | 1,253 | 1,295 | A | ||||||||||||
The Williams Companies, Inc. Credit-Linked Certificates | 6.750% | 4/15/09 | 910 | 981 | A | ||||||||||||
TransDigm | 8.375% | 7/15/11 | 1,027 | 1,101 | |||||||||||||
UCAR Finance Inc. | 10.250% | 2/15/12 | 1,315 | 1,502 | |||||||||||||
UGS Corporation | 10.000% | 6/1/12 | 900 | 1,024 | A | ||||||||||||
WII Components, Inc. | 10.000% | 2/15/12 | 1,000 | 1,000 | |||||||||||||
WMG Holdings Corporation | 0.000% | 12/15/14 | 1,010 | 645 | A,B | ||||||||||||
24,716 | |||||||||||||||||
Steel Products — 0.6% | |||||||||||||||||
Allegheny Technologies, Inc. | 8.375% | 12/15/11 | 1,120 | 1,243 | |||||||||||||
Storage Facilities — 0.7% | |||||||||||||||||
Mobile Mini, Inc. | 9.500% | 7/1/13 | 1,260 | 1,468 | |||||||||||||
Telecommunications — 5.7% | |||||||||||||||||
AT&T Corp. | 9.050% | 11/15/11 | 720 | 829 | |||||||||||||
AT&T Corp. | 9.750% | 11/15/31 | 680 | 812 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Telecommunications — Continued | |||||||||||||||||
Cincinnati Bell Inc. | 8.375% | 1/15/14 | $ | 2,280 | $ | 2,308 | |||||||||||
GTE Hawaiian Telephone Company, Inc. | 7.000% | 2/1/06 | 300 | 309 | |||||||||||||
GTE Hawaiian Telephone Company, Inc. | 7.375% | 9/1/06 | 230 | 240 | |||||||||||||
MCI Inc. | 6.908% | 5/1/07 | 377 | 386 | |||||||||||||
MCI Inc. | 7.688% | 5/1/09 | 377 | 390 | |||||||||||||
MCI Inc. | 8.735% | 5/1/14 | 1,333 | 1,433 | |||||||||||||
Qwest Communications International Inc. | 7.500% | 2/15/11 | 1,080 | 1,107 | A | ||||||||||||
Qwest Corporation | 7.875% | 9/1/11 | 1,580 | 1,714 | A | ||||||||||||
Qwest Services Corporation | 14.000% | 12/15/10 | 2,139 | 2,572 | A | ||||||||||||
12,100 | |||||||||||||||||
Telecommunications (Cellular/ Wireless) — 3.3% | |||||||||||||||||
Centennial Communications Corporation | 8.125% | 2/1/14 | 1,980 | 2,034 | |||||||||||||
Nextel Communications, Inc. | 5.950% | 3/15/14 | 1,132 | 1,172 | |||||||||||||
Nextel Communications, Inc. | 7.375% | 8/1/15 | 495 | 544 | |||||||||||||
Rural Cellular Corporation | 9.750% | 1/15/10 | 450 | 407 | |||||||||||||
Rural Cellular Corporation | 8.250% | 3/15/12 | 370 | 392 | |||||||||||||
SBA Communications Corporation | 8.500% | 12/1/12 | 996 | 1,016 | A | ||||||||||||
Ubiquitel Operating Company | 9.875% | 3/1/11 | 610 | 685 | A | ||||||||||||
US Unwired Inc. | 10.000% | 6/15/12 | 800 | 902 | A | ||||||||||||
7,152 | |||||||||||||||||
Transportation — 3.3% | |||||||||||||||||
Continental Airlines, Inc. | 7.373% | 12/15/15 | 951 | 803 | |||||||||||||
Gulfmark Offshore, Inc. | 7.750% | 7/15/14 | 1,110 | 1,176 | A | ||||||||||||
Horizon Lines, LLC | 9.000% | 11/1/12 | 800 | 860 | A | ||||||||||||
Kansas City Southern Railway | 9.500% | 10/1/08 | 1,834 | 2,084 | |||||||||||||
OMI Corporation | 7.625% | 12/1/13 | 956 | 1,023 | |||||||||||||
US Airways | 8.360% | 1/20/19 | 1,154 | 1,164 | |||||||||||||
7,110 | |||||||||||||||||
Water Utilities — 0.7% | |||||||||||||||||
National Waterworks, Inc. | 10.500% | 12/1/12 | 1,247 | 1,403 | |||||||||||||
Total Corporate Bonds and Notes (Identified Cost — $178,971) | 189,872 | ||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Mortgage-Backed Securities — 0.3% | |||||||||||||||||
Fixed Rate Securities — 0.3% | |||||||||||||||||
Blackrock Capital Finance L.P. 1996-R1 | 9.479% | 9/25/26 | $ | 806 | $ | 540 | |||||||||||
Ocwen Residential Mortgage Corporation 1998-R1 | 7.000% | 10/25/40 | 310 | 50 | |||||||||||||
Mortgage-Backed Securities (Identified Cost — $621) | 590 | ||||||||||||||||
Yankee BondsE — 7.5% | |||||||||||||||||
Cable — 0.1% | |||||||||||||||||
Rogers Cable Inc. | 6.750% | 3/15/15 | 330 | 337 | A | ||||||||||||
Chemicals — 1.6% | |||||||||||||||||
Rhodia SA | 10.250% | 6/1/10 | 1,360 | 1,530 | |||||||||||||
Rhodia SA | 8.875% | 6/1/11 | 1,980 | 1,995 | |||||||||||||
3,525 | |||||||||||||||||
Foreign Governments — 0.7% | |||||||||||||||||
Federative Republic of Brazil | 14.500% | 10/15/09 | 1,070 | 1,427 | |||||||||||||
Media — 0.8% | |||||||||||||||||
Kabel Deutschland GmbH | 10.625% | 7/1/14 | 1,540 | 1,771 | A | ||||||||||||
Oil and Gas — 0.7% | |||||||||||||||||
Western Oil Sands Inc. | 8.375% | 5/1/12 | 1,355 | 1,584 | |||||||||||||
Paper and Forest Products — 0.3% | |||||||||||||||||
Abitibi Consolidated Inc. | 5.990% | 6/15/11 | 536 | 552 | C | ||||||||||||
Services — 0.3% | |||||||||||||||||
Compagnie Generale de Geophysique S.A. | 10.625% | 11/15/07 | 708 | 746 | |||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Yankee Bonds — Continued | |||||||||||||||||
Special Purpose — 0.2% | |||||||||||||||||
JSG Funding PLC | 15.500% | 10/1/13 | $ | 370 | $ | 433 | |||||||||||
Telecommunications — 1.5% | |||||||||||||||||
Inmarsat Finance II Plc | 0.000% | 11/15/12 | 1,591 | 1,146 | A,B | ||||||||||||
Inmarsat Finance Plc | 7.625% | 6/30/12 | 1,360 | 1,414 | |||||||||||||
Nortel Networks Ltd. | 6.125% | 2/15/06 | 551 | 561 | |||||||||||||
3,121 | |||||||||||||||||
Telecommunications (Cellular/ Wireless) — 0.8% | |||||||||||||||||
Rogers Wireless Communications Inc. | 9.625% | 5/1/11 | 1,088 | 1,275 | |||||||||||||
Rogers Wireless Communications Inc. | 8.000% | 12/15/12 | 330 | 349 | A | ||||||||||||
1,624 | |||||||||||||||||
Transportation — 0.5% | |||||||||||||||||
Teekay Shipping Corporation | 8.875% | 7/15/11 | 915 | 1,061 | |||||||||||||
Total Yankee Bonds (Identified Cost — $15,153) | 16,181 | ||||||||||||||||
Common Stocks — 0.1% | |||||||||||||||||
Engineering and Construction — 0.1% | |||||||||||||||||
Washington Group International, Inc. | 8 | shs | $ | 350 | F | ||||||||||||
Food — N.M. | |||||||||||||||||
International Fast Food Corporation | 40 | 0.01 | F | ||||||||||||||
Telecommunications — N.M. | |||||||||||||||||
Cincinnati Bell Inc. | 0.1 | 1 | F | ||||||||||||||
Total Common Stocks (Identified Cost — $2,847) | 351 | ||||||||||||||||
Par/ | |||||||||||||||||
Rate | Shares | Value | |||||||||||||||
Preferred Stocks — 0.8% | |||||||||||||||||
High Voltage Engineering Corporation | 12.50% | 0.4 | shs | $ | 5 | G | |||||||||||
Paxson Communications Corporation | 14.25% | 0.1 | 1,165 | G,H | |||||||||||||
Fannie Mae | 7.00% | 9 | 482 | C | |||||||||||||
Total Preferred Stocks (Identified Cost — $2,155) | 1,652 | ||||||||||||||||
Warrants — 0.2% | |||||||||||||||||
American Tower Corporation | 1 | wts | 191 | A,F | |||||||||||||
Horizon PCS, Inc. | 2 | 0.02 | A,F | ||||||||||||||
Next Generation Network, Inc. | 16 | 0.1 | F | ||||||||||||||
Washington Group International, Series A | 5 | 70 | F | ||||||||||||||
Washington Group International, Series B | 6 | 62 | F | ||||||||||||||
Washington Group International, Series C | 3 | 29 | F | ||||||||||||||
Total Warrants (Identified Cost — $310) | 352 | ||||||||||||||||
Total Long-Term Securities (Identified Cost — $200,057) | 208,998 | ||||||||||||||||
Short-Term Securities — 0.7% | |||||||||||||||||
Repurchase Agreements — 0.7% | |||||||||||||||||
Deutsche Bank AG | |||||||||||||||||
2.2%, dated 12/31/04, to be repurchased at $755 on 1/3/05 (Collateral: $755 Freddie Mac notes, 2.375%, due 4/5/06, value $775) | $ | 755 | 755 | ||||||||||||||
Goldman, Sachs & Company | |||||||||||||||||
2.22%, dated 12/31/04, to be repurchased at $700 on 1/3/05 (Collateral: $655 Freddie Mac notes, 5.625%, due 3/15/11, value $716) | 700 | 700 | |||||||||||||||
Total Short-Term Securities (Identified Cost — $1,455) | 1,455 | ||||||||||||||||
Total Investments — 98.3% (Identified Cost — $201,512) | 210,453 | ||||||||||||||||
Other Assets Less Liabilities — 1.7% | 3,608 | ||||||||||||||||
Net Assets — 100.0% | $ | 214,061 | |||||||||||||||
Portfolio of Investments — Continued
A | Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities represent 23.64% of net assets. |
B | Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends. |
C | Indexed security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”). The coupon rates are the rates as of December 31, 2004. |
D | Unit — A security which consists of a bond and warrants to purchase the common stock of the issuer. |
E | Yankee Bond — A dollar-denominated bond issued in the U.S. by foreign entities. |
F | Non-income producing. |
G | Pay-in-Kind (“PIK”) security — A bond in which interest or dividends during the initial few years is paid in additional PIK securities rather than in cash. |
H | Private placement. |
See notes to financial statements.
Statement of Assets and Liabilities
High Yield Portfolio
Assets: | |||||||||||
Investment securities at market value (Identified Cost — $200,057) | $ | 208,998 | |||||||||
Short-term securities at value (Identified Cost — $1,455) | 1,455 | ||||||||||
Total investments | $ | 210,453 | |||||||||
Cash | 530 | ||||||||||
Receivable for: | |||||||||||
Securities sold | 243 | ||||||||||
Fund shares sold | 226 | ||||||||||
Dividend and interest income | 3,947 | ||||||||||
215,399 | |||||||||||
Liabilities: | |||||||||||
Payable for: | |||||||||||
Securities purchased | 240 | ||||||||||
Fund shares repurchased | 635 | ||||||||||
Income distribution | 151 | ||||||||||
Due to: | |||||||||||
Manager | 119 | ||||||||||
Distributor | 87 | ||||||||||
Accrued expenses | 106 | ||||||||||
1,338 | |||||||||||
Net Assets | $ | 214,061 | |||||||||
Net assets consist of: | |||||||||||
Accumulated paid-in-capital applicable to: | |||||||||||
21,862 Primary Class shares outstanding | $ | 352,359 | |||||||||
929 Institutional Class shares outstanding | 8,532 | ||||||||||
Under/(over) distributed net investment income | (92 | ) | |||||||||
Accumulated net realized gain/(loss) on investments | (155,679 | ) | |||||||||
Unrealized appreciation/(depreciation) of investments | 8,941 | ||||||||||
Net Assets | $ | 214,061 | |||||||||
Net Asset Value Per Share: | |||||||||||
Primary Class | $9.39 | ||||||||||
Institutional Class | $9.41 | ||||||||||
See notes to financial statements.
Statement of Operations
High Yield Portfolio
Investment Income: | |||||||||||
Dividends | $ | 192 | |||||||||
Interest | 17,485 | ||||||||||
Total income | $ | 17,677 | |||||||||
Expenses: | |||||||||||
Management fees | 1,410 | ||||||||||
Distribution and service fees | 1,046 | ||||||||||
Audit and legal fees | 52 | ||||||||||
Custodian fees | 122 | ||||||||||
Directors’ fees and expenses | 21 | ||||||||||
Registration fees | 24 | ||||||||||
Reports to shareholders | 37 | ||||||||||
Transfer agent and shareholder servicing expense: | |||||||||||
Primary Class | 182 | ||||||||||
Institutional Class | 2 | ||||||||||
Other expenses | 11 | ||||||||||
2,907 | |||||||||||
Less compensating balance credits | (4 | ) | |||||||||
Total expenses, net of compensating balance credits | 2,903 | ||||||||||
Net Investment Income | 14,774 | ||||||||||
Net Realized and Unrealized Gain/(Loss) on Investments: | |||||||||||
Realized gain/(loss) on investments | 2,146 | ||||||||||
Change in unrealized appreciation/(depreciation) of investments | 4,056 | ||||||||||
Net Realized and Unrealized Gain/(Loss) on Investments | 6,202 | ||||||||||
Change in Net Assets Resulting From Operations | $ | 20,976 | |||||||||
See notes to financial statements.
Statement of Changes in Net Assets
High Yield Portfolio
For the Years Ended | |||||||||
12/31/04 | 12/31/03 | ||||||||
Change in Net Assets: | |||||||||
Net investment income | $ | 14,774 | $ | 15,039 | |||||
Net realized gain/(loss) on investments | 2,146 | 2,379 | |||||||
Change in unrealized appreciation/(depreciation) on investments | 4,056 | 24,619 | |||||||
Change in net assets resulting from operations | 20,976 | 42,037 | |||||||
Distributions to shareholders from net investment income: | |||||||||
Primary Class | (14,195 | ) | (14,885 | ) | |||||
Institutional Class | (565 | ) | (389 | ) | |||||
Change in net assets from Fund share transactions: | |||||||||
Primary Class | (24,402 | ) | 35,499 | ||||||
Institutional Class | 2,040 | 3,066 | |||||||
Change in net assets | (16,146 | ) | 65,328 | ||||||
Net Assets: | |||||||||
Beginning of year | 230,207 | 164,879 | |||||||
End of year | $ | 214,061 | $ | 230,207 | |||||
Under/(over) distributed net investment income | $ | (92 | ) | $ | (88 | ) | |||
See notes to financial statements.
Financial Highlights
High Yield Portfolio
Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.
Primary Class:
Years Ended December 31, | |||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||
Net asset value, beginning of year | $9.10 | $ | 7.96 | $ | 9.22 | $ | 10.18 | $ | 14.97 | ||||||||||||
Investment operations: | |||||||||||||||||||||
Net investment income | .62 | .63 | .77 | .94 | 1.32 | ||||||||||||||||
Net realized and unrealized gain/(loss) on investments | .29 | 1.15 | (1.26 | ) | (.94 | ) | (3.45 | ) | |||||||||||||
Total from investment operations | .91 | 1.78 | (.49 | ) | — | (2.13 | ) | ||||||||||||||
Distributions: | |||||||||||||||||||||
From net investment income | (.62 | ) | (.64 | ) | (.77 | ) | (.96 | ) | (1.27 | ) | |||||||||||
From net realized gain on investments | — | — | — | — | (1.39 | ) | |||||||||||||||
Total distributions | (.62 | ) | (.64 | ) | (.77 | ) | (.96 | ) | (2.66 | ) | |||||||||||
Net asset value, end of year | $9.39 | $ | 9.10 | $ | 7.96 | $ | 9.22 | $ | 10.18 | ||||||||||||
Ratios/supplemental data: | |||||||||||||||||||||
Total return | 10.51 | % | 23.03 | % | (5.28) | % | (.13) | % | (16.43) | % | |||||||||||
Expenses to average net assets | 1.36 | % | 1.41 | % | 1.36 | % | 1.51 | % | 1.51 | % | |||||||||||
Net investment income to average net assets | 6.79 | % | 7.26 | % | 9.06 | % | 9.59 | % | 9.98 | % | |||||||||||
Portfolio turnover rate | 109 | % | 122 | % | 97 | % | 130 | % | 45 | % | |||||||||||
Net assets, end of year (in thousands) | $ | 205,314 | $ | 223,773 | $ | 162,175 | $ | 199,214 | $ | 217,769 | |||||||||||
See notes to financial statements.
Institutional Class:
Years Ended December 31, | |||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||
Net asset value, beginning of year | $9.11 | $ | 7.96 | $ | 9.20 | $ | 10.18 | $ | 14.97 | ||||||||||||
Investment operations: | |||||||||||||||||||||
Net investment income | .66 | .66 | .78 | 1.01 | 1.41 | ||||||||||||||||
Net realized and unrealized gain/(loss) on investments | .31 | 1.15 | (1.24 | ) | (1.00 | ) | (3.47 | ) | |||||||||||||
Total from investment operations | .97 | 1.81 | (.46 | ) | .01 | (2.06 | ) | ||||||||||||||
Distributions: | |||||||||||||||||||||
From net investment income | (.67 | ) | (.66 | ) | (.78 | ) | (.99 | ) | (1.34 | ) | |||||||||||
From net realized gain on investments | — | — | — | — | (1.39 | ) | |||||||||||||||
Total distributions | (.67 | ) | (.66 | ) | (.78 | ) | (.99 | ) | (2.73 | ) | |||||||||||
Net asset value, end of year | $9.41 | $ | 9.11 | $ | 7.96 | $ | 9.20 | $ | 10.18 | ||||||||||||
Ratios/supplemental data: | |||||||||||||||||||||
Total return | 11.15 | % | 23.54 | % | (5.00) | % | (.06) | % | (15.99) | % | |||||||||||
Expenses to average net assets | .80 | % | .85 | % | .82 | % | .97 | % | 1.03 | % | |||||||||||
Net investment income to average net assets | 7.38 | % | 7.78 | % | 9.63 | % | 10.20 | % | 10.98 | % | |||||||||||
Portfolio turnover rate | 109 | % | 122 | % | 97 | % | 130 | % | 45 | % | |||||||||||
Net assets, end of year (in thousands) | $8,747 | $ | 6,434 | $ | 2,704 | $ | 1,331 | $ | 673 | ||||||||||||
See notes to financial statements.
Management’s Discussion of Fund Performance
Investment Grade Income Portfolio
Average annual total returns for the Investment Grade Income Portfolio and its benchmark for various periods ended December 31, 2004, are presented below:
One | Five | Ten | Since | ||||||||||||||
Year | Years | Years | InceptionA | ||||||||||||||
Investment Grade | |||||||||||||||||
Primary Class | +6.29% | +8.38% | +8.16% | +7.96% | |||||||||||||
Institutional Class | +6.85% | +8.94% | N/A | +7.51% | |||||||||||||
Lehman Credit Bond IndexB | +4.08% | +8.05% | +7.91% | +8.19% |
The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.leggmasonfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. |
For the calendar year 2004, the Primary Class of the Fund returned 6.29% versus 4.08% for the Fund’s benchmark, the Lehman Credit Bond Index. The option-adjusted spread of the Index narrowed from +89 basis points (bps)C to similar duration Treasuries on December 31, 2003, to +75 bps on December 31, 2004. The portfolio’s outperformance is primarily attributable to the manager’s decision to overweight BBB rated issues, which returned 6.25% for the year, as well as favorable overweight and underweight sub-sector and issue selection decisions. Overweights to communications and energy which were up 6.38% and 7.12%, respectively in 2004 and an underweight to non-corporate issuers which were up 4.48% helped relative performance. Duration exposure was neutral to somewhat short for the period, and this detracted from performance since most yields rose by less than forward rates had anticipated.
Western Asset Management Company
January 28, 2005
A | The inception date of the Primary Class is August 7, 1987. The inception date of the Institutional Class is December 1, 1995. Index returns are for periods beginning July 31, 1987. |
B | This index includes all publicly issued, fixed rate, non-convertible, investment grade, domestic corporate debt. It also includes Yankee bonds, which are dollar-denominated, SEC- registered public, non-convertible debt issued or guaranteed by foreign sovereign governments, municipalities, governmental agencies, and international agencies. |
C | 100 basis points = 1%. |
Investment Grade Income Portfolio
As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Each example is based on an investment of $1,000 invested on July 1, 2004, and held through December 31, 2004.
Actual Expenses
The first line for each class in the table below provides information about actual account values and actual expenses for each class. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each class in the table below provides information about hypothetical account values and hypothetical expenses based on the relevant class’s actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the class’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples for the relevant class that appear in the shareholder reports of other funds.
Beginning | Ending | Expenses PaidA | |||||||||||||||
Account | Account | During the | Annualized | ||||||||||||||
Value | Value | Period 7/1/04 to | Expense | ||||||||||||||
7/1/04 | 12/31/04 | 12/31/04 | Ratio | ||||||||||||||
Primary Class: | |||||||||||||||||
Actual | $ | 1,000.00 | $ | 1,067.70 | $ | 5.21 | 1.00% | ||||||||||
Hypothetical (5% return before expenses) | 1,000.00 | 1,020.16 | 5.09 | ||||||||||||||
Institutional Class: | |||||||||||||||||
Actual | $ | 1,000.00 | $ | 1,071.60 | $ | 2.45 | 0.47% | ||||||||||
Hypothetical (5% return before expenses) | 1,000.00 | 1,022.84 | 2.40 |
A | These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365. |
Performance Information
Investment Grade Income Portfolio
The following graphs compare the Fund’s total returns against that of a closely matched broad-based securities market index. The graphs illustrate the cumulative total return of an initial $10,000 investment in Primary Class shares and an initial $1,000,000 investment in Institutional Class shares of the Fund, for the periods indicated. The lines for the Fund represent the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The line representing the securities market index does not include any transaction costs associated with buying and selling securities in the index or other administrative expenses. Both the Fund’s results and the index’s results assume reinvestment of all dividends and distributions.
Growth of a $10,000 Investment — Primary Class
Periods Ended December 31, 2004
Cumulative | Average Annual | |||||||||
Total Return | Total Return | |||||||||
One Year | +6.29% | +6.29% | ||||||||
Five Years | +49.54% | +8.38% | ||||||||
Ten Years | +119.16% | +8.16% |
The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.leggmasonfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.
The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
A | This index includes all publicly issued, fixed rate, non-convertible, investment grade, domestic corporate debt. It also includes Yankee bonds, which are dollar-denominated, SEC-registered public, non-convertible debt issued or guaranteed by foreign sovereign governments, municipalities, governmental agencies, and international agencies. |
Growth of a $1,000,000 Investment — Institutional Class
Periods Ended December 31, 2004
Cumulative | Average Annual | |||||||||
Total Return | Total Return | |||||||||
One Year | +6.85% | +6.85% | ||||||||
Five Years | +53.42% | +8.94% | ||||||||
Life of Class* | +93.01% | +7.51% | ||||||||
*Inception date: December 1, 1995 |
The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please call 1-888-425-6432. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.
The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
C | Index returns are for periods beginning November 30, 1995. |
Portfolio Composition (As of December 31, 2004)
Debt RatingsD (As a percentage of the portfolio)
Maturity Schedule (As a percentage of the portfolio)
D | Source: Standard & Poor’s |
Portfolio of Investments
Investment Grade Income Portfolio
(Amounts in Thousands)
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Long-Term Securities — 97.5% | |||||||||||||||||
Corporate Bonds and Notes — 72.9% | |||||||||||||||||
Aerospace/ Defense — 1.3% | |||||||||||||||||
General Dynamics Corporation | 3.000% | 5/15/08 | $ | 525 | $ | 513 | |||||||||||
L-3 Communications Corp. | 7.625% | 6/15/12 | 1,000 | 1,098 | |||||||||||||
Lockheed Martin Corporation | 8.500% | 12/1/29 | 760 | 1,040 | |||||||||||||
Northrop Grumman Corporation | 4.079% | 11/16/06 | 680 | 687 | |||||||||||||
Northrop Grumman Corporation | 7.750% | 2/15/31 | 170 | 218 | |||||||||||||
Raytheon Company | 6.150% | 11/1/08 | 489 | 526 | |||||||||||||
Raytheon Company | 5.375% | 4/1/13 | 400 | 416 | |||||||||||||
Raytheon Company | 6.400% | 12/15/18 | 840 | 927 | |||||||||||||
5,425 | |||||||||||||||||
Auto Parts and Equipment — 0.2% | |||||||||||||||||
American Axle & Manufacturing Inc. | 5.250% | 2/11/14 | 800 | 768 | |||||||||||||
Lear Corporation | 7.960% | 5/15/05 | 231 | 235 | |||||||||||||
1,003 | |||||||||||||||||
Automotive — 0.6% | |||||||||||||||||
Ford Motor Company | 7.450% | 7/16/31 | 725 | 729 | |||||||||||||
Ford Motor Company | 8.900% | 1/15/32 | 370 | 421 | |||||||||||||
General Motors Corporation | 8.250% | 7/15/23 | 650 | 677 | |||||||||||||
General Motors Corporation | 8.375% | 7/15/33 | 660 | 684 | |||||||||||||
2,511 | |||||||||||||||||
Banking and Finance — 9.9% | |||||||||||||||||
Boeing Capital Corporation | 6.500% | 2/15/12 | 1,000 | 1,121 | |||||||||||||
Boeing Capital Corporation | 5.800% | 1/15/13 | 1,500 | 1,618 | |||||||||||||
Countrywide Home Loans, Inc. | 2.875% | 2/15/07 | 1,320 | 1,297 | |||||||||||||
Countrywide Home Loans, Inc. | 3.250% | 5/21/08 | 1,200 | 1,173 | |||||||||||||
Ford Motor Credit Company | 6.875% | 2/1/06 | 250 | 257 | |||||||||||||
Ford Motor Credit Company | 6.500% | 1/25/07 | 6,950 | 7,227 | |||||||||||||
Ford Motor Credit Company | 7.375% | 10/28/09 | 2,970 | 3,204 | |||||||||||||
Ford Motor Credit Company | 7.250% | 10/25/11 | 2,070 | 2,220 | |||||||||||||
Ford Motor Credit Company | 7.000% | 10/1/13 | 2,730 | 2,894 | |||||||||||||
General Motors Acceptance Corporation | 3.185% | 5/18/06 | 1,725 | 1,717 | A |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Banking and Finance — Continued | |||||||||||||||||
General Motors Acceptance Corporation | 6.125% | 8/28/07 | $ | 3,000 | $ | 3,089 | |||||||||||
General Motors Acceptance Corporation | 5.625% | 5/15/09 | 590 | 590 | |||||||||||||
General Motors Acceptance Corporation | 6.875% | 9/15/11 | 750 | 769 | |||||||||||||
General Motors Acceptance Corporation | 0.000% | 6/15/15 | 2,700 | 1,276 | B | ||||||||||||
Household Finance Corporation | 4.125% | 11/16/09 | 1,325 | 1,318 | |||||||||||||
John Deere Capital Corporation | 4.500% | 8/22/07 | 495 | 506 | |||||||||||||
MBNA America Bank | 5.375% | 1/15/08 | 1,200 | 1,253 | |||||||||||||
Mizuho Financial Group, Inc. | 5.790% | 4/15/14 | 2,595 | 2,726 | C | ||||||||||||
National Rural Utilities Cooperative Finance Corporation | 7.250% | 3/1/12 | 1,700 | 1,962 | |||||||||||||
SB Treasury Company LLC | 9.400% | 12/29/49 | 840 | 968 | C | ||||||||||||
Toyota Motor Credit Corporation | 5.500% | 12/15/08 | 1,000 | 1,059 | |||||||||||||
Wells Fargo & Company | 5.125% | 2/15/07 | 2,600 | 2,690 | |||||||||||||
Wells Fargo & Company | 5.000% | 11/15/14 | 90 | 91 | |||||||||||||
41,025 | |||||||||||||||||
Banks — 4.4% | |||||||||||||||||
Bank of America Corporation | 3.375% | 2/17/09 | 1,500 | 1,470 | |||||||||||||
Bank of America Corporation | 7.400% | 1/15/11 | 1,785 | 2,068 | |||||||||||||
Bank of America Corporation | 4.750% | 8/15/13 | 470 | 469 | |||||||||||||
Bank One Corporation | 4.125% | 9/1/07 | 2,130 | 2,164 | |||||||||||||
BankAmerica Capital | 2.640% | 1/15/27 | 585 | 565 | A | ||||||||||||
CBA Capital Trust I | 5.805% | 6/30/15 | 3,510 | 3,654 | C | ||||||||||||
Chase Capital II | 2.660% | 2/1/27 | 1,980 | 1,860 | A | ||||||||||||
Key Bank NA | 5.800% | 7/1/14 | 535 | 567 | |||||||||||||
UnionBanCal Corporation | 5.250% | 12/16/13 | 785 | 796 | |||||||||||||
Wachovia Bank NA | 7.800% | 8/18/10 | 580 | 681 | |||||||||||||
Wachovia Corporation | 3.625% | 2/17/09 | 2,400 | 2,372 | |||||||||||||
Washington Mutual, Inc. | 4.200% | 1/15/10 | 700 | 697 | |||||||||||||
Washington Mutual, Inc. | 4.625% | 4/1/14 | 1,000 | 956 | |||||||||||||
18,319 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Building Materials — N.M. | |||||||||||||||||
American Standard, Inc. | 8.250% | 6/1/09 | $ | 37 | $ | 43 | |||||||||||
American Standard, Inc. | 7.625% | 2/15/10 | 5 | 5 | |||||||||||||
48 | |||||||||||||||||
Cable — 2.0% | |||||||||||||||||
Comcast Cable Communications, Inc. | 6.750% | 1/30/11 | 960 | 1,078 | |||||||||||||
Comcast Corporation | 7.050% | 3/15/33 | 1,800 | 2,060 | |||||||||||||
Cox Communications, Inc. | 7.125% | 10/1/12 | 2,875 | 3,223 | |||||||||||||
CSC Holdings Inc. | 7.625% | 7/15/18 | 1,500 | 1,586 | |||||||||||||
Tele-Communications, Inc. | 7.125% | 2/15/28 | 180 | 203 | |||||||||||||
8,150 | |||||||||||||||||
Casino Resorts — 0.2% | |||||||||||||||||
Harrah’s Operating Company, Inc. | 7.875% | 12/15/05 | 500 | 520 | |||||||||||||
Harrah’s Operating Company, Inc. | 5.500% | 7/1/10 | 410 | 424 | |||||||||||||
944 | |||||||||||||||||
Chemicals — 0.7% | |||||||||||||||||
E. I. du Pont de Nemours and Company | 4.875% | 4/30/14 | 1,100 | 1,123 | |||||||||||||
The Dow Chemical Company | 6.000% | 10/1/12 | 750 | 819 | |||||||||||||
The Dow Chemical Company | 7.375% | 11/1/29 | 800 | 971 | |||||||||||||
2,913 | |||||||||||||||||
Computer Services and Systems — 1.2% | |||||||||||||||||
Electronic Data Systems Corporation | 7.125% | 10/15/09 | 530 | 583 | |||||||||||||
Electronic Data Systems Corporation | 6.500% | 8/1/13 | 500 | 528 | |||||||||||||
Electronic Data Systems Corporation | 7.450% | 10/15/29 | 570 | 616 | |||||||||||||
Hewlett-Packard Company | 3.625% | 3/15/08 | 1,500 | 1,493 | |||||||||||||
International Business Machines Corporation | 4.750% | 11/29/12 | 1,750 | 1,787 | |||||||||||||
5,007 | |||||||||||||||||
Consumer Products — 0.3% | |||||||||||||||||
The Clorox Company | 5.000% | 1/15/15 | 350 | 356 | C | ||||||||||||
The Procter & Gamble Company | 4.300% | 8/15/08 | 1,000 | 1,025 | |||||||||||||
1,381 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Diversified Financial Services — 5.8% | |||||||||||||||||
Associates Corporation of North America | 8.150% | 8/1/09 | $ | 775 | $ | 905 | |||||||||||
Capital One Bank | 4.875% | 5/15/08 | 150 | 154 | |||||||||||||
Capital One Financial Corporation | 8.750% | 2/1/07 | 400 | 439 | |||||||||||||
Capital One Financial Corporation | 7.125% | 8/1/08 | 340 | 373 | |||||||||||||
CIT Group Inc. | 3.875% | 11/3/08 | 1,065 | 1,056 | |||||||||||||
Citigroup Inc. | 5.500% | 8/9/06 | 1,000 | 1,034 | |||||||||||||
Citigroup Inc. | 5.000% | 3/6/07 | 4,800 | 4,954 | |||||||||||||
Citigroup Inc. | 5.625% | 8/27/12 | 1,600 | 1,704 | |||||||||||||
General Electric Capital Corporation | 3.500% | 5/1/08 | 4,140 | 4,109 | |||||||||||||
General Electric Capital Corporation | 3.750% | 12/15/09 | 4,900 | 4,822 | |||||||||||||
General Electric Capital Corporation | 5.450% | 1/15/13 | 2,000 | 2,111 | |||||||||||||
General Electric Capital Corporation | 6.750% | 3/15/32 | 5 | 6 | |||||||||||||
IBJ Preferred Capital Corp. LLC | 8.790% | 12/29/49 | 1,520 | 1,722 | C | ||||||||||||
iStar Financial Inc. | 6.000% | 12/15/10 | 580 | 612 | |||||||||||||
24,001 | |||||||||||||||||
Diversified Services — 0.3% | |||||||||||||||||
SPX Corporation | 7.500% | 1/1/13 | 1,000 | 1,085 | |||||||||||||
Drug and Grocery Store Chains — 0.5% | |||||||||||||||||
Kroger Company | 8.000% | 9/15/29 | 1,000 | 1,245 | |||||||||||||
Safeway Inc. | 5.800% | 8/15/12 | 750 | 792 | |||||||||||||
2,037 | |||||||||||||||||
Electric — 4.7% | |||||||||||||||||
AEP Texas Central Company | 5.500% | 2/15/13 | 1,060 | 1,101 | |||||||||||||
American Electric Power Company, Inc. | 6.125% | 5/15/06 | 965 | 1,000 | |||||||||||||
American Electric Power Company, Inc. | 5.250% | 6/1/15 | 350 | 353 | |||||||||||||
Commonwealth Edison Company | 6.150% | 3/15/12 | 560 | 616 | |||||||||||||
Dominion Resources, Inc. | 5.125% | 12/15/09 | 490 | 507 | |||||||||||||
Dominion Resources, Inc. | 5.700% | 9/17/12 | 590 | 625 | |||||||||||||
FirstEnergy Corp. | 6.450% | 11/15/11 | 2,285 | 2,483 | |||||||||||||
FirstEnergy Corp. | 7.375% | 11/15/31 | 4,440 | 5,070 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Electric — Continued | |||||||||||||||||
Niagara Mohawk Power Corporation | 7.750% | 10/1/08 | $ | 1,010 | $ | 1,136 | |||||||||||
Oncor Electric Delivery Company | 7.000% | 9/1/22 | 500 | 570 | |||||||||||||
Southern California Edison Company | 8.000% | 2/15/07 | 950 | 1,035 | |||||||||||||
System Energy Resources, Inc. | 4.875% | 10/1/07 | 1,020 | 1,042 | |||||||||||||
Tampa Electric Company | 6.375% | 8/15/12 | 380 | 419 | |||||||||||||
The Cleveland Electric Illuminating Company | 5.650% | 12/15/13 | 940 | 975 | |||||||||||||
The Cleveland Electric Illuminating Company | 7.880% | 11/1/17 | 850 | 1,046 | |||||||||||||
The Detroit Edison Company | 5.200% | 10/15/12 | 1,260 | 1,309 | |||||||||||||
19,287 | |||||||||||||||||
Energy — 3.6% | |||||||||||||||||
Alabama Power Company | 3.125% | 5/1/08 | 920 | 901 | |||||||||||||
DTE Energy Company | 6.375% | 4/15/33 | 350 | 365 | |||||||||||||
Duke Energy Corporation | 3.750% | 3/5/08 | 1,020 | 1,019 | |||||||||||||
Duke Energy Corporation | 5.625% | 11/30/12 | 270 | 284 | |||||||||||||
Exelon Corporation | 6.750% | 5/1/11 | 2,000 | 2,237 | |||||||||||||
MidAmerican Energy Holdings Company | 5.875% | 10/1/12 | 750 | 795 | |||||||||||||
Pacific Gas and Electric Company | 2.720% | 4/3/06 | 832 | 833 | A | ||||||||||||
Pacific Gas and Electric Company | 6.050% | 3/1/34 | 4,270 | 4,435 | |||||||||||||
Sempra Energy | 2.809% | 5/21/08 | 1,685 | 1,679 | A | ||||||||||||
TXU Corp. | 6.375% | 6/15/06 | 100 | 104 | |||||||||||||
TXU Energy Co. | 2.838% | 1/17/06 | 355 | 356 | A,C | ||||||||||||
TXU Energy Co. | 7.000% | 3/15/13 | 930 | 1,039 | |||||||||||||
Xcel Energy, Inc. | 7.000% | 12/1/10 | 900 | 1,014 | |||||||||||||
15,061 | |||||||||||||||||
Environmental Services — 0.6% | |||||||||||||||||
Republic Services, Inc. | 6.750% | 8/15/11 | 1,340 | 1,505 | |||||||||||||
Waste Management, Inc. | 6.375% | 11/15/12 | 310 | 343 | |||||||||||||
Waste Management, Inc. | 7.375% | 5/15/29 | 690 | 811 | |||||||||||||
2,659 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Food, Beverage and Tobacco — 3.3% | |||||||||||||||||
Altria Group, Inc. | 6.375% | 2/1/06 | $ | 490 | $ | 502 | |||||||||||
Altria Group, Inc. | 7.000% | 11/4/13 | 1,385 | 1,501 | |||||||||||||
Coca-Cola Enterprises Inc. | 5.250% | 5/15/07 | 980 | 1,019 | |||||||||||||
Kellogg Company | 6.600% | 4/1/11 | 1,000 | 1,120 | |||||||||||||
Kellogg Company | 7.450% | 4/1/31 | 650 | 819 | |||||||||||||
Kraft Foods Inc. | 4.125% | 11/12/09 | 3,850 | 3,829 | |||||||||||||
Kraft Foods Inc. | 6.250% | 6/1/12 | 210 | 231 | |||||||||||||
Kraft Foods Inc. | 6.500% | 11/1/31 | 1,050 | 1,158 | |||||||||||||
R.J. Reynolds Tobacco Holdings, Inc. | 7.750% | 5/15/06 | 1,280 | 1,338 | |||||||||||||
R.J. Reynolds Tobacco Holdings, Inc. | 7.875% | 5/15/09 | 860 | 922 | |||||||||||||
The Pepsi Bottling Group, Inc. | 7.000% | 3/1/29 | 340 | 410 | |||||||||||||
Tyson Foods, Inc. | 7.000% | 1/15/28 | 800 | 865 | |||||||||||||
13,714 | |||||||||||||||||
Gas and Pipeline Utilities — 1.5% | |||||||||||||||||
CenterPoint Energy Resources Corp. | 7.875% | 4/1/13 | 1,010 | 1,200 | |||||||||||||
Dynegy Holdings Inc. | 8.750% | 2/15/12 | 1,690 | 1,770 | |||||||||||||
Tennessee Gas Pipeline Company | 8.375% | 6/15/32 | 1,000 | 1,128 | |||||||||||||
The Williams Companies, Inc. | 7.625% | 7/15/19 | 2,000 | 2,200 | |||||||||||||
6,298 | |||||||||||||||||
Health Care — 1.0% | |||||||||||||||||
Tenet Healthcare Corporation | 7.375% | 2/1/13 | 2,310 | 2,241 | |||||||||||||
Tenet Healthcare Corporation | 6.875% | 11/15/31 | 750 | 639 | |||||||||||||
WellPoint Inc. | 5.000% | 12/15/14 | 1,330 | 1,326 | C | ||||||||||||
4,206 | |||||||||||||||||
Homebuilding — 0.2% | |||||||||||||||||
Centex Corporation | 5.125% | 10/1/13 | 420 | 420 | |||||||||||||
Pulte Homes, Inc. | 6.250% | 2/15/13 | 385 | 410 | |||||||||||||
830 | |||||||||||||||||
Insurance — 0.3% | |||||||||||||||||
Loews Corporation | 7.000% | 10/15/23 | 1,000 | 1,013 | |||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Investment Banking/ Brokerage — 5.7% | |||||||||||||||||
J.P. Morgan Chase & Co. | 5.125% | 9/15/14 | $ | 6,175 | $ | 6,215 | |||||||||||
Lehman Brothers Holdings Inc. | 6.250% | 5/15/06 | 2,000 | 2,081 | |||||||||||||
Lehman Brothers Holdings Inc. | 4.800% | 3/13/14 | 800 | 789 | |||||||||||||
Merrill Lynch & Co., Inc. | 3.375% | 9/14/07 | 1,345 | 1,337 | |||||||||||||
Merrill Lynch & Co., Inc. | 6.000% | 2/17/09 | 800 | 859 | |||||||||||||
Merrill Lynch & Co., Inc. | 5.000% | 1/15/15 | 1,420 | 1,414 | |||||||||||||
Morgan Stanley | 5.800% | 4/1/07 | 2,600 | 2,726 | |||||||||||||
The Bear Stearns Companies Inc. | 4.000% | 1/31/08 | 1,600 | 1,612 | |||||||||||||
The Goldman Sachs Group, Inc. | 4.750% | 7/15/13 | 4,490 | 4,443 | |||||||||||||
The Goldman Sachs Group, Inc. | 6.345% | 2/15/34 | 2,025 | 2,109 | |||||||||||||
23,585 | |||||||||||||||||
Machinery — 0.3% | |||||||||||||||||
Case New Holland Incorporated | 9.250% | 8/1/11 | 1,000 | 1,113 | C | ||||||||||||
Manufacturing (Diversified) — 0.1% | |||||||||||||||||
The Gillette Company | 2.875% | 3/15/08 | 410 | 401 | |||||||||||||
Media — 2.9% | |||||||||||||||||
AOL Time Warner Inc. | 6.150% | 5/1/07 | 1,390 | 1,470 | |||||||||||||
Clear Channel Communications, Inc. | 4.400% | 5/15/11 | 1,210 | 1,175 | |||||||||||||
EchoStar DBS Corporation | 5.256% | 10/1/08 | 500 | 518 | A | ||||||||||||
Liberty Media Corporation | 3.990% | 9/17/06 | 2,335 | 2,364 | A | ||||||||||||
Liberty Media Corporation | 8.500% | 7/15/29 | 340 | 394 | |||||||||||||
Liberty Media Corporation | 8.250% | 2/1/30 | 120 | 136 | |||||||||||||
News America, Inc. | 6.550% | 3/15/33 | 965 | 1,027 | |||||||||||||
Time Warner Entertainment Company, L.P. | 8.375% | 7/15/33 | 855 | 1,105 | |||||||||||||
Time Warner Inc. | 6.875% | 5/1/12 | 1,260 | 1,435 | |||||||||||||
Time Warner Inc. | 7.700% | 5/1/32 | 1,740 | 2,128 | |||||||||||||
Viacom Inc. | 7.700% | 7/30/10 | 90 | 105 | |||||||||||||
Viacom Inc. | 5.625% | 8/15/12 | 240 | 257 | |||||||||||||
12,114 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Media and Entertainment — 0.3% | |||||||||||||||||
The Walt Disney Company | 6.200% | 6/20/14 | $ | 1,280 | $ | 1,417 | |||||||||||
Medical Care Facilities — 1.0% | |||||||||||||||||
HCA, Inc. | 6.300% | 10/1/12 | 1,790 | 1,815 | |||||||||||||
HCA, Inc. | 5.750% | 3/15/14 | 2,280 | 2,209 | |||||||||||||
4,024 | |||||||||||||||||
Metals and Mining — 0.5% | |||||||||||||||||
Alcoa Inc. | 5.375% | 1/15/13 | 1,800 | 1,893 | |||||||||||||
Oil and Gas — 4.3% | |||||||||||||||||
Amerada Hess Corporation | 7.300% | 8/15/31 | 3,740 | 4,173 | |||||||||||||
Apache Corporation | 6.250% | 4/15/12 | 1,150 | 1,287 | |||||||||||||
Conoco Inc. | 6.950% | 4/15/29 | 820 | 968 | |||||||||||||
ConocoPhillips | 4.750% | 10/15/12 | 2,810 | 2,865 | |||||||||||||
Devon Energy Corporation | 7.950% | 4/15/32 | 1,520 | 1,942 | |||||||||||||
El Paso Corporation | 7.800% | 8/1/31 | 1,660 | 1,594 | |||||||||||||
El Paso Corporation | 7.750% | 1/15/32 | 340 | 325 | |||||||||||||
Ocean Energy Inc. | 4.375% | 10/1/07 | 965 | 979 | |||||||||||||
Panhandle Eastern Pipe Line Company | 4.800% | 8/15/08 | 1,170 | 1,195 | |||||||||||||
Pemex Project Funding Master Trust | 8.500% | 2/15/08 | 100 | 113 | |||||||||||||
Pride International, Inc. | 7.375% | 7/15/14 | 800 | 874 | |||||||||||||
Valero Energy Corporation | 6.875% | 4/15/12 | 565 | 641 | |||||||||||||
XTO Energy, Inc. | 6.250% | 4/15/13 | 745 | 815 | |||||||||||||
17,771 | |||||||||||||||||
Paper and Forest Products — 1.1% | |||||||||||||||||
International Paper Company | 5.500% | 1/15/14 | 1,000 | 1,033 | |||||||||||||
MeadWestvaco Corporation | 6.850% | 4/1/12 | 1,080 | 1,221 | |||||||||||||
Weyerhaeuser Company | 6.125% | 3/15/07 | 331 | 348 | |||||||||||||
Weyerhaeuser Company | 6.750% | 3/15/12 | 1,070 | 1,206 | |||||||||||||
Weyerhaeuser Company | 7.375% | 3/15/32 | 720 | 854 | |||||||||||||
4,662 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Pharmaceuticals — 0.4% | |||||||||||||||||
Bristol-Myers Squibb Company | 4.750% | 10/1/06 | $ | 300 | $ | 307 | |||||||||||
Bristol-Myers Squibb Company | 5.750% | 10/1/11 | 1,160 | 1,242 | |||||||||||||
1,549 | |||||||||||||||||
Photo Equipment and Supplies — 0.4% | |||||||||||||||||
Eastman Kodak Company | 3.625% | 5/15/08 | 975 | 950 | |||||||||||||
Eastman Kodak Company | 7.250% | 11/15/13 | 500 | 539 | |||||||||||||
1,489 | |||||||||||||||||
Real Estate — 0.4% | |||||||||||||||||
EOP Operating Limited Partnership | 6.750% | 2/15/12 | 1,500 | 1,670 | |||||||||||||
Retail — 0.6% | |||||||||||||||||
Target Corporation | 5.875% | 3/1/12 | 860 | 936 | |||||||||||||
Toys “R” Us, Inc. | 7.875% | 4/15/13 | 1,000 | 993 | |||||||||||||
Wal-Mart Stores, Inc. | 6.875% | 8/10/09 | 475 | 533 | |||||||||||||
2,462 | |||||||||||||||||
Special Purpose — 7.7% | |||||||||||||||||
Ahold Finance USA, Inc. | 8.250% | 7/15/10 | 960 | 1,087 | |||||||||||||
American Honda Finance Corporation | 3.850% | 11/6/08 | 960 | 957 | C | ||||||||||||
Anadarko Finance Company | 6.750% | 5/1/11 | 970 | 1,092 | |||||||||||||
Arch Western Finance, LLC | 6.750% | 7/1/13 | 1,000 | 1,033 | |||||||||||||
Caterpillar Financial Services Corporation | 4.500% | 6/15/09 | 1,040 | 1,062 | |||||||||||||
ChevronTexaco Capital Company | 3.500% | 9/17/07 | 1,000 | 1,004 | |||||||||||||
Conoco Funding Company | 5.450% | 10/15/06 | 1,250 | 1,295 | |||||||||||||
DaimlerChrysler NA Holding Corporation | 6.400% | 5/15/06 | 800 | 832 | |||||||||||||
DaimlerChrysler NA Holding Corporation | 2.940% | 9/10/07 | 1,520 | 1,525 | A | ||||||||||||
DaimlerChrysler NA Holding Corporation | 4.050% | 6/4/08 | 470 | 469 | |||||||||||||
DaimlerChrysler NA Holding Corporation | 7.200% | 9/1/09 | 260 | 289 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Special Purpose — Continued | |||||||||||||||||
DaimlerChrysler NA Holding Corporation | 7.300% | 1/15/12 | $ | 735 | $ | 835 | |||||||||||
DaimlerChrysler NA Holding Corporation | 6.500% | 11/15/13 | 290 | 315 | |||||||||||||
DaimlerChrysler NA Holding Corporation | 8.500% | 1/18/31 | 1,800 | 2,249 | |||||||||||||
Duke Capital Corporation | 6.250% | 2/15/13 | 340 | 367 | |||||||||||||
Fosters Finance Corporation | 4.875% | 10/1/14 | 840 | 835 | C | ||||||||||||
NiSource Finance Corp. | 3.200% | 11/1/06 | 985 | 976 | |||||||||||||
Rabobank Capital Funding Trust III | 5.254% | 12/31/16 | 1,020 | 1,014 | C | ||||||||||||
Sprint Capital Corporation | 4.780% | 8/17/06 | 1,055 | 1,075 | D | ||||||||||||
Sprint Capital Corporation | 6.000% | 1/15/07 | 700 | 733 | |||||||||||||
Sprint Capital Corporation | 8.375% | 3/15/12 | 1,520 | 1,852 | |||||||||||||
Sprint Capital Corporation | 8.750% | 3/15/32 | 2,170 | 2,891 | |||||||||||||
TCI Communications Financing III | 9.650% | 3/31/27 | 3,350 | 3,874 | |||||||||||||
Unilever Capital Corporation | 7.125% | 11/1/10 | 480 | 552 | |||||||||||||
Verizon Global Funding Corp. | 6.125% | 6/15/07 | 2,065 | 2,187 | |||||||||||||
Verizon Global Funding Corp. | 7.750% | 6/15/32 | 375 | 468 | |||||||||||||
Verizon Wireless Capital LLC | 5.375% | 12/15/06 | 800 | 829 | |||||||||||||
31,697 | |||||||||||||||||
Telecommunications — 1.5% | |||||||||||||||||
BellSouth Corporation | 4.750% | 11/15/12 | 830 | 835 | |||||||||||||
GTE Hawaiian Telephone Company, Inc. | 7.000% | 2/1/06 | 750 | 773 | |||||||||||||
Qwest Corporation | 5.625% | 11/15/08 | 550 | 559 | |||||||||||||
SBC Communications Inc. | 5.100% | 9/15/14 | 1,910 | 1,928 | |||||||||||||
Verizon New York Inc. | 6.875% | 4/1/12 | 1,820 | 2,043 | |||||||||||||
6,138 | |||||||||||||||||
Telecommunications (Cellular/ Wireless) — 1.8% | |||||||||||||||||
AT&T Wireless Services Inc. | 7.500% | 5/1/07 | 1,500 | 1,629 | |||||||||||||
AT&T Wireless Services Inc. | 8.125% | 5/1/12 | 390 | 472 | |||||||||||||
AT&T Wireless Services Inc. | 8.750% | 3/1/31 | 980 | 1,321 | |||||||||||||
Cingular Wireless LLC | 5.625% | 12/15/06 | 800 | 831 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Telecommunications (Cellular/ Wireless) — Continued | |||||||||||||||||
Motorola, Inc. | 7.625% | 11/15/10 | $ | 850 | $ | 986 | |||||||||||
Nextel Communications, Inc. | 5.950% | 3/15/14 | 469 | 485 | |||||||||||||
Nextel Communications, Inc. | 7.375% | 8/1/15 | 1,600 | 1,760 | |||||||||||||
7,484 | |||||||||||||||||
Transportation — 1.3% | |||||||||||||||||
Burlington Northern Railroad Company | 6.960% | 3/22/09 | 230 | 242 | |||||||||||||
Burlington Northern Railroad Company | 7.330% | 6/23/10 | 167 | 167 | |||||||||||||
Continental Airlines, Inc. | 6.545% | 2/2/19 | 169 | 167 | |||||||||||||
Continental Airlines, Inc. | 7.256% | 3/15/20 | 576 | 590 | |||||||||||||
CSX Transportation, Inc. | 7.875% | 5/15/43 | 252 | 315 | |||||||||||||
Delta Air Lines, Inc. | 7.570% | 11/18/10 | 400 | 395 | |||||||||||||
Delta Air Lines, Inc. | 6.718% | 1/2/23 | 746 | 778 | |||||||||||||
Norfolk Southern Corporation | 7.875% | 5/15/43 | 348 | 445 | |||||||||||||
Northwest Airlines Corporation | 7.575% | 3/1/19 | 196 | 203 | |||||||||||||
Union Pacific Corporation | 4.875% | 1/15/15 | 1,740 | 1,724 | |||||||||||||
United Airlines, Inc. | 7.783% | 1/1/14 | 245 | 217 | |||||||||||||
5,243 | |||||||||||||||||
Total Corporate Bonds and Notes (Identified Cost — $293,660) | 301,629 | ||||||||||||||||
U.S. Government and Agency Obligations — 1.6% | |||||||||||||||||
Fixed Rate Securities — 0.1% | |||||||||||||||||
Tennessee Valley Authority | 5.375% | 11/13/08 | 150 | 159 | |||||||||||||
United States Treasury Notes | 3.000% | 11/15/07 | 180 | 179 | |||||||||||||
338 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
U.S. Government and Agency Obligations — Continued | |||||||||||||||||
Indexed SecuritiesE — 1.5% | |||||||||||||||||
United States Treasury Inflation-Protected Security | 0.875% | 4/15/10 | $ | 4,272 | $ | 4,230 | |||||||||||
United States Treasury Inflation-Protected Security | 2.000% | 7/15/14 | 1,732 | 1,787 | |||||||||||||
6,017 | |||||||||||||||||
Total U.S. Government and Agency Obligations (Identified Cost — $6,322) | 6,355 | ||||||||||||||||
U.S. Government Agency Mortgage-Backed Securities — N.M. | |||||||||||||||||
Fixed Rate Securities — N.M. | |||||||||||||||||
Fannie Mae | 8.000% | 4/25/06 | 13 | 13 | |||||||||||||
Indexed SecuritiesA — N.M. | |||||||||||||||||
Freddie Mac | 3.783% | 9/1/24 | 111 | 114 | |||||||||||||
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost — $124) | 127 | ||||||||||||||||
Yankee BondsF — 22.8% | |||||||||||||||||
Banking and Finance — 1.0% | |||||||||||||||||
Corporacion Andina de Fomento | 2.460% | 1/26/07 | 1,260 | 1,263 | A | ||||||||||||
HBOS Capital Funding LP | 6.071% | 6/30/14 | 1,490 | 1,597 | C | ||||||||||||
HBOS Treasury Services plc | 4.000% | 9/15/09 | 1,080 | 1,077 | C | ||||||||||||
3,937 | |||||||||||||||||
Banks — 0.8% | |||||||||||||||||
ABN Amro Bank Nv | 4.650% | 6/4/18 | 1,530 | 1,440 | |||||||||||||
ING Bank N.V. | 5.125% | 5/1/15 | 500 | 501 | C | ||||||||||||
Royal Bank of Scotland Group plc | 8.817% | 3/31/05 | 1,500 | 1,521 | |||||||||||||
3,462 | |||||||||||||||||
Cable — 0.2% | |||||||||||||||||
British Sky Broadcasting Group plc | 6.875% | 2/23/09 | 870 | 954 | |||||||||||||
Containers and Packaging — 0.3% | |||||||||||||||||
Cascades Inc. | 7.250% | 2/15/13 | 1,000 | 1,060 | |||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Yankee Bonds — Continued | |||||||||||||||||
Diversified Financial Services — 0.7% | |||||||||||||||||
Encana Holdings Finance Corp. | 5.800% | 5/1/14 | $ | 2,725 | $ | 2,905 | |||||||||||
Electric — 1.0% | |||||||||||||||||
Empresa Nacional de Electricidad S.A. | 8.500% | 4/1/09 | 1,805 | 2,054 | |||||||||||||
Hydro-Quebec | 7.500% | 4/1/16 | 1,625 | 2,005 | |||||||||||||
4,059 | |||||||||||||||||
Foreign Governments — 7.8% | |||||||||||||||||
Federative Republic of Brazil | 3.125% | 4/15/09 | 132 | 131 | A | ||||||||||||
Federative Republic of Brazil | 14.500% | 10/15/09 | 280 | 373 | |||||||||||||
Federative Republic of Brazil | 12.000% | 4/15/10 | 580 | 716 | |||||||||||||
Federative Republic of Brazil | 3.125% | 4/15/12 | 379 | 361 | A | ||||||||||||
Federative Republic of Brazil | 3.125% | 4/15/12 | 582 | 555 | A | ||||||||||||
Federative Republic of Brazil | 8.000% | 4/15/14 | 1,437 | 1,470 | |||||||||||||
Federative Republic of Brazil | 11.000% | 8/17/40 | 410 | 487 | |||||||||||||
Province of Nova Scotia | 5.750% | 2/27/12 | 1,500 | 1,630 | |||||||||||||
Province of Ontario | 3.500% | 9/17/07 | 1,000 | 998 | |||||||||||||
Province of Ontario | 5.125% | 7/17/12 | 450 | 470 | |||||||||||||
Quebec Province | 7.500% | 9/15/29 | 460 | 598 | |||||||||||||
Republic of Chile | 2.519% | 1/28/08 | 250 | 252 | A | ||||||||||||
Republic of Colombia | 10.500% | 7/9/10 | 360 | 420 | |||||||||||||
Republic of Colombia | 11.750% | 2/25/20 | 510 | 655 | |||||||||||||
Republic of Italy | 3.750% | 12/14/07 | 1,490 | 1,493 | |||||||||||||
Republic of Panama | 9.625% | 2/8/11 | 120 | 142 | |||||||||||||
Republic of Panama | 10.750% | 5/15/20 | 460 | 598 | |||||||||||||
Republic of Panama | 9.375% | 1/16/23 | 260 | 300 | |||||||||||||
Republic of Peru | 5.000% | 3/7/17 | 933 | 891 | D | ||||||||||||
Republic of Peru | 5.000% | 3/7/17 | 220 | 211 | C,D | ||||||||||||
Republic of Peru | 8.750% | 11/21/33 | 210 | 228 | |||||||||||||
Republic of South Africa | 7.375% | 4/25/12 | 650 | 744 | |||||||||||||
Republic of South Africa | 6.500% | 6/2/14 | 700 | 767 | |||||||||||||
Russian Federation | 8.250% | 3/31/10 | 80 | 88 | |||||||||||||
Russian Federation | 5.000% | 3/31/30 | 3,920 | 4,055 | D |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Yankee Bonds — Continued | |||||||||||||||||
Foreign Governments — Continued | |||||||||||||||||
United Mexican States | 8.375% | 1/14/11 | $ | 6,375 | $ | 7,487 | |||||||||||
United Mexican States | 11.500% | 5/15/26 | 1,100 | 1,683 | |||||||||||||
United Mexican States | 7.500% | 4/8/33 | 4,032 | 4,355 | |||||||||||||
32,158 | |||||||||||||||||
Insurance — 0.8% | |||||||||||||||||
Axa | 8.600% | 12/15/30 | 1,630 | 2,141 | |||||||||||||
Oil Insurance Ltd | 5.150% | 8/15/33 | 585 | 591 | C | ||||||||||||
XL Capital Ltd. | 5.250% | 9/15/14 | 700 | 701 | |||||||||||||
3,433 | |||||||||||||||||
Manufacturing (Diversified) — 1.0% | |||||||||||||||||
Tyco International Group SA | 6.375% | 2/15/06 | 1,900 | 1,963 | |||||||||||||
Tyco International Group SA | 6.375% | 10/15/11 | 250 | 276 | |||||||||||||
Tyco International Group SA | 7.000% | 6/15/28 | 554 | 644 | |||||||||||||
Tyco International Group SA | 6.875% | 1/15/29 | 1,051 | 1,204 | |||||||||||||
4,087 | |||||||||||||||||
Oil and Gas — 1.5% | |||||||||||||||||
Gazprom | 9.625% | 3/1/13 | 150 | 177 | C | ||||||||||||
Gazprom | 9.625% | 3/1/13 | 50 | 59 | |||||||||||||
Petrobras International Finance Company (PIFCO) | 9.750% | 7/6/11 | 905 | 1,086 | |||||||||||||
Petroliam Nasional Berhad | 7.625% | 10/15/26 | 610 | 745 | C | ||||||||||||
YPF Sociedad Anonima | 10.000% | 11/2/28 | 3,500 | 4,200 | |||||||||||||
6,267 | |||||||||||||||||
Special Purpose — 3.5% | |||||||||||||||||
Aries Vermogensverwaltungs | 9.600% | 10/25/14 | 1,000 | 1,230 | C | ||||||||||||
Deutsche Telekom International Finance BV | 8.750% | 6/15/30 | 1,400 | 1,849 | |||||||||||||
Deutsche Telekom International Finance BV | 9.250% | 6/1/32 | 670 | 953 | |||||||||||||
Diageo Capital plc | 3.500% | 11/19/07 | 630 | 628 | |||||||||||||
Diageo Capital plc | 3.375% | 3/20/08 | 120 | 119 | |||||||||||||
General Motors Nova Scotia Finance Company | 6.850% | 10/15/08 | 1,160 | 1,210 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Yankee Bonds — Continued | |||||||||||||||||
Special Purpose — Continued | |||||||||||||||||
HSBC Capital Funding LP | 4.610% | 6/27/13 | $ | 760 | $ | 734 | C | ||||||||||
HSBC Holdings plc | 5.250% | 12/12/12 | 4,400 | 4,561 | |||||||||||||
Petronas Capital Ltd. | 7.875% | 5/22/22 | 770 | 961 | C | ||||||||||||
Telefonica Europe BV | 8.250% | 9/15/30 | 800 | 1,073 | |||||||||||||
UFJ Finance Aruba AEC | 6.750% | 7/15/13 | 920 | 1,025 | |||||||||||||
14,343 | |||||||||||||||||
Telecommunications — 3.3% | |||||||||||||||||
British Telecommunications plc | 8.375% | 12/15/10 | 900 | 1,081 | |||||||||||||
British Telecommunications plc | 8.875% | 12/15/30 | 420 | 562 | |||||||||||||
France Telecom SA | 8.500% | 3/1/11 | 3,000 | 3,579 | |||||||||||||
France Telecom SA | 9.250% | 3/1/31 | 340 | 461 | |||||||||||||
INTELSAT | 6.500% | 11/1/13 | 1,365 | 1,242 | |||||||||||||
Koninklijke KPN NV | 8.000% | 10/1/10 | 990 | 1,169 | |||||||||||||
Tele Norte Leste Participacoes S.A. | 8.000% | 12/18/13 | 1,080 | 1,112 | |||||||||||||
Telecom Italia S.p.A. | 5.250% | 11/15/13 | 2,025 | 2,047 | |||||||||||||
Telecom Italia S.p.A | 4.950% | 9/30/14 | 1,860 | 1,822 | C | ||||||||||||
Telus Corporation | 7.500% | 6/1/07 | 700 | 761 | |||||||||||||
13,836 | |||||||||||||||||
Telecommunications (Cellular/ Wireless) — 0.2% | |||||||||||||||||
Rogers Wireless Communications Inc. | 6.375% | 3/1/14 | 1,000 | 990 | |||||||||||||
Transportation — 0.3% | |||||||||||||||||
Canadian Pacific Railway Limited | 7.125% | 10/15/31 | 1,000 | 1,194 | |||||||||||||
Utilities — 0.4% | |||||||||||||||||
United Utilities plc | 5.375% | 2/1/19 | 1,550 | 1,529 | |||||||||||||
Total Yankee Bonds (Identified Cost — $86,166) | 94,214 | ||||||||||||||||
Preferred Stocks — 0.2% | |||||||||||||||||
Fannie Mae | 7.000% | 16 | shs | 918 | A | ||||||||||||
Total Preferred Stocks (Identified Cost — $810) | 918 | ||||||||||||||||
Total Long-Term Securities (Identified Cost — $387,082) | 403,243 | ||||||||||||||||
Short-Term Securities — 1.0% | ||||||||||||||||||
U.S. Government and Agency Obligations — 0.1% | ||||||||||||||||||
Fixed Rate Securities — 0.1% | ||||||||||||||||||
Fannie Mae | 0.000% | 4/1/05 | $ | 385 | $ | 383 | B,G | |||||||||||
Repurchase Agreements — 0.9% | ||||||||||||||||||
Deutsche Bank AG | ||||||||||||||||||
2.2%, dated 12/31/04, to be repurchased at $1,929 on 1/3/05 (Collateral: $1,975 Freddie Mac notes, 2.375%, due 4/5/06, value $1,980) | 1,929 | 1,929 | ||||||||||||||||
Goldman, Sachs & Company | ||||||||||||||||||
2.22%, dated 12/31/04, to be repurchased at $1,800 on 1/3/05 (Collateral: $1,840 Federal Home Loan Bank zero coupon bonds, due 1/28/05, value $999) | 1,800 | 1,800 | ||||||||||||||||
3,729 | ||||||||||||||||||
Total Short-Term Securities (Identified Cost — $4,112) | 4,112 | |||||||||||||||||
Total Investments — 98.5% (Identified Cost — $391,194) | 407,355 | |||||||||||||||||
Other Assets Less Liabilities — 1.5% | 6,222 | |||||||||||||||||
Net Assets — 100.0% | $ | 413,577 | ||||||||||||||||
Actual | Appreciation/ | ||||||||||
Expiration | Contracts | (Depreciation) | |||||||||
Futures Contracts PurchasedH | |||||||||||
U.S. Treasury Bond Futures | March 2005 | 15 | $ | 11 | |||||||
Futures Contracts WrittenH | |||||||||||
U.S. Treasury Note Futures | March 2005 | 62 | $ | 17 | |||||||
U.S. Treasury Note Futures | March 2005 | 257 | 12 | ||||||||
$ | 29 | ||||||||||
A | Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”). The coupon rates are the rates as of December 31, 2004. |
B | Zero coupon bond — A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity. |
C | Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities represent 5.97% of net assets. |
D | Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes. |
E | Inflation-Protected Securities — Security whose principal value is adjusted daily or monthly in accordance with changes to the Consumer Price Index for All Urban Consumers. Interest is calculated on the basis of the current adjusted principal value. |
F | Yankee Bond — A dollar-denominated bond issued in the U.S. by foreign entities. |
G | Collateral to cover futures contracts. |
H | Futures are described in more detail in the notes to financial statements. |
Statement of Assets and Liabilities
Investment Grade Income Portfolio
Assets: | |||||||||||
Investment securities at market value (Identified Cost — $387,082) | $ | 403,243 | |||||||||
Short-term securities at value (Identified Cost — $4,112) | 4,112 | ||||||||||
Total investments | $ | 407,355 | |||||||||
Cash | 464 | ||||||||||
Receivable for: | |||||||||||
Fund shares sold | 1,114 | ||||||||||
Interest | 5,988 | ||||||||||
Other assets | 1 | ||||||||||
414,922 | |||||||||||
Liabilities: | |||||||||||
Payable for: | |||||||||||
Fund shares repurchased | 786 | ||||||||||
Futures variation margin | 66 | ||||||||||
Income distribution | 82 | ||||||||||
Due to: | |||||||||||
Manager | 124 | ||||||||||
Distributor | 170 | ||||||||||
Accrued expenses | 117 | ||||||||||
1,345 | |||||||||||
Net Assets | $ | 413,577 | |||||||||
Net assets consist of: | |||||||||||
Accumulated paid-in capital applicable to: | |||||||||||
37,316 Primary Class shares outstanding | $ | 386,368 | |||||||||
944 Institutional Class shares outstanding | 10,011 | ||||||||||
Under/(over) distributed net investment income | (117 | ) | |||||||||
Accumulated net realized gain/(loss) on investments, options and futures | 1,114 | ||||||||||
Unrealized appreciation/(depreciation) of investments, options and futures | 16,201 | ||||||||||
Net Assets | $ | 413,577 | |||||||||
Net Asset Value Per Share: | |||||||||||
Primary Class | $10.81 | ||||||||||
Institutional Class | $10.82 | ||||||||||
See notes to financial statements.
Statement of Operations
Investment Grade Income Portfolio
Investment Income: | ||||||||||||
Interest | $ | 22,425 | ||||||||||
Expenses: | ||||||||||||
Management fees | $ | 2,458 | ||||||||||
Distribution and service fees | 2,007 | |||||||||||
Audit and legal fees | 64 | |||||||||||
Custodian fees | 147 | |||||||||||
Directors’ fees and expenses | 32 | |||||||||||
Registration fees | 44 | |||||||||||
Reports to shareholders | 47 | |||||||||||
Transfer agent and shareholder servicing expense: | ||||||||||||
Primary Class | 320 | |||||||||||
Institutional Class | 4 | |||||||||||
Other expenses | 34 | |||||||||||
5,157 | ||||||||||||
Less: Fees waived | (1,102 | ) | ||||||||||
Compensating balance credits | (2 | ) | ||||||||||
Total expenses, net of waivers and compensating balance credits | 4,053 | |||||||||||
Net Investment Income | 18,372 | |||||||||||
Net Realized and Unrealized Gain/(Loss) on Investments: | ||||||||||||
Realized gain/(loss) on: | ||||||||||||
Investments | 8,966 | |||||||||||
Futures | 846 | |||||||||||
9,812 | ||||||||||||
Change in unrealized appreciation/(depreciation) of investments, options and futures | (3,555 | ) | ||||||||||
Net Realized and Unrealized Gain/(Loss) on Investments | 6,257 | |||||||||||
Change in Net Assets Resulting From Operations | $ | 24,629 | ||||||||||
See notes to financial statements.
Statement of Changes in Net Assets
Investment Grade Income Portfolio
For the Years Ended | ||||||||||
12/31/04 | 12/31/03 | |||||||||
Change in Net Assets: | ||||||||||
Net investment income | $ | 18,372 | $ | 18,069 | ||||||
Net realized gain/(loss) on investments, options and futures | 9,812 | 6,707 | ||||||||
Change in unrealized appreciation/(depreciation) of investments, options, and futures | (3,555 | ) | 11,745 | |||||||
Change in net assets resulting from operations | 24,629 | 36,521 | ||||||||
Distributions to shareholders: | ||||||||||
From net investment income: | ||||||||||
Primary Class | (17,963 | ) | (18,075 | ) | ||||||
Institutional Class | (411 | ) | (209 | ) | ||||||
From net realized gain on investments: | ||||||||||
Primary Class | (9,054 | ) | (2,770 | ) | ||||||
Institutional Class | (220 | ) | (36 | ) | ||||||
Change in net assets from Fund share transactions: | ||||||||||
Primary Class | (2,354 | ) | 58,641 | |||||||
Institutional Class | 4,370 | 2,909 | ||||||||
Change in net assets | (1,003 | ) | 76,981 | |||||||
Net Assets: | ||||||||||
Beginning of year | 414,580 | 337,599 | ||||||||
End of year | $ | 413,577 | $ | 414,580 | ||||||
Under/(over) distributed net investment income | $ | (117 | ) | $ | (116 | ) | ||||
See notes to financial statements.
Financial Highlights
Investment Grade Income Portfolio
Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.
Primary Class:
Years Ended December 31, | |||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||
Net asset value, beginning of year | $ | 10.88 | $ | 10.42 | $ | 10.10 | $ | 9.97 | $ | 9.78 | |||||||||||
Investment operations: | |||||||||||||||||||||
Net investment income | .49 | A | .50 | A | .54 | A | .60 | A | .67 | A | |||||||||||
Net realized and unrealized gain/(loss) on investments, options and futures | .18 | .53 | .32 | .14 | .19 | ||||||||||||||||
Total from investment operations | .67 | 1.03 | .86 | .74 | .86 | ||||||||||||||||
Distributions: | |||||||||||||||||||||
From net investment income | (.49 | ) | (.50 | ) | (.54 | ) | (.61 | ) | (.67 | ) | |||||||||||
From net realized gain on investments | (.25 | ) | (.07 | ) | — | — | — | ||||||||||||||
Total distributions | (.74 | ) | (.57 | ) | (.54 | ) | (.61 | ) | (.67 | ) | |||||||||||
Net asset value, end of year | $ | 10.81 | $ | 10.88 | $ | 10.42 | $ | 10.10 | $ | 9.97 | |||||||||||
Ratios/supplemental data: | |||||||||||||||||||||
Total return | 6.29 | % | 10.16 | % | 8.82 | % | 7.52 | % | 9.16 | % | |||||||||||
Expenses to average net assets | 1.00 | %A | 1.00 | %A | 1.00 | %A | 1.00 | %A | 1.00 | %A | |||||||||||
Net investment income to average net assets | 4.47 | %A | 4.62 | %A | 5.32 | %A | 5.90 | %A | 6.82 | %A | |||||||||||
Portfolio turnover rate | 75 | % | 78 | % | 131 | % | 131 | % | 94 | % | |||||||||||
Net assets, end of year (in thousands) | $ | 403,361 | $ | 408,685 | $ | 334,763 | $ | 255,298 | $ | 194,987 | |||||||||||
A | Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 1.00% until April 30, 2005. If no fees had been waived by LMFA, the annualized ratio of expenses to average daily net assets would have been as follows: for the years ended December 31, 2004, 1.27%; 2003, 1.28%; 2002, 1.30%; 2001, 1.27%; and 2000, 1.31%. |
See notes to financial statements.
Institutional Class:
Years Ended December 31, | |||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||
Net asset value, beginning of year | $ | 10.89 | $ | 10.43 | $ | 10.11 | $ | 9.97 | $ | 9.79 | |||||||||||
Investment operations: | |||||||||||||||||||||
Net investment income | .54 | B | .55 | B | .59 | B | .66 | B | .71 | B | |||||||||||
Net realized and unrealized gain/(loss) on investments, options and futures | .17 | .53 | .31 | .14 | .19 | ||||||||||||||||
Total from investment operations | .71 | 1.08 | .90 | .80 | .90 | ||||||||||||||||
Distributions: | |||||||||||||||||||||
From net investment income | (.53 | ) | (.55 | ) | (.58 | ) | (.66 | ) | (.72 | ) | |||||||||||
From net realized gain on investments | (.25 | ) | (.07 | ) | — | — | — | ||||||||||||||
Total distributions | (.78 | ) | (.62 | ) | (.58 | ) | (.66 | ) | (.72 | ) | |||||||||||
Net asset value, end of year | $ | 10.82 | $ | 10.89 | $ | 10.43 | $ | 10.11 | $ | 9.97 | |||||||||||
Ratios/supplemental data: | |||||||||||||||||||||
Total return | 6.85 | % | 10.71 | % | 9.38 | % | 8.16 | % | 9.63 | % | |||||||||||
Expenses to average net assets | .47 | %B | .50 | % B | .48 | % B | .47 | % B | .48 | % B | |||||||||||
Net investment income to average net assets | 5.02 | % B | 5.13 | % B | 5.85 | % B | 6.50 | % B | 7.32 | % B | |||||||||||
Portfolio turnover rate | 75 | % | 78 | % | 131 | % | 131 | % | 94 | % | |||||||||||
Net assets, end of year (in thousands) | $ | 10,216 | $ | 5,895 | $ | 2,836 | $ | 1,424 | $ | 839 | |||||||||||
B | Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 0.50% until April 30, 2005. If no fees had been waived by LMFA, the annualized ratio of expenses to average daily net assets would have been as follows: for the years ended December 31, 2004, 0.73%; 2003, 0.78%; 2002, 0.78%; 2001, 0.74%; and 2000, 0.79%. |
See notes to financial statements.
Management’s Discussion of Fund Performance
Limited Duration Bond Portfolio
Average annual total returns for the Limited Duration Bond Portfolio and its benchmark for various periods ended December 31, 2004, are presented below:
One | Five | Ten | |||||||||||
Year | Years | Years | |||||||||||
Limited Duration Bond Portfolio | |||||||||||||
Primary Class | +1.89% | +5.26% | +5.72% | ||||||||||
Institutional Class | +2.41% | +5.83% | +6.28% | ||||||||||
Lehman Intermediate Government Bond IndexA,C | +2.33% | +6.57% | +6.75% | ||||||||||
Merrill Lynch 1-3 year Treasury IndexB,C | +0.91% | +4.93% | +5.71% |
The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.leggmasonfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods. |
Stronger-than-expected economic activity, higher-than-expected inflation, and a moderate tightening of monetary policy drove short- and intermediate-term yields substantially higher this past year, while bond yields were steady to somewhat lower. The yield curve flattened significantly in the process. Considering that both core and headline consumer price inflation rates roughly doubled from the levels of 2003, and the economy enjoyed a second year of above-trend growth, the bond market’s stability in the face of these pressures was remarkable. Non-U.S. fixed-income markets generally performed better and with substantially less volatility, thanks to slower growth and subdued inflation. Japanese rates were relatively stable, and deflationary pressures eased. The Bank of England raised its target rate four times during the period, while the European Central Bank (“ECB”) remained on hold. Monetary conditions in the U.K. are now tight enough to have inverted both the nominal
A | A total return index consisting of investment grade corporate debt issues as well as U.S. government securities. The debt issues all maintain maturities within a range of 1 to 10 years. It is not possible to invest in an index. |
B | A subset of the Merrill Lynch Treasury Master Index, consisting of bonds with an outstanding par that is greater than or equal to $25 million and fixed rate coupons greater than 4.25%. The maturity range on these securities is from 1 to 3 years. |
C | Effective June 30, 2004, Limited Duration changed its comparative index from the Lehman Intermediate Government Bond Index to the Merrill Lynch 1-3 year Treasury Index, because the new index is more representative of the types of securities in which the Fund invests. |
The Limited Duration Bond Portfolio was challenged by this environment, but investment strategies were generally rewarded as the total returns (appreciation or depreciation in the Fund’s net asset value per share, plus dividends and any capital gain distributions) of each share class exceeded the performance of its benchmark. For the calendar year, the Primary Class of the Fund returned 1.89%, versus the benchmark return of 0.91%. The Fund’s neutral to underweight duration posture for most of the period contributed to returns as interest rates rose, and the Fund’s barbelled exposure to maturities was rewarded by a flatter yield curve. Overweight exposure to mortgage-backed securities also contributed to performance, as spreads tightened and the sector delivered excess returns relative to Treasuries.
Western Asset Management Company
January 28, 2005
Limited Duration Bond Portfolio
As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Each example is based on an investment of $1,000 invested on July 1, 2004, and held through December 31, 2004.
Actual Expenses
The first line for each class in the table below provides information about actual account values and actual expenses for each class. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line for each class in the table below provides information about hypothetical account values and hypothetical expenses based on the relevant class’s actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the class’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples for the relevant class that appear in the shareholder reports of other funds.
Beginning | Ending | Expenses PaidA | |||||||||||||||
Account | Account | During the | Annualized | ||||||||||||||
Value | Value | Period | Expense | ||||||||||||||
7/1/04 | 12/31/04 | 7/1/04 to 12/31/04 | Ratio | ||||||||||||||
Primary Class: | |||||||||||||||||
Actual | $ | 1,000.00 | $ | 1,023.90 | $ | 5.10 | 1.00% | ||||||||||
Hypothetical (5% return before expenses) | 1,000.00 | 1,020.16 | 5.09 | ||||||||||||||
Institutional Class: | |||||||||||||||||
Actual | $ | 1,000.00 | $ | 1,027.60 | $ | 2.45 | 0.48% | ||||||||||
Hypothetical (5% return before expenses) | 1,000.00 | 1,022.79 | 2.45 |
A | These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365. |
Performance Information
Limited Duration Bond Portfolio (formerly U.S. Government Intermediate-Term Portfolio)
The following graphs compare the Fund’s total returns against those of closely matched broad-based securities market indices. The lines illustrate the cumulative total return of an initial $10,000 investment in Primary Class shares and an initial $1,000,000 investment in Institutional Class shares of the Fund, for the periods indicated. The lines for the Fund represent the total return after deducting all Fund investment management and other administrative expenses and the transaction costs of buying and selling securities. The lines representing each securities market index do not include any transaction costs associated with buying and selling securities in the index or other administrative expenses.
Growth of a $10,000 Investment — Primary Class
Periods Ended December 31, 2004
Cumulative | Average Annual | |||||||||
Total Return | Total Return | |||||||||
One Year | +1.89% | +1.89% | ||||||||
Five Years | +29.20% | +5.26% | ||||||||
Ten Years | +74.38% | +5.72% |
The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please visit www.leggmasonfunds.com. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.
The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
A | A total return index consisting of investment grade corporate debt issues as well as U.S. government securities. The debt issues all maintain maturities within a range of 1 to 10 years. |
B | A subset of the Merrill Lynch Treasury Master Index, consisting of bonds with an outstanding par that is greater than or equal to $25 million and fixed rate coupons greater than 4.25%. The maturity range on these securities is from 1 to 3 years. |
Growth of a $1,000,000 Investment — Institutional Class
Periods Ended December 31, 2004
Cumulative | Average Annual | |||||||||
Total Return | Total Return | |||||||||
One Year | +2.41% | +2.41% | ||||||||
Five Years | +32.74% | +5.83% | ||||||||
Ten Years | +83.86% | +6.28% |
The performance data quoted represents past performance and does not guarantee future results. The performance stated may have been due to extraordinary market conditions, which may not be duplicated in the future. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information please call 1-888-425-6432. The investment return and principal value of the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Calculations assume reinvestment of dividends and capital gain distributions. Performance would have been lower if fees had not been waived in various periods.
The graph and table do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
Portfolio Composition (As of December 31, 2004)
Debt RatingsC (As a percentage of the portfolio)
Maturity Schedule (As a percentage of the portfolio)
C | Source: Standard & Poor’s |
Portfolio of Investments
Limited Duration Bond Portfolio
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Long-Term Securities — 94.2% | |||||||||||||||||
Corporate Bonds and Notes — 25.7% | |||||||||||||||||
Aerospace/ Defense — 0.2% | |||||||||||||||||
Northrop Grumman Corporation | 4.079% | 11/16/06 | $ | 500 | $ | 505 | |||||||||||
Banking and Finance — 3.1% | |||||||||||||||||
Ford Motor Credit Company | 3.379% | 9/28/07 | 2,720 | 2,700 | A | ||||||||||||
General Motors Acceptance Corporation | 2.970% | 1/16/07 | 1,400 | 1,385 | A | ||||||||||||
General Motors Acceptance Corporation | 3.680% | 9/23/08 | 2,600 | 2,534 | A | ||||||||||||
Household Finance Corporation | 2.625% | 11/16/09 | 1,200 | 1,201 | A | ||||||||||||
John Deere Capital Corporation | 3.900% | 1/15/08 | 1,000 | 1,007 | |||||||||||||
SLM Corporation | 2.300% | 1/26/09 | 100 | 100 | A | ||||||||||||
8,927 | |||||||||||||||||
Banks — 0.5% | |||||||||||||||||
Bank of America Corporation | 2.820% | 9/15/14 | 750 | 755 | A | ||||||||||||
Washington Mutual Bank | 2.870% | 1/15/15 | 740 | 741 | A | ||||||||||||
1,496 | |||||||||||||||||
Cable — 1.2% | |||||||||||||||||
Comcast Cable Communications, Inc. | 6.375% | 1/30/06 | 2,000 | 2,066 | |||||||||||||
Comcast Cable Communications, Inc. | 8.375% | 5/1/07 | 230 | 254 | |||||||||||||
Cox Communications, Inc. | 3.040% | 12/14/07 | 1,050 | 1,052 | A,B | ||||||||||||
3,372 | |||||||||||||||||
Portfolio of Investments — Continued
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Cable — Continued | |||||||||||||||||
Computer Services and Systems — 0.4% | |||||||||||||||||
Electronic Data Systems Corporation | 7.125% | 10/15/09 | $ | 1,000 | $ | 1,101 | |||||||||||
Diversified Financial Services — 1.1% | |||||||||||||||||
CIT Group Inc. | 2.530% | 5/18/07 | 680 | 680 | A | ||||||||||||
Citigroup Inc. | 2.480% | 11/5/14 | 1,370 | 1,372 | A | ||||||||||||
General Electric Capital Corporation | 2.510% | 11/21/11 | 1,020 | 1,021 | A | ||||||||||||
3,073 | |||||||||||||||||
Electric — 1.5% | |||||||||||||||||
Dominion Resources, Inc. | 2.590% | 5/15/06 | 2,000 | 2,004 | A | ||||||||||||
FirstEnergy Corp. | 5.500% | 11/15/06 | 1,610 | 1,662 | |||||||||||||
FirstEnergy Corp. | 6.450% | 11/15/11 | 680 | 739 | |||||||||||||
4,405 | |||||||||||||||||
Energy — 2.3% | |||||||||||||||||
Alabama Power Company | 2.571% | 8/25/09 | 1,000 | 1,000 | A | ||||||||||||
DTE Energy Company | 3.350% | 6/1/07 | 1,050 | 1,054 | A | ||||||||||||
Duke Energy Corporation | 3.750% | 3/5/08 | 1,500 | 1,498 | |||||||||||||
Pacific Gas and Electric Company | 3.600% | 3/1/09 | 1,000 | 984 | |||||||||||||
Sempra Energy | 2.809% | 5/21/08 | 2,000 | 1,993 | A | ||||||||||||
6,529 | |||||||||||||||||
Environmental Services — 0.4% | |||||||||||||||||
Waste Management, Inc. | 7.375% | 8/1/10 | 1,090 | 1,249 | |||||||||||||
Food, Beverage and Tobacco — 1.9% | |||||||||||||||||
Altria Group, Inc. | 5.625% | 11/4/08 | 3,000 | 3,118 | |||||||||||||
General Mills, Inc. | 6.449% | 10/15/06 | 1,000 | 1,049 | |||||||||||||
Kraft Foods Inc. | 5.625% | 11/1/11 | 1,110 | 1,176 | |||||||||||||
5,343 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Food, Beverage and Tobacco — Continued | |||||||||||||||||
Insurance — 0.1% | |||||||||||||||||
Metropolitan Life Global Funding | 2.740% | 3/15/12 | $ | 370 | $ | 369 | A,B | ||||||||||
Investment Banking/ Brokerage — 2.5% | |||||||||||||||||
J.P. Morgan Chase & Co. | 2.160% | 10/2/09 | 1,730 | 1,732 | A | ||||||||||||
Lehman Brothers Holdings Inc. | 2.350% | 11/10/09 | 1,120 | 1,121 | A | ||||||||||||
Merrill Lynch & Co., Inc. | 2.715% | 1/15/15 | 1,020 | 1,020 | A | ||||||||||||
Morgan Stanley | 2.556% | 1/15/10 | 700 | 701 | A | ||||||||||||
The Bear Stearns Companies Inc. | 2.720% | 9/9/09 | 1,000 | 999 | A | ||||||||||||
The Goldman Sachs Group, Inc. | 2.430% | 7/23/09 | 1,500 | 1,505 | A | ||||||||||||
�� | 7,078 | ||||||||||||||||
Media — 1.8% | |||||||||||||||||
Liberty Media Corporation | 3.990% | 9/17/06 | 1,160 | 1,174 | A | ||||||||||||
News America Incorporated | 6.625% | 1/9/08 | 2,000 | 2,159 | |||||||||||||
Time Warner Inc. | 6.125% | 4/15/06 | 550 | 570 | |||||||||||||
Viacom Inc. | 5.625% | 5/1/07 | 1,000 | 1,045 | |||||||||||||
4,948 | |||||||||||||||||
Oil and Gas — 2.9% | |||||||||||||||||
Amerada Hess Corporation | 7.375% | 10/1/09 | 1,500 | 1,676 | |||||||||||||
ConocoPhillips | 4.750% | 10/15/12 | 2,110 | 2,151 | |||||||||||||
Occidental Petroleum Corporation | 7.650% | 2/15/06 | 750 | 785 | |||||||||||||
Pemex Project Funding Master Trust | 8.500% | 2/15/08 | 3,300 | 3,721 | |||||||||||||
8,333 | |||||||||||||||||
Paper and Forest Products — 0.3% | |||||||||||||||||
Weyerhaeuser Company | 6.750% | 3/15/12 | 670 | 755 | |||||||||||||
Portfolio of Investments — Continued
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Paper and Forest Products — Continued | |||||||||||||||||
Pharmaceuticals — 0.7% | |||||||||||||||||
Bristol-Myers Squibb Company | 4.750% | 10/1/06 | $ | 2,000 | $ | 2,045 | |||||||||||
Retail — 0.6% | |||||||||||||||||
Wal-Mart Stores, Inc. | 5.450% | 8/1/06 | 1,500 | 1,551 | |||||||||||||
Special Purpose — 2.9% | |||||||||||||||||
American Honda Finance Corporation | 2.398% | 12/6/05 | 310 | 310 | A,B | ||||||||||||
American Honda Finance Corporation | 2.200% | 10/22/07 | 840 | 839 | A,B | ||||||||||||
DaimlerChrysler NA Holding Corporation | 2.940% | 9/10/07 | 3,000 | 3,010 | A | ||||||||||||
Sprint Capital Corporation | 4.780% | 8/17/06 | 3,000 | 3,057 | C | ||||||||||||
Verizon Wireless Capital LLC | 5.375% | 12/15/06 | 1,000 | 1,036 | |||||||||||||
8,252 | |||||||||||||||||
Telecommunications (Cellular/ Wireless) — 1.3% | |||||||||||||||||
AT&T Wireless Services Inc. | 7.350% | 3/1/06 | 2,000 | 2,092 | |||||||||||||
Motorola, Inc. | 4.608% | 11/16/07 | 1,500 | 1,530 | |||||||||||||
3,622 | |||||||||||||||||
Total Corporate Bonds and Notes (Identified Cost — $73,132) | 72,953 | ||||||||||||||||
Asset-Backed Securities — 17.9% | |||||||||||||||||
Fixed Rate Securities — 3.0% | |||||||||||||||||
AmeriCredit Automobile Receivables Trust 2003-BX | 2.720% | 1/6/10 | 3,000 | 2,974 | |||||||||||||
AmeriCredit Automobile Receivables Trust 2002-B | 3.780% | 2/12/07 | 1,646 | 1,647 | |||||||||||||
Structured Asset Securities Corporation 2003-AL1 | 3.356% | 4/25/31 | 941 | 887 | B |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Asset-Backed Securities — Continued | |||||||||||||||||
Fixed Rate Securities — Continued | |||||||||||||||||
UPFC Auto Receivables Trust 2004-A | 3.270% | 9/15/10 | $ | 3,000 | $ | 2,988 | |||||||||||
8,496 | |||||||||||||||||
Indexed SecuritiesA — 14.9% | |||||||||||||||||
Asset Backed Funding Certificates 2002-WF2 | 2.858% | 5/25/32 | 2,071 | 2,085 | |||||||||||||
Asset Backed Funding Corporation Certificates 2002-OPT1 | 2.931% | 6/25/32 | 1,815 | 1,819 | |||||||||||||
Bear Stearns Asset Backed Securities, Inc. 2004-1 | 2.938% | 6/25/34 | 3,000 | 3,000 | |||||||||||||
CHEC Loan Trust 2004-2 | 2.748% | 2/25/31 | 3,500 | 3,499 | |||||||||||||
Citibank Credit Card Issuance Trust 2002-B1 | 2.879% | 6/25/09 | 1,675 | 1,681 | |||||||||||||
Countrywide Home Equity Loan Trust 2002-G | 2.773% | 12/15/28 | 5,036 | 5,046 | |||||||||||||
Countrywide Home Equity Loan Trust 2004-J | 2.693% | 12/15/33 | 5,349 | 5,352 | |||||||||||||
Countrywide Home Equity Loan Trust 2004-O | 2.683% | 2/15/34 | 2,482 | 2,482 | |||||||||||||
Fremont Home Loan Trust 2004-C | 2.688% | 1/25/32 | 2,459 | 2,458 | |||||||||||||
GSAA Home Equity Trust 2004-9 | 2.798% | 11/25/33 | 3,026 | 3,032 | |||||||||||||
Providian Gateway Master Trust 2002-B | 3.103% | 6/15/09 | 3,000 | 3,020 | B | ||||||||||||
Rental Car Finance Corp. 2003-1A | 2.818% | 5/25/08 | 3,000 | 3,006 | B | ||||||||||||
Rental Car Finance Corp. 2004-1A | 2.618% | 6/25/09 | 3,000 | 2,988 | B |
Portfolio of Investments — Continued
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Asset-Backed Securities — Continued | |||||||||||||||||
Indexed Securities — Continued | |||||||||||||||||
Superior Wholesale Inventory Financing Trust 2004-A10 | 2.503% | 9/15/11 | $ | 3,000 | $ | 3,007 | |||||||||||
42,475 | |||||||||||||||||
Total Asset-Backed Securities (Identified Cost — $51,023) | 50,971 | ||||||||||||||||
Mortgage-Backed Securities — 18.9% | |||||||||||||||||
Fixed Rate Securities — 8.8% | |||||||||||||||||
Banc of America Funding Corporation 2004-B | 4.289% | 12/20/34 | 2,812 | 2,838 | |||||||||||||
Blackrock Capital Finance L.P. 1997-R3 | 7.220% | 11/25/28 | 514 | 519 | B | ||||||||||||
Countrywide Alternative Loan Trust 2004-33 | 5.017% | 12/25/34 | 854 | 865 | |||||||||||||
Countrywide Alternative Loan Trust 2004-33 | 5.126% | 12/25/34 | 1,865 | 1,894 | |||||||||||||
Residential Asset Securitization Trust 2003-A14 | 4.750% | 2/25/19 | 12,797 | 12,789 | |||||||||||||
Washington Mutual MSC Mortgage Pass -Through Certificates Series 2004-RA1 | 7.000% | 3/25/34 | 5,786 | 5,947 | |||||||||||||
24,852 | |||||||||||||||||
Indexed SecuritiesA — 10.1% | |||||||||||||||||
Bear Stearns Arm Trust 2004-10 | 4.711% | 1/25/35 | 1,614 | 1,630 | |||||||||||||
Harborview Mortgage Loan Trust 2004-8 | 2.810% | 11/29/34 | 2,928 | 2,934 | |||||||||||||
HomeBanc Mortgage Trust 2004-2 | 2.788% | 12/25/34 | 2,970 | 2,973 | |||||||||||||
Impac CMB Trust 2004-2 | 2.678% | 4/25/34 | 2,313 | 2,317 | |||||||||||||
Impac CMB Trust 2004-6 | 2.808% | 10/25/34 | 1,479 | 1,477 | |||||||||||||
Impac Secured Assets Corp. 2004-3 | 2.618% | 11/25/34 | 3,570 | 3,566 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Mortgage-Backed Securities — Continued | |||||||||||||||||
Indexed Securities — Continued | |||||||||||||||||
JPMorgan Mortgage Trust 2003-A1 | 4.380% | 10/25/33 | $ | 2,782 | $ | 2,707 | |||||||||||
Sequoia Mortgage Trust 2003-2 | 2.880% | 6/20/33 | 2,178 | 2,166 | |||||||||||||
Sequoia Mortgage Trust 2003-7 | 2.730% | 1/20/34 | 2,442 | 2,437 | |||||||||||||
Thornburg Mortgage Securities Trust 2004-2 | 2.568% | 6/25/44 | 3,572 | 3,568 | |||||||||||||
Washington Mutual 2004-AR8 | 2.838% | 6/25/44 | 2,876 | 2,876 | |||||||||||||
28,651 | |||||||||||||||||
Total Mortgage-Backed Securities (Identified Cost — $50,937) | 53,503 | ||||||||||||||||
U.S. Government and Agency Obligations — 15.6% | |||||||||||||||||
Fixed Rate Securities — 6.6% | |||||||||||||||||
Fannie Mae | 0.000% | 1/3/05 | 1,000 | 1,000 | D | ||||||||||||
Fannie Mae | 3.125% | 7/15/06 | 6,000 | 5,998 | |||||||||||||
Freddie Mac | 2.500% | 3/30/06 | 6,000 | 5,958 | |||||||||||||
Freddie Mac | 3.125% | 9/15/06 | 3,000 | 2,997 | |||||||||||||
United States Treasury Notes | 3.000% | 11/15/07 | 1,600 | 1,590 | |||||||||||||
United States Treasury Notes | 3.375% | 10/15/09 | 1,050 | 1,040 | |||||||||||||
18,583 | |||||||||||||||||
Indexed SecuritiesE — 9.0% | |||||||||||||||||
United States Treasury Inflation-Protected Security | 3.625% | 1/15/08 | 8,270 | 9,008 | |||||||||||||
United States Treasury Inflation-Protected Security | 0.875% | 4/15/10 | 3,798 | 3,761 | |||||||||||||
United States Treasury Inflation-Protected Security | 3.000% | 7/15/12 | 6,369 | 7,108 |
Portfolio of Investments — Continued
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
U.S. Government and Agency Obligations — Continued | |||||||||||||||||
Indexed SecuritiesE — Continued | |||||||||||||||||
United States Treasury Inflation-Protected Security | 2.000% | 7/15/14 | $ | 2,521 | $ | 2,601 | |||||||||||
United States Treasury Inflation-Protected Security | 3.875% | 4/15/29 | 2,322 | 3,187 | |||||||||||||
25,665 | |||||||||||||||||
Total U.S. Government and Agency Obligations (Identified Cost — $46,528) | 44,248 | ||||||||||||||||
U.S. Government Agency Mortgage-Backed Securities — 12.2% | |||||||||||||||||
Fixed Rate Securities — 7.0% | |||||||||||||||||
Fannie Mae | 8.500% | 6/1/10 to 8/1/11 | 88 | 88 | |||||||||||||
Fannie Mae | 6.500% | 11/1/10 to 10/1/32 | 4,755 | 5,005 | |||||||||||||
Fannie Mae | 7.000% | 1/1/13 to 1/1/33 | 7,956 | 8,438 | |||||||||||||
Fannie Mae | 9.500% | 7/1/14 | 103 | 114 | |||||||||||||
Fannie Mae | 11.000% | 12/1/15 | 86 | 94 | |||||||||||||
Fannie Mae | 12.500% | 1/1/18 to 4/1/18 | 71 | 81 | |||||||||||||
Fannie Mae | 9.000% | 11/1/21 | 229 | 253 | |||||||||||||
Freddie Mac | 8.250% | 2/1/08 | 27 | 27 | |||||||||||||
Freddie Mac | 8.500% | 12/1/08 to 6/1/21 | 116 | 120 | |||||||||||||
Freddie Mac | 9.750% | 11/1/09 to 11/1/14 | 46 | 50 | |||||||||||||
Freddie Mac | 9.000% | 1/1/17 to 1/1/21 | 267 | 290 | |||||||||||||
Freddie Mac | 7.000% | 1/25/21 to 4/1/32 | 3,816 | 4,039 | |||||||||||||
Freddie Mac | 8.000% | 2/1/31 | 646 | 700 | |||||||||||||
Government National Mortgage Association | 9.000% | 6/15/06 to 9/15/22 | 388 | 403 | |||||||||||||
Government National Mortgage Association | 6.000% | 5/15/14 to 11/15/28 | 412 | 432 | |||||||||||||
20,134 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
U.S. Government Agency Mortgage-Backed Securities — Continued | |||||||||||||||||
Fixed Rate Securities — Continued | |||||||||||||||||
Indexed SecuritiesA — 5.0% | |||||||||||||||||
Fannie Mae | 4.330% | 11/1/34 | $ | 1,762 | $ | 1,771 | |||||||||||
Fannie Mae | 4.200% | 12/1/34 | 1,700 | 1,702 | |||||||||||||
Fannie Mae | 4.500% | 12/1/34 | 1,400 | 1,409 | F | ||||||||||||
Fannie Mae | 4.330% | 12/1/34 | 3,100 | 3,117 | F | ||||||||||||
Freddie Mac | 4.374% | 12/1/34 | 700 | 703 | |||||||||||||
Freddie Mac | 4.494% | 12/1/34 | 3,600 | 3,625 | |||||||||||||
Freddie Mac | 4.088% | 1/1/35 | 633 | 630 | |||||||||||||
Freddie Mac | 4.105% | 1/1/35 | 1,147 | 1,142 | |||||||||||||
14,099 | |||||||||||||||||
Stripped Securities — 0.2% | |||||||||||||||||
Government National Mortgage Association | 6.06% | 6/16/26 | 3,039 | 317 | G1 | ||||||||||||
Government National Mortgage Association | 6.11% | 8/16/26 | 2,560 | 284 | G1 | ||||||||||||
601 | |||||||||||||||||
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost — $35,016) | 34,834 | ||||||||||||||||
Yankee BondsH — 3.4% | |||||||||||||||||
Banks — 0.4% | |||||||||||||||||
The Korea Development Bank | 4.750% | 7/20/09 | 1,000 | 1,019 | |||||||||||||
Energy — 0.3% | |||||||||||||||||
SP Powerassets Limited Global | 3.800% | 10/22/08 | 1,000 | 999 | B | ||||||||||||
Foreign Governments — 0.5% | |||||||||||||||||
Russian Federation | 8.250% | 3/31/10 | 1,360 | 1,509 | |||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Yankee Bonds — Continued | |||||||||||||||||
Foreign Governments — Continued | |||||||||||||||||
Manufacturing (Diversified) — 1.1% | |||||||||||||||||
Tyco International Group SA | 4.436% | 6/15/07 | $ | 3,000 | $ | 3,048 | B | ||||||||||
Telecommunications — 1.1% | |||||||||||||||||
British Telecommunications plc | 7.875% | 12/15/05 | 1,500 | 1,564 | |||||||||||||
Telecom Italia Capital | 4.000% | 1/15/10 | 1,500 | 1,471 | B | ||||||||||||
3,035 | |||||||||||||||||
Total Yankee Bonds (Identified Cost — $9,640) | 9,610 | ||||||||||||||||
Preferred Stocks — 0.5% | |||||||||||||||||
Fannie Mae | 7.000% | 11 | shs | 635 | A | ||||||||||||
Home Ownership Funding Corporation | 13.331% | 5 | 191 | B,C | |||||||||||||
Home Ownership Funding Corporation II | 13.338% | 14 | 534 | B,C | |||||||||||||
Total Preferred Stocks (Identified Cost — $2,097) | 1,360 | ||||||||||||||||
Total Long-Term Securities (Identified Cost — $268,373) | 267,479 | ||||||||||||||||
Short-Term Securities — 7.3% | |||||||||||||||||
U.S. Government and Agency Obligations — 5.5% | |||||||||||||||||
Fixed Rate Securities — 5.5% | |||||||||||||||||
Fannie Mae | 0.000% | 1/18/05 | $ | 6,088 | 6,081 | D | |||||||||||
Fannie Mae | 0.000% | 1/21/05 | 1,600 | 1,598 | D | ||||||||||||
Fannie Mae | 0.000% | 4/1/05 | 200 | 199 | D,I | ||||||||||||
Fannie Mae | 0.000% | 9/16/05 | 8,000 | 7,866 | D | ||||||||||||
15,744 | |||||||||||||||||
Repurchase Agreements — 1.8% | |||||||||||||||||
Deutsche Bank | |||||||||||||||||
2.2%, dated 12/31/04, to be repurchased at $2,563 on 1/3/05 (Collateral: $2,620 Freddie Mac notes, 2.375%, due 4/5/06, value $2,631) | 2,563 | 2,563 |
Par/Shares | Value | |||||||||||||||
Repurchase Agreements — Continued | ||||||||||||||||
Goldman, Sachs & Company | ||||||||||||||||
2.22%, dated 12/31/04, to be repurchased at $2,600 on 1/3/05 (Collateral: $2,660 Freddie Mac zero coupon notes, due 1/28/05, value $2,656) | $ | 2,600 | $ | 2,600 | ||||||||||||
5,163 | ||||||||||||||||
Total Short-Term Securities (Identified Cost — $21,907) | 20,907 | |||||||||||||||
Total Investments — 101.5% (Identified Cost — $290,280) | 288,386 | |||||||||||||||
Other Assets Less Liabilities — (1.5)% | (4,234 | ) | ||||||||||||||
Net Assets — 100.0% | $ | 284,152 | ||||||||||||||
Actual | Appreciation/ | ||||||||||
Expiration | Contracts | (Depreciation) | |||||||||
Futures Contracts PurchasedJ | |||||||||||
Eurodollar Futures | October 2005 | 37 | $ | (39 | ) | ||||||
A | Indexed security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”). The coupon rates are the rates as of December 31, 2004. |
B | Rule 144a Security — A security purchased pursuant to Rule 144a under the Securities Act of 1933 which may not be resold subject to that rule except to qualified institutional buyers. These securities represent 6.8% of net assets. |
C | Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes, at which time it begins to accrue interest or pay dividends. |
D | Zero coupon bond — A bond with no periodic interest payments which is sold at such a discount as to produce a current yield to maturity. |
E | Treasury Inflation-Protected Security — Treasury security whose principal value is adjusted daily in accordance with changes to the Consumer Price Index for All Urban Consumers. Interest is calculated on the basis of the current adjusted principal value. |
F | When issued security — Securities purchased on a delayed delivery basis. Final settlement amount and maturity date have not yet been announced. |
G | Stripped security — Security with interest-only or principal-only payment streams, denoted by a 1 or 2, respectively. For interest-only securities, the amount shown as principal is the notional balance used to calculate the amount of interest due. |
H | Yankee Bonds — A dollar denominated bond issued in the U.S. by foreign entities. |
I | Collateral to cover futures and options contracts. |
J | Futures are described in more detail in the notes to financial statements. |
See notes to financial statements.
Statement of Assets and Liabilities
Limited Duration Bond Portfolio
Assets: | |||||||||||
Investment securities at market value (Identified Cost — $268,373) | $ | 267,479 | |||||||||
Short-term securities at value (Identified Cost — $21,907) | 20,907 | ||||||||||
Total investments | $ | 288,386 | |||||||||
Cash | 1 | ||||||||||
Receivable for: | |||||||||||
Fund shares sold | 1,020 | ||||||||||
Interest income | 1,575 | ||||||||||
Dividend income | 11 | ||||||||||
Futures variation margin | 3 | ||||||||||
Other assets | 11 | ||||||||||
291,007 | |||||||||||
Liabilities: | |||||||||||
Payable for: | |||||||||||
Securities purchased | 4,538 | ||||||||||
Fund shares repurchased | 2,026 | ||||||||||
Income distribution | 38 | ||||||||||
Due to: | |||||||||||
Manager | 49 | ||||||||||
Distributor | 117 | ||||||||||
Accrued expenses | 87 | ||||||||||
6,855 | |||||||||||
Net Assets | $ | 284,152 | |||||||||
Net assets consist of: | |||||||||||
Accumulated paid-in-capital applicable to: | |||||||||||
26,505 Primary Class shares outstanding | $ | 285,013 | |||||||||
921 Institutional Class shares outstanding | 9,507 | ||||||||||
Under/(over) distributed net investment income | (106 | ) | |||||||||
Accumulated net realized gain/(loss) on investments, options and futures | (8,329 | ) | |||||||||
Unrealized appreciation/(depreciation) of investments, options and futures | (1,933 | ) | |||||||||
Net Assets | $ | 284,152 | |||||||||
Net Asset Value Per Share: | |||||||||||
Primary Class | $ | 10.36 | |||||||||
Institutional Class | $ | 10.37 | |||||||||
See notes to financial statements.
Statement of Operations
Limited Duration Bond Portfolio
Investment Income: | ||||||||||||
Dividends | $ | 253 | ||||||||||
Interest | 11,387 | |||||||||||
Total income | $ | 11,640 | ||||||||||
Expenses: | ||||||||||||
Management fees | 1,585 | |||||||||||
Distribution and service fees | 1,485 | |||||||||||
Audit and legal fees | 99 | |||||||||||
Custodian fees | 127 | |||||||||||
Directors’ fees and expenses | 40 | |||||||||||
Registration fees | 29 | |||||||||||
Reports to shareholders | 29 | |||||||||||
Transfer agent and shareholder servicing expense: | ||||||||||||
Primary Class | 255 | |||||||||||
Institutional Class | 4 | |||||||||||
Other expenses | 16 | |||||||||||
3,669 | ||||||||||||
Less: Fees waived | (656 | ) | ||||||||||
Compensating balance credits | (1 | ) | ||||||||||
Total expenses, net of waivers and compensating balance credits | 3,012 | |||||||||||
Net Investment Income | 8,628 | |||||||||||
Net Realized and Unrealized Gain/(Loss) on Investments: | ||||||||||||
Realized gain/(loss) on: | ||||||||||||
Investments | (2,632 | ) | ||||||||||
Futures | (1,445 | ) | ||||||||||
(4,077 | ) | |||||||||||
Change in unrealized appreciation/(depreciation) of investments and futures | 1,121 | |||||||||||
Net Realized and Unrealized Gain/(Loss) on Investments | (2,956 | ) | ||||||||||
Change in Net Assets Resulting From Operations | $ | 5,672 | ||||||||||
See notes to financial statements.
Statement of Changes in Net Assets
Limited Duration Bond Portfolio
For the Years Ended | ||||||||||
12/31/04 | 12/31/03 | |||||||||
Change in Net Assets: | ||||||||||
Net investment income | $ | 8,628 | $ | 9,203 | ||||||
Net realized gain/(loss) on investments, options and futures | (4,077 | ) | 8,052 | |||||||
Change in unrealized appreciation/(depreciation) of investments, options and futures | 1,121 | (13,276 | ) | |||||||
Change in net assets resulting from operations | 5,672 | 3,979 | ||||||||
Distributions to shareholders: | ||||||||||
From net investment income: | ||||||||||
Primary Class | (10,465 | ) | (9,512 | ) | ||||||
Institutional Class | (348 | ) | (279 | ) | ||||||
From net realized gain on investments: | ||||||||||
Primary Class | (186 | ) | — | |||||||
Institutional Class | (7 | ) | — | |||||||
Change in net assets from Fund share transactions: | ||||||||||
Primary Class | (47,055 | ) | (47,284 | ) | ||||||
Institutional Class | 1,957 | (1,598 | ) | |||||||
Change in net assets | (50,432 | ) | (54,694 | ) | ||||||
Net Assets: | ||||||||||
Beginning of year | 334,584 | 389,278 | ||||||||
End of year | $ | 284,152 | $ | 334,584 | ||||||
Under/(over) distributed net investment income | $ | (106 | ) | $ | 1,269 | |||||
See notes to financial statements.
Financial Highlights
Limited Duration Bond Portfolio
Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.
Primary Class:
Years Ended December 31, | |||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||
Net asset value, beginning of year | $10.54 | $ | 10.70 | $ | 10.32 | $ | 10.26 | $ | 9.92 | ||||||||||||
Investment operations: | |||||||||||||||||||||
Net investment income | .29 | A | .26 | A | .41 | A | .53 | A | .62 | A | |||||||||||
Net realized and unrealized gain/(loss) on investments, options and futures | (.09 | ) | (.14 | ) | .38 | .06 | .33 | ||||||||||||||
Total from investment operations | .20 | .12 | .79 | .59 | .95 | ||||||||||||||||
Distributions: | |||||||||||||||||||||
From net investment income | (.37 | ) | (.28 | ) | (.41 | ) | (.53 | ) | (.61 | ) | |||||||||||
From net realized gain on investments | (.01 | ) | — | — | — | — | |||||||||||||||
Total distributions | (.38 | ) | (.28 | ) | (.41 | ) | (.53 | ) | (.61 | ) | |||||||||||
Net asset value, end of year | $10.36 | $ | 10.54 | $ | 10.70 | $ | 10.32 | $ | 10.26 | ||||||||||||
Ratios/supplemental data: | |||||||||||||||||||||
Total return | 1.89 | % | 1.11 | % | 7.79 | % | 5.83 | % | 9.95 | % | |||||||||||
Expenses to average net assets | 1.00 | %A | 1.00 | %A | 1.00 | %A | 1.00 | %A | 1.00 | %A | |||||||||||
Net investment income to average net assets | 2.81 | %A | 2.48 | %A | 3.85 | %A | 5.08 | %A | 6.14 | %A | |||||||||||
Portfolio turnover rate | 238 | % | 487 | % | 204 | % | 535 | % | 248 | % | |||||||||||
Net assets, end of year (in thousands) | $ | 274,606 | $ | 326,844 | $ | 379,793 | $ | 300,597 | $ | 272,668 | |||||||||||
A | Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 1.00% until April 30, 2005. If no fees had been waived by LMFA, the annualized ratio of expenses to average daily net assets would have been as follows: for the years ended December 31, 2004, 1.21%; 2003, 1.21%; 2002, 1.19%; 2001, 1.17%; and 2000, 1.19%. |
See notes to financial statements.
Institutional Class:
Years Ended December 31, | |||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||
Net asset value, beginning of year | $10.55 | $ | 10.70 | $ | 10.32 | $ | 10.27 | $ | 9.92 | ||||||||||||
Investment operations: | |||||||||||||||||||||
Net investment income | .35 | B | .32 | B | .46 | B | .58 | B | .67 | B | |||||||||||
Net realized and unrealized gain/(loss) on investments, options and futures | (.10 | ) | (.14 | ) | .38 | .05 | .35 | ||||||||||||||
Total from investment operations | .25 | .18 | .84 | .63 | 1.02 | ||||||||||||||||
Distributions: | |||||||||||||||||||||
From net investment income | (.42 | ) | (.33 | ) | (.46 | ) | (.58 | ) | (.67 | ) | |||||||||||
From net realized gain on investments | (.01 | ) | — | — | — | — | |||||||||||||||
Total distributions | (.43 | ) | (.33 | ) | (.46 | ) | (.58 | ) | (.67 | ) | |||||||||||
Net asset value, end of year | $10.37 | $ | 10.55 | $ | 10.70 | $ | 10.32 | $ | 10.27 | ||||||||||||
Ratios/supplemental data: | |||||||||||||||||||||
Total return | 2.41 | % | 1.71 | % | 8.35 | % | 6.30 | % | 10.64 | % | |||||||||||
Expenses to average net assets | 0.48 | % B | .46 | %B | .47 | %B | .46 | %B | .46 | %B | |||||||||||
Net investment income to average net assets | 3.22 | % B | 3.03 | % B | 4.38 | % B | 5.63 | % B | 6.66 | % B | |||||||||||
Portfolio turnover rate | 238 | % | 487 | % | 204 | % | 535 | % | 248 | % | |||||||||||
Net assets, end of year (in thousands) | $ | 9,546 | $ | 7,740 | $ | 9,485 | $ | 7,221 | $ | 6,723 | |||||||||||
B | Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 0.50% until April 30, 2005. If no fees had been waived by LMFA, the annualized ratio of expenses to average daily net assets would have been as follows: for the years ended December 31, 2004, 0.70%; 2003, 0.68%; 2002, 0.66%; 2001, 0.63%; and 2000, 0.65%. |
See notes to financial statements.
U.S. Government Money Market Portfolio
As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Each example is based on an investment of $1,000 invested on July 1, 2004, and held through December 31, 2004.
Actual Expenses
The first line in the table below provides information about actual account values and actual expenses for the Fund. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line in the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Beginning | Ending | Expenses PaidA | ||||||||||||||
Account | Account | During the | Annualized | |||||||||||||
Value | Value | Period | Expense | |||||||||||||
7/1/04 | 12/31/04 | 7/1/04 to 12/31/04 | Ratio | |||||||||||||
Actual | $ | 1,000.00 | $ | 1,004.80 | $ | 3.61 | .71% | |||||||||
Hypothetical (5% return before expenses) | 1,000.00 | $ | 1,021.61 | $ | 3.64 |
A | These calculations are based on expenses incurred in the most recent fiscal half-year. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average value over the period, multiplied by the number of days in the most recent fiscal half-year (184), and divided by 365. |
Performance Information
U.S. Government Money Market Portfolio
Maturity Schedule (As a percentage of the portfolio)
Statement of Net Assets
U.S. Government Money Market Portfolio
Maturity | |||||||||||||
Rate | Date | Par | Value | ||||||||||
U.S. Government and Agency Obligations — 86.3% | |||||||||||||
Fannie Mae | 1.00% to 2.46% | 1/13/05 to 5/27/05 | $ | 195,980 | $ | 195,777 | |||||||
Federal Home Loan Bank | 1.30% to 2.45% | 1/13/05 to 11/4/05 | 65,125 | 65,098 | |||||||||
Freddie Mac | 1.24% to 2.321% | 1/11/05 to 9/26/05 | 78,160 | 78,071 | |||||||||
Total U.S. Government and Agency Obligations (Identified Cost — $338,946) | 338,946 | ||||||||||||
Repurchase Agreements — 11.2% | |||||||||||||
Goldman Sachs & Company 2.22%, dated 12/31/04, to be repurchased at $31,006 on 1/3/05 (Collateral: $28,845 Freddie Mac notes, 5.625%, due 3/15/11, value $32,099) | 31,000 | 31,000 | |||||||||||
Lehman Brothers, Inc. 2.10%, dated 12/31/04, to be repurchased at $13,043 on 1/3/05 (Collateral: $13,355 Fannie Mae notes, 3.10%, due 4/4/07, value $13,402) | 13,041 | 13,041 | |||||||||||
Total Repurchase Agreements (Identified Cost — $44,041) | 44,041 | ||||||||||||
Total Investments, at Amortized Cost and Value — 97.5% | 382,987 | A | |||||||||||
Other Assets Less Liabilities — 2.5% | 9,696 | ||||||||||||
Net Assets Applicable to 392,684 Shares Outstanding — 100% | $ | 392,683 | |||||||||||
Net Asset Value Per Share | $ | 1.00 | |||||||||||
A | Also represents cost for income tax purposes. |
See notes to financial statements.
Statement of Operations
U.S. Government Money Market Portfolio
Investment Income: | ||||||||||
Interest | $ | 6,030 | ||||||||
Expenses: | ||||||||||
Management fee | $ | 2,216 | ||||||||
Distribution and service fees | 443 | |||||||||
Audit and legal fees | 37 | |||||||||
Custodian fees | 103 | |||||||||
Directors’ fees and expenses | 23 | |||||||||
Registration fees | 56 | |||||||||
Reports to shareholders | 32 | |||||||||
Transfer agent and shareholder servicing expense | 243 | |||||||||
Other expenses | 17 | |||||||||
3,170 | ||||||||||
Less compensating balance credits | (4 | ) | ||||||||
Total expenses, net of compensating balance credits | 3,166 | |||||||||
Net Investment Income | 2,864 | |||||||||
Net Realized Gain/(Loss) on Investments: | ||||||||||
Realized gain/(loss) on investments | (1 | ) | ||||||||
Change in Net Assets Resulting From Operations | $ | 2,863 | ||||||||
See notes to financial statements.
Statement of Changes in Net Assets
U.S. Government Money Market Portfolio
For the Years Ended | ||||||||
12/31/04 | 12/31/03 | |||||||
Change in Net Assets: | ||||||||
Net investment income | $ | 2,864 | $ | 2,477 | ||||
Net realized gain/(loss) on investments | (1 | ) | — | |||||
Change in net assets resulting from operations | 2,863 | 2,477 | ||||||
Distributions to shareholders from net investment income | (2,864 | ) | (2,633 | ) | ||||
Change in net assets from Fund share transactions | (51,197 | ) | (97,836 | ) | ||||
Change in net assets | (51,198 | ) | (97,992 | ) | ||||
Net Assets: | ||||||||
Beginning of year | 443,881 | 541,873 | ||||||
End of year | $ | 392,683 | $ | 443,881 | ||||
See notes to financial statements.
Financial Highlights
U.S. Government Money Market Portfolio
Contained below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements.
Years Ended December 31, | |||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||
Net asset value, beginning of year | $1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | ||||||||||||
Investment operations: | |||||||||||||||||||||
Net investment income | .01 | .0049 | A | .01 | A | .04 | A | .06 | A | ||||||||||||
Total from investment operations | .01 | .0049 | .01 | .04 | .06 | ||||||||||||||||
Distributions: | |||||||||||||||||||||
From net investment income | (.01 | ) | (.0049 | ) | (.01 | ) | (.04 | ) | (.06 | ) | |||||||||||
Total distributions | (.01 | ) | (.0049 | ) | (.01 | ) | (.04 | ) | (.06 | ) | |||||||||||
Net asset value, end of year | $1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | ||||||||||||
Ratios/supplemental data: | |||||||||||||||||||||
Total return | .67 | % | .51 | % | 1.13 | % | 3.57 | % | 5.66 | % | |||||||||||
Expenses to average net assets | .71 | % | .71 | %A | .72 | %A | .71 | %A | .73 | %A | |||||||||||
Net investment income to average net assets | .65 | % | .49 | %A | 1.11 | % A | 3.46 | % A | 5.53 | % A | |||||||||||
Net assets, end of year (in thousands) | $ | 392,683 | $ | 443,881 | $ | 541,873 | $ | 501,070 | $ | 426,988 | |||||||||||
A | Net of 12b-1 service fees waived by Legg Mason Wood Walker, Inc. of 0.10% of average daily net assets. If no fees had been waived by Legg Mason, the annualized ratio of expenses to average daily net assets would have been as follows for the years ended December 31, 2003: 0.81%; 2002: 0.82%; 2001: 0.81% and 2000: 0.83%. |
See notes to financial statements.
Notes to Financial Statements
Legg Mason Income Trust, Inc.
1. Organization and Significant Accounting Policies:
Security Valuation
Security Transactions
For the year ended December 31, 2004, investment transactions (excluding short-term investments) were as follows:
Purchases | Proceeds From Sales | |||||||||||||||
U.S. Gov’t. | U.S. Gov’t. | |||||||||||||||
Securities | Other | Securities | Other | |||||||||||||
Core Bond | $ | 114,405 | $ | 21,636 | $ | 80,293 | $ | 13,735 | ||||||||
High Yield | — | 230,519 | — | 243,918 | ||||||||||||
Investment Grade | 79,013 | 221,545 | 95,751 | 207,889 | ||||||||||||
Limited Duration | 388,579 | 249,573 | 546,461 | 77,551 |
Repurchase Agreements
Investment Income and Distributions to Shareholders
Compensating Balance Credits
Other
2. Federal Income Taxes:
Core Bond | High Yield | Investment Grade | ||||||||||||||||||
2004 | 2004 | 2003 | 2004 | 2003 | ||||||||||||||||
Ordinary income | $ | 1,183 | $ | 14,760 | $ | 15,274 | $ | 19,210 | $ | 18,284 | ||||||||||
Long-term capital gains | — | — | — | 8,438 | 2,806 | |||||||||||||||
Total distributions | $ | 1,183 | $ | 14,760 | $ | 15,274 | $ | 27,648 | $ | 21,090 | ||||||||||
Government | ||||||||||||||||
Limited Duration | Money Market | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Ordinary income | $ | 11,006 | $ | 9,791 | $ | 2,864 | $ | 2,633 | ||||||||
Long-term capital gains | — | — | — | — | ||||||||||||
Total distributions | $ | 11,006 | $ | 9,791 | $ | 2,864 | $ | 2,633 | ||||||||
Pursuant to federal income tax regulations applicable to investment companies, the Funds have elected to treat net capital losses realized between November 1 and December 31 of each year (“post-October loss”) as occurring on the first day of the following tax year. For the year ended December 31, 2004, realized capital losses reflected in the accompanying financial statements, as shown in the table on the next page, will not be recognized for federal income tax purposes until 2005.
The tax basis components of net assets at December 31, 2004, were:
Core | High | Investment | Limited | Government | ||||||||||||||||
Bond | Yield | Grade | Duration | Money Market | ||||||||||||||||
Unrealized appreciation | $ | 433 | $ | 12,828 | $ | 17,486 | $ | 1,170 | $ | — | ||||||||||
Unrealized depreciation | (205 | ) | (3,941 | ) | (1,631 | ) | (3,131 | ) | — | |||||||||||
Net unrealized appreciation/depreciation | 228 | 8,887 | 15,855 | (1,961 | ) | — | ||||||||||||||
Undistributed ordinary income | 16 | 58 | 771 | — | 5 | |||||||||||||||
Undistributed long-term capital gains | — | — | 654 | — | — | |||||||||||||||
Capital loss carryforwards | — | (154,555 | ) | — | (8,369 | ) | (1 | ) | ||||||||||||
Post-October loss push and other loss deferrals | — | (1,070 | ) | — | — | — | ||||||||||||||
Paid-in capital | 63,529 | 360,741 | 396,297 | 294,481 | 392,679 | |||||||||||||||
Net assets | $ | 63,773 | $ | 214,061 | $ | 413,577 | $ | 284,151 | $ | 392,683 | ||||||||||
The Funds intend to retain realized capital gains that may be offset against available capital loss carryforwards for federal income tax purposes. At December 31, 2004, the Funds had capital loss carryforwards as follows:
Limited | Government | |||||||||||
Expiration Date | High Yield | Duration | Money Market | |||||||||
2008 | $ | (35,788 | ) | $ | (3,834 | ) | — | |||||
2009 | (83,723 | ) | — | — | ||||||||
2010 | (32,488 | ) | — | — | ||||||||
2011 | (2,556 | ) | — | — | ||||||||
2012 | — | (4,535 | ) | (1 | ) |
For financial reporting purposes, capital accounts and distributions to shareholders are adjusted to reflect the tax character of permanent book/tax differences. For the year ended December 31, 2004, the Funds recorded the following permanent reclassifications, which relate primarily to reclassifications of gains/losses on paydown securities and swap securities. Results of operations and net assets were not affected by these reclassifications.
Investment | Limited | Government | ||||||||||||||||||
Core Bond | High Yield | Grade | Duration | Money Market | ||||||||||||||||
Undistributed net investment income | $ | 100 | $ | (18 | ) | $ | 1 | $ | 810 | $ | — | |||||||||
Accumulated realized gain/(loss) | (100 | ) | 140 | (1 | ) | (782 | ) | — | ||||||||||||
Paid-in capital | — | (122 | ) | — | (28 | ) | — |
At December 31, 2004, the cost of investments for federal income tax purposes was $62,021 for Core Bond, $201,566 for High Yield, $391,540 for Investment Grade, $290,308 for Limited Duration, and $382,987 for Government Money Market.
3. Financial Instruments:
Purchased option: | Impact on the Fund: | |
The option expires | Realize a loss in the amount of the cost of the option. | |
The option is closed through a closing sale transaction | Realize a gain or loss depending on whether the proceeds from the closing sale transaction are greater or less than the cost of the option. | |
The Fund exercises a call option | The cost of the security purchased through the exercise of the option will be increased by the premium originally paid to purchase the option. | |
The Fund exercises a put option | Realize a gain or loss from the sale of the underlying security. The proceeds of that sale will be reduced by the premium originally paid to purchase the put option. | |
Written option: | Impact on the Fund: | |
The option expires | Realize a gain equal to the amount of the premium received. | |
The option is closed through a closing purchase transaction | Realize a gain or loss without regard to any unrealized gain or loss on the underlying security and eliminate the option liability. The Fund will realize a loss in this transaction if the cost of the closing purchase exceeds the premium received when the option was written. | |
A written call option is exercised by the option purchaser | Realize a gain or loss from the sale of the underlying security. The proceeds of that sale will be increased by the premium originally received when the option was written. | |
A written put option is exercised by the option purchaser | The amount of the premium originally received will reduce the cost of the security that the Fund purchased when the option was exercised. | |
The risk associated with purchasing options is limited to the premium originally paid. Options written by a Fund involve, to varying degrees, risk of loss in excess of the option value reflected in the statement of net assets. The risk in writing a covered call option is that a Fund may forgo 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 a Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. In addition, there is the risk a Fund may not be able to enter into a closing transaction because of an illiquid secondary market or, for over-the-counter options, because of the counterparty’s inability to perform.
Core Bond:
Calls | Puts | |||||||||||||||
Actual | Actual | |||||||||||||||
Contracts | Premiums | Contracts | Premiums | |||||||||||||
Options written | 282 | $ | 217 | 293 | $ | 185 | ||||||||||
Options closed | (151 | ) | (120 | ) | (42 | ) | (24 | ) | ||||||||
Options expired | (55 | ) | (40 | ) | (146 | ) | (64 | ) | ||||||||
Options exercised | — | — | — | — | ||||||||||||
Options outstanding, December 31, 2004 | 76 | $ | 57 | 105 | $ | 97 | ||||||||||
Upon entering into a futures contract, the Fund is required to deposit with the broker cash or cash equivalents in an amount equal to a certain percentage of the contract amount. This is known as the “initial margin.” Subsequent payments (“variation margin”) are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. The daily changes in contract value are recorded as unrealized gains or losses and the Fund recognizes a realized gain or loss when the contract is closed. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded.
Forward Currency Exchange Contracts
Notes to Financial Statements — Continued
Swap Agreements
4. Transactions With Affiliates:
Year Ended | At | ||||||||||||||||
December 31, | December 31, | ||||||||||||||||
2004 | 2004 | ||||||||||||||||
Expense | Management | Management | |||||||||||||||
Fund | Management Fee | Limitation | Fees Waived | Fees Payable | |||||||||||||
Core Bond | 0.45% | 1.00% | $ | (127 | ) | $ | 24 | ||||||||||
High Yield | |||||||||||||||||
— Primary Class | 0.65% | None | — | 114 | |||||||||||||
— Institutional Class | 0.65% | None | — | 5 | |||||||||||||
Investment Grade | |||||||||||||||||
— Primary Class | 0.60% | 1.00% | (1,080 | ) | 121 | ||||||||||||
— Institutional Class | 0.60% | 0.50% | (22 | ) | 3 | ||||||||||||
Limited Duration | |||||||||||||||||
— Primary Class | 0.45% | 1.00% | (637 | ) | 47 | ||||||||||||
— Institutional Class | 0.45% | 0.50% | (19 | ) | 2 | ||||||||||||
Government Money Market | 0.50% – 0.40% B | None | — | 172 |
Western Asset Management Company (“Adviser”) serves as investment adviser to the Funds. The Adviser is responsible for the actual investment activity of each Fund. LMFA pays the Adviser a fee, computed daily and payable monthly, at an annual rate of 40% of the management fee received by LMFA for Core Bond; 77% of the management fee received by LMFA for High Yield; 40% of the management fee received for Investment Grade; and 30% for Government Money Market. For Limited Duration, LMFA pays the Adviser a fee, computed daily and payable monthly, of 0.20% of its average daily net assets, not to exceed the fee received by LMFA.
B | Government Money Market’s management fee varies with the level of the Fund’s average daily net assets. The management fee is calculated as follows: |
Average Net Assets | Advisory Fee Rate | |||
$0 – $500 million | 0.50% | |||
next $500 million | 0.475% | |||
next $500 million | 0.45% | |||
next $500 million | 0.425% | |||
thereafter | 0.40% |
Notes to Financial Statements — Continued
Legg Mason Wood Walker, Incorporated (“Legg Mason”), a member of the New York Stock Exchange, serves as distributor of the Funds. Legg Mason receives an annual distribution fee and an annual service fee based on each Fund’s Primary Class’s average daily net assets, computed daily and payable monthly as shown in the table below. For the period from its inception (February 27, 2004) to December 31, 2004, Legg Mason waived $85 of Core Bond’s distribution and service fees.
At December 31, 2004 | ||||||||||||
Distribution | Service | Distribution and Service | ||||||||||
Fee | Fee | Fees Payable | ||||||||||
Core Bond | 0.25% | 0.25% | $ | 35 | ||||||||
High Yield | 0.25% | 0.25% | 87 | |||||||||
Investment Grade | 0.25% | 0.25% | 170 | |||||||||
Limited Duration | 0.25% | 0.25% | 117 | |||||||||
Government Money Market | N/A | 0.10% | 34 |
LM Fund Services, Inc. (“LMFS”), a registered transfer agent, has an agreement with the Funds’ transfer agent to assist it with some of its duties. For this assistance, the transfer agent paid LMFS the following amounts for the period ended December 31, 2004: Core Bond, $8; High Yield, $59; Investment Grade, $81; Limited Duration, $56; and Government Money Market, $91.
5. Line of Credit:
6. Fund Share Transactions:
Core Bond | |||||||||||||
Period Ended | |||||||||||||
Shares | |||||||||||||
Sold | 7,274 | ||||||||||||
Reinvestment of Distributions | 111 | ||||||||||||
Repurchased | (977 | ) | |||||||||||
Net Increase | 6,408 | ||||||||||||
Amount | |||||||||||||
Sold | $ | 72,052 | |||||||||||
Reinvestment of Distributions | 1,103 | ||||||||||||
Repurchased | (9,621 | ) | |||||||||||
Net Increase | $ | 63,534 | |||||||||||
High Yield | |||||||||||||||||
Primary Class | Institutional Class | ||||||||||||||||
Years Ended | Years Ended | ||||||||||||||||
12/31/04 | 12/31/03 | 12/31/04 | 12/31/03 | ||||||||||||||
Shares | |||||||||||||||||
Sold | 4,287 | 11,415 | 608 | 978 | |||||||||||||
Reinvestment of Distributions | 1,211 | 1,342 | 61 | 44 | |||||||||||||
Repurchased | (8,220 | ) | (8,542 | ) | (446 | ) | (656 | ) | |||||||||
Net Change | (2,722 | ) | 4,215 | 223 | 366 | ||||||||||||
Amount | |||||||||||||||||
Sold | $ | 39,099 | $ | 97,837 | $ | 5,538 | $ | 8,358 | |||||||||
Reinvestment of Distributions | 10,986 | 11,598 | 558 | 385 | |||||||||||||
Repurchased | (74,487 | ) | (73,936 | ) | (4,056 | ) | (5,677 | ) | |||||||||
Net Change | $ | (24,402 | ) | $ | 35,499 | $ | 2,040 | $ | 3,066 | ||||||||
A | For the period February 27, 2004 (commencement of operations) to December 31, 2004. |
Notes to Financial Statements — Continued
Investment Grade | |||||||||||||||||
Primary Class | Institutional Class | ||||||||||||||||
Years Ended | Years Ended | ||||||||||||||||
12/31/04 | 12/31/03 | 12/31/04 | 12/31/03 | ||||||||||||||
Shares | |||||||||||||||||
Sold | 7,793 | 14,879 | 557 | 412 | |||||||||||||
Reinvestment of Distributions | 2,253 | 1,713 | 58 | 23 | |||||||||||||
Repurchased | (10,301 | ) | (11,141 | ) | (213 | ) | (165 | ) | |||||||||
Net Change | (255 | ) | 5,451 | 402 | 270 | ||||||||||||
Amount | |||||||||||||||||
Sold | $ | 84,747 | $ | 159,989 | $ | 6,057 | $ | 4,456 | |||||||||
Reinvestment of Distributions | 24,367 | 18,456 | 631 | 244 | |||||||||||||
Repurchased | (111,468 | ) | (119,804 | ) | (2,318 | ) | (1,791 | ) | |||||||||
Net Change | $ | (2,354 | ) | $ | 58,641 | $ | 4,370 | $ | 2,909 | ||||||||
Limited Duration | |||||||||||||||||
Primary Class | Institutional Class | ||||||||||||||||
Years Ended | Years Ended | ||||||||||||||||
12/31/04 | 12/31/03 | 12/31/04 | 12/31/03 | ||||||||||||||
Shares | |||||||||||||||||
Sold | 5,553 | 10,382 | 499 | 417 | |||||||||||||
Reinvestment of Distributions | 910 | 785 | 33 | 26 | |||||||||||||
Repurchased | (10,970 | ) | (15,656 | ) | (345 | ) | (595 | ) | |||||||||
Net Change | (4,507 | ) | (4,489 | ) | 187 | (152 | ) | ||||||||||
Amount | |||||||||||||||||
Sold | $ | 58,022 | $ | 110,857 | $ | 5,222 | $ | 4,469 | |||||||||
Reinvestment of Distributions | 9,486 | 8,339 | 346 | 272 | |||||||||||||
Repurchased | (114,563 | ) | (166,480 | ) | (3,611 | ) | (6,339 | ) | |||||||||
Net Change | $ | (47,055 | ) | $ | (47,284 | ) | $ | 1,957 | $ | (1,598 | ) | ||||||
U.S. Government Money | |||||||||||||||||
Market | |||||||||||||||||
Year Ended | |||||||||||||||||
12/31/04 | 12/31/03 | ||||||||||||||||
Shares | |||||||||||||||||
Sold | 1,461,762 | 1,306,465 | |||||||||||||||
Reinvestment of Distributions | 2,616 | 2,476 | |||||||||||||||
Repurchased | (1,515,575 | ) | (1,406,777 | ) | |||||||||||||
Net Change | (51,197 | ) | (97,836 | ) | |||||||||||||
Amount | |||||||||||||||||
Sold | $ | 1,461,762 | $ | 1,306,465 | |||||||||||||
Reinvestment of Distributions | 2,616 | 2,476 | |||||||||||||||
Repurchased | (1,515,575 | ) | (1,406,777 | ) | |||||||||||||
Net Change | $ | (51,197 | ) | $ | (97,836 | ) | |||||||||||
Report of Independent Registered Public Accounting Firm
To the Shareholders of Core Bond Fund, High Yield Portfolio, Investment Grade Income Portfolio, Limited Duration Bond Portfolio, and U.S. Government Money Market Portfolio, and to the Directors of Legg Mason Income Trust, Inc.:
In our opinion, the accompanying statements of assets and liabilities for Core Bond Fund, High Yield Portfolio, Investment Grade Income Portfolio, and Limited Duration Bond Portfolio, including the portfolio of investments, and the statement of net assets for U.S. Government Money Market Portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Core Bond Fund, High Yield Portfolio, Investment Grade Income Portfolio, Limited Duration Bond Portfolio, and U.S. Government Money Market Portfolio (comprising Legg Mason Income Trust, Inc., hereafter referred to as the “Funds”) at December 31, 2004, the results of each of their operations, the changes in each of their net assets and the financial highlights for each of the fiscal periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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 are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2004 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
Directors and Officers
The table below provides information about each of the Corporation’s directors and officers, including biographical information about their business experience and information about their relationships with Legg Mason, Inc. and its affiliates. The mailing address of each director and officer is 100 Light Street, c/o Legal and Compliance Department, 23rd Floor, Baltimore, Maryland 21202.
Name, Position(s) and | Number of Legg Mason | |||
Year First Elected | Funds Overseen and | Principal Occupation(s) | ||
With Fund, and Age | Other Directorships | During the Past Five Years | ||
INDEPENDENT DIRECTORS:A | ||||
Hearn, Ruby P. Director since 2004 B Age 64 | Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios). | Senior Vice President Emerita of The Robert Wood Johnson Foundation since 2001. Formerly: Senior Vice President of The Robert Wood Johnson Foundation (1996-2001). | ||
Lehman, Arnold L. Director since 1987 B Age 60 | Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios). | Director of The Brooklyn Museum of Art since 1997; Trustee of American Federation of Arts since 1998. Formerly: Director of The Baltimore Museum of Art (1979-1997). | ||
Masters, Robin J.W. Director since 2002 B Age 49 | Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios). | Retired. Director of Bermuda SMARTRISK (non-profit) since 2001. Formerly: Chief Investment Officer of ACE Limited (insurance) (1986-2000). | ||
McGovern, Jill E. Director since 1989 B Age 60 | Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios). | Chief Executive Officer of The Marrow Foundation since 1993. Formerly: Executive Director of the Baltimore International Festival (1991-1993); Senior Assistant to the President of The Johns Hopkins University (1986-1990). | ||
Mehlman, Arthur S. Director since 2002 B Age 62 | Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios); Trustee of The Royce Family of Funds (consisting of 21 portfolios); Director of Municipal Mortgage & Equity, LLC. | Retired. Director of The League for People with Disabilities, Inc.; Director of University of Maryland Foundation and University of Maryland College Park Foundation (non-profits). Formerly: Partner, KPMG LLP (international accounting firm) (1972-2002). | ||
O’Brien, G. Peter Director since 2002 B Age 59 | Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios); Trustee of The Royce Family of Funds (consisting of 21 portfolios); Director of Renaissance Capital Greenwich Funds; and Director of Technology Investment Capital Corp. | Trustee of Colgate University; President of Hill House, Inc. (residential home care). Formerly: Managing Director, Equity Capital Markets Group of Merrill Lynch & Co. (1971-1999). | ||
Directors and Officers — Continued
Name, Position(s) and | Number of Legg Mason | |||
Year First Elected | Funds Overseen and | Principal Occupation(s) | ||
With Fund, and Age | Other Directorships | During the Past Five Years | ||
Rowan, S. Ford Director since 2002 B Age 61 | Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios). | Consultant, Rowan & Blewitt Inc. (management consulting); Chairman, National Center for Critical Incident Analysis, National Defense University, since 2004; Director of Santa Fe Institute (scientific research institute) since 1999; Director of Annapolis Center for Science-Based Public Policy since 1995. | ||
Tarola, Robert M. Director since 2004 B Age 54 | Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios). | Senior Vice President and Chief Financial Officer of W. R. Grace & Co. (specialty chemicals) since 1999. | ||
INTERESTED DIRECTORS:C | ||||
Curley, John F., Jr. Chairman and Director since 1987 B Age 65 | Chairman and Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios). | Chairman of the Board of all Legg Mason funds. Formerly: Vice Chairman and Director of Legg Mason, Inc. and Legg Mason Wood Walker, Incorporated (1982-1998); Director of Legg Mason Fund Adviser, Inc. (1982-1998) and Western Asset Management Company (1986-1998) (each a registered investment adviser). | ||
Fetting, Mark R. President since 2001; Director since 2002B Age 50 | President and Director/ Trustee of all Legg Mason funds (consisting of 23 portfolios); Trustee of The Royce Family of Funds (consisting of 21 portfolios). | Senior Executive Vice President of Legg Mason, Inc.; Director and/or officer of various Legg Mason affiliates since 2000. Formerly: Division President and Senior Officer of Prudential Financial Group, Inc. and related companies, including fund boards and consulting services to subsidiary companies (1991-2000); Partner, Greenwich Associates; Vice President, T. Rowe Price Group, Inc. | ||
EXECUTIVE OFFICERS:D | ||||
Karpinski, Marie K. Vice President and Treasurer since 1987 B Age 55 | Vice President and Treasurer of all Legg Mason funds (consisting of 23 portfolios). | Vice President and Treasurer of all Legg Mason funds. Vice President and Treasurer of Legg Mason Fund Adviser, Inc.; Treasurer of Western Asset Funds, Inc.; Treasurer and Principal Financial and Accounting Officer of Pacific American Income Shares, Inc., Western Asset Premier Bond Fund, Western Asset/ Claymore U.S. Treasury Inflation Protected Securities Fund, and Western Asset/ Claymore U.S. Treasury Inflation Protected Securities Fund 2. | ||
Merz, Gregory T. Vice President and Chief Legal Officer since 2003B Age 46 | Vice President and Chief Legal Officer of all Legg Mason funds (consisting of 23 portfolios). | Vice President and Deputy General Counsel of Legg Mason, Inc. since 2003. Formerly: Associate General Counsel, Fidelity Investments (1993-2002); Senior Associate, Debevoise & Plimpton (1985-1993). | ||
Name, Position(s) and | Number of Legg Mason | |||
Year First Elected | Funds Overseen and | Principal Occupation(s) | ||
With Fund, and Age | Other Directorships | During the Past Five Years | ||
Olmert, Amy M. Vice President and Chief Compliance Officer since 2004B Age 41 | Vice President and Chief Compliance Officer of all Legg Mason funds (consisting of 23 portfolios). | Senior Vice President of Legg Mason, Inc. since 2004. Chief Compliance Officer of all Legg Mason funds, Western Asset Funds, Inc., Pacific American Income Shares, Inc., Western Asset Premier Bond Fund, Western Asset/ Claymore U.S. Treasury Inflation Protected Securities Fund, and Western Asset/ Claymore U.S. Treasury Inflation Protected Securities Fund 2 since 2004. Formerly: Managing Director, Deutsche Asset Management (1997-2004). | ||
ADDITIONAL INFORMATION ABOUT THE CORPORATION’S DIRECTORS
A | Each of the Independent Directors serves on the standing committees of the Board of Directors, which include the Audit Committee (chair: Arthur Mehlman), the Nominating Committee (co-chairs: Peter O’Brien and Jill McGovern), and the Independent Directors Committee (chair: Arnold Lehman). |
B | Directors of the Funds serve a term of indefinite length until their resignation or removal and stand for re-election by shareholders only as and when required by the 1940 Act. Officers of the Funds are elected annually to serve until their successors are elected and qualified. |
C | Mr. Curley and Mr. Fetting are considered to be interested persons (as defined in the 1940 Act) of the Funds by virtue of being both employees of Legg Mason Wood Walker, Incorporated, the principal underwriter of the Funds, and as owners of common stock of Legg Mason, Inc. |
D | Officers of the Funds are interested persons (as defined in the 1940 Act). |
Investment Manager
Legg Mason Fund Adviser, Inc. Baltimore, MD |
Investment Adviser
Western Asset Management Company Pasadena, CA |
Board of Directors
John F. Curley, Jr., Chairman Mark R. Fetting, President Dr. Ruby P. Hearn Arnold L. Lehman Robin J.W. Masters Dr. Jill E. McGovern Arthur S. Mehlman G. Peter O’Brien S. Ford Rowan Robert M. Tarola |
Officers
Marie K. Karpinski, Vice President and Treasurer Gregory T. Merz, Vice President and Chief Legal Officer Amy M. Olmert, Vice President and Chief Compliance Officer Richard M. Wachterman, Secretary Erin K. Morris, Assistant Treasurer Jennifer P. Streaks, Assistant Secretary |
Transfer and Shareholder Servicing Agent
Boston Financial Data Services Braintree, MA |
Custodian
State Street Bank & Trust Company Boston, MA |
Counsel
Kirkpatrick & Lockhart LLP Washington, DC |
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP Baltimore, MD |
Equity Funds American Leading Companies Trust Classic Valuation Fund Growth Trust Special Investment Trust U.S. Small-Capitalization Value Trust Value Trust Specialty Funds Balanced Trust Financial Services Fund Opportunity Trust Global Funds Emerging Markets Trust Global Income Trust International Equity Trust Taxable Bond Funds Core Bond Fund High Yield Portfolio Investment Grade Income Portfolio Limited Duration Bond Portfolio Tax-Free Bond Funds Maryland Tax-Free Income Trust Pennsylvania Tax-Free Income Trust Tax-Free Intermediate-Term Income Trust Money Market Funds Cash Reserve Trust Tax Exempt Trust U.S. Government Money Market Portfolio | Legg Mason, Inc., based in Baltimore, Maryland, has built its reputation, at least in part, on the success of the Legg Mason Funds, introduced in 1979. The primary purpose of our funds is to enable investors to diversify their portfolios across various asset classes and, consequently, enjoy the stability and growth prospects generally associated with diversification. The success of our funds is contingent on the experience, discipline, and acumen of our fund managers. We believe the quality of our managers is crucial to investment success. Unlike many firms, which focus on a particular asset class or the fluctuations of the market, at Legg Mason we focus on providing a collection of top-notch managers in all the major asset classes. Information about the policies and procedures that the Fund uses to determine how to vote proxies relating to its portfolio securities is contained in the Statement of Additional Information, available without charge upon request by calling 1-800-822-5544 or on the Securities and Exchange Commission (“SEC”) website (http://www.sec.gov). Information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is also available on the SEC’s website or through the Fund’s website at www.leggmasonfunds.com/aboutlmf. The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Form N-Q is available on the SEC’s website or may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information about the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. For more information about the differences between the fund share classes included in this report, contact a Legg Mason Financial Advisor. |
This report is not to be distributed unless preceded or accompanied by a prospectus.
Legg Mason Funds For Primary Class Shareholders 800-822-5544 www.leggmasonfunds.com | Legg Mason Institutional Funds For FI and I Class Shareholders 888-425-6432 www.lminstitutionalfunds.com |
Legg Mason Wood Walker, Incorporated
LMF-056
Item 2 — Code of Ethics Applicable to Registrant’s Principal Executive Officer and Principal Financial Officer
(a) | Legg Mason Income Trust, Inc. (“Registrant”) has adopted a Code of Ethics, as defined in the instructions to Form N-CSR that applies to the Registrant’s President and Treasurer, which is designed to deter wrongdoing and to promote: |
• | Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; | |||
• | Full, fair, accurate, timely and understandable disclosure in reports and documents the Registrant files with, or submits to, the SEC or in other public communications made by the Registrant; | |||
• | Compliance with applicable governmental laws, rules and regulations; | |||
• | Prompt internal reporting of violations of the Code of Ethics to an appropriate person or persons identified in the Code of Ethics; and | |||
• | Accountability for adherence to the Code of Ethics. |
(c) | On August 12, 2004, the Registrant’s Code of Ethics for Principal Executive and Financial Officers was amended. The amended Code is set forth as an exhibit to this filing. A brief description of the amendment is set forth below: |
• | The fifth bullet point of Section IV has been revised to clarify that it applies to employment positions. | |||
• | The sixth bullet point of Section IV has been revised to require that Covered Persons report any employment positions they (or a member of their immediate family) hold with a service provider to a fund. | |||
• | Footnote one to the third bullet in Section II has been added. That third bullet of Section II states that a Covered Officer should confer with the Chief Legal Officer if the Covered Officer will serve as director of any public company. There is an exception to the requirement to confer with the Chief Legal Officer if the directorship is of the Legg Mason Funds or their investment advisers or any affiliated person thereof. Footnote one clarifies that the exception does not apply to a company that is affiliated with a fund because the fund owns 5% of the company’s stock, or because the company owns more than 5% of the fund’s stock and the company is not part of the Legg Mason complex. |
(d) | The Registrant has not granted a waiver, including an implicit waiver, from a provision of the code of ethics to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions during the period covered by this report. | |||
(e) | Not applicable. | |||
(f) | A copy of the Code of Ethics is attached as exhibit 12(a)(1) to this Form N-CSR. |
Item 3 — Audit Committee Financial Expert
The directors of the Registrant determined that its board has at least one audit committee financial expert serving on its Audit Committee. | ||||
Mr. Arthur S. Mehlman is the Audit Committee financial expert. He is “independent.” |
Item 4 — Principal Accountant Fees and Services
(a) | Audit Fees | |||
Fiscal Year Ended December 31, 2003 — $139,220 Fiscal Year Ended December 31, 2004 — $156,750 | ||||
(b) | Audit-Related Fees | |||
There were no additional fees billed to the Registrant during either of the last two fiscal years in addition to those disclosed in Item (a) above. | ||||
PricewaterhouseCoopers LLP did not bill fees for assurance and related services that required pre-approval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years. | ||||
(c) | Tax Fees | |||
Fiscal Year Ended December 31, 2003 — $3,480 Fiscal Year Ended December 31, 2004 — $5,000 | ||||
Services include preparation of federal and state income tax returns and preparation of excise tax returns. | ||||
PricewaterhouseCoopers LLP did not bill fees for tax services that required pre-approval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years. | ||||
(d) | All Other Fees | |||
There were no fees billed to the Registrant by PricewaterhouseCoopers LLP during either of the last two fiscal years in addition to those disclosed in items (a) through (c) above. | ||||
PricewaterhouseCoopers LLP did not bill fees for services not included in Items 4(a) through (c) above that required pre-approval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years. | ||||
(e) | (1) The Audit Committee’s policy is delegation to its Chairperson of the authority to pre-approve items for which a decision may be desired prior to the next meeting of the Committee. Such pre-approvals are reported at the next quarterly meeting of the Audit Committee. |
(2) | There were no services provided to the Registrant that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. | |||
PricewaterhouseCoopers LLP did not bill fees for services where pre-approval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X was waived pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years. | ||||
(f) | The percentage of hours expended by the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountants’ full-time, permanent employees was zero. | |||
(g) | Non-Audit Fees | |||
Fiscal Year Ended December 31, 2003 — $883,350 Fiscal Year Ended December 31, 2004 — $372,631 | ||||
(h) | The members of the Registrant’s Audit Committee have considered whether the non-audit services that were rendered by the Registrant’s principal accountant to the Registrant’s investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the Registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X are compatible with maintaining the principal accountant’s independence. |
Item 5 — Audit Committee of Listed Registrants
The Registrant is not a listed issuer as defined in Rule 10A-3 under the Securities Exchange Act of 1934.
Item 6 — Schedule of Investments
The schedule of investments in securities of unaffiliated issuers is included in the annual report.
Item 7 — Disclosure of Proxy Voting Policies and Procedures For Closed-End Management Investment Companies
The Registrant is not a closed-end management investment company.
Item 8 — Portfolio Managers of Closed-End Management Investment Companies
The Registrant is not a closed-end management investment company.
Item 9 — Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers
The Registrant is not a closed-end management investment company.
Item 10 — Submission of Matters to a Vote of Security Holders
The Nominating Committee will accept recommendations for nominations from shareholders. Shareholders may forward recommendations to the Fund Secretary at 100 Light Street, 23rd Floor, Baltimore, Maryland 21202, Attn: Fund Secretary . |
Item 11 — Controls and Procedures
(a) | The Registrant’s principal executive and principal financial officers have concluded, based on their evaluation of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) as of a date within 90 days of the filing date of this report, that the Registrant’s disclosure controls and procedures are reasonably designed to ensure that information required to be disclosed by the Registrant on Form N-CSR is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rule and forms and that information required to be disclosed by the Registrant in the reports that it files or submits on Form N-CSR is accumulated and communicated to the Registrant’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. | |||
(b) | There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) during the Registrant’s second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting. |
Item 12 — Exhibits
(a) | File the exhibits listed below as part of this Form. | |||
(a)(1) | The Registrant’s code of ethics applicable to registrant’s principal executive officer and principal financial officer is attached hereto. | |||
(a)(2) | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. | |||
(a)(3) | The Registrant is not a closed-end management investment company. | |||
(b) | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. |
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, thereunto duly authorized.
Legg Mason Income Trust, Inc. | ||||
By: | /s/ Mark R. Fetting | |||
Mark R. Fetting | ||||
President Legg Mason Light Street Trust Trust, Inc. | ||||
Date: February 25, 2005
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/ Mark R. Fetting | |||
Mark R. Fetting | ||||
President Legg Mason Income Trust, Inc. | ||||
Date: February 25, 2005
By: | /s/ Marie K. Karpinski | |||
Marie K. Karpinski | ||||
Vice President and Treasurer Legg Mason Income Trust, Inc. | ||||
Date: February 25, 2005