REGISTERED MANAGEMENT INVESTMENT COMPANIES
Legg Mason & Co., LLC
100 Light Street
Baltimore, MD 21202
To Our Shareholders,
We are pleased to provide you with Legg Mason Income Trust’s annual report for the year ended December 31, 2005, 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 | 4.07% | 8.42 years | $ | 9.71 | ||||||||
High Yield | 6.61% | 6.94 years | $ | 8.93 | ||||||||
Investment Grade | 5.00% | 10.31 years | $ | 10.40 | ||||||||
Limited DurationB | 3.89% | 3.32 years | $ | 10.20 | ||||||||
U.S. Government Money MarketC | 3.55% | 49 days | $ | 1.00 |
For the year ended December 31, 2005, total returns for the Primary Class of shares of the Core Bond, High Yield, Investment Grade and Limited Duration Portfolios were +0.94%, +2.39%, +1.69%, and +1.83%, respectively. Total returns for the Institutional Class of shares of High Yield, Investment Grade and Limited Duration Portfolios were +2.94%, +2.27%, and +2.29%, respectively. (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.)
A | SEC yields reported for the Core Bond, High Yield, Investment Grade and Limited Duration Portfolios are for the 30 days ended December 31, 2005. For the U.S. Government Money Market Portfolio, the SEC yield is for the 7 days ended December 31, 2005. |
B | Limited Duration was formerly the U.S. Government Intermediate Portfolio, see page 85 for additional information about the change. |
C | An investment in the U.S. Government Money Market Portfolio is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. |
On January 3, 2006, the Board of Directors of the Legg Mason U.S. Government Money Market Portfolio approved, subject to shareholder approval, a Plan of Liquidation, Dissolution and Termination whereby all the Fund’s assets would be liquidated and the Fund would subsequently be dissolved. The estimated time of liquidation is February 27, 2006.
Sincerely, |
John F. Curley, Jr. Chairman | Mark R. Fetting President |
February 15, 2006
D | Source: “Open and Closed-End Mutual Funds Third Quarter 2005 Market Shares,” published by Strategic Insight. |
To Our Clients and Shareholders Worldwide,
Today represents a major milestone in the proud, over a century history of Legg Mason. With the successful acquisition of Citigroup’s worldwide asset management business, Legg Mason has transformed itself from a well-regarded money management and regional securities firm into a global asset manager with more than $800 billion in assets under management. We undertook this important step to enable us to concentrate all of our resources on what we believe we do best: managing your money.
Sincerely, | |
/s/ Raymond A. Mason | |
Raymond A. “Chip” Mason Chairman, President and Chief Executive Officer |
December 2005
Management’s Discussion of Fund Performance
Core Bond Fund
The average annual total return for the Core Bond Fund for the period from its inception to December 31, 2005, is presented below, along with the total return of its benchmark:
Since | |||||||||
One Year | InceptionA | ||||||||
Core Bond Fund | |||||||||
Primary Class | +0.94% | +1.54% | |||||||
Lehman Aggregate Bond IndexB | +2.43% | +4.88% |
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 period. |
Our investment strategy produced generally negative results. The total return (appreciation or depreciation in the Fund’s net asset value per share, plus dividends and any capital gain distributions) of the Fund’s Primary Class lagged the performance of its primary benchmark, the Lehman Aggregate Bond Index, delivering 0.94% versus 2.43% for the index. The Fund’s underweight duration stance suffered as yields fell, but its barbelled exposure to maturities benefited from a flatter yield curve. A neutral-to-underweight exposure to the credit sector was rewarded as spreads widened, but an emphasis on BBB-rated bonds suffered since they underperformed higher-quality bonds. An overweight exposure to Treasury Inflation-Protected SecuritiesC subtracted modestly from performance as they underperformed Treasuries.
Western Asset Management Company
January 31, 2006
A | The Inception date of the Primary Class is February 27, 2004. Index returns are for periods beginning February 29, 2004. |
B | 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. |
C | 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. |
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, 2005, and held through December 31, 2005.
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 | ||||||||||
Value | Value | Period | ||||||||||
7/1/05 | 12/31/05 | 7/1/05 to 12/31/05 | ||||||||||
Actual | $ | 1,000.00 | $ | 992.60 | $ | 5.02 | ||||||
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 of 1.00% 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 graph on the following page compares the Fund’s total returns to 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
Periods Ended December 31, 2005
Cumulative | Average Annual | |||||||||||
Total Return | Total Return | |||||||||||
One Year | +0.94% | +0.94% | ||||||||||
Life of Class* | +2.87% | +1.54% | ||||||||||
* 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. |
Standard & Poor’s Debt RatingsC (as a percentage of the portfolio)
Maturity Schedule (as a percentage of the portfolio)
B | The Fund is actively managed. As a result, the composition of its portfolio holdings and sectors is subject to change at any time. |
C | Standard & Poor’s Ratings Services provide capital markets with credit ratings for the evaluation and assessment of credit risk. |
Portfolio of Investments
Legg Mason Core Bond Fund
(Amounts in Thousands)
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Long-Term Securities — 124.3% | |||||||||||||||||
Corporate Bonds and Notes — 23.2% | |||||||||||||||||
Aerospace/ Defense — 0.1% | |||||||||||||||||
Northrop Grumman Corporation | 4.079% | 11/16/06 | $ | 40 | $ | 40 | |||||||||||
United Technologies Corporation | 5.400% | 5/1/35 | 20 | 20 | |||||||||||||
60 | |||||||||||||||||
Automotive — 1.7% | |||||||||||||||||
Ford Motor Company | 7.450% | 7/16/31 | 720 | 490 | |||||||||||||
General Motors Corporation | 8.250% | 7/15/23 | 1,000 | 642 | |||||||||||||
General Motors Corporation | 8.375% | 7/15/33 | 150 | 99 | |||||||||||||
1,231 | |||||||||||||||||
Banking and Finance — 3.2% | |||||||||||||||||
Ford Motor Credit Company | 4.950% | 1/15/08 | 40 | 36 | |||||||||||||
Ford Motor Credit Company | 6.625% | 6/16/08 | 190 | 172 | |||||||||||||
Ford Motor Credit Company | 7.375% | 10/28/09 | 590 | 523 | |||||||||||||
Ford Motor Credit Company | 7.375% | 2/1/11 | 230 | 202 | |||||||||||||
Ford Motor Credit Company | 7.250% | 10/25/11 | 210 | 182 | |||||||||||||
General Motors Acceptance Corporation | 6.125% | 2/1/07 | 10 | 10 | |||||||||||||
General Motors Acceptance Corporation | 6.150% | 4/5/07 | 50 | 47 | |||||||||||||
General Motors Acceptance Corporation | 6.125% | 8/28/07 | 230 | 213 | |||||||||||||
General Motors Acceptance Corporation | 5.625% | 5/15/09 | 685 | 609 | |||||||||||||
General Motors Acceptance Corporation | 7.750% | 1/19/10 | 110 | 103 | |||||||||||||
HSBC Finance Corporation | 4.125% | 11/16/09 | 225 | 217 | |||||||||||||
2,314 | |||||||||||||||||
Banks — 1.1% | |||||||||||||||||
Bank of America Corporation | 3.875% | 1/15/08 | 90 | 88 | |||||||||||||
Bank of America Corporation | 4.500% | 8/1/10 | 120 | 118 | |||||||||||||
Bank One Corporation | 6.500% | 2/1/06 | 220 | 220 | |||||||||||||
Bank One Corporation | 2.625% | 6/30/08 | 335 | 318 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Banks — Continued | |||||||||||||||||
Rabobank Capital Funding Trust II | 5.260% | 12/31/49 | $ | 10 | $ | 10 | A,B | ||||||||||
Rabobank Capital Funding Trust III | 5.254% | 12/29/49 | 20 | 20 | A,B | ||||||||||||
774 | |||||||||||||||||
Cable — 0.5% | |||||||||||||||||
Comcast Corporation | 6.500% | 1/15/15 | 240 | 254 | |||||||||||||
Cox Communications, Inc. | 3.875% | 10/1/08 | 70 | 67 | |||||||||||||
321 | |||||||||||||||||
Diversified Financial Services — 1.6% | |||||||||||||||||
CIT Group Inc. | 4.000% | 5/8/08 | 5 | 5 | |||||||||||||
Citigroup Inc. | 4.125% | 2/22/10 | 230 | 223 | |||||||||||||
General Electric Capital Corporation | 4.250% | 1/15/08 | 180 | 178 | |||||||||||||
Marsh & McLennan Companies, Inc. | 5.150% | 9/15/10 | 650 | 646 | |||||||||||||
Wells Fargo & Company | 4.200% | 1/15/10 | 105 | 102 | |||||||||||||
1,154 | |||||||||||||||||
Electric — 0.7% | |||||||||||||||||
Dominion Resources, Inc. | 4.750% | 12/15/10 | 30 | 29 | |||||||||||||
Dominion Resources, Inc. | 5.700% | 9/17/12 | 95 | 97 | |||||||||||||
FirstEnergy Corp. | 7.375% | 11/15/31 | 285 | 336 | |||||||||||||
Oncor Electric Delivery Company | 6.375% | 1/15/15 | 30 | 32 | |||||||||||||
The Cleveland Electric Illuminating Company | 5.650% | 12/15/13 | 20 | 20 | |||||||||||||
514 | |||||||||||||||||
Energy — 2.6% | |||||||||||||||||
Duke Energy Corporation | 6.250% | 1/15/12 | 50 | 53 | |||||||||||||
Duke Energy Corporation | 5.625% | 11/30/12 | 90 | 92 | |||||||||||||
Pacific Gas and Electric Company | 6.050% | 3/1/34 | 135 | 140 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Energy — Continued | |||||||||||||||||
TXU Corp. | 6.550% | 11/15/34 | $ | 800 | $ | 756 | |||||||||||
TXU Energy Co. | 7.000% | 3/15/13 | 770 | 820 | |||||||||||||
1,861 | |||||||||||||||||
Environmental Services — 0.1% | |||||||||||||||||
Waste Management, Inc. | 6.375% | 11/15/12 | 85 | 91 | |||||||||||||
Food, Beverage and Tobacco — 0.5% | |||||||||||||||||
Altria Group, Inc. | 7.000% | 11/4/13 | 155 | 169 | |||||||||||||
Anheuser-Busch Companies, Inc. | 4.950% | 1/15/14 | 155 | 155 | |||||||||||||
Kraft Foods Inc. | 5.625% | 11/1/11 | 65 | 67 | |||||||||||||
391 | |||||||||||||||||
Investment Banking/ Brokerage — 0.7% | |||||||||||||||||
BNP Paribas NY | 6.875% | 3/1/09 | 110 | 116 | |||||||||||||
Lehman Brothers Holdings Inc. | 4.000% | 1/22/08 | 115 | 113 | |||||||||||||
Morgan Stanley | 3.625% | 4/1/08 | 190 | 185 | |||||||||||||
The Goldman Sachs Group, Inc. | 4.500% | 6/15/10 | 110 | 108 | |||||||||||||
522 | |||||||||||||||||
Media — 0.4% | |||||||||||||||||
Clear Channel Communications, Inc. | 4.625% | 1/15/08 | 30 | 30 | |||||||||||||
Clear Channel Communications, Inc. | 4.250% | 5/15/09 | 50 | 48 | |||||||||||||
Clear Channel Communications, Inc. | 5.500% | 9/15/14 | 40 | 38 | |||||||||||||
Time Warner Inc. | 6.875% | 5/1/12 | 75 | 80 | |||||||||||||
Time Warner Inc. | 7.700% | 5/1/32 | 75 | 84 | |||||||||||||
280 | |||||||||||||||||
Medical Care Facilities — 1.0% | |||||||||||||||||
HCA, Inc. | 5.750% | 3/15/14 | 700 | 679 | |||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Medical Care Facilities — Continued | |||||||||||||||||
Oil and Gas — 1.7% | |||||||||||||||||
Amerada Hess Corporation | 7.300% | 8/15/31 | $ | 245 | $ | 283 | |||||||||||
Apache Corporation | 6.250% | 4/15/12 | 35 | 38 | |||||||||||||
Conoco Inc. | 6.950% | 4/15/29 | 225 | 271 | |||||||||||||
ConocoPhillips | 4.750% | 10/15/12 | 60 | 60 | |||||||||||||
Devon Energy Corporation | 7.950% | 4/15/32 | 140 | 181 | |||||||||||||
Kerr-McGee Corporation | 6.875% | 9/15/11 | 300 | 320 | |||||||||||||
XTO Energy, Inc. | 7.500% | 4/15/12 | 15 | 17 | |||||||||||||
XTO Energy, Inc. | 6.250% | 4/15/13 | 20 | 21 | |||||||||||||
1,191 | |||||||||||||||||
Paper and Forest Products — 0.4% | |||||||||||||||||
International Paper Company | 5.500% | 1/15/14 | 40 | 39 | |||||||||||||
Weyerhaeuser Company | 6.750% | 3/15/12 | 235 | 250 | |||||||||||||
289 | |||||||||||||||||
Photo Equipment and Supplies — 0.7% | |||||||||||||||||
Eastman Kodak Company | 7.250% | 11/15/13 | 540 | 516 | |||||||||||||
Retail — 0.5% | |||||||||||||||||
Target Corporation | 5.400% | 10/1/08 | 155 | 158 | |||||||||||||
Wal-Mart Stores, Inc. | 3.375% | 10/1/08 | 190 | 183 | |||||||||||||
341 | |||||||||||||||||
Special Purpose — 4.8% | |||||||||||||||||
ASIF Global Financing XIX | 4.900% | 1/17/13 | 40 | 40 | A | ||||||||||||
DaimlerChrysler NA Holding Corporation | 4.050% | 6/4/08 | 95 | 92 | |||||||||||||
DaimlerChrysler NA Holding Corporation | 7.200% | 9/1/09 | 50 | 53 | |||||||||||||
Lilacs Repackaging 05-I | 5.138% | 1/15/64 | 500 | 493 | A | ||||||||||||
Sprint Capital Corporation | 4.780% | 8/17/06 | 15 | 15 | |||||||||||||
Sprint Capital Corporation | 6.000% | 1/15/07 | 270 | 273 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Special Purpose — Continued | |||||||||||||||||
Sprint Capital Corporation | 8.375% | 3/15/12 | $ | 2,040 | $ | 2,364 | |||||||||||
Verizon Global Funding Corp. | 7.375% | 9/1/12 | 105 | 117 | |||||||||||||
3,447 | |||||||||||||||||
Telecommunications — 0.1% | |||||||||||||||||
BellSouth Corporation | 4.750% | 11/15/12 | 10 | 10 | |||||||||||||
SBC Communications Inc. | 5.100% | 9/15/14 | 70 | 68 | |||||||||||||
78 | |||||||||||||||||
Transportation — 0.8% | |||||||||||||||||
JetBlue Airways Corporation | 4.715% | 8/15/16 | 300 | 296 | C | ||||||||||||
JetBlue Airways Corporation | 4.790% | 11/15/16 | 300 | 294 | C | ||||||||||||
590 | |||||||||||||||||
Total Corporate Bonds and Notes (Identified Cost — $17,415) | 16,644 | ||||||||||||||||
Asset-Backed Securities — 4.3% | |||||||||||||||||
Fixed Rate Securities — 1.0% | |||||||||||||||||
Bank One Issuance Trust 2003-C1 | 4.540% | 9/15/10 | 200 | 198 | |||||||||||||
BankAmerica Manufactured Housing Contract 1997-2 | 6.790% | 12/10/22 | 32 | 32 | |||||||||||||
Citibank Credit Card Issuance Trust 2001-C3 | 6.650% | 5/15/08 | 200 | 201 | |||||||||||||
Conseco Finance Home Equity Loan Trust 2001-A | 7.440% | 3/15/32 | 200 | 201 | |||||||||||||
MMCA Automobile Owner Trust 2002-4 | 3.050% | 11/16/09 | 107 | 107 | |||||||||||||
739 | |||||||||||||||||
Indexed SecuritiesC — 3.3% | |||||||||||||||||
AAA Trust 2005-2 | 4.291% | 11/26/35 | 191 | 191 | A | ||||||||||||
Ameriquest Mortgage Securities Inc. 2005-R3 | 4.469% | 5/25/35 | 185 | 185 | |||||||||||||
Bayview Financial Acquisition Trust 2003-BA | 4.859% | 4/25/33 | 176 | 176 | A |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Asset-Backed Securities — Continued | |||||||||||||||||
Indexed SecuritiesC — Continued | |||||||||||||||||
Bayview Financial Acquisition Trust 2004-C | 4.799% | 5/28/44 | $ | 475 | $ | 475 | |||||||||||
Bayview Financial Acquisition Trust 2005-B | 4.340% | 4/28/39 | 250 | 250 | |||||||||||||
Carrington Mortgage Loan Trust 2005-OPT2 | 4.469% | 5/25/35 | 325 | 325 | |||||||||||||
Credit-Based Asset Servicing and Securitization 2005-RP1 | 4.559% | 1/25/35 | 182 | 182 | A | ||||||||||||
EQCC Trust 2002-1 | 4.679% | 11/25/31 | 10 | 10 | |||||||||||||
Household Mortgage Loan Trust 2003-HC1 | 4.720% | 2/20/33 | 127 | 127 | |||||||||||||
Morgan Stanley ABS Capital I 2005-WMC2 | 4.459% | 2/25/35 | 267 | 266 | |||||||||||||
Residential Asset Mortgage Product Inc 2004-RPIA | 4.490% | 11/25/42 | 41 | 41 | A | ||||||||||||
Wachovia Asset Securitization, Inc. 2002-HE1 | 4.749% | 9/27/32 | 127 | 127 | |||||||||||||
2,355 | |||||||||||||||||
Total Asset-Backed Securities (Identified Cost — $3,109) | 3,094 | ||||||||||||||||
Mortgage-Backed Securities — 19.9% | |||||||||||||||||
Fixed Rate Securities — 3.0% | |||||||||||||||||
Asset Securitization Corporation 1996-D2 | 6.920% | 2/14/29 | 26 | 26 | |||||||||||||
Banc of America Commercial Mortgage Incorporated 2005-3 | 4.668% | 7/10/43 | 500 | 482 | |||||||||||||
Countrywide Alternative Loan Trust 2004-2 CB | 4.250% | 3/25/34 | 297 | 293 | |||||||||||||
GS Mortgage Securities Corporation II 2005-GG4 | 4.680% | 7/10/39 | 200 | 195 | |||||||||||||
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2005-LDP4 | 4.918% | 10/15/42 | 200 | 196 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Mortgage-Backed Securities — Continued | |||||||||||||||||
Fixed Rate Securities — Continued | |||||||||||||||||
LB-UBS Commercial Mortgage Trust 2005-C3 A5 | 4.739% | 7/15/30 | $ | 140 | $ | 136 | |||||||||||
LB-UBS Commercial Mortgage Trust 2005-C3 AAB | 4.664% | 7/15/30 | 200 | 194 | |||||||||||||
MASTR Reperforming Loan Trust 2005-1 | 7.000% | 8/25/34 | 312 | 322 | A | ||||||||||||
Morgan Stanley Capital I, Series 2005-HQ6 | 4.989% | 8/13/42 | 240 | 237 | |||||||||||||
Washington Mutual MSC Mortgage Pass-Through Certificates, Series 2004-RA1 | 7.000% | 3/25/34 | 102 | 104 | |||||||||||||
2,185 | |||||||||||||||||
Indexed SecuritiesC — 16.3% | |||||||||||||||||
ABFS Mortgage Loan Trust 2003-2 | 4.879% | 4/25/34 | 118 | 118 | A | ||||||||||||
Banc of America Funding Corporation 2005-E | 4.402% | 6/20/35 | 587 | 595 | |||||||||||||
Brazos Texas Higher Education Authority, Inc. 2005-1 | 4.549% | 6/15/42 | 400 | 397 | |||||||||||||
Countrywide Alternative Loan Trust 2005-17 | 4.639% | 7/25/35 | 614 | 612 | |||||||||||||
Countrywide Alternative Loan Trust 2005-38 | 4.729% | 9/25/35 | 549 | 548 | |||||||||||||
Countrywide Home Loans 2005-11, 3A3 | 4.736% | 4/25/35 | 497 | 499 | |||||||||||||
Countrywide Home Loans 2005-11, 6A1 | 4.679% | 3/25/35 | 446 | 446 | |||||||||||||
Countrywide Home Loans 2005-3 | 4.669% | 4/25/35 | 483 | 482 | |||||||||||||
Countrywide Home Loans 2005-9 1A1 | 4.679% | 5/25/35 | 516 | 514 | |||||||||||||
Greenpoint Mortgage Funding Trust 2005-AR1 | 4.599% | 6/25/45 | 500 | 500 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Mortgage-Backed Securities — Continued | |||||||||||||||||
Indexed SecuritiesC — Continued | |||||||||||||||||
Greenpoint Mortgage Funding Trust 2005-AR4 | 4.639% | 10/25/45 | $ | 314 | $ | 313 | |||||||||||
GSMPS Mortgage Loan Trust 2005-RP2 | 4.729% | 3/25/35 | 360 | 361 | A | ||||||||||||
Harborview Mortgage Loan Trust 2005-7 | 4.822% | 6/19/45 | 642 | 648 | |||||||||||||
Harborview Mortgage Loan Trust 2005-9 | 4.710% | 6/20/35 | 570 | 569 | |||||||||||||
Impac CMB Trust 2003-7 | 4.699% | 8/25/33 | 221 | 221 | |||||||||||||
Lehman XS Trust Mortgage Pass-Through Certificates Series 2005-7N | 4.679% | 12/25/35 | 359 | 359 | |||||||||||||
MSDWCC Heloc Trust 2005-1 | 4.569% | 7/25/17 | 77 | 77 | |||||||||||||
Thornburg Mortgage Securities Trust 2005-2 A1 | 4.599% | 7/25/35 | 251 | 251 | |||||||||||||
Thornburg Mortgage Securities Trust 2005-2 A2 | 4.609% | 7/25/35 | 375 | 375 | |||||||||||||
WaMu Mortgage Pass-Through Certificates, Series 2005-AR13 | 4.669% | 10/25/45 | 577 | 576 | |||||||||||||
WaMu Mortgage Pass-Through Certificates, Series 2005-AR19 | 4.660% | 12/25/45 | 800 | 800 | |||||||||||||
WaMu Mortgage Pass-Through Certificates, Series 2005-AR11 | 4.699% | 8/25/45 | 1,422 | 1,424 | |||||||||||||
WaMu Mortgage Pass-Through Certificates, Series 2005-AR6 | 4.609% | 4/25/45 | 549 | 547 | |||||||||||||
WaMu Mortgage Pass-Through Certificates, Series 2005-AR8 | 4.649% | 7/25/45 | 479 | 478 | |||||||||||||
11,710 | |||||||||||||||||
Stripped Securities — 0.1% | |||||||||||||||||
Mach One Trust, Commercial Mortgage-Backed Securities 2004-1A | 1.624% | 5/28/40 | 1,290 | 71 | A,D1 | ||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Mortgage-Backed Securities — Continued | |||||||||||||||||
Stripped Securities — Continued | |||||||||||||||||
Variable Rate SecuritiesE — 0.5% | |||||||||||||||||
Bear Stearns ARM Trust, Mortgage Pass-Through Certificates, Series 2004-4 | 3.517% | 6/25/34 | $ | 200 | $ | 193 | |||||||||||
Credit-Based Asset Servicing and Securitization 1999-3 | 6.654% | 2/3/29 | 44 | 43 | A | ||||||||||||
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 2005-CIBC13 | 5.294% | 1/12/43 | 100 | 101 | |||||||||||||
337 | |||||||||||||||||
Total Mortgage-Backed Securities (Identified Cost — $14,386) | 14,303 | ||||||||||||||||
U.S. Government and Agency Obligations — 22.5% | |||||||||||||||||
Fixed Rate Securities — 14.0% | |||||||||||||||||
Fannie Mae | 4.610% | 10/10/13 | 560 | 540 | |||||||||||||
Fannie Mae | 3.000% | 4/26/19 | 140 | 139 | B | ||||||||||||
Freddie Mac | 4.125% | 10/18/10 | 40 | 39 | |||||||||||||
Freddie Mac | 4.650% | 10/10/13 | 600 | 579 | |||||||||||||
Freddie Mac | 5.625% | 11/23/35 | 300 | 303 | |||||||||||||
United States Treasury Bonds | 6.250% | 8/15/23 | 150 | 179 | |||||||||||||
United States Treasury Bonds | 5.250% | 11/15/28 | 20 | 22 | |||||||||||||
United States Treasury Bonds | 5.250% | 2/15/29 | 270 | 295 | |||||||||||||
United States Treasury Bonds | 6.250% | 5/15/30 | 2,080 | 2,583 | |||||||||||||
United States Treasury Notes | 1.500% | 3/31/06 | 40 | 40 | |||||||||||||
United States Treasury Notes | 2.750% | 6/30/06 | 4,780 | 4,743 | |||||||||||||
United States Treasury Notes | 3.750% | 5/15/08 | 40 | 39 | |||||||||||||
United States Treasury Notes | 4.375% | 11/15/08 | 50 | 50 | |||||||||||||
United States Treasury Notes | 4.125% | 8/15/10 | 240 | 238 | |||||||||||||
United States Treasury Notes | 4.500% | 11/15/10 | 220 | 221 | |||||||||||||
United States Treasury Notes | 3.875% | 2/15/13 | 10 | 10 | |||||||||||||
United States Treasury Notes | 4.500% | 11/15/15 | 80 | 81 | |||||||||||||
10,101 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
U.S. Government and Agency Obligations — Continued | |||||||||||||||||
Stripped Securities — 0.4% | |||||||||||||||||
United States Treasury Bonds | 0.000% | 11/15/21 | $ | 420 | $ | 201 | D2 | ||||||||||
United States Treasury Bonds | 0.000% | 11/15/27 | 210 | 77 | D2 | ||||||||||||
278 | |||||||||||||||||
Treasury Inflation-Protected SecuritiesF — 8.1% | |||||||||||||||||
United States Treasury Inflation-Protected Security | 3.375% | 1/15/07 | 2,150 | 2,166 | |||||||||||||
United States Treasury Inflation-Protected Security | 3.625% | 1/15/08 | 197 | 203 | |||||||||||||
United States Treasury Inflation-Protected Security | 3.875% | 1/15/09 | 267 | 281 | |||||||||||||
United States Treasury Inflation-Protected Security | 0.875% | 4/15/10 | 620 | 590 | |||||||||||||
United States Treasury Inflation-Protected Security | 3.375% | 1/15/12 | 79 | 84 | |||||||||||||
United States Treasury Inflation-Protected Security | 2.000% | 1/15/14 | 70 | 70 | |||||||||||||
United States Treasury Inflation-Protected Security | 1.625% | 1/15/15 | 73 | 70 | |||||||||||||
United States Treasury Inflation-Protected Security | 1.875% | 7/15/15 | 72 | 70 | |||||||||||||
United States Treasury Inflation-Protected Security | 2.375% | 1/15/25 | 1,754 | 1,844 | |||||||||||||
United States Treasury Inflation-Protected Security | 3.875% | 4/15/29 | 315 | 425 | |||||||||||||
5,803 | |||||||||||||||||
Total U.S. Government and Agency Obligations (Identified Cost — $16,208) | 16,182 | ||||||||||||||||
U.S. Government Agency Mortgage-Backed Securities — 47.1% | |||||||||||||||||
Fixed Rate Securities — 47.1% | |||||||||||||||||
Fannie Mae | 6.000% | 8/1/17 to 10/1/35 | 763 | 774 | |||||||||||||
Fannie Mae | 5.500% | 12/1/17 to 9/1/35 | 1,305 | 1,293 | |||||||||||||
Fannie Mae | 5.000% | 10/1/20 | 1,587 | 1,570 | |||||||||||||
Fannie Mae | 6.500% | 12/1/34 | 356 | 366 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
U.S. Government Agency Mortgage-Backed Securities — Continued | |||||||||||||||||
Fixed Rate Securities — Continued | |||||||||||||||||
Fannie Mae | 4.500% | 9/1/35 | $ | 99 | $ | 94 | |||||||||||
Fannie Mae | 5.000% | 12/1/35 | 8,900 | 8,622 | G | ||||||||||||
Fannie Mae | 5.500% | 12/1/35 | 5,150 | 5,099 | G | ||||||||||||
Fannie Mae | 6.000% | 12/1/35 | 6,000 | 6,054 | G | ||||||||||||
Fannie Mae | 6.500% | 12/1/35 | 2,350 | 2,410 | G | ||||||||||||
Freddie Mac | 4.500% | 4/1/19 | 319 | 311 | |||||||||||||
Freddie Mac | 5.000% | 7/1/20 to 9/1/35 11/15/28 to | 1,542 | 1,522 | |||||||||||||
Government National Mortgage Association | 6.000% | 12/15/33 | 891 | 914 | |||||||||||||
Government National Mortgage Association | 6.500% | 2/15/32 | 382 | 399 | |||||||||||||
Government National Mortgage Association | 5.000% | 8/15/33 to 5/15/34 | 1,103 | 1,089 | |||||||||||||
Government National Mortgage Association | 5.500% | 2/15/35 | 3,168 | 3,189 | |||||||||||||
Government National Mortgage Association | 5.000% | 12/15/35 | 100 | 99 | G | ||||||||||||
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost — $33,756) | 33,805 | ||||||||||||||||
Yankee BondsH — 6.2% | |||||||||||||||||
Cable — 0.1% | |||||||||||||||||
Rogers Cable Inc. | 5.500% | 3/15/14 | 90 | 84 | |||||||||||||
Foreign Governments — 2.6% | |||||||||||||||||
Russian Federation | 5.000% | 3/31/30 | 860 | 971 | B | ||||||||||||
United Mexican States | 8.375% | 1/14/11 | 20 | 23 | |||||||||||||
United Mexican States | 8.300% | 8/15/31 | 120 | 154 | |||||||||||||
United Mexican States | 7.500% | 4/8/33 | 588 | 696 | |||||||||||||
1,844 | |||||||||||||||||
Manufacturing (Diversified) — 2.1% | |||||||||||||||||
Tyco International Group SA | 6.375% | 10/15/11 | 45 | 47 | |||||||||||||
Tyco International Group SA | 6.000% | 11/15/13 | 100 | 102 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Yankee BondsH — Continued | |||||||||||||||||
Manufacturing (Diversified) — Continued | |||||||||||||||||
Tyco International Group SA | 7.000% | 6/15/28 | $ | 10 | $ | 11 | |||||||||||
Tyco International Group SA | 6.875% | 1/15/29 | 1,235 | 1,346 | |||||||||||||
1,506 | |||||||||||||||||
Special Purpose — 1.0% | |||||||||||||||||
Anadarko Finance Company | 6.750% | 5/1/11 | 125 | 135 | |||||||||||||
Apache Finance Canada Corporation | 4.375% | 5/15/15 | 60 | 58 | |||||||||||||
Banagricola DPR Funding Ltd. | 5.420% | 3/15/10 | 213 | 213 | A,C | ||||||||||||
ChevronTexaco Capital Company | 3.500% | 9/17/07 | 140 | 137 | |||||||||||||
Conoco Funding Company | 6.350% | 10/15/11 | 10 | 11 | |||||||||||||
Deutsche Telekom International Finance BV | 5.250% | 7/22/13 | 40 | 40 | |||||||||||||
Resona Preferred Global Securities Limited | 7.191% | 12/29/49 | 140 | 148 | A,B | ||||||||||||
742 | |||||||||||||||||
Telecommunications — 0.4% | |||||||||||||||||
British Telecommunications plc | 8.375% | 12/15/10 | 100 | 114 | |||||||||||||
Koninklijke (Royal) KPN NV | 8.000% | 10/1/10 | 50 | 55 | |||||||||||||
Telecom Italia Capital S.p.A. | 4.950% | 9/30/14 | 70 | 67 | |||||||||||||
Telecom Italia Capital S.p.A. | 5.250% | 10/1/15 | 20 | 19 | |||||||||||||
255 | |||||||||||||||||
Total Yankee Bonds (Identified Cost — $4,236) | 4,431 | ||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Municipal Bonds — 0.6% | |||||||||||||||||
Liberty New York Development Corporation Revenue | 5.250% | 10/1/35 | $ | 410 | $ | 462 | |||||||||||
Total Municipal Bonds (Identified Cost — $458) | 462 | ||||||||||||||||
Preferred Stocks — 0.5% | |||||||||||||||||
Fannie Mae | 7.000% | 3 | shs | 160 | C | ||||||||||||
Fannie Mae | 5.380% | 0.001 | 92 | I | |||||||||||||
General Motors Corporation | 5.250% | 8 | 124 | I | |||||||||||||
Total Preferred Stocks (Identified Cost — $398) | 376 | ||||||||||||||||
Total Long-Term Securities (Identified Cost — $89,966) | 89,297 | ||||||||||||||||
Short-Term Securities — 5.7% | |||||||||||||||||
U.S. Government and Agency Obligations — 0.1% | |||||||||||||||||
Fannie Mae | 0.000% | 5/15/06 | $ | 51 | 50 | J,K | |||||||||||
Options PurchasedL — 0.4% | |||||||||||||||||
Eurodollar Futures Call, April 2006, Strike Price $95.00 | 94 | M | 54 | ||||||||||||||
Eurodollar Futures Call, January 2006, Strike Price $94.50 | 23 | M | 42 | ||||||||||||||
Eurodollar Futures Call, July 2006, Strike Price $94.50 | 58 | M | 95 | ||||||||||||||
Eurodollar Futures Call, July 2006, Strike Price $95.00 | 10 | M | 6 | ||||||||||||||
Eurodollar Futures Call, October 2006, Strike Price $94.50 | 11 | M | 18 | ||||||||||||||
Eurodollar Futures Put, July 2006, Strike Price $94.00 | 4 | M | — | ||||||||||||||
U.S. Treasury Note Futures Call, March 2006, Strike Price $103.00 | 27 | M | 90 | ||||||||||||||
U.S. Treasury Note Futures Call, March 2006, Strike Price $106.50 | 7 | M | 3 | ||||||||||||||
U.S. Treasury Note Futures Call, March 2006, Strike Price $109.00 | 5 | M | 6 | ||||||||||||||
314 | |||||||||||||||||
Par/Shares | Value | |||||||||||||||
Repurchase Agreements — 5.2% | ||||||||||||||||
Deutsche Bank AG 4.15%, dated 12/30/05 to be repurchased at $1,867 on 1/3/06 (Collateral: $1,890 Federal Home Loan Bank notes, 4.5%, due 9/8/08, value $1,904) | $ | 1,866 | $ | 1,866 | ||||||||||||
Lehman Brothers, Inc. 4.15%, dated 12/30/05 to be repurchased at $1,866 on 1/3/06 (Collateral: $8,230 Federal Home Loan Bank zero-coupon bonds, due 9/18/28, value $1,902) | 1,865 | 1,865 | ||||||||||||||
3,731 | ||||||||||||||||
Total Short-Term Securities (Identified Cost — $4,172) | 4,095 | |||||||||||||||
Total Investments — 130.0% (Identified Cost — $94,138) | 93,392 | |||||||||||||||
Other Assets Less Liabilities — (30.0)% | (21,567 | ) | ||||||||||||||
Net Assets — 100.0% | $ | 71,825 | ||||||||||||||
Actual | Appreciation/ | ||||||||||
Expiration | Contracts | (Depreciation) | |||||||||
Futures Contracts PurchasedL | |||||||||||
Eurodollar Futures | March 2006 | 4 | $ | (1 | ) | ||||||
Eurodollar Futures | June 2006 | 7 | (11 | ) | |||||||
Eurodollar Futures | September 2006 | 7 | 1 | ||||||||
Eurodollar Futures | December 2006 | 3 | — | N | |||||||
U.S. Treasury Note Futures | March 2006 | 12 | 10 | ||||||||
U.S. Treasury Note Futures | March 2006 | 96 | 13 | ||||||||
$ | 12 | ||||||||||
Futures Contracts WrittenL | |||||||||||
U.S. Treasury Bond Futures | March 2006 | 50 | $ | (101 | ) | ||||||
U.S. Treasury Note Futures | March 2006 | 3 | 1 | ||||||||
$ | (100 | ) | |||||||||
Options WrittenL | |||||||||||
Eurodollar Futures Call, Strike Price $95.25 | April 2006 | 3 | $ | — | N | ||||||
Eurodollar Futures Call, Strike Price $95.38 | April 2006 | 2 | — | N | |||||||
Eurodollar Futures Call, Strike Price $95.50 | April 2006 | 2 | 1 | ||||||||
Eurodollar Futures Call, Strike Price $95.50 | October 2006 | 5 | — | N | |||||||
Eurodollar Futures Put, Strike Price $95.75 | April 2006 | 8 | (8 | ) | |||||||
Eurodollar Futures Put, Strike Price $95.75 | July 2006 | 11 | (12 | ) | |||||||
U.S. Treasury Bond Futures Call, Strike Price $116.00 | March 2006 | 12 | 1 | ||||||||
U.S. Treasury Bond Futures Call, Strike Price $117.00 | March 2006 | 3 | 2 | ||||||||
U.S. Treasury Bond Futures Put, Strike Price $107.00 | March 2006 | 4 | 3 | ||||||||
U.S. Treasury Bond Futures Put, Strike Price $109.00 | March 2006 | 15 | 12 | ||||||||
U.S. Treasury Bond Futures Put, Strike Price $110.00 | March 2006 | 4 | 1 |
Actual | Appreciation/ | ||||||||||
Expiration | Contracts | (Depreciation) | |||||||||
Options WrittenL — Continued | |||||||||||
U.S. Treasury Bond Futures Put, Strike Price $111.00 | March 2006 | 2 | $ | 3 | |||||||
U.S. Treasury Bond Futures Put, Strike Price $112.00 | March 2006 | 2 | 1 | ||||||||
U.S. Treasury Note Futures Call, Strike Price $107.00 | March 2006 | 4 | — | N | |||||||
U.S. Treasury Note Futures Call, Strike Price $110.00 | March 2006 | 15 | (2 | ) | |||||||
U.S. Treasury Note Futures Call, Strike Price $111.00 | March 2006 | 38 | 11 | ||||||||
U.S. Treasury Note Futures Call, Strike Price $112.00 | March 2006 | 2 | 1 | ||||||||
U.S. Treasury Note Futures Call, Strike Price $113.00 | March 2006 | 5 | 2 | ||||||||
U.S. Treasury Note Futures Call, Strike Price $111.00 | June 2006 | 3 | — | N | |||||||
U.S. Treasury Note Futures Call, Strike Price $112.00 | June 2006 | 4 | — | N | |||||||
U.S. Treasury Note Futures Call, Strike Price $110.00 | June 2006 | 6 | (1 | ) | |||||||
U.S. Treasury Note Futures Put, Strike Price $107.00 | March 2006 | 18 | 7 | ||||||||
U.S. Treasury Note Futures Put, Strike Price $106.00 | June 2006 | 4 | — | N | |||||||
$ | 22 | ||||||||||
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, which the Fund’s investment adviser has determined to be liquid, represent 3.4% of net assets. |
B | Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes. |
C | Indexed security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”) or the ten year Treasury Bill Constant Maturity Rate. The coupon rates are the rates as of December 31, 2005. |
D | 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. |
E | The coupon rates shown on variable rate securities are the rates at December 31, 2005. These rates vary with the weighted average coupon of the underlying loans. |
F | 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. |
G | When-issued security — Security purchased on a delayed delivery basis. Final settlement amount and maturity have not yet been announced. |
H | Yankee Bond — A dollar-denominated bond issued in the U.S. by foreign entities. |
I | Convertible Security — Security may be converted into issuer’s common stock. |
J | 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. |
K | Collateral to cover options and futures contracts. |
L | Options and futures are described in more detail in the notes to financial statements. |
M | Par represents actual number of contracts. |
N | Amounts less than $1. |
See notes to financial statements.
Statement of Assets and Liabilities
Core Bond Fund
Assets: | |||||||||
Investment securities at market value (Identified Cost – $89,966) | $89,297 | ||||||||
Short-term securities at value (Identified Cost – $4,172) | 4,095 | ||||||||
Cash | 5 | ||||||||
Receivable for securities sold | 101 | ||||||||
Receivable for fund shares sold | 206 | ||||||||
Receivable for futures variation margin | 6 | ||||||||
Interest and dividends receivable | 657 | ||||||||
Total assets | 94,367 | ||||||||
Liabilities: | |||||||||
Proceeds from option written (Identified Cost – $101) | $ | 79 | |||||||
Payable for fund shares repurchased | 69 | ||||||||
Payable for securities purchased | 22,322 | ||||||||
Income distribution payable | 8 | ||||||||
Accrued distribution and service fees | 19 | ||||||||
Accrued expenses | 45 | ||||||||
Total liabilities | 22,542 | ||||||||
Net Assets | $71,825 | ||||||||
Net assets consist of: | |||||||||
Accumulated paid-in capital applicable to: | |||||||||
7,398 Primary Class shares outstanding | $73,372 | ||||||||
Undistributed net investment income | — | A | |||||||
Accumulated net realized loss on investments, options, and futures | (735) | ||||||||
Unrealized appreciation/(depreciation) of investments, options and futures | (812) | ||||||||
Net Assets | $71,825 | ||||||||
Net Asset Value Per Share: | |||||||||
Primary Class | $9.71 | ||||||||
A | Amounts less than $1. |
Statement of Operations
Core Bond Fund
Investment Income: | |||||||||||
Interest | $ | 3,017 | |||||||||
Dividends | 25 | ||||||||||
Total income | $ | 3,042 | |||||||||
Expenses: | |||||||||||
Management fees | $ | 319 | |||||||||
Distribution and service fees | 355 | ||||||||||
Audit and legal fees | 68 | ||||||||||
Custodian fees | 105 | ||||||||||
Directors’ fees and expenses | 14 | ||||||||||
Registration fees | 22 | ||||||||||
Reports to shareholders | 30 | ||||||||||
Transfer agent and shareholder servicing expense | 51 | ||||||||||
Other expenses | 17 | ||||||||||
981 | |||||||||||
Less: Fees waived | (272 | ) | |||||||||
Compensating balance credits | — | A,B | |||||||||
Total expenses, net of waivers and compensating balance credits | 709 | ||||||||||
Net Investment Income | 2,333 | ||||||||||
Net Realized and Unrealized Gain/(Loss) on Investments: | |||||||||||
Realized gain/(loss) on: | |||||||||||
Investments | (461 | ) | |||||||||
Options | 307 | ||||||||||
Futures | (509 | ) | |||||||||
(663 | ) | ||||||||||
Change in unrealized depreciation of investments, options and futures | (1,045 | ) | |||||||||
Net Realized and Unrealized Loss on Investments | (1,708 | ) | |||||||||
Change in Net Assets Resulting From Operations | $ | 625 | |||||||||
A | Amounts less than $1. |
B | See note 1, Compensating Balance Credits, in the notes to financial statements.. |
Statement of Changes in Net Assets
Core Bond Fund
For the Years Ended | ||||||||||
12/31/05 | 12/31/04A | |||||||||
Change in Net Assets: | ||||||||||
Net investment income | $ | 2,333 | $ | 951 | ||||||
Net realized gain/(loss) on investments, options and futures | (663 | ) | 238 | |||||||
Change in unrealized appreciation/(depreciation) of investments, options and futures | (1,045 | ) | 233 | |||||||
Change in net assets resulting from operations | 625 | 1,422 | ||||||||
Distributions to shareholders: | ||||||||||
From net investment income: | ||||||||||
Primary Class | (2,400 | ) | (1,051 | ) | ||||||
From net realized gain on investments: | ||||||||||
Primary Class | (11 | ) | (132 | ) | ||||||
Change in net assets from Fund share transactions: | ||||||||||
Primary Class | 9,838 | 63,534 | ||||||||
Change in net assets | 8,052 | 63,773 | ||||||||
Net Assets: | ||||||||||
Beginning of year | 63,773 | — | ||||||||
End of year | $ | 71,825 | $ | 63,773 | ||||||
Undistributed net investment income | $ | — | B | $ | — | |||||
A | For the period February 27, 2004 (commencement of operations) to December 31, 2004. |
B | Amount less than $1. |
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:
Years Ended December 31, | |||||||||
2005 | 2004A | ||||||||
Net asset value, beginning of year | $ | 9.95 | $ | 10.00 | |||||
Investment operations: | |||||||||
Net investment income | .32 | B | .18 | B | |||||
Net realized and unrealized loss on investments | (.23 | ) | .004 | ||||||
Total from investment operations | .09 | .18 | |||||||
Distributions: | |||||||||
From net investment income | (.33 | ) | (.21 | ) | |||||
From net realized gain on investments | (.002 | ) | (.02 | ) | |||||
Total distributions | (.33 | ) | (.23 | ) | |||||
Net asset value, end of year | $ | 9.71 | $ | 9.95 | |||||
Ratios/supplemental data: | |||||||||
Total return | .94% | 1.90% | C | ||||||
Total expenses to average net assetsD | 1.00% | B | 1.00% | B,E | |||||
Net expenses to average net assetsF | 1.00% | B | 1.00% | B,E | |||||
Net investment income to average net assets | 3.29% | B | 2.50% | B,E | |||||
Portfolio turnover rate | 435.7% | 233.8% | C | ||||||
Net assets, end of year (in thousands) | $ | 71,825 | $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, 2006. If no fees had been waived by LMFA, the annualized ratio of expenses to daily average net assets would have been as follows: for the years ended December 31, 2005, 1.38%; and 2004, 1.56%. |
C | Not annualized. |
D | This ratio reflects total expenses before compensating balance credits, but net of the voluntary expense waivers described above. |
E | Annualized. |
F | This ratio reflects expenses net of compensating balance credits and voluntary expense waivers described above. |
See notes to financial statements.
Management’s Discussion of Fund Performance
High Yield Portfolio
Average annual total returns for the High Yield Portfolio (“Fund”) and its benchmark for various periods ended December 31, 2005, are presented below:
One | Five | Ten | Since | ||||||||||||||
Year | Years | Years | InceptionA | ||||||||||||||
High Yield | |||||||||||||||||
Primary Class | +2.39% | +5.66% | +4.59% | +5.03% | |||||||||||||
Institutional Class | +2.94% | +6.06% | N/A | +1.77% | |||||||||||||
Lehman High Yield Index 2% Issuer ConstrainedB | +2.76% | +9.12% | +6.70% | +6.87% | |||||||||||||
Lehman High Yield IndexC | +2.74% | +8.85% | +6.54% | +6.74% |
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 2005 the Primary Class of the Fund returned 2.39% versus 2.76% for the Fund’s primary benchmark, the Lehman High Yield Index 2% Issuer Constrained. Effective September 1, 2005, the Fund changed its comparative index from the Lehman High Yield Index to the Lehman High Yield Index 2% Issuer Constrained (“High Yield Constrained Index”). As a result of significant changes to the Lehman High Yield composition and Lehman index methodology rules, the adviser has determined that the High Yield Constrained Index is more representative of the overall high yield market and therefore, more accurately reflects the types of securities in which the fund invests. The option-adjusted-spread (“OAS”)D of the index widened from +288 basis points (“bps”)E on 12/31/04, to +336 bps on 12/31/05. A significant part of the spread widening is attributable
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, 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. The index limits the maximum exposure to any one issuer to 2%. |
C | A market value-weighted index that tracks the daily price, 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. |
D | This is a measuring tool for evaluating price differences between similar products with different embedded options. A larger OAS implies a greater return for greater risks. |
E | 100 basis points = 1%. |
The Fund’s underperformance is attributable to the adviser’s decision to overweight the lower quality spectrum of the high yield market. The CCC and lower rated issues in the index returned 0.89%. Consistent with the adviser’s overall strategy the portfolio maintained a short duration position, which had minimal impact on performance as short rates rose and long rates declined.
Western Asset Management Company
January 31, 2006
High Yield Portfolio
As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees on Primary Class shares; 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, 2005, and held through December 31, 2005.
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 ratio 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 | |||||||||||
Value | Value | Period | |||||||||||
7/1/05 | 12/31/05 | 7/1/05 to 12/31/05 | |||||||||||
Primary Class: | |||||||||||||
Actual | $ | 1,000.00 | $ | 1,019.70 | $ | 7.11 | |||||||
Hypothetical (5% return before expenses) | 1,000.00 | 1,018.16 | 7.11 | ||||||||||
Institutional Class: | |||||||||||||
Actual | $ | 1,000.00 | $ | 1,022.40 | $ | 4.29 | |||||||
Hypothetical (5% return before expenses) | 1,000.00 | 1,020.96 | 4.29 |
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 ratios of 1.40% and 0.84% for the Primary Class and Institutional Class, respectively, 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 graphs on the following pages compare the Fund’s total returns to that of two closely matched broad-based securities market indices. 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 and the index’s results assume reinvestment of all dividends and distributions.
Growth of a $10,000 Investment — Primary Class
Periods Ended December 31, 2005
Cumulative | Average Annual | |||||||||||
Total Return | Total Return | |||||||||||
One Year | +2.39% | +2.39% | ||||||||||
Five Years | +31.68% | +5.66% | ||||||||||
Ten Years | +56.58% | +4.59% | ||||||||||
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, 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. The index limits the maximum exposure to any one issuer to 2%. |
B | A market value-weighted index that tracks the daily price, 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, 2005
Cumulative | Average Annual | |||||||||||
Total Return | Total Return | |||||||||||
One Year | +2.94% | +2.94% | ||||||||||
Five Years | +34.19% | +6.06% | ||||||||||
Life of Class* | +14.42% | +1.77% | ||||||||||
*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.
C | Index returns are for periods beginning April 30, 1998. |
Standard & Poor’s Debt RatingsE (as a percentage of the portfolio)
Maturity Schedule (as a percentage of the portfolio)
D | The Fund is actively managed. As a result, the composition of its portfolio holdings and sectors is subject to change at any time. |
E | Standard & Poor’s Ratings Services provides capital markets with credit ratings for the evaluation and assessment of credit risk. |
Portfolio of Investments
High Yield Portfolio
December 31, 2005
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Long-Term Securities — 97.2% | |||||||||||||||||
Corporate Bonds and Notes — 88.0% | |||||||||||||||||
Advertising — 1.0% | |||||||||||||||||
Affinion Group Inc. | 10.125% | 10/15/13 | $ | 990 | $ | 965 | A | ||||||||||
WDAC Subsidiary Corp. | 8.375% | 12/1/14 | 770 | 746 | A | ||||||||||||
1,711 | |||||||||||||||||
Apparel — 1.5% | |||||||||||||||||
Levi Strauss & Co. | 8.804% | 4/1/12 | 750 | 755 | B | ||||||||||||
Oxford Industries, Inc. | 8.875% | 6/1/11 | 891 | 908 | |||||||||||||
Russell Corporation | 9.250% | 5/1/10 | 858 | 870 | |||||||||||||
2,533 | |||||||||||||||||
Auto and Automotive Parts — 3.2% | |||||||||||||||||
Commercial Vehicle Group, Inc. | 8.000% | 7/1/13 | 840 | 829 | A | ||||||||||||
Keystone Automotive Operations Inc. | 9.750% | 11/1/13 | 1,260 | 1,090 | |||||||||||||
TRW Automotive | 9.375% | 2/15/13 | 480 | 520 | |||||||||||||
TRW Automotive | 11.000% | 2/15/13 | 400 | 449 | |||||||||||||
Visteon Corporation | 8.250% | 8/1/10 | 2,954 | 2,511 | |||||||||||||
5,399 | |||||||||||||||||
Automotive — 0.1% | |||||||||||||||||
General Motors Corporation | 8.375% | 7/15/33 | 240 | 158 | |||||||||||||
Automotive Retailer — 0.4% | |||||||||||||||||
Asbury Automotive Group Inc. | 9.000% | 6/15/12 | 676 | 676 | |||||||||||||
Banking and Finance — 3.7% | |||||||||||||||||
EPL Finance Corp | 11.750% | 11/15/13 | 570 | 568 | A | ||||||||||||
Ford Motor Credit Company | 7.375% | 2/1/11 | 610 | 535 | |||||||||||||
General Motors Acceptance Corporation | 6.875% | 8/28/12 | 2,260 | 2,037 | |||||||||||||
General Motors Acceptance Corporation | 8.000% | 11/1/31 | 3,370 | 3,228 | |||||||||||||
6,368 | |||||||||||||||||
Building Materials — 2.8% | |||||||||||||||||
Associated Materials Incorporated | 0.000% | 3/1/14 | 2,420 | 1,186 | C | ||||||||||||
Interface, Inc. | 7.300% | 4/1/08 | 402 | 406 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Building Materials — Continued | |||||||||||||||||
Interface, Inc. | 10.375% | 2/1/10 | $ | 1,183 | $ | 1,280 | |||||||||||
K Hovnanian Enterprises Inc. | 6.250% | 1/15/16 | 720 | 668 | |||||||||||||
Nortek, Inc. | 8.500% | 9/1/14 | 370 | 357 | |||||||||||||
NTK Holdings, Inc. | 0.000% | 3/1/14 | 1,510 | 944 | C | ||||||||||||
4,841 | |||||||||||||||||
Cable — 3.7% | |||||||||||||||||
Charter Communications Holdings, LLC | 10.250% | 9/15/10 | 1,215 | 1,209 | |||||||||||||
Charter Communications Holdings, LLC | 11.750% | 5/15/14 | 3,090 | 1,715 | A,C | ||||||||||||
CSC Holdings Inc. | 8.125% | 8/15/09 | 430 | 434 | |||||||||||||
CSC Holdings Inc. | 7.625% | 4/1/11 | 165 | 164 | |||||||||||||
CSC Holdings Inc. | 7.000% | 4/15/12 | 510 | 482 | A | ||||||||||||
EchoStar DBS Corporation | 7.780% | 10/1/08 | 450 | 459 | B | ||||||||||||
EchoStar DBS Corporation | 6.625% | 10/1/14 | 950 | 911 | |||||||||||||
LodgeNet Entertainment Corporation | 9.500% | 6/15/13 | 882 | 959 | |||||||||||||
6,333 | |||||||||||||||||
Casino Resorts — 2.9% | |||||||||||||||||
Boyd Gaming Corporation | 8.750% | 4/15/12 | 340 | 364 | |||||||||||||
Boyd Gaming Corporation | 6.750% | 4/15/14 | 180 | 179 | |||||||||||||
Inn of The Mountain Gods Resort and Casino | 12.000% | 11/15/10 | 1,660 | 1,644 | |||||||||||||
Pinnacle Entertainment, Inc. | 8.250% | 3/15/12 | 850 | 879 | |||||||||||||
Premier Entertainment Biloxi LLC | 10.750% | 2/1/12 | 1,911 | 1,844 | |||||||||||||
4,910 | |||||||||||||||||
Chemicals — 0.6% | |||||||||||||||||
Westlake Chemical Corporation | 8.750% | 7/15/11 | 887 | 949 | |||||||||||||
Coal — 0.6% | |||||||||||||||||
Alpha Natural Resources LLC | 10.000% | 6/1/12 | 1,010 | 1,092 | |||||||||||||
Computer Services and Systems — 1.5% | |||||||||||||||||
Activant Solutions, Inc. | 10.054% | 4/1/10 | 870 | 897 | A,B | ||||||||||||
Sungard Data Systems Incorporated | 10.250% | 8/15/15 | 1,620 | 1,620 | A | ||||||||||||
2,517 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Containers and Packaging — 1.4% | |||||||||||||||||
Graham Packaging Company Inc. | 8.500% | 10/15/12 | $ | 174 | $ | 171 | |||||||||||
Graham Packaging Company Inc. | 9.875% | 10/15/14 | 526 | 513 | |||||||||||||
Graphic Packaging International Corp. | 9.500% | 8/15/13 | 869 | 830 | |||||||||||||
Plastipak Holdings Inc. | 8.500% | 12/15/15 | 840 | 849 | A | ||||||||||||
2,363 | |||||||||||||||||
Drug and Grocery Store Chains — 0.8% | |||||||||||||||||
Delhaize America, Inc. | 8.125% | 4/15/11 | 504 | 549 | |||||||||||||
Delhaize America, Inc. | 9.000% | 4/15/31 | 630 | 741 | |||||||||||||
1,290 | |||||||||||||||||
Electric — 2.1% | |||||||||||||||||
Mirant Americas Generation, LLC | 8.300% | 5/1/11 | 1,050 | 1,328 | |||||||||||||
Mirant North America LLC | 7.375% | 12/31/13 | 570 | 577 | A | ||||||||||||
The AES Corporation | 7.750% | 3/1/14 | 940 | 986 | |||||||||||||
The AES Corporation | 9.000% | 5/15/15 | 643 | 704 | A | ||||||||||||
3,595 | |||||||||||||||||
Electronics — 1.2% | |||||||||||||||||
L-3 Communications Corporation | 6.375% | 10/15/15 | 1,470 | 1,466 | A | ||||||||||||
Rayovac Corporation | 8.500% | 10/1/13 | 615 | 537 | |||||||||||||
2,003 | |||||||||||||||||
Energy — 2.6% | |||||||||||||||||
Elwood Energy LLC | 8.159% | 7/5/26 | 1,413 | 1,521 | |||||||||||||
Midwest Generation LLC | 8.560% | 1/2/16 | 1,068 | 1,161 | |||||||||||||
Sierra Pacific Resources | 6.750% | 8/15/17 | 980 | 975 | A | ||||||||||||
VeraSun Energy Corporation | 9.875% | 12/15/12 | 720 | 731 | A | ||||||||||||
4,388 | |||||||||||||||||
Entertainment — 0.2% | |||||||||||||||||
Warner Music Group | 7.375% | 4/15/14 | 420 | 417 | |||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Environmental Services — 0.5% | |||||||||||||||||
Allied Waste North America Incorporated | 8.500% | 12/1/08 | $ | 314 | $ | 330 | |||||||||||
Waste Services Inc. | 9.500% | 4/15/14 | 500 | 500 | |||||||||||||
830 | |||||||||||||||||
Food, Beverage and Tobacco — 1.3% | |||||||||||||||||
Domino’s, Inc. | 8.250% | 7/1/11 | 974 | 1,018 | |||||||||||||
R.J. Reynolds Tobacco Holdings Inc. | 6.500% | 7/15/10 | 580 | 577 | A | ||||||||||||
Stater Bros. Holdings Inc. | 7.991% | 6/15/10 | 640 | 640 | B | ||||||||||||
2,235 | |||||||||||||||||
Funeral Parlors and Cemeteries — 0.3% | |||||||||||||||||
Service Corporation International | 7.500% | 6/15/17 | 480 | 476 | A | ||||||||||||
Gaming — 0.8% | |||||||||||||||||
River Rock Entertainment Authority | 9.750% | 11/1/11 | 1,290 | 1,390 | |||||||||||||
Gas and Pipeline Utilities — 4.1% | |||||||||||||||||
ANR Pipeline, Inc. | 9.625% | 11/1/21 | 477 | 583 | |||||||||||||
Colorado Interstate Gas Company | 6.800% | 11/15/15 | 500 | 511 | A | ||||||||||||
Dynegy Holdings Inc. | 9.875% | 7/15/10 | 230 | 252 | A | ||||||||||||
Dynegy Holdings Inc. | 8.750% | 2/15/12 | 600 | 648 | |||||||||||||
Dynegy Holdings Inc. | 10.125% | 7/15/13 | 1,270 | 1,435 | A | ||||||||||||
Southern Natural Gas Company | 8.875% | 3/15/10 | 338 | 361 | |||||||||||||
The Williams Companies, Inc. | 7.500% | 1/15/31 | 440 | 455 | |||||||||||||
The Williams Companies, Inc. | 8.750% | 3/15/32 | 2,281 | 2,646 | |||||||||||||
6,891 | |||||||||||||||||
Health Care — 1.9% | |||||||||||||||||
Tenet Healthcare Corporation | 9.875% | 7/1/14 | 2,417 | 2,447 | |||||||||||||
Tenet Healthcare Corporation | 9.250% | 2/1/15 | 770 | 764 | A | ||||||||||||
3,211 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Homebuilding — 0.9% | |||||||||||||||||
Beazer Homes USA, Inc. | 8.375% | 4/15/12 | $ | 230 | $ | 239 | |||||||||||
Beazer Homes USA, Inc. | 6.875% | 7/15/15 | 300 | 288 | |||||||||||||
KB HOME | 6.250% | 6/15/15 | 500 | 484 | |||||||||||||
Kimball Hill, Inc. | 10.500% | 12/15/12 | 490 | 482 | A | ||||||||||||
1,493 | |||||||||||||||||
Investment Banking/ Brokerage — 0.5% | |||||||||||||||||
E*Trade Financial Corporation | 7.375% | 9/15/13 | 450 | 455 | A | ||||||||||||
E*Trade Financial Corporation | 7.875% | 12/1/15 | 332 | 343 | |||||||||||||
798 | |||||||||||||||||
Machinery — 0.8% | |||||||||||||||||
Case New Holland Incorporated | 9.250% | 8/1/11 | 190 | 203 | |||||||||||||
Terex Corporation | 7.375% | 1/15/14 | 1,140 | 1,129 | |||||||||||||
1,332 | |||||||||||||||||
Manufacturing (Diversified) — 1.9% | |||||||||||||||||
Jacuzzi Brands Incorporated | 9.625% | 7/1/10 | 1,150 | 1,222 | |||||||||||||
Ki Holdings Inc. | 0.000% | 11/15/14 | 1,926 | 1,262 | C | ||||||||||||
Simmons Bedding Company | 7.875% | 1/15/14 | 729 | 674 | |||||||||||||
3,158 | |||||||||||||||||
Media — 2.8% | |||||||||||||||||
AMC Entertainment Incorporated | 8.000% | 3/1/14 | 500 | 452 | |||||||||||||
Lamar Media Corporation | 6.625% | 8/15/15 | 430 | 432 | |||||||||||||
LIN Television Corporation | 6.500% | 5/15/13 | 500 | 479 | |||||||||||||
LIN Television Corporation | 6.500% | 5/15/13 | 250 | 240 | |||||||||||||
Paxson Communications Corporation | 0.000% | 1/15/09 | 270 | 286 | C | ||||||||||||
PRIMEDIA Inc. | 9.715% | 5/15/10 | 1,155 | 1,110 | B | ||||||||||||
PRIMEDIA Inc. | 8.875% | 5/15/11 | 140 | 129 | |||||||||||||
Readers Digest Association, Inc. | 6.500% | 3/1/11 | 460 | 450 | |||||||||||||
Sinclair Broadcast Group, Inc. | 8.750% | 12/15/11 | 940 | 990 | |||||||||||||
Sinclair Broadcast Group, Inc. | 8.000% | 3/15/12 | 210 | 216 | |||||||||||||
4,784 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Medical Care Facilities — 1.7% | |||||||||||||||||
Community Health Systems Inc. | 6.500% | 12/15/12 | $ | 210 | $ | 204 | |||||||||||
DaVita, Inc. | 7.250% | 3/15/15 | 940 | 952 | |||||||||||||
HCA, Inc. | 9.000% | 12/15/14 | 270 | 316 | |||||||||||||
HCA, Inc. | 7.690% | 6/15/25 | 330 | 343 | |||||||||||||
HCA, Inc. | 7.500% | 11/6/33 | 190 | 196 | |||||||||||||
Select Medical Corporation | 7.625% | 2/1/15 | 950 | 914 | |||||||||||||
2,925 | |||||||||||||||||
Medical Products — 0.2% | |||||||||||||||||
Fresenius Medical Care Capital Trust II | 7.875% | 2/1/08 | 100 | 103 | D | ||||||||||||
Fresenius Medical Care Capital Trust IV | 7.875% | 6/15/11 | 170 | 181 | |||||||||||||
284 | |||||||||||||||||
Metals — 0.3% | |||||||||||||||||
Metals USA, Inc. | 11.125% | 12/1/15 | 580 | 595 | A | ||||||||||||
Oil and Gas — 10.3% | |||||||||||||||||
AmeriGas Partners, L.P. | 7.250% | 5/20/15 | 800 | 816 | |||||||||||||
Belden & Blake Corporation | 8.750% | 7/15/12 | 2,055 | 2,096 | |||||||||||||
Chesapeake Energy Corporation | 7.500% | 9/15/13 | 40 | 42 | |||||||||||||
Chesapeake Energy Corporation | 6.375% | 6/15/15 | 130 | 130 | |||||||||||||
Chesapeake Energy Corporation | 6.250% | 1/15/18 | 810 | 794 | |||||||||||||
El Paso CGP Co. | 7.750% | 6/15/10 | 230 | 235 | |||||||||||||
El Paso Corporation | 7.800% | 8/1/31 | 870 | 868 | |||||||||||||
El Paso Corporation | 7.750% | 1/15/32 | 1,110 | 1,113 | |||||||||||||
El Paso Production Holding Company | 7.750% | 6/1/13 | 1,210 | 1,255 | |||||||||||||
Encore Acquisition Company | 6.250% | 4/15/14 | 160 | 152 | |||||||||||||
Encore Acquisition Company | 6.000% | 7/15/15 | 380 | 350 | |||||||||||||
Encore Acquisition Company | 7.250% | 12/1/17 | 400 | 396 | |||||||||||||
Exco Resources, Inc. | 7.250% | 1/15/11 | 810 | 822 | |||||||||||||
Kerr-McGee Corporation | 7.875% | 9/15/31 | 940 | 1,115 | |||||||||||||
Parker Drilling Company | 9.625% | 10/1/13 | 1,140 | 1,273 | |||||||||||||
Plains Exploration & Production Company | 7.125% | 6/15/14 | 810 | 838 | |||||||||||||
Pogo Producing Company | 6.875% | 10/1/17 | 910 | 887 | A | ||||||||||||
Pride International, Inc. | 7.375% | 7/15/14 | 940 | 1,008 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Oil and Gas — Continued | |||||||||||||||||
SemGroup, L.P. | 8.750% | 11/15/15 | $ | 1,130 | $ | 1,155 | A | ||||||||||
Suburban Propane Partners LP | 6.875% | 12/15/13 | 1,110 | 1,038 | |||||||||||||
Whiting Petroleum Corporation | 7.000% | 2/1/14 | 1,030 | 1,033 | A | ||||||||||||
17,416 | |||||||||||||||||
Paper and Forest Products — 1.5% | |||||||||||||||||
Georgia-Pacific Corp. | 9.500% | 12/1/11 | 760 | 801 | |||||||||||||
NewPage Corporation | 12.000% | 5/1/13 | 1,890 | 1,739 | |||||||||||||
2,540 | |||||||||||||||||
Pharmaceuticals — 0.3% | |||||||||||||||||
Leiner Health Products Inc. | 11.000% | 6/1/12 | 490 | 461 | |||||||||||||
Printing and Copying Services — 0.3% | |||||||||||||||||
Clarke American Corporation | 11.750% | 12/15/13 | 590 | 590 | A | ||||||||||||
Real Estate — 1.0% | |||||||||||||||||
Forest City Enterprises, Inc. | 6.500% | 2/1/17 | 910 | 892 | |||||||||||||
Ventas, Inc. | 6.750% | 6/1/10 | 200 | 205 | |||||||||||||
Ventas, Inc. | 9.000% | 5/1/12 | 158 | 180 | |||||||||||||
Ventas, Inc. | 8.750% | 5/1/09 | 475 | 513 | |||||||||||||
1,790 | |||||||||||||||||
Rental and Lease Services — 1.9% | |||||||||||||||||
Hertz Corporation | 8.875% | 1/1/14 | 600 | 611 | A | ||||||||||||
Hertz Corporation | 10.500% | 1/1/16 | 1,150 | 1,185 | A | ||||||||||||
NationsRent Inc. | 9.500% | 10/15/10 | 1,390 | 1,515 | |||||||||||||
3,311 | |||||||||||||||||
Retail — 3.0% | |||||||||||||||||
Ames True Temper | 8.150% | 1/15/12 | 930 | 874 | B | ||||||||||||
Brookstone Company Inc. | 12.000% | 10/15/12 | 810 | 757 | A | ||||||||||||
J.C. Penney Company, Inc. | 6.875% | 10/15/15 | 550 | 596 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Retail — Continued | |||||||||||||||||
J.C. Penney Company, Inc. | 7.400% | 4/1/37 | $ | 120 | $ | 134 | |||||||||||
Neiman Marcus Group, Inc. | 10.375% | 10/15/15 | 1,240 | 1,260 | A | ||||||||||||
Norcraft Companies | 9.000% | 11/1/11 | 1,420 | 1,470 | |||||||||||||
5,091 | |||||||||||||||||
Special Purpose — 9.3% | |||||||||||||||||
AAC Group Holding Corp. | 0.000% | 10/1/12 | 1,820 | 1,315 | C | ||||||||||||
Alamosa Incorporated | 11.000% | 7/31/10 | 294 | 331 | |||||||||||||
Alamosa Incorporated | 8.500% | 1/31/12 | 710 | 768 | |||||||||||||
Di Finance Corporation | 9.500% | 2/15/13 | 1,600 | 1,664 | |||||||||||||
H & E Equipment Services LLC | 11.125% | 6/15/12 | 1,444 | 1,596 | |||||||||||||
H-Lines Finance Holding Corp. | 0.000% | 4/1/13 | 994 | 822 | C | ||||||||||||
Milacron Escrow Corporation | 11.500% | 5/15/11 | 2,265 | 1,937 | |||||||||||||
Rainbow National Services LLC | 8.750% | 9/1/12 | 510 | 543 | A | ||||||||||||
Rainbow National Services LLC | 10.375% | 9/1/14 | 360 | 403 | A | ||||||||||||
Standard Aero Holdings Inc. | 8.250% | 9/1/14 | 1,170 | 959 | |||||||||||||
Stripes Acquisition LLC | 10.625% | 12/15/13 | 595 | 604 | A | ||||||||||||
Texas Genco LLC | 6.875% | 12/15/14 | 323 | 350 | A | ||||||||||||
The Williams Companies, Inc. Credit Certificate Trust | 6.750% | 4/15/09 | 410 | 415 | A | ||||||||||||
TransDigm Funding Corp. | 8.375% | 7/15/11 | 1,100 | 1,158 | |||||||||||||
UCAR Finance Inc. | 10.250% | 2/15/12 | 1,015 | 1,072 | |||||||||||||
UGS Corporation | 10.000% | 6/1/12 | 900 | 981 | |||||||||||||
Vanguard Health Holding Company I LLC | 11.250% | 10/1/15 | 710 | 518 | |||||||||||||
Vanguard Health Holding Company II LLC | 9.000% | 10/1/14 | 270 | 287 | |||||||||||||
15,723 | |||||||||||||||||
Steel Products — 1.4% | |||||||||||||||||
Chaparral Steel Company | 10.000% | 7/15/13 | 970 | 1,045 | |||||||||||||
Citisteel USA, Inc. | 11.553% | 9/1/10 | 1,270 | 1,264 | A,B | ||||||||||||
2,309 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Special Purpose — Continued | |||||||||||||||||
Storage Facilities — 0.3% | |||||||||||||||||
Mobile Mini, Inc. | 9.500% | 7/1/13 | $ | 490 | $ | 538 | |||||||||||
Telecommunications — 4.5% | |||||||||||||||||
Cincinnati Bell Inc. | 7.000% | 2/15/15 | 1,819 | 1,783 | |||||||||||||
Citizens Communications Company | 9.000% | 8/15/31 | 340 | 344 | |||||||||||||
Hawaiian Telcom Communications, Inc. | 12.500% | 5/1/15 | 1,810 | 1,693 | A | ||||||||||||
Qwest Communications International Inc. | 7.250% | 2/15/11 | 1,703 | 1,737 | |||||||||||||
Qwest Communications International Inc. | 7.500% | 2/15/14 | 620 | 637 | |||||||||||||
Qwest Communications International Inc. | 3.500% | 11/15/25 | 450 | 521 | E | ||||||||||||
Qwest Corporation | 7.875% | 9/1/11 | 830 | 894 | |||||||||||||
7,609 | |||||||||||||||||
Telecommunications (Cellular/ Wireless) — 1.0% | |||||||||||||||||
Rural Cellular Corporation | 9.875% | 2/1/10 | 1,050 | 1,108 | |||||||||||||
Ubiquitel Operating Company | 9.875% | 3/1/11 | 610 | 675 | |||||||||||||
1,783 | |||||||||||||||||
Transportation — 4.9% | |||||||||||||||||
American Airlines, Inc. | 7.800% | 4/1/08 | 1,130 | 1,115 | |||||||||||||
American Commercial Lines LLC | 9.500% | 2/15/15 | 500 | 540 | |||||||||||||
Continental Airlines, Inc. | 7.568% | 12/1/06 | 1,400 | 1,380 | |||||||||||||
Continental Airlines, Inc. | 7.033% | 12/15/12 | 827 | 753 | |||||||||||||
Gulfmark Offshore, Inc. | 7.750% | 7/15/14 | 930 | 967 | |||||||||||||
Horizon Lines, LLC | 9.000% | 11/1/12 | 428 | 451 | |||||||||||||
Kansas City Southern Railway | 9.500% | 10/1/08 | 121 | 131 | |||||||||||||
Kansas City Southern Railway | 7.500% | 6/15/09 | 710 | 733 | |||||||||||||
OMI Corporation | 7.625% | 12/1/13 | 966 | 979 | |||||||||||||
Progress Rail Services Corp. | 7.750% | 4/1/12 | 900 | 922 | A | ||||||||||||
United Air Lines, Inc. | 7.811% | 10/1/09 | 344 | 299 | |||||||||||||
8,270 | |||||||||||||||||
Maturity | Par/ | |||||||||||||||||
Rate | Date | Shares | Value | |||||||||||||||
Total Corporate Bonds and Notes (Identified Cost — $150,886) | $ | 149,376 | ||||||||||||||||
Mortgage-Backed Securities — 0.4% | ||||||||||||||||||
Blackrock Capital Finance L.P. 1996-R1 | 9.517% | 9/25/26 | $ | 643 | 399 | |||||||||||||
Blackrock Capital Finance L.P. 1997-R1 | 7.750% | 3/25/37 | 520 | 182 | A | |||||||||||||
Ocwen Residential Mortgage Corporation 1998-R1 | 7.000% | 10/25/40 | 203 | 32 | ||||||||||||||
Total Mortgage-Backed Securities (Identified Cost — $808) | 613 | |||||||||||||||||
Yankee BondsF — 7.7% | ||||||||||||||||||
Cable — 0.4% | ||||||||||||||||||
Rogers Cable Inc. | 5.500% | 3/15/14 | 790 | 740 | ||||||||||||||
Chemicals — | ||||||||||||||||||
Nell Af SARL | 8.375% | 8/15/15 | 980 | 970 | A | |||||||||||||
Rhodia SA | 10.250% | 6/1/10 | 760 | 832 | ||||||||||||||
1,802 | ||||||||||||||||||
Electronics — 0.4% | ||||||||||||||||||
Flextronics Intl Ltd | 6.500% | 5/15/13 | 670 | 681 | ||||||||||||||
Exploration and Production — 0.3% | ||||||||||||||||||
Ocean Rig Norway AS | 8.375% | 7/1/13 | 520 | 554 | A | |||||||||||||
Media — 0.7% | ||||||||||||||||||
Kabel Deutschland GmbH | 10.625% | 7/1/14 | 1,100 | 1,158 | A | |||||||||||||
Maturity | Par/ | |||||||||||||||||
Rate | Date | Shares | Value | |||||||||||||||
Yankee Bonds — Continued | ||||||||||||||||||
Oil and Gas — 0.4% | ||||||||||||||||||
Utilicorp Canada Finance Corp | 7.750% | 6/15/11 | $ | 510 | $ | 522 | ||||||||||||
Western Oil Sands Inc. | 8.375% | 5/1/12 | 100 | 112 | ||||||||||||||
634 | ||||||||||||||||||
Paper and Forest Products — 0.4% | ||||||||||||||||||
Domtar Inc. | 7.875% | 10/15/11 | 450 | 414 | ||||||||||||||
Domtar Inc. | 5.375% | 12/1/13 | 130 | 104 | ||||||||||||||
Tembec Industries, Inc. | 8.500% | 2/1/11 | 420 | 233 | ||||||||||||||
751 | ||||||||||||||||||
Semiconductor Equipment and Production — 0.1% | ||||||||||||||||||
MagnaChip Semiconductor S.A. | 8.000% | 12/15/14 | 235 | 224 | ||||||||||||||
Services — 0.5% | ||||||||||||||||||
Compagnie Generale de Geophysique SA (CGG) | 7.500% | 5/15/15 | 780 | 807 | ||||||||||||||
Special | ||||||||||||||||||
Montell Finl Co Bv | 8.100% | 3/15/27 | 750 | 686 | A | |||||||||||||
Steel (Producers) — 0.4% | ||||||||||||||||||
Ispat Inland Ulc | 9.750% | 4/1/14 | 600 | 680 | ||||||||||||||
Telecommunications — 1.3% | ||||||||||||||||||
Intelsat, Ltd. | 7.625% | 4/15/12 | 2,000 | 1,615 | ||||||||||||||
Wind Acquisition Finance SA | 10.750% | 12/1/15 | 630 | 650 | A | |||||||||||||
2,265 | ||||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Yankee Bonds — Continued | |||||||||||||||||
Telecommunications (Cellular/ Wireless) — 1.0% | |||||||||||||||||
Rogers Wireless Communications Inc. | 9.625% | 5/1/11 | $ | 1,088 | $ | 1,251 | |||||||||||
Rogers Wireless Communications Inc. | 8.000% | 12/15/12 | 330 | 350 | |||||||||||||
1,601 | |||||||||||||||||
Transportation — 0.3% | |||||||||||||||||
Teekay Shipping Corporation | 8.875% | 7/15/11 | 426 | 481 | |||||||||||||
Total Yankee Bonds (Identified Cost — $13,235) | 13,064 | ||||||||||||||||
Preferred Stocks — 0.9% | |||||||||||||||||
Paxson Communications Corporation | 14.250% | 0.1 | shs | 1,566 | G,H | ||||||||||||
Total Preferred Stocks (Identified Cost — $1,429) | 1,566 | ||||||||||||||||
Warrants — 0.2% | |||||||||||||||||
American Tower Corporation | 1 | wts | 318 | A,I | |||||||||||||
Next Generation Network, Inc. | 16 | 0.2 | I | ||||||||||||||
Total Warrants (Identified Cost — $291) | 318 | ||||||||||||||||
Total Long-Term Securities (Identified Cost — $166,649) | 164,937 | ||||||||||||||||
Short-Term Securities — 0.6% | |||||||||||||||||
Repurchase Agreements — 0.6% | |||||||||||||||||
Goldman, Sachs & Company 4.24%, dated 12/30/05, to be repurchased at $531 on 1/3/06 (Collateral: $545 Freddie Mac notes, 5%, due 12/27/07, value $546) | $ | 531 | 531 |
Par/ | ||||||||||||||||
Shares | Value | |||||||||||||||
Repurchase Agreements — Continued | ||||||||||||||||
Lehman Brothers, Inc. 4.15%, dated 12/30/05, to be repurchased at $530 on 1/3/06 (Collateral: $2,245 Federal Home Loan Bank zero-coupon bonds, due 9/29/28, value $547) | $ | 530 | $ | 530 | ||||||||||||
Total Short-Term Securities (Identified Cost — $1,061) | 1,061 | |||||||||||||||
Total Investments — 97.8% (Identified Cost — $167,710) | 165,998 | |||||||||||||||
Other Assets Less Liabilities — 2.2% | 3,790 | |||||||||||||||
Net Assets — 100.0% | $ | 169,788 | ||||||||||||||
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, which the Fund’s investment adviser has determined to be liquid, represent 21.7% of net assets. |
B | 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, 2005. |
C | Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes. |
D | Unit — A security which consists of a bond and warrants to purchase the stock of the issuer. |
E | Convertible Security — Security may be converted into issuer’s common stock. |
F | Yankee Bond — A dollar-denominated bond issued in the U.S. by foreign entities. |
G | Pay-in-Kind (“PIK”) security — A security in which interest or dividends during the initial few years is paid in additional PIK securities rather than in cash. |
H | Private placement. |
I | Non-income producing. |
See notes to financial statements.
Statement of Assets and Liabilities
High Yield Portfolio
Assets: | |||||||||
Investment securities at market value (Identified Cost – $166,649) | $ | 164,937 | |||||||
Short-term securities at value (Identified Cost – $1,061) | 1,061 | ||||||||
Cash | 1 | ||||||||
Interest and dividends receivable | 3,495 | ||||||||
Receivable for fund shares sold | 1,069 | ||||||||
Total assets | 170,563 | ||||||||
Liabilities: | |||||||||
Payable for fund shares repurchased | $ | 390 | |||||||
Income distribution payable | 148 | ||||||||
Accrued management fee | 95 | ||||||||
Accrued distribution and service fees | 67 | ||||||||
Accrued expenses | 75 | ||||||||
Total liabilities | 775 | ||||||||
Net Assets | $ | 169,788 | |||||||
Net assets consist of: | |||||||||
Accumulated paid-in capital applicable to: | |||||||||
17,633 Primary Class shares outstanding | $ | 313,676 | |||||||
1,383 Institutional Class shares outstanding | 12,701 | ||||||||
Undistributed net investment income | 1 | ||||||||
Accumulated net realized loss on investments | (154,878 | ) | |||||||
Unrealized appreciation/(depreciation) of investments | (1,712 | ) | |||||||
Net Assets | $ | 169,788 | |||||||
Net Asset Value Per Share: | |||||||||
Primary Class | $ | 8.93 | |||||||
Institutional Class | $ | 8.96 | |||||||
See notes to financial statements.
Statement of Operations
High Yield Portfolio
Investment Income: | |||||||||||
Interest | $ | 16,556 | |||||||||
Dividends | 196 | ||||||||||
Total income | $ | 16,752 | |||||||||
Expenses: | |||||||||||
Management fees | 1,254 | ||||||||||
Distribution and service fees | 910 | ||||||||||
Audit and legal fees | 84 | ||||||||||
Custodian fees | 94 | ||||||||||
Directors’ fees and expenses | 15 | ||||||||||
Registration fees | 45 | ||||||||||
Reports to shareholders | 53 | ||||||||||
Transfer agent and shareholder servicing expense: | |||||||||||
Primary Class | 157 | ||||||||||
Institutional Class | 2 | ||||||||||
Other expenses | 27 | ||||||||||
2,641 | |||||||||||
Less compensating balance credits | (6 | )A | |||||||||
Total expenses, net of compensating balance credits | 2,635 | ||||||||||
Net Investment Income | 14,117 | ||||||||||
Net Realized and Unrealized Gain/(Loss) on Investments: | |||||||||||
Realized gain on investments | 765 | ||||||||||
Change in unrealized depreciation of investments | (10,653 | ) | |||||||||
Net Realized and Unrealized Loss on Investments | (9,888 | ) | |||||||||
Change in Net Assets Resulting From Operations | $ | 4,229 | |||||||||
A | See note 1, Compensating Balance Credits, in the notes to financial statements. |
See notes to financial statements.
Statement of Changes in Net Assets
High Yield Portfolio
For the Years Ended | ||||||||||
12/31/05 | 12/31/04 | |||||||||
Change in Net Assets: | ||||||||||
Net investment income | $ | 14,117 | $ | 14,774 | ||||||
Net realized gain/(loss) on investments | 765 | 2,146 | ||||||||
Change in unrealized appreciation/(depreciation) on investments | (10,653 | ) | 4,056 | |||||||
Change in net assets resulting from operations | 4,229 | 20,976 | ||||||||
Distributions to shareholders: | ||||||||||
From net investment income: | ||||||||||
Primary Class | (13,197 | ) | (14,195 | ) | ||||||
Institutional Class | (861 | ) | (565 | ) | ||||||
Change in net assets from Fund share transactions: | ||||||||||
Primary Class | (38,618 | ) | (24,402 | ) | ||||||
Institutional Class | 4,174 | 2,040 | ||||||||
Change in net assets | (44,273 | ) | (16,146 | ) | ||||||
Net Assets: | ||||||||||
Beginning of year | 214,061 | 230,207 | ||||||||
End of year | $ | 169,788 | $ | 214,061 | ||||||
Under/(over) distributed net investment income | $ | 1 | $ | (92 | ) | |||||
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, | |||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||||
Net asset value, beginning of year | $ | 9.39 | $ | 9.10 | $ | 7.96 | $ | 9.22 | $ | 10.18 | |||||||||||
Investment operations: | |||||||||||||||||||||
Net investment income | .67 | .62 | .63 | .77 | .94 | ||||||||||||||||
Net realized and unrealized gain/(loss) on investments | (.46 | ) | .29 | 1.15 | (1.26 | ) | (.94 | ) | |||||||||||||
Total from investment operations | .21 | .91 | 1.78 | (.49 | ) | — | |||||||||||||||
Distributions: | |||||||||||||||||||||
From net investment income | (.67 | ) | (.62 | ) | (.64 | ) | (.77 | ) | (.96 | ) | |||||||||||
Total distributions | (.67 | ) | (.62 | ) | (.64 | ) | (.77 | ) | (.96 | ) | |||||||||||
Net asset value, end of year | $ | 8.93 | $ | 9.39 | $ | 9.10 | $ | 7.96 | $ | 9.22 | |||||||||||
Ratios/supplemental data: | |||||||||||||||||||||
Total return | 2.39 | % | 10.51 | % | 23.03 | % | (5.28 | )% | (.13 | )% | |||||||||||
Total expenses to average net assetsA | 1.40 | % | 1.36 | % | 1.41 | % | 1.36 | % | 1.51 | % | |||||||||||
Net expenses to average net assetsB | 1.40 | % | 1.36 | % | 1.41 | % | 1.36 | % | 1.51 | % | |||||||||||
Net investment income to average net assets | 7.28 | % | 6.79 | % | 7.26 | % | 9.06 | % | 9.59 | % | |||||||||||
Portfolio turnover rate | 134.0 | % | 109.1 | % | 122.3 | % | 96.6 | % | 130.0 | % | |||||||||||
Net assets, end of year (in thousands) | $ | 157,399 | $ | 205,314 | $ | 223,773 | $ | 162,175 | $ | 199,214 | |||||||||||
A | This ratio reflects total expenses before compensating balance credits. |
B | This ratio reflects expenses net of compensating balance credits. |
See notes to financial statements.
Institutional Class:
Years Ended December 31, | |||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||||
Net asset value, beginning of year | $9.41 | $ | 9.11 | $ | 7.96 | $ | 9.20 | $ | 10.18 | ||||||||||||
Investment operations: | |||||||||||||||||||||
Net investment income | .71 | .66 | .66 | .78 | 1.01 | ||||||||||||||||
Net realized and unrealized gain/(loss) on investments, | (.45 | ) | .31 | 1.15 | (1.24 | ) | (1.00 | ) | |||||||||||||
Total from investment operations | .26 | .97 | 1.81 | (.46 | ) | .01 | |||||||||||||||
Distributions: | |||||||||||||||||||||
From net investment income | (.71 | ) | (.67 | ) | (.66 | ) | (.78 | ) | (.99 | ) | |||||||||||
Total distributions | (.71 | ) | (.67 | ) | (.66 | ) | (.78 | ) | (.99 | ) | |||||||||||
Net asset value, end of year | $8.96 | $ | 9.41 | $ | 9.11 | $ | 7.96 | $ | 9.20 | ||||||||||||
Ratios/supplemental data: | |||||||||||||||||||||
Total return | 2.94 | % | 11.15 | % | 23.54 | % | (5.00 | )% | (.06 | )% | |||||||||||
Total expenses to average net assetsA | .85 | % | .80 | % | .85 | % | .82 | % | .97 | % | |||||||||||
Net expenses to average net assetsB | .84 | % | .80 | % | .85 | % | .82 | % | .97 | % | |||||||||||
Net investment income to average net assets | 7.93 | % | 7.38 | % | 7.78 | % | 9.63 | % | 10.20 | % | |||||||||||
Portfolio turnover rate | 134.0 | % | 109.1 | % | 122.3 | % | 96.6 | % | 130.0 | % | |||||||||||
Net assets, end of year (in thousands) | $ | 12,389 | $ | 8,747 | $ | 6,434 | $ | 2,704 | $ | 1,331 | |||||||||||
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 (“Fund”) and its benchmark for various periods ended December 31, 2005, are presented below:
One | Five | Ten | Since | ||||||||||||||
Year | Years | Years | InceptionA | ||||||||||||||
Investment Grade | |||||||||||||||||
Primary Class | +1.69% | +6.86% | +6.37% | +7.61% | |||||||||||||
Institutional Class | +2.27% | +7.43% | +6.95% | +6.98% | |||||||||||||
Lehman Credit Bond IndexB | +1.96% | +7.12% | +6.46% | +8.31% | |||||||||||||
Lehman Aggregate Bond IndexC | +2.43% | +5.87% | +6.16% | +7.77% |
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 2005 the Primary Class of the Fund returned 1.69% versus 1.96% for its primary benchmark, the Lehman Credit Bond Index. The option-adjusted-spread (“OAS”)D of the index widened from +75 basis points (“bps”)E to similar duration treasuries on 12/31/04, to +83 bps on 12/31/05. The asset class underperformed similar duration Treasuries in large part due to the poor performance of the auto sector. The Fund’s underperformance is primarily attributable to the adviser’s decision to overweight the consumer cyclical sub-sector (inclusive of the auto companies) which returned - -4.71% for the period. Being overweight to the utility sector, which returned 3.02% and having
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, and 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 | 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 non- convertible investment grade debt issues with at least $100 million par amount outstanding and with at least one year to final maturity. |
D | This is a measurement tool for evaluating price differences between similar products with different embedded options. A larger OAS implies a greater return for greater risks. |
E | 100 basis points = 1%. |
Western Asset Management Company
January 31, 2006
Investment Grade Income Portfolio
As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees on Primary Class shares; 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, 2005, and held through December 31, 2005.
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 ratio 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 | |||||||||||
Value | Value | Period | |||||||||||
7/1/05 | 12/31/05 | 7/1/05 to 12/31/05 | |||||||||||
Primary Class: | |||||||||||||
Actual | $ | 1,000.00 | $ | 994.00 | $ | 5.03 | |||||||
Hypothetical (5% return before expenses) | 1,000.00 | 1,020.16 | 5.09 | ||||||||||
Institutional Class: | |||||||||||||
Actual | $ | 1,000.00 | $ | 997.80 | $ | 2.22 | |||||||
Hypothetical (5% return before expenses) | 1,000.00 | 1,022.68 | 2.24 |
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 ratios of 1.00% and 0.44% for the Primary Class and Institutional Class, respectively, 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 graphs on the following pages compare the Fund’s total returns to that of two closely matched broad-based securities market indices. 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 each 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 indices results assume reinvestment of all dividends and distributions.
Growth of a $10,000 Investment — Primary Class
Periods Ended December 31, 2005
Cumulative | Average Annual | |||||||||||
Total Return | Total Return | |||||||||||
One Year | +1.69% | +1.69% | ||||||||||
Five Years | +39.32% | +6.86% | ||||||||||
Ten Years | +85.51% | +6.37% | ||||||||||
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. |
B | 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. |
Growth of a $1,000,000 Investment — Institutional Class
Periods Ended December 31, 2005
Cumulative | Average Annual | |||||||||
Total Return | Total Return | |||||||||
One Year | +2.27% | +2.27% | ||||||||
Five Years | +43.12% | +7.43% | ||||||||
Ten Years | +95.76% | +6.95% | ||||||||
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, 2005)C
Standard & Poor’s Debt RatingsD (as a percentage of the portfolio)
Maturity Schedule (as a percentage of the portfolio)
C | The Fund is actively managed. As a result, the composition of its portfolio holdings and sectors is subject to change at any time. |
D | Standard & Poor’s Ratings Services provides capital markets with credit ratings for the evaluation and assessment of credit risk. |
Portfolio of Investments
Investment Grade Income Portfolio
(Amounts in Thousands)
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Long-Term Securities — 98.6% | |||||||||||||||||
Corporate Bonds and Notes — 73.9% | |||||||||||||||||
Aerospace/ Defense — 1.0% | |||||||||||||||||
L-3 Communications Corp. | 7.625% | 6/15/12 | $ | 1,000 | $ | 1,053 | |||||||||||
Lockheed Martin Corporation | 8.500% | 12/1/29 | 760 | 1,036 | |||||||||||||
Northrop Grumman Corporation | 7.750% | 2/15/31 | 170 | 217 | |||||||||||||
Raytheon Company | 6.150% | 11/1/08 | 489 | 507 | |||||||||||||
Raytheon Company | 5.375% | 4/1/13 | 1,240 | 1,257 | |||||||||||||
4,070 | |||||||||||||||||
Auto Parts and Equipment — 0.2% | |||||||||||||||||
American Axle & Manufacturing Inc. | 5.250% | 2/11/14 | 800 | 630 | |||||||||||||
Automotive — 0.9% | |||||||||||||||||
Ford Motor Company | 7.450% | 7/16/31 | 1,975 | 1,343 | |||||||||||||
Ford Motor Company | 8.900% | 1/15/32 | 370 | 271 | |||||||||||||
General Motors Corporation | 8.250% | 7/15/23 | 650 | 418 | |||||||||||||
General Motors Corporation | 8.375% | 7/15/33 | 1,990 | 1,313 | |||||||||||||
3,345 | |||||||||||||||||
Banking and Finance — 8.7% | |||||||||||||||||
AIFUL Corporation | 5.000% | 8/10/10 | 2,105 | 2,078 | A | ||||||||||||
Boeing Capital Corporation | 6.500% | 2/15/12 | 1,000 | 1,079 | |||||||||||||
Boeing Capital Corporation | 5.800% | 1/15/13 | 530 | 556 | |||||||||||||
Countrywide Home Loans, Inc. | 3.250% | 5/21/08 | 1,200 | 1,152 | |||||||||||||
Countrywide Home Loans, Inc. | 4.125% | 9/15/09 | 340 | 328 | |||||||||||||
Ford Motor Credit Company | 4.950% | 1/15/08 | 250 | 224 | |||||||||||||
Ford Motor Credit Company | 6.625% | 6/16/08 | 8,210 | 7,447 | |||||||||||||
Ford Motor Credit Company | 7.375% | 10/28/09 | 2,970 | 2,634 | |||||||||||||
Ford Motor Credit Company | 7.375% | 2/1/11 | 2,390 | 2,095 | |||||||||||||
Ford Motor Credit Company | 7.250% | 10/25/11 | 2,410 | 2,082 | |||||||||||||
General Motors Acceptance Corporation | 6.150% | 4/5/07 | 1,570 | 1,483 | |||||||||||||
General Motors Acceptance Corporation | 6.125% | 8/28/07 | 2,680 | 2,484 | |||||||||||||
General Motors Acceptance Corporation | 6.311% | 11/30/07 | 320 | 289 | |||||||||||||
General Motors Acceptance Corporation | 5.625% | 5/15/09 | 590 | 525 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Banking and Finance — Continued | |||||||||||||||||
General Motors Acceptance Corporation | 6.875% | 9/15/11 | $ | 750 | $ | 684 | |||||||||||
General Motors Acceptance Corporation | 0.000% | 6/15/15 | 2,700 | 1,243 | B | ||||||||||||
HSBC Finance Corporation | 4.750% | 4/15/10 | 1,325 | 1,305 | |||||||||||||
John Deere Capital Corporation | 4.500% | 8/22/07 | 5 | 5 | |||||||||||||
MBNA America Bank | 5.375% | 1/15/08 | 1,200 | 1,210 | |||||||||||||
National Rural Utilities Cooperative Finance Corporation | 7.250% | 3/1/12 | 1,700 | 1,896 | |||||||||||||
Residential Capital Corporation | 6.375% | 6/30/10 | 1,970 | 2,002 | |||||||||||||
SB Treasury Company LLC | 9.400% | 12/29/49 | 840 | 920 | A,C | ||||||||||||
33,721 | |||||||||||||||||
Banks — 5.8% | |||||||||||||||||
Bank of America Corporation | 7.400% | 1/15/11 | 3,165 | 3,486 | |||||||||||||
Bank of America Corporation | 4.750% | 8/15/13 | 470 | 461 | |||||||||||||
BankAmerica Capital III | 4.720% | 1/15/27 | 585 | 565 | D | ||||||||||||
BB&T Capital Trust I | 5.850% | 8/18/35 | 1,750 | 1,748 | |||||||||||||
CBA Capital Trust I | 5.805% | 12/31/49 | 3,510 | 3,615 | A | ||||||||||||
Chase Capital II | 4.750% | 2/1/27 | 1,980 | 1,869 | D | ||||||||||||
Key Bank NA | 5.800% | 7/1/14 | 535 | 556 | |||||||||||||
Rabobank Capital Funding Trust II | 5.260% | 12/31/49 | 320 | 317 | A,C | ||||||||||||
Rabobank Capital Funding Trust III | 5.254% | 12/29/49 | 3,120 | 3,059 | A,C | ||||||||||||
Suntrust Bank | 5.000% | 9/1/15 | 1,450 | 1,433 | |||||||||||||
UnionBanCal Corporation | 5.250% | 12/16/13 | 785 | 783 | |||||||||||||
Wachovia Bank NA | 7.800% | 8/18/10 | 2,640 | 2,963 | |||||||||||||
Washington Mutual, Inc. | 4.200% | 1/15/10 | 700 | 678 | |||||||||||||
Washington Mutual, Inc. | 4.625% | 4/1/14 | 1,000 | 940 | |||||||||||||
22,473 | |||||||||||||||||
Building Materials — N.M. | |||||||||||||||||
American Standard, Inc. | 8.250% | 6/1/09 | 37 | 40 | |||||||||||||
American Standard, Inc. | 7.625% | 2/15/10 | 5 | 6 | |||||||||||||
46 | |||||||||||||||||
Cable — 1.7% | |||||||||||||||||
Comcast Cable Communications, Inc. | 6.750% | 1/30/11 | 960 | 1,017 | |||||||||||||
Comcast Corporation | 7.050% | 3/15/33 | 1,800 | 1,943 | |||||||||||||
Cox Communications, Inc. | 4.625% | 1/15/10 | 1,410 | 1,365 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Cable — Continued | |||||||||||||||||
CSC Holdings Inc. | 7.625% | 7/15/18 | $ | 1,500 | $ | 1,425 | |||||||||||
EchoStar DBS Corporation | 7.304% | 10/1/08 | 500 | 510 | D | ||||||||||||
Tele-Communications, Inc. | 7.125% | 2/15/28 | 180 | 193 | |||||||||||||
6,453 | |||||||||||||||||
Casino Resorts — 0.6% | |||||||||||||||||
Harrah’s Operating Company, Inc. | 5.500% | 7/1/10 | 410 | 410 | |||||||||||||
Harrah’s Operating Company, Inc. | 5.750% | 10/1/17 | 2,110 | 2,053 | |||||||||||||
2,463 | |||||||||||||||||
Chemicals — 0.7% | |||||||||||||||||
E. I. du Pont de Nemours and Company | 4.875% | 4/30/14 | 1,100 | 1,081 | |||||||||||||
The Dow Chemical Company | 6.000% | 10/1/12 | 750 | 788 | |||||||||||||
The Dow Chemical Company | 7.375% | 11/1/29 | 800 | 964 | |||||||||||||
2,833 | |||||||||||||||||
Computer Services and Systems — 0.9% | |||||||||||||||||
Electronic Data Systems Corporation | 7.125% | 10/15/09 | 530 | 563 | |||||||||||||
Electronic Data Systems Corporation | 6.500% | 8/1/13 | 500 | 514 | |||||||||||||
Electronic Data Systems Corporation | 7.450% | 10/15/29 | 570 | 606 | |||||||||||||
International Business Machines Corporation | 4.750% | 11/29/12 | 1,750 | 1,736 | |||||||||||||
�� | |||||||||||||||||
3,419 | |||||||||||||||||
Consumer Products — 0.1% | |||||||||||||||||
The Clorox Company | 5.000% | 1/15/15 | 350 | 345 | |||||||||||||
The Procter & Gamble Company | 4.300% | 8/15/08 | 200 | 198 | |||||||||||||
543 | |||||||||||||||||
Diversified Financial Services — 7.4% | |||||||||||||||||
AIG SunAmerica Global Financing VI | 6.300% | 5/10/11 | 5,170 | 5,492 | A | ||||||||||||
Associates Corporation of North America | 8.150% | 8/1/09 | 775 | 856 | |||||||||||||
Beaver Valley Funding Corp. | 9.000% | 6/1/17 | 1,100 | 1,262 | |||||||||||||
Capital One Bank | 4.875% | 5/15/08 | 150 | 149 | |||||||||||||
Capital One Bank | 5.750% | 9/15/10 | 870 | 891 | |||||||||||||
Capital One Bank | 6.500% | 6/13/13 | 690 | 733 | |||||||||||||
Capital One Financial Corporation | 8.750% | 2/1/07 | 400 | 415 | |||||||||||||
Capital One Financial Corporation | 7.125% | 8/1/08 | 340 | 356 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Diversified Financial Services — Continued | |||||||||||||||||
Citigroup Inc. | 5.000% | 9/15/14 | $ | 1,600 | $ | 1,575 | |||||||||||
General Electric Capital Corporation | 4.000% | 6/15/09 | 3,640 | 3,533 | |||||||||||||
General Electric Capital Corporation | 3.750% | 12/15/09 | 4,900 | 4,701 | |||||||||||||
General Electric Capital Corporation | 5.450% | 1/15/13 | 2,000 | 2,049 | |||||||||||||
General Electric Capital Corporation | 6.750% | 3/15/32 | 5 | 6 | |||||||||||||
iStar Financial Inc. | 5.375% | 4/15/10 | 3,180 | 3,152 | |||||||||||||
iStar Financial Inc. | 6.000% | 12/15/10 | 580 | 589 | |||||||||||||
Marsh & McLennan Companies, Inc. | 5.150% | 9/15/10 | 240 | 238 | |||||||||||||
Marsh & McLennan Companies, Inc. | 5.875% | 8/1/33 | 900 | 862 | |||||||||||||
Mizuho Preferred Capital Corp. LLC | 8.790% | 12/29/49 | 1,520 | 1,643 | A,C | ||||||||||||
Wells Fargo & Company | 5.000% | 11/15/14 | 90 | 89 | |||||||||||||
28,591 | |||||||||||||||||
Drug and Grocery Store Chains — 0.7% | |||||||||||||||||
Kroger Company | 8.000% | 9/15/29 | 1,000 | 1,162 | |||||||||||||
Safeway Inc. | 7.500% | 9/15/09 | 600 | 641 | |||||||||||||
Safeway Inc. | 5.800% | 8/15/12 | 750 | 754 | |||||||||||||
2,557 | |||||||||||||||||
Electric — 4.3% | |||||||||||||||||
AEP Texas Central Company | 5.500% | 2/15/13 | 1,060 | 1,073 | |||||||||||||
American Electric Power Company, Inc. | 5.250% | 6/1/15 | 350 | 349 | |||||||||||||
Commonwealth Edison Company | 6.150% | 3/15/12 | 560 | 583 | |||||||||||||
Dominion Resources, Inc. | 5.125% | 12/15/09 | 490 | 488 | |||||||||||||
Dominion Resources, Inc. | 4.750% | 12/15/10 | 140 | 137 | |||||||||||||
Dominion Resources, Inc. | 5.700% | 9/17/12 | 510 | 519 | |||||||||||||
FirstEnergy Corp. | 6.450% | 11/15/11 | 2,285 | 2,422 | |||||||||||||
FirstEnergy Corp. | 7.375% | 11/15/31 | 4,440 | 5,239 | |||||||||||||
Niagara Mohawk Power Corporation | 7.750% | 10/1/08 | 1,010 | 1,078 | |||||||||||||
System Energy Resources, Inc. | 4.875% | 10/1/07 | 1,020 | 1,013 | |||||||||||||
Tampa Electric Company | 6.375% | 8/15/12 | 380 | 406 | |||||||||||||
The Cleveland Electric Illuminating Company | 5.650% | 12/15/13 | 940 | 958 | |||||||||||||
The Cleveland Electric Illuminating Company | 7.880% | 11/1/17 | 850 | 1,029 | |||||||||||||
The Detroit Edison Company | 5.200% | 10/15/12 | 1,260 | 1,267 | |||||||||||||
16,561 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Energy — 4.0% | |||||||||||||||||
Alabama Power Company | 3.125% | 5/1/08 | $ | 920 | $ | 884 | |||||||||||
DTE Energy Company | 6.375% | 4/15/33 | 350 | 358 | |||||||||||||
Duke Energy Corporation | 5.625% | 11/30/12 | 270 | 277 | |||||||||||||
Exelon Corporation | 6.750% | 5/1/11 | 2,000 | 2,129 | |||||||||||||
MidAmerican Energy Holdings Company | 5.875% | 10/1/12 | 750 | 774 | |||||||||||||
Pacific Gas and Electric Company | 6.050% | 3/1/34 | 4,610 | 4,771 | |||||||||||||
Sempra Energy | 4.840% | 5/21/08 | 1,685 | 1,688 | D | ||||||||||||
TXU Corp. | 6.550% | 11/15/34 | 2,730 | 2,580 | |||||||||||||
TXU Energy Co. | 7.000% | 3/15/13 | 930 | 991 | |||||||||||||
Xcel Energy, Inc. | 7.000% | 12/1/10 | 900 | 969 | |||||||||||||
15,421 | |||||||||||||||||
Environmental Services — 0.3% | |||||||||||||||||
Waste Management, Inc. | 6.375% | 11/15/12 | 310 | 330 | |||||||||||||
Waste Management, Inc. | 7.375% | 5/15/29 | 690 | 807 | |||||||||||||
1,137 | |||||||||||||||||
Food, Beverage and Tobacco — 1.4% | |||||||||||||||||
Altria Group, Inc. | 7.000% | 11/4/13 | 1,385 | 1,515 | |||||||||||||
Kellogg Company | 6.600% | 4/1/11 | 1,000 | 1,071 | |||||||||||||
Kellogg Company | 7.450% | 4/1/31 | 650 | 803 | |||||||||||||
R.J. Reynolds Tobacco Holdings, Inc. | 7.875% | 5/15/09 | 860 | 894 | |||||||||||||
The Pepsi Bottling Group, Inc. | 7.000% | 3/1/29 | 340 | 408 | |||||||||||||
Tyson Foods, Inc. | 7.000% | 1/15/28 | 800 | 842 | |||||||||||||
5,533 | |||||||||||||||||
Gas and Pipeline Utilities — 1.6% | |||||||||||||||||
CenterPoint Energy Resources Corp. | 7.875% | 4/1/13 | 1,010 | 1,155 | |||||||||||||
Dynegy Holdings Inc. | 8.750% | 2/15/12 | 1,690 | 1,825 | |||||||||||||
Tennessee Gas Pipeline Company | 8.375% | 6/15/32 | 1,000 | 1,135 | |||||||||||||
The Williams Companies, Inc. | 7.625% | 7/15/19 | 2,000 | 2,145 | |||||||||||||
6,260 | |||||||||||||||||
Health Care — 1.1% | |||||||||||||||||
Tenet Healthcare Corporation | 9.875% | 7/1/14 | 2,310 | 2,339 | |||||||||||||
Tenet Healthcare Corporation | 6.875% | 11/15/31 | 750 | 604 | |||||||||||||
WellPoint Inc. | 5.000% | 12/15/14 | 1,330 | 1,306 | |||||||||||||
4,249 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Homebuilding — 0.3% | |||||||||||||||||
Centex Corporation | 5.125% | 10/1/13 | $ | 420 | $ | 403 | |||||||||||
D.R. Horton, Inc. | 5.250% | 2/15/15 | 610 | 571 | |||||||||||||
Pulte Homes, Inc. | 6.250% | 2/15/13 | 385 | 392 | |||||||||||||
1,366 | |||||||||||||||||
Insurance — 0.7% | |||||||||||||||||
Liberty Mutual Group | 5.750% | 3/15/14 | 720 | 710 | A | ||||||||||||
The St. Paul Travelers Companies, Inc. | 5.500% | 12/1/15 | 1,100 | 1,108 | |||||||||||||
Willis Group North America | 5.125% | 7/15/10 | 760 | 758 | |||||||||||||
2,576 | |||||||||||||||||
Investment Banking/ Brokerage — 5.5% | |||||||||||||||||
J.P. Morgan Chase & Co. | 5.125% | 9/15/14 | 3,195 | 3,163 | |||||||||||||
J.P. Morgan Chase & Co. | 4.891% | 9/1/15 | 1,035 | 1,024 | C | ||||||||||||
J.P. Morgan Chase & Co. | 5.150% | 10/1/15 | 2,000 | 1,971 | |||||||||||||
Merrill Lynch & Co., Inc. | 3.375% | 9/14/07 | 1,345 | 1,312 | |||||||||||||
Merrill Lynch & Co., Inc. | 6.000% | 2/17/09 | 800 | 825 | |||||||||||||
Merrill Lynch & Co., Inc. | 5.000% | 1/15/15 | 65 | 64 | |||||||||||||
Morgan Stanley | 5.800% | 4/1/07 | 2,600 | 2,627 | |||||||||||||
Morgan Stanley | 5.050% | 1/21/11 | 900 | 900 | |||||||||||||
Morgan Stanley | 4.750% | 4/1/14 | 2,660 | 2,551 | |||||||||||||
The Bear Stearns Companies Inc. | 4.550% | 6/23/10 | 1,600 | 1,570 | |||||||||||||
The Goldman Sachs Group, Inc. | 5.125% | 1/15/15 | 3,100 | 3,065 | |||||||||||||
The Goldman Sachs Group, Inc. | 6.345% | 2/15/34 | 2,025 | 2,127 | |||||||||||||
21,199 | |||||||||||||||||
Machinery — 0.3% | |||||||||||||||||
Case New Holland Incorporated | 9.250% | 8/1/11 | 1,000 | 1,070 | |||||||||||||
Media — 3.1% | |||||||||||||||||
Clear Channel Communications, Inc. | 4.400% | 5/15/11 | 1,210 | 1,126 | |||||||||||||
Clear Channel Communications, Inc. | 5.500% | 9/15/14 | 940 | 899 | |||||||||||||
Liberty Media Corporation | 7.875% | 7/15/09 | 1,000 | 1,054 | |||||||||||||
Liberty Media Corporation | 8.500% | 7/15/29 | 340 | 337 | |||||||||||||
Liberty Media Corporation | 8.250% | 2/1/30 | 120 | 117 | |||||||||||||
News America, Inc. | 6.550% | 3/15/33 | 1,495 | 1,538 | |||||||||||||
News America, Inc. | 6.200% | 12/15/34 | 115 | 114 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Media — Continued | |||||||||||||||||
Time Warner Entertainment Company, L.P. | 8.375% | 7/15/33 | $ | 855 | $ | 1,010 | |||||||||||
Time Warner Inc. | 6.150% | 5/1/07 | 1,390 | 1,407 | |||||||||||||
Time Warner Inc. | 9.125% | 1/15/13 | 1,130 | 1,337 | |||||||||||||
Time Warner Inc. | 7.700% | 5/1/32 | 1,625 | 1,828 | |||||||||||||
Viacom Inc. | 7.700% | 7/30/10 | 90 | 97 | |||||||||||||
Viacom Inc. | 5.625% | 8/15/12 | 1,095 | 1,087 | |||||||||||||
11,951 | |||||||||||||||||
Media and Entertainment — 0.3% | |||||||||||||||||
The Walt Disney Company | 6.200% | 6/20/14 | 1,280 | 1,347 | |||||||||||||
Medical Care Facilities — 1.7% | |||||||||||||||||
Coventry Health Care, Inc. | 5.875% | 1/15/12 | 1,050 | 1,061 | |||||||||||||
HCA, Inc. | 6.300% | 10/1/12 | 1,790 | 1,799 | |||||||||||||
HCA, Inc. | 6.250% | 2/15/13 | 2,130 | 2,132 | |||||||||||||
HCA, Inc. | 5.750% | 3/15/14 | 150 | 145 | |||||||||||||
Health Care REIT, Inc. | 5.875% | 5/15/15 | 1,440 | 1,429 | |||||||||||||
6,566 | |||||||||||||||||
Metals and Mining — 0.5% | |||||||||||||||||
Alcoa Inc. | 5.375% | 1/15/13 | 1,800 | 1,828 | |||||||||||||
Oil and Gas — 5.7% | |||||||||||||||||
Amerada Hess Corporation | 7.300% | 8/15/31 | 3,740 | 4,328 | |||||||||||||
Apache Corporation | 6.250% | 4/15/12 | 1,150 | 1,236 | |||||||||||||
Conoco Inc. | 6.950% | 4/15/29 | 600 | 724 | |||||||||||||
ConocoPhillips | 4.750% | 10/15/12 | 2,290 | 2,276 | |||||||||||||
Devon Energy Corporation | 7.950% | 4/15/32 | 1,080 | 1,393 | |||||||||||||
El Paso Corporation | 7.800% | 8/1/31 | 1,660 | 1,656 | |||||||||||||
El Paso Corporation | 7.750% | 1/15/32 | 340 | 341 | |||||||||||||
Kerr-McGee Corporation | 7.875% | 9/15/31 | 4,700 | 5,577 | |||||||||||||
Ocean Energy Inc. | 4.375% | 10/1/07 | 965 | 954 | |||||||||||||
Panhandle Eastern Pipe Line Company | 4.800% | 8/15/08 | 1,170 | 1,157 | |||||||||||||
Pemex Project Funding Master Trust | 8.500% | 2/15/08 | 100 | 106 | |||||||||||||
Pride International, Inc. | 7.375% | 7/15/14 | 800 | 858 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Oil and Gas — Continued | |||||||||||||||||
Valero Energy Corporation | 6.875% | 4/15/12 | $ | 565 | $ | 616 | |||||||||||
XTO Energy, Inc. | 6.250% | 4/15/13 | 745 | 789 | |||||||||||||
22,011 | |||||||||||||||||
Paper and Forest Products — 1.4% | |||||||||||||||||
International Paper Company | 5.500% | 1/15/14 | 900 | 885 | |||||||||||||
Weyerhaeuser Company | 6.125% | 3/15/07 | 127 | 129 | |||||||||||||
Weyerhaeuser Company | 6.750% | 3/15/12 | 2,150 | 2,282 | |||||||||||||
Weyerhaeuser Company | 7.375% | 3/15/32 | 1,785 | 1,984 | |||||||||||||
5,280 | |||||||||||||||||
Pharmaceuticals — 0.3% | |||||||||||||||||
Bristol-Myers Squibb Company | 5.750% | 10/1/11 | 1,160 | 1,198 | |||||||||||||
Photo Equipment and Supplies — 0.4% | |||||||||||||||||
Eastman Kodak Company | 3.625% | 5/15/08 | 975 | 896 | |||||||||||||
Eastman Kodak Company | 7.250% | 11/15/13 | 500 | 478 | |||||||||||||
1,374 | |||||||||||||||||
Real Estate — 0.4% | |||||||||||||||||
EOP Operating Limited Partnership | 6.750% | 2/15/12 | 1,500 | 1,592 | |||||||||||||
Retail — 0.4% | |||||||||||||||||
Target Corporation | 5.875% | 3/1/12 | 860 | 903 | |||||||||||||
Wal-Mart Stores, Inc. | 6.875% | 8/10/09 | 475 | 506 | |||||||||||||
1,409 | |||||||||||||||||
Special Purpose — 7.0% | |||||||||||||||||
Ahold Finance USA, Inc. | 8.250% | 7/15/10 | 960 | 1,038 | |||||||||||||
Arch Western Finance, LLC | 6.750% | 7/1/13 | 1,000 | 1,019 | |||||||||||||
ASIF Global Financing XIX | 4.900% | 1/17/13 | 1,120 | 1,114 | A | ||||||||||||
Caterpillar Financial Services Corporation | 4.500% | 6/15/09 | 1,040 | 1,026 | |||||||||||||
DaimlerChrysler NA Holding Corporation | 6.400% | 5/15/06 | 800 | 804 | |||||||||||||
DaimlerChrysler NA Holding Corporation | 4.960% | 9/10/07 | 1,520 | 1,523 | D |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Special Purpose — Continued | |||||||||||||||||
DaimlerChrysler NA Holding Corporation | 4.050% | 6/4/08 | $ | 470 | $ | 457 | |||||||||||
DaimlerChrysler NA Holding Corporation | 7.200% | 9/1/09 | 260 | 275 | |||||||||||||
DaimlerChrysler NA Holding Corporation | 7.300% | 1/15/12 | 735 | 793 | |||||||||||||
DaimlerChrysler NA Holding Corporation | 6.500% | 11/15/13 | 290 | 304 | |||||||||||||
DaimlerChrysler NA Holding Corporation | 8.500% | 1/18/31 | 1,800 | 2,178 | |||||||||||||
Duke Capital Corporation | 6.250% | 2/15/13 | 340 | 354 | |||||||||||||
Fosters Finance Corporation | 4.875% | 10/1/14 | 840 | 808 | A | ||||||||||||
International Lease Finance Corporation | 6.375% | 3/15/09 | 890 | 924 | |||||||||||||
Reed Elsevier Capital Inc. | 4.625% | 6/15/12 | 2,300 | 2,229 | |||||||||||||
Sprint Capital Corporation | 6.000% | 1/15/07 | 700 | 707 | |||||||||||||
Sprint Capital Corporation | 8.375% | 3/15/12 | 1,860 | 2,155 | |||||||||||||
Sprint Capital Corporation | 8.750% | 3/15/32 | 2,170 | 2,880 | |||||||||||||
TCI Communications Financing III | 9.650% | 3/31/27 | 3,350 | 3,625 | |||||||||||||
Unilever Capital Corporation | 7.125% | 11/1/10 | 480 | 523 | |||||||||||||
Verizon Global Funding Corp. | 6.125% | 6/15/07 | 2,065 | 2,100 | |||||||||||||
Verizon Global Funding Corp. | 7.750% | 6/15/32 | 375 | 447 | |||||||||||||
27,283 | |||||||||||||||||
Telecommunications — 1.5% | |||||||||||||||||
BellSouth Corporation | 4.750% | 11/15/12 | 830 | 809 | |||||||||||||
GTE Hawaiian Telephone Company, Inc. | 7.000% | 2/1/06 | 750 | 749 | |||||||||||||
Qwest Corporation | 5.625% | 11/15/08 | 550 | 544 | |||||||||||||
SBC Communications Inc. | 5.100% | 9/15/14 | 1,910 | 1,866 | |||||||||||||
Verizon New York Inc. | 6.875% | 4/1/12 | 1,820 | 1,897 | |||||||||||||
5,865 | |||||||||||||||||
Telecommunications (Cellular/ Wireless) — 1.7% | |||||||||||||||||
Cingular Wireless LLC | 5.625% | 12/15/06 | 800 | 806 | |||||||||||||
Motorola, Inc. | 7.625% | 11/15/10 | 135 | 150 | |||||||||||||
New Cingular Wireless Services Inc. | 7.500% | 5/1/07 | 1,500 | 1,550 | |||||||||||||
New Cingular Wireless Services Inc. | 8.125% | 5/1/12 | 570 | 659 | |||||||||||||
New Cingular Wireless Services Inc. | 8.750% | 3/1/31 | 980 | 1,298 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Telecommunications (Cellular/ Wireless) — Continued | |||||||||||||||||
Nextel Communications, Inc. | 5.950% | 3/15/14 | $ | 469 | $ | 471 | |||||||||||
Nextel Communications, Inc. | 7.375% | 8/1/15 | 1,600 | 1,689 | |||||||||||||
6,623 | |||||||||||||||||
Transportation — 1.3% | |||||||||||||||||
Burlington Northern Railroad Company | 6.960% | 3/22/09 | 182 | 189 | |||||||||||||
Burlington Northern Railroad Company | 7.330% | 6/23/10 | 137 | 144 | |||||||||||||
Continental Airlines, Inc. | 7.256% | 3/15/20 | 539 | 548 | |||||||||||||
Continental Airlines, Inc. | 6.545% | 2/2/19 | 165 | 164 | |||||||||||||
CSX Transportation, Inc. | 7.875% | 5/15/43 | 252 | 327 | |||||||||||||
Delta Air Lines, Inc. | 7.570% | 11/18/10 | 300 | 296 | |||||||||||||
Delta Air Lines, Inc. | 6.718% | 7/2/24 | 698 | 708 | |||||||||||||
Norfolk Southern Corporation | 7.875% | 5/15/43 | 348 | 445 | |||||||||||||
Northwest Airlines Corporation | 7.575% | 3/1/19 | 191 | 192 | |||||||||||||
Union Pacific Corporation | 4.875% | 1/15/15 | 1,740 | 1,697 | |||||||||||||
United Airlines, Inc. | 7.783% | 1/1/14 | 245 | 244 | |||||||||||||
4,954 | |||||||||||||||||
Total Corporate Bonds and Notes (Identified Cost — $287,275) | 285,797 | ||||||||||||||||
U.S. Government and Agency Obligations — 3.3% | |||||||||||||||||
Fixed Rate Securities — 0.3% | |||||||||||||||||
Tennessee Valley Authority | 5.375% | 11/13/08 | 150 | 152 | |||||||||||||
United States Treasury Bonds | 5.375% | 2/15/31 | 750 | 847 | |||||||||||||
999 | |||||||||||||||||
Treasury Inflation-Protected SecuritiesE — 3.0% | |||||||||||||||||
United States Treasury Inflation-Protected Security | 1.875% | 7/15/15 | 11,807 | 11,612 | |||||||||||||
Total U.S. Government and Agency Obligations (Identified Cost — $12,719) | 12,611 | ||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
U.S. Government Agency Mortgage-Backed Securities — N.M. | |||||||||||||||||
Fixed Rate Securities — N.M. | |||||||||||||||||
Fannie Mae | 8.000% | 4/25/06 | $ | 1 | $ | 2 | |||||||||||
Indexed SecuritiesD — N.M. | |||||||||||||||||
Freddie Mac | 5.329% | 9/1/24 | 85 | 87 | |||||||||||||
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost — $86) | 89 | ||||||||||||||||
Yankee BondsF — 21.1% | |||||||||||||||||
Banking and Finance — 2.2% | |||||||||||||||||
Corporacion Andina de Fomento | 4.556% | 1/26/07 | 1,260 | 1,260 | D | ||||||||||||
HBOS Capital Funding LP | 6.071% | 6/30/49 | 1,490 | 1,540 | A,C | ||||||||||||
HBOS Treasury Services plc | 4.000% | 9/15/09 | 1,080 | 1,051 | A | ||||||||||||
Mizuho Financial Group, Inc. | 5.790% | 4/15/14 | 3,565 | 3,683 | A | ||||||||||||
Sumitomo Mitsui Banking Corporation | 5.625% | 7/29/49 | 730 | 727 | A,C | ||||||||||||
8,261 | |||||||||||||||||
Cable — 0.2% | |||||||||||||||||
British Sky Broadcasting Group plc | 6.875% | 2/23/09 | 870 | 911 | |||||||||||||
Diversified Financial Services — 0.7% | |||||||||||||||||
Encana Holdings Finance Corp | 5.800% | 5/1/14 | 2,725 | 2,840 | |||||||||||||
Electric — 1.0% | |||||||||||||||||
Empresa Nacional de Electricidad S.A. | 8.500% | 4/1/09 | 1,805 | 1,968 | |||||||||||||
Hydro-Quebec | 7.500% | 4/1/16 | 1,625 | 1,948 | |||||||||||||
3,916 | |||||||||||||||||
Foreign Governments — 5.8% | |||||||||||||||||
Federative Republic of Brazil | 5.250% | 4/15/12 | 329 | 325 | D | ||||||||||||
Federative Republic of Brazil | 5.250% | 4/15/12 | 505 | 498 | D | ||||||||||||
Federative Republic of Brazil | 8.875% | 4/15/24 | 240 | 268 | |||||||||||||
Federative Republic of Brazil | 10.125% | 5/15/27 | 740 | 930 | |||||||||||||
Federative Republic of Brazil | 12.250% | 3/6/30 | 510 | 736 | |||||||||||||
Province of Nova Scotia | 5.750% | 2/27/12 | 1,000 | 1,045 | |||||||||||||
Province of Ontario | 4.500% | 2/3/15 | 460 | 451 | |||||||||||||
Republic of Chile | 4.630% | 1/28/08 | 120 | 120 | D | ||||||||||||
Republic of Colombia | 11.750% | 2/25/20 | 570 | 788 | |||||||||||||
Republic of Panama | 9.375% | 1/16/23 | 270 | 338 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Yankee Bonds — Continued | |||||||||||||||||
Foreign Governments — Continued | |||||||||||||||||
Republic of Panama | 7.125% | 1/29/26 | $ | 740 | $ | 750 | |||||||||||
Republic of Peru | 5.000% | 3/7/17 | 558 | 534 | C | ||||||||||||
Republic of Peru | 5.000% | 3/7/17 | 205 | 193 | A,C | ||||||||||||
Republic of Peru | 8.750% | 11/21/33 | 500 | 563 | |||||||||||||
Republic of South Africa | 7.375% | 4/25/12 | 650 | 723 | |||||||||||||
Republic of South Africa | 6.500% | 6/2/14 | 700 | 757 | |||||||||||||
Russian Federation | 5.000% | 3/31/30 | 4,320 | 4,877 | C | ||||||||||||
United Mexican States | 8.375% | 1/14/11 | 705 | 804 | |||||||||||||
United Mexican States | 11.500% | 5/15/26 | 1,100 | 1,798 | |||||||||||||
United Mexican States | 8.300% | 8/15/31 | 820 | 1,054 | |||||||||||||
United Mexican States | 7.500% | 4/8/33 | 3,942 | 4,667 | |||||||||||||
22,219 | |||||||||||||||||
Insurance — 0.7% | |||||||||||||||||
Axa | 8.600% | 12/15/30 | 1,630 | 2,178 | |||||||||||||
Oil Insurance Ltd | 5.150% | 8/15/33 | 585 | 581 | A,C | ||||||||||||
XL Capital Ltd. | 5.250% | 9/15/14 | 20 | 20 | |||||||||||||
2,779 | |||||||||||||||||
Manufacturing (Diversified) — 0.5% | |||||||||||||||||
Tyco International Group SA | 6.375% | 10/15/11 | 250 | 260 | |||||||||||||
Tyco International Group SA | 7.000% | 6/15/28 | 554 | 609 | |||||||||||||
Tyco International Group SA | 6.875% | 1/15/29 | 1,051 | 1,146 | |||||||||||||
2,015 | |||||||||||||||||
Oil and Gas — 1.5% | |||||||||||||||||
Petrobras International Finance Company (PIFCO) | 9.750% | 7/6/11 | 905 | 1,063 | |||||||||||||
Petroliam Nasional Berhad | 7.625% | 10/15/26 | 610 | 756 | A | ||||||||||||
YPF Sociedad Anonima | 10.000% | 11/2/28 | 3,500 | 4,113 | |||||||||||||
5,932 | |||||||||||||||||
Special Purpose — 4.2% | |||||||||||||||||
Anadarko Finance Company | 6.750% | 5/1/11 | 970 | 1,050 | |||||||||||||
Conoco Funding Company | 6.350% | 10/15/11 | 520 | 557 | |||||||||||||
Deutsche Telekom International Finance BV | 8.250% | 6/15/30 | 1,400 | 1,781 | |||||||||||||
Deutsche Telekom International Finance BV | 9.250% | 6/1/32 | 670 | 923 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Yankee Bonds — Continued | |||||||||||||||||
Special Purpose — Continued | |||||||||||||||||
General Motors Nova Scotia Finance Company | 6.850% | 10/15/08 | $ | 1,160 | $ | 870 | |||||||||||
HSBC Capital Funding LP | 4.610% | 12/29/49 | 760 | 717 | A,C | ||||||||||||
HSBC Holdings plc | 5.250% | 12/12/12 | 3,850 | 3,863 | |||||||||||||
Molson Coors Capital Finance | 4.850% | 9/22/10 | 1,305 | 1,287 | |||||||||||||
Petronas Capital Ltd. | 7.875% | 5/22/22 | 770 | 961 | A | ||||||||||||
Resona Preferred Global Securities Limited | 7.191% | 12/29/49 | 2,120 | 2,249 | A,C | ||||||||||||
Telefonica Europe BV | 8.250% | 9/15/30 | 800 | 994 | |||||||||||||
UFJ Finance Aruba AEC | 6.750% | 7/15/13 | 920 | 1,005 | |||||||||||||
16,257 | |||||||||||||||||
Telecommunications — 3.6% | |||||||||||||||||
British Telecommunications plc | 8.375% | 12/15/10 | 900 | 1,024 | |||||||||||||
British Telecommunications plc | 8.875% | 12/15/30 | 420 | 562 | |||||||||||||
France Telecom SA | 7.750% | 3/1/11 | 3,000 | 3,351 | |||||||||||||
France Telecom SA | 8.500% | 3/1/31 | 340 | 453 | |||||||||||||
INTELSAT | 7.625% | 4/15/12 | 32 | 26 | |||||||||||||
INTELSAT | 6.500% | 11/1/13 | 1,333 | 993 | |||||||||||||
Koninklijke (Royal) KPN NV | 8.000% | 10/1/10 | 990 | 1,087 | |||||||||||||
Koninklijke (Royal) KPN NV | 8.375% | 10/1/30 | 655 | 776 | |||||||||||||
Tele Norte Leste Participacoes S.A. | 8.000% | 12/18/13 | 1,080 | 1,145 | |||||||||||||
Telecom Italia Capital S.p.A. | 5.250% | 11/15/13 | 2,025 | 1,987 | |||||||||||||
Telecom Italia Capital S.p.A. | 4.950% | 9/30/14 | 1,860 | 1,777 | |||||||||||||
Telus Corporation | 7.500% | 6/1/07 | 700 | 723 | |||||||||||||
13,904 | |||||||||||||||||
Telecommunications (Cellular/ Wireless) — 0.3% | |||||||||||||||||
Rogers Wireless Communications Inc. | 6.375% | 3/1/14 | 1,000 | 1,003 | |||||||||||||
Utilities — 0.4% | |||||||||||||||||
United Utilities plc | 5.375% | 2/1/19 | 1,550 | 1,519 | |||||||||||||
Total Yankee Bonds (Identified Cost — $77,790) | 81,556 | ||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Municipal Bonds — 0.1% | |||||||||||||||||
Liberty New York Development Corporation Revenue | 5.250% | 10/1/35 | $ | 320 | $ | 361 | |||||||||||
Total Municipal Bonds (Identified Cost — $354) | 361 | ||||||||||||||||
Preferred Stocks — 0.2% | |||||||||||||||||
Fannie Mae | 7.000% | 16 | shs | 883 | D | ||||||||||||
Total Preferred Stocks (Identified Cost — $810) | 883 | ||||||||||||||||
Total Long-Term Securities (Identified Cost — $379,034) | 381,297 | ||||||||||||||||
Short-Term Securities — 0.2% | |||||||||||||||||
U.S. Government and Agency Obligations — N.M. | |||||||||||||||||
Fannie Mae | 0.000% | 5/15/06 | $ | 168 | 165 | B,G | |||||||||||
Repurchase Agreements — 0.2% | |||||||||||||||||
Lehman Brothers, Inc. 4.15%, dated 12/30/05, to be repurchased at $336 on 1/3/06 (Collateral: $315 Fannie Mae notes, 7.125%, due 6/15/10, value $343) | 336 | 336 | |||||||||||||||
Merrill Lynch Government Securities, Inc. 4.24%, dated 12/30/05, to be repurchased at $336 on 1/3/06 (Collateral: $340 Federal Home Loan Bank notes, 4.18%, due 7/14/08, value $342) | 336 | 336 | |||||||||||||||
672 | |||||||||||||||||
Total Short-Term Securities (Identified Cost — $837) | 837 | ||||||||||||||||
Total Investments — 98.8% (Identified Cost — $379,871) | 382,134 | ||||||||||||||||
Other Assets Less Liabilities — 1.2% | 4,636 | ||||||||||||||||
Net Assets — 100.0% | $ | 386,770 | |||||||||||||||
Actual | Appreciation/ | ||||||||||||
Expiration | Contracts | (Depreciation) | |||||||||||
Futures Contracts PurchasedH | |||||||||||||
U.S. Treasury Note Futures | March 2006 | 392 | $ | 172 | |||||||||
Futures Contracts WrittenH | |||||||||||||
U.S. Treasury Bond Futures | March 2006 | 32 | $ | (64 | ) | ||||||||
U.S. Treasury Note Futures | March 2006 | 352 | (331 | ) | |||||||||
$ | (395 | ) | |||||||||||
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, which the Fund’s investment adviser has determined to be liquid, represent 8.3% of net assets. |
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 | Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes. |
D | Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”) or the ten year Treasury Bill Constant Maturity Rate. The coupon rates are the rates as of December 31, 2005. |
E | Inflation-Protected Securities — Treasury Security whose principal value is adjusted daily or monthly in accordance with changes in the Consumer Price Index for all Urban Consumers, Interest is calculated on the basis of 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 – $379,034) | $ | 381,297 | |||||||
Short-term securities at value (Identified Cost – $837) | 837 | ||||||||
Cash | 1 | ||||||||
Receivable for futures variation martin | 50 | ||||||||
Receivable for fund shares sold | 678 | ||||||||
Interest and dividends receivable | 6,212 | ||||||||
Other assets | 1 | ||||||||
Total assets | 389,076 | ||||||||
Liabilities: | |||||||||
Payable for fund shares repurchased | $ | 1,085 | |||||||
Payable for securities purchased | 862 | ||||||||
Income distribution payable | 77 | ||||||||
Accrued management fee | 156 | ||||||||
Accrued distribution and service fees | 51 | ||||||||
Accrued expenses | 75 | ||||||||
Total liabilities | 2,306 | ||||||||
Net Assets | $ | 386,770 | |||||||
Net assets consist of: | |||||||||
Accumulated paid-in capital applicable to: | |||||||||
35,212 Primary Class shares outstanding | $ | 364,096 | |||||||
1,964 Institutional Class shares outstanding | 20,925 | ||||||||
Overdistributed net investment income | (118 | ) | |||||||
Accumulated net realized loss on investments, options, and futures | (173 | ) | |||||||
Unrealized appreciation/(depreciation) of investments, options and futures | 2,040 | ||||||||
Net Assets | $ | 386,770 | |||||||
Net Asset Value Per Share: | |||||||||
Primary Class | $ | 10.40 | |||||||
Institutional Class | $ | 10.41 | |||||||
Statement of Operations
Investment Grade Income Portfolio
Investment Income: | ||||||||||||
Interest | $ | 22,905 | ||||||||||
Dividends | 57 | |||||||||||
Total income | $ | 22,962 | ||||||||||
Expenses: | ||||||||||||
Management fees | $ | 2,443 | ||||||||||
Distribution and service fees | 1,956 | |||||||||||
Audit and legal fees | 65 | |||||||||||
Custodian fees | 131 | |||||||||||
Directors’ fees and expenses | 46 | |||||||||||
Registration fees | 58 | |||||||||||
Reports to shareholders | 71 | |||||||||||
Transfer agent and shareholder servicing expense: | ||||||||||||
Primary Class | 364 | |||||||||||
Institutional Class | 3 | |||||||||||
Other expenses | 45 | |||||||||||
5,182 | ||||||||||||
Less: Fees waived | (1,197 | ) | ||||||||||
Compensating balance credits | (3 | )A | ||||||||||
Total expenses, net of waivers and compensating balance credits | 3,982 | |||||||||||
Net Investment Income | 18,980 | |||||||||||
Net Realized and Unrealized Gain/(Loss) on Investments: | ||||||||||||
Realized gain/(loss) on: | ||||||||||||
Investments | 2,392 | |||||||||||
Futures | (90 | ) | ||||||||||
2,302 | ||||||||||||
Change in unrealized depreciation of investments and futures | (14,161 | ) | ||||||||||
Net Realized and Unrealized Loss on Investments | (11,859 | ) | ||||||||||
Change in Net Assets Resulting From Operations | $ | 7,121 | ||||||||||
A | See note 1, Compensating Balance Credits, in the notes to financial statements. |
See notes to financial statements.
Statement of Changes in Net Assets
Investment Grade Income Portfolio
For the Years Ended | ||||||||||
12/31/05 | 12/31/04 | |||||||||
Change in Net Assets: | ||||||||||
Net investment income | $ | 18,980 | $ | 18,372 | ||||||
Net realized gain on investments, and futures | 2,302 | 9,812 | ||||||||
Change in unrealized depreciation of investments, and futures | (14,161 | ) | (3,555 | ) | ||||||
Change in net assets resulting from operations | 7,121 | 24,629 | ||||||||
Distributions to shareholders: | ||||||||||
From net investment income: | ||||||||||
Primary Class | (18,146 | ) | (17,963 | ) | ||||||
Institutional Class | (836 | ) | (411 | ) | ||||||
From net realized gain on investments: | ||||||||||
Primary Class | (3,431 | ) | (9,054 | ) | ||||||
Institutional Class | (157 | ) | (220 | ) | ||||||
Change in net assets from Fund share transactions: | ||||||||||
Primary Class | (22,272 | ) | (2,354 | ) | ||||||
Institutional Class | 10,914 | 4,370 | ||||||||
Change in net assets | (26,807 | ) | (1,003 | ) | ||||||
Net Assets: | ||||||||||
Beginning of year | 413,577 | 414,580 | ||||||||
End of year | $ | 386,770 | $ | 413,577 | ||||||
Overdistributed net investment income | $ | (118 | ) | $ | (117 | ) | ||||
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, | |||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||||
Net asset value, beginning of year | $ | 10.81 | $ | 10.88 | $ | 10.42 | $ | 10.10 | $ | 9.97 | |||||||||||
Investment operations: | |||||||||||||||||||||
Net investment income | .49 | A | .49 | A | .50 | A | .54 | A | .60 | A | |||||||||||
Net realized and unrealized gain/(loss) on investments, options and futures | (.31 | ) | .18 | .53 | .32 | .14 | |||||||||||||||
Total from investment operations | .18 | .67 | 1.03 | .86 | .74 | ||||||||||||||||
Distributions: | |||||||||||||||||||||
From net investment income | (.49 | ) | (.49 | ) | (.50 | ) | (.54 | ) | (.61 | ) | |||||||||||
From net realized gain on investments | (.10 | ) | (.25 | ) | (.07 | ) | — | — | |||||||||||||
Total distributions | (.59 | ) | (.74 | ) | (.57 | ) | (.54 | ) | (.61 | ) | |||||||||||
Net asset value, end of year | $ | 10.40 | $ | 10.81 | $ | 10.88 | $ | 10.42 | $ | 10.10 | |||||||||||
Ratios/supplemental data: | |||||||||||||||||||||
Total return | 1.69 | % | 6.29 | % | 10.16 | % | 8.82 | % | 7.52 | % | |||||||||||
Total expenses to average net assetsB | 1.00 | %A | 1.00 | %A | 1.00 | %A | 1.00 | %A | 1.00 | %A | |||||||||||
Net expenses to average net assetsC | 1.00 | %A | 1.00 | %A | 1.00 | %A | 1.00 | %A | 1.00 | %A | |||||||||||
Net investment income to average net assets | 4.64 | %A | 4.47 | %A | 4.62 | %A | 5.32 | %A | 5.90 | %A | |||||||||||
Portfolio turnover rate | 51.1 | % | 74.9 | % | 78.2 | % | 131.0 | % | 131.3 | % | |||||||||||
Net assets, end of year (in thousands) | $ | 366,329 | $ | 403,361 | $ | 408,685 | $ | 334,763 | $ | 255,298 | |||||||||||
A | Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 1.00% until April 30, 2006. 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, 2005, 1.30%; 2004, 1.27%; 2003, 1.28%; 2002, 1.30%; and 2001, 1.27%. |
B | This ratio reflects total expenses before compensating balance credits, but net of the voluntary expense waivers described above. |
C | This ratio reflects expenses net of compensating balance credits and voluntary expense waivers described above. |
See notes to financial statements.
Institutional Class:
Years Ended December 31, | |||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||||
Net asset value, beginning of year | $ | 10.82 | $ | 10.89 | $ | 10.43 | $ | 10.11 | $9.97 | ||||||||||||
Investment operations: | |||||||||||||||||||||
Net investment income | .55 | D | .54 | D | .55 | D | .59 | D | .66 | D | |||||||||||
Net realized and unrealized gain/(loss) on investments, options and futures | (.31 | ) | .17 | .53 | .31 | .14 | |||||||||||||||
Total from investment operations | .24 | .71 | 1.08 | .90 | .80 | ||||||||||||||||
Distributions: | |||||||||||||||||||||
From net investment income | (.55 | ) | (.53 | ) | (.55 | ) | (.58 | ) | (.66 | ) | |||||||||||
From net realized gain on investments | (.10 | ) | (.25 | ) | (.07 | ) | — | — | |||||||||||||
Total distributions | (.65 | ) | (.78 | ) | (.62 | ) | (.58 | ) | (.66 | ) | |||||||||||
Net asset value, end of year | $ | 10.41 | $ | 10.82 | $ | 10.89 | $ | 10.43 | $ | 10.11 | |||||||||||
Ratios/supplemental data: | |||||||||||||||||||||
Total return | 2.27 | % | 6.85 | % | 10.71 | % | 9.38 | % | 8.16 | % | |||||||||||
Total expenses to average net assetsB | .44 | % D | .47 | % D | .50 | % D | .48 | % D | .47 | % D | |||||||||||
Net expenses to average net assetsC | .44 | % D | .47 | % D | .50 | % D | .48 | % D | .47 | % D | |||||||||||
Net investment income to average net assets | 5.26 | % D | 5.02 | % D | 5.13 | % D | 5.85 | % D | 6.50 | % D | |||||||||||
Portfolio turnover rate | 51.1 | % | 74.9 | % | 78.2 | % | 131.0 | % | 131.3 | % | |||||||||||
Net assets, end of year (in thousands) | $ | 20,441 | $ | 10,216 | $ | 5,895 | $ | 2,836 | $ | 1,424 | |||||||||||
D | Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 0.50% until April 30, 2006. 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, 2005, 0.74%; 2004, 0.73%; 2003, 0.78%; 2002, 0.78%; and 2001, 0.74%. |
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, 2005, are presented below:
One | Five | Ten | Since | ||||||||||||||
Year | Years | Years | InceptionA | ||||||||||||||
Limited Duration Bond PortfolioB | |||||||||||||||||
Primary Class | +1.83% | +3.66% | +4.54% | +6.19% | |||||||||||||
Institutional Class | +2.29% | +4.18% | +5.09% | +5.91% | |||||||||||||
Merrill Lynch 1-3 Year Treasury IndexC,D | +1.67% | +3.67% | +4.79% | +6.09% | |||||||||||||
Lehman Intermediate U.S. Government Bond IndexC,E | +1.68% | +4.82% | +5.50% | +7.19% |
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 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. |
Our investment strategies were generally rewarded as the Fund’s total return (appreciation or depreciation in the Fund’s net asset value per share, plus dividends and any capital gain distributions) of the various share classes exceeded the performance of its primary benchmark, the Merrill Lynch 1-3 Year Treasury Index. For the calendar year, the Fund’s Primary Class returned 1.83% versus the benchmark’s return of 1.67%. The Fund’s modestly underweight duration posture for most of the period contributed to performance, since interest rates rose by more than the market had expected, and the Fund’s barbelled exposure to maturities for most of the period was rewarded by a flatter yield curve. Overweight exposure to short- and intermediate-maturity mortgage-backed securities and
A | The inception date of the Primary Class is August 7, 1987. The inception date of the Institutional Class is December 1, 1994. Index returns are for periods beginning July 31, 1987. |
B | Prior to August 31, 2004, the Fund was known as Legg Mason U.S. Government Intermediate-Term Portfolio and followed a policy of investing at least 80% of its assets in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, or repurchase agreements secured by such investments, with a dollar-weighted average portfolio maturity between three and ten years. The Fund’s performance prior to such change might have been better or worse had the Fund been managed in accordance with its current objective, policies and strategies. |
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. |
D | A total rate of return index based on daily closing prices and consisting of Treasury bills with a maturity of 1 to 3 years. |
E | The 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. |
Western Asset Management Company
January 31, 2006
Limited Duration Bond Portfolio
As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution and service (12b-1) fees on Primary Class shares; 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, 2005, and held through December 31, 2005.
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 ratio 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 | |||||||||||
Value | Value | Period | |||||||||||
7/1/05 | 12/31/05 | 7/1/05 to 12/31/05 | |||||||||||
Primary Class: | |||||||||||||
Actual | $ | 1,000.00 | $ | 1,008.40 | $ | 5.06 | |||||||
Hypothetical (5% return before expenses) | 1,000.00 | 1,020.16 | 5.09 | ||||||||||
Institutional Class: | |||||||||||||
Actual | $ | 1,000.00 | $ | 1,010.10 | $ | 2.33 | |||||||
Hypothetical (5% return before expenses) | 1,000.00 | 1,022.68 | 2.35 |
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 ratios of 1.00% and 0.46% for the Primary Class and Institutional, Class respectively, 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
The graphs on the following pages compare the Fund’s total returns to 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. Both the Fund’s and the indices’ results assume reinvestment of all dividends and distributions.
\
Growth of a $10,000 Investment — Primary Class
Periods Ended December 31, 2005
Cumulative | Average Annual | |||||||||
Total Return | Total Return | |||||||||
One Year | +1.83% | +1.83% | ||||||||
Five Years | +19.67% | +3.66% | ||||||||
Ten Years | +55.94% | +4.54% | ||||||||
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 rate of return index based on daily closing prices and consisting of Treasury bills with a maturity of 1-3 years. |
B | 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. |
Growth of a $1,000,000 Investment — Institutional Class
Periods Ended December 31, 2005
Cumulative | Average Annual | |||||||||
Total Return | Total Return | |||||||||
One Year | +2.29% | +2.29% | ||||||||
Five Years | +22.71% | +4.18% | ||||||||
Ten Years | +64.34% | +5.09% | ||||||||
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, 2005)C
Standard & Poor’s Debt RatingsD (as a percentage of the portfolio)
Maturity Schedule (as a percentage of the portfolio)
C | The Fund is actively managed. As a result, the composition of its portfolio holdings and sectors is subject to change at any time. |
D | Standard & Poor’s Ratings Services provides capital markets with credit ratings for the evaluation and assessment of credit risk. |
Portfolio of Investments
Limited Duration Bond Portfolio
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Long-Term Securities — 99.0% | |||||||||||||||||
Corporate Bonds and Notes — 29.1% | |||||||||||||||||
Banking and Finance — 6.8% | |||||||||||||||||
Countrywide Financial Corporation | 4.541% | 5/5/08 | $ | 20 | $ | 20 | A | ||||||||||
Countrywide Financial Corporation | 4.767% | 12/19/08 | 690 | 690 | A | ||||||||||||
Ford Motor Credit Company | 5.349% | 9/28/07 | 1,020 | 943 | A | ||||||||||||
Ford Motor Credit Company | 6.625% | 6/16/08 | 4,810 | 4,363 | |||||||||||||
General Motors Acceptance Corporation | 5.100% | 7/16/07 | 110 | 103 | A | ||||||||||||
General Motors Acceptance Corporation | 5.654% | 9/23/08 | 4,000 | 3,617 | A | ||||||||||||
HSBC Finance Corporation | 4.560% | 5/10/10 | 690 | 690 | A | ||||||||||||
iStar Financial Inc. | 4.830% | 3/3/08 | 1,160 | 1,159 | A | ||||||||||||
John Deere Capital Corporation | 3.900% | 1/15/08 | 1,000 | 980 | |||||||||||||
Nissan Motor Acceptance Corporation | 4.625% | 3/8/10 | 660 | 645 | B | ||||||||||||
Residential Capital Corporation | 5.896% | 6/29/07 | 1,680 | 1,684 | A | ||||||||||||
SLM Corporation | 4.340% | 7/27/09 | 1,140 | 1,139 | A | ||||||||||||
U.S. Bank National Association | 4.400% | 8/15/08 | 240 | 238 | |||||||||||||
16,271 | |||||||||||||||||
Cable — 0.5% | |||||||||||||||||
Comcast Cable Communications, Inc. | 8.375% | 5/1/07 | 230 | 240 | |||||||||||||
Cox Communications, Inc. | 5.039% | 12/14/07 | 1,050 | 1,058 | A | ||||||||||||
1,298 | |||||||||||||||||
Chemicals — 0.5% | |||||||||||||||||
The Dow Chemical Company | 5.000% | 11/15/07 | 310 | 310 | |||||||||||||
The Dow Chemical Company | 5.750% | 12/15/08 | 560 | 574 | |||||||||||||
The Dow Chemical Company | 5.970% | 1/15/09 | 330 | 341 | |||||||||||||
1,225 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Chemicals — Continued | |||||||||||||||||
Computer Services and Systems — 0.5% | |||||||||||||||||
Electronic Data Systems Corporation | 7.125% | 10/15/09 | $ | 1,000 | $ | 1,063 | |||||||||||
Diversified Financial Services — 1.4% | |||||||||||||||||
Capital One Financial Corporation | 4.738% | 5/17/07 | 690 | 688 | |||||||||||||
CIT Group Inc. | 4.590% | 5/23/08 | 690 | 692 | A | ||||||||||||
General Electric Capital Corporation | 4.591% | 6/15/09 | 1,470 | 1,472 | A | ||||||||||||
ZFS Finance USA Trust III | 5.651% | 12/15/65 | 500 | 501 | A,B | ||||||||||||
3,353 | |||||||||||||||||
Electric — 1.0% | |||||||||||||||||
Appalachian Power Company | 3.600% | 5/15/08 | 1,700 | 1,647 | |||||||||||||
Niagara Mohawk Power Corporation | 7.750% | 10/1/08 | 460 | 491 | |||||||||||||
Ohio Edison Company | 4.000% | 5/1/08 | 310 | 303 | |||||||||||||
2,441 | |||||||||||||||||
Energy — 2.5% | |||||||||||||||||
Alabama Power Company | 4.580% | 8/25/09 | 1,000 | 1,002 | A | ||||||||||||
CenterPoint Energy, Inc. | 5.875% | 6/1/08 | 440 | 446 | |||||||||||||
Duke Energy Corporation | 3.750% | 3/5/08 | 1,500 | 1,465 | |||||||||||||
Pacific Gas and Electric Company | 3.600% | 3/1/09 | 1,000 | 959 | |||||||||||||
Sempra Energy | 4.840% | 5/21/08 | 2,000 | 2,004 | A | ||||||||||||
5,876 | |||||||||||||||||
Environmental Services — 0.8% | |||||||||||||||||
Waste Management, Inc. | 6.500% | 11/15/08 | 570 | 591 | |||||||||||||
Waste Management, Inc. | 7.375% | 8/1/10 | 1,090 | 1,186 | |||||||||||||
1,777 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Food, Beverage and Tobacco — 1.4% | |||||||||||||||||
Altria Group, Inc. | 5.625% | 11/4/08 | $ | 3,000 | $ | 3,041 | |||||||||||
Sara Lee Corporation | 6.250% | 9/15/11 | 230 | 237 | |||||||||||||
3,278 | |||||||||||||||||
Investment Banking/Brokerage — 1.2% | |||||||||||||||||
Lehman Brothers Holdings Inc. | 4.560% | 11/10/09 | 1,120 | 1,125 | A | ||||||||||||
Morgan Stanley | 4.430% | 1/15/10 | 630 | 631 | A | ||||||||||||
The Bear Stearns Companies Inc. | 4.730% | 9/9/09 | 1,000 | 1,004 | A | ||||||||||||
2,760 | |||||||||||||||||
Manufacturing (Diversified) — 1.3% | |||||||||||||||||
Tyco International Group SA | 4.436% | 6/15/07 | 3,000 | 2,963 | B | ||||||||||||
Media — 2.4% | |||||||||||||||||
Clear Channel Communications, Inc. | 6.625% | 6/15/08 | 140 | 143 | |||||||||||||
Clear Channel Communications, Inc. | 4.250% | 5/15/09 | 550 | 529 | |||||||||||||
Clear Channel Communications, Inc. | 7.650% | 9/15/10 | 610 | 653 | |||||||||||||
Liberty Media Corporation | 7.875% | 7/15/09 | 1,330 | 1,401 | |||||||||||||
News America Incorporated | 6.625% | 1/9/08 | 2,000 | 2,063 | |||||||||||||
Viacom Inc. | 5.625% | 5/1/07 | 1,000 | 1,005 | |||||||||||||
5,794 | |||||||||||||||||
Oil and Gas — 3.6% | |||||||||||||||||
Amerada Hess Corporation | 6.650% | 8/15/11 | 1,710 | 1,837 | |||||||||||||
Anadarko Petroleum Corporation | 3.250% | 5/1/08 | 1,440 | 1,387 | |||||||||||||
Occidental Petroleum Corporation | 7.375% | 11/15/08 | 1,140 | 1,218 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Oil and Gas — Continued | |||||||||||||||||
Ocean Energy Inc. | 4.375% | 10/1/07 | $ | 580 | $ | 573 | |||||||||||
Pemex Project Funding Master Trust | 8.500% | 2/15/08 | 3,300 | 3,515 | |||||||||||||
8,530 | |||||||||||||||||
Paper and Forest Products — 0.6% | |||||||||||||||||
International Paper Company | 3.800% | 4/1/08 | 1,150 | 1,115 | |||||||||||||
Weyerhaeuser Company | 6.125% | 3/15/07 | 395 | 401 | |||||||||||||
1,516 | |||||||||||||||||
Photo Equipment and Supplies — N.M. | |||||||||||||||||
Eastman Kodak Company | 7.250% | 11/15/13 | 110 | 105 | |||||||||||||
Special Purpose — 2.8% | |||||||||||||||||
American Honda Finance Corporation | 4.412% | 5/12/08 | 900 | 900 | A,B | ||||||||||||
BAE Systems Holdings Inc. | 4.740% | 8/15/08 | 680 | 680 | A,B | ||||||||||||
DaimlerChrysler NA Holding Corporation | 4.960% | 9/10/07 | 3,060 | 3,067 | A | ||||||||||||
DaimlerChrysler NA Holding Corporation | 4.780% | 10/31/08 | 320 | 320 | A | ||||||||||||
International Lease Finance Corporation | 5.000% | 4/15/10 | 650 | 647 | |||||||||||||
National Rural Utilities Cooperative Finance Corporation | 5.750% | 12/1/08 | 330 | 337 | |||||||||||||
Sprint Capital Corporation | 6.125% | 11/15/08 | 470 | 483 | |||||||||||||
Verizon Global Funding Corp. | 7.250% | 12/1/10 | 240 | 260 | |||||||||||||
6,694 | |||||||||||||||||
Telecommunications — 0.2% | |||||||||||||||||
AT&T Inc. | 5.300% | 11/15/10 | 540 | 542 | |||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Corporate Bonds and Notes — Continued | |||||||||||||||||
Telecommunications (Cellular/Wireless) — 1.6% | |||||||||||||||||
ALLTEL Corporation | 4.656% | 5/17/07 | $ | 2,310 | $ | 2,299 | |||||||||||
Motorola, Inc. | 4.608% | 11/16/07 | 1,500 | 1,491 | |||||||||||||
3,790 | |||||||||||||||||
Total Corporate Bonds and Notes (Identified Cost — $70,524) | 69,276 | ||||||||||||||||
Asset-Backed Securities — 15.8% | |||||||||||||||||
Fixed Rate Securities — 4.3% | |||||||||||||||||
AmeriCredit Automobile Receivables Trust 2003-BX | 2.720% | 1/6/10 | 2,649 | 2,609 | |||||||||||||
MBNA Practice Solutions Owners Trust 2005-2 | 4.100% | 5/15/09 | 2,700 | 2,653 | B | ||||||||||||
Prestige Auto Receivables Trust 2005-1A | 4.370% | 6/15/12 | 1,300 | 1,285 | B | ||||||||||||
Structured Asset Securities Corporation 2003-AL1 | 3.356% | 4/25/31 | 784 | 712 | B | ||||||||||||
UPFC Auto Receivables Trust 2004-A | 3.270% | 9/15/10 | 3,000 | 2,946 | |||||||||||||
10,205 | |||||||||||||||||
Indexed SecuritiesA — 11.5% | |||||||||||||||||
Asset Backed Funding Certificates 2002-WF2 | 5.129% | 5/25/32 | 221 | 223 | |||||||||||||
Bear Stearns Asset Backed Securities, Inc. 2004-1 | 4.899% | 6/25/34 | 3,000 | 3,019 | |||||||||||||
CHEC Loan Trust 2004-2 | 4.709% | 2/25/31 | 3,500 | 3,505 | |||||||||||||
Citibank Credit Card Issuance Trust 2002-B1 | 4.849% | 6/25/09 | 1,675 | 1,680 | |||||||||||||
Countrywide Home Equity Loan Trust 2002-G | 4.739% | 12/15/28 | 1,814 | 1,822 | |||||||||||||
Countrywide Home Equity Loan Trust 2004-J | 4.659% | 12/15/33 | 2,419 | 2,423 | |||||||||||||
Countrywide Home Equity Loan Trust 2004-O | 4.649% | 2/15/34 | 1,368 | 1,370 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Asset-Backed Securities — Continued | |||||||||||||||||
Indexed SecuritiesA — Continued | |||||||||||||||||
Fremont Home Loan Trust 2004-C | 4.649% | 1/25/32 | $ | 1,103 | $ | 1,104 | |||||||||||
GSAA Home Equity Trust 2004-9 | 4.759% | 9/25/34 | 1,351 | 1,352 | |||||||||||||
Magnetite CBO II, Ltd. | 4.820% | 8/25/12 | 169 | 169 | B,C | ||||||||||||
RAAC Series 2005-RP1 | 4.719% | 7/25/37 | 1,644 | 1,644 | B | ||||||||||||
Rental Car Finance Corp. 2003-1A | 4.779% | 5/25/08 | 3,000 | 3,010 | B | ||||||||||||
Rental Car Finance Corp. 2004-1A | 4.579% | 6/25/09 | 3,000 | 3,005 | B | ||||||||||||
Superior Wholesale Inventory Financing Trust 2004-A10 | 4.469% | 9/15/11 | 3,000 | 3,001 | |||||||||||||
27,327 | |||||||||||||||||
Total Asset-Backed Securities (Identified Cost — $37,687) | 37,532 | ||||||||||||||||
Mortgage-Backed Securities — 19.5% | |||||||||||||||||
Fixed Rate Securities — 3.2% | |||||||||||||||||
Blackrock Capital Finance L.P. 1997-R3 | 7.220% | 11/25/28 | 236 | 236 | B | ||||||||||||
Prime Mortgage Trust 2005-2 | 7.596% | 10/25/32 | 1,904 | 1,962 | |||||||||||||
Residential Asset Mortgage Products, Inc. 2005-SL1 A7 | 8.000% | 5/25/32 | 1,987 | 2,063 | |||||||||||||
Washington Mutual MSC Mortgage Pass-Through Certificates, Series 2004-RA1 | 7.000% | 3/25/34 | 3,406 | 3,468 | |||||||||||||
7,729 | |||||||||||||||||
Indexed SecuritiesA — 11.4% | |||||||||||||||||
Banc of America Mortgage Securities 2005-F | 5.027% | 7/25/35 | 2,446 | 2,422 | |||||||||||||
Bear Stearns Arm Trust 2004-10 | 4.604% | 1/25/35 | 1,049 | 1,039 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Mortgage-Backed Securities — Continued | |||||||||||||||||
Indexed SecuritiesA — Continued | |||||||||||||||||
Harborview Mortgage Loan Trust 2004-8 | 4.770% | 11/19/34 | $ | 1,636 | $ | 1,638 | |||||||||||
HomeBanc Mortgage Trust 2004-2 | 4.749% | 12/25/34 | 2,193 | 2,196 | |||||||||||||
HomeBanc Mortgage Trust 2005-1 | 4.629% | 3/25/35 | 2,513 | 2,490 | |||||||||||||
Impac CMB Trust 2004-2 | 4.639% | 4/25/34 | 1,176 | 1,178 | |||||||||||||
Impac CMB Trust 2004-6 | 4.769% | 10/25/34 | 1,097 | 1,099 | |||||||||||||
Impac Secured Assets Corp. 2004-3 | 4.579% | 11/25/34 | 880 | 880 | |||||||||||||
Provident Funding Mortgage Loan Trust 2005-1 1A1 | 4.180% | 5/25/35 | 2,362 | 2,326 | |||||||||||||
Sequoia Mortgage Trust 2003-2 A2 | 4.700% | 6/20/33 | 1,209 | 1,206 | |||||||||||||
Sequoia Mortgage Trust 2003-7 A1 | 4.690% | 1/20/34 | 1,208 | 1,209 | |||||||||||||
Thornburg Mortgage Securities Trust 2004-2 | 4.529% | 6/25/44 | 773 | 773 | |||||||||||||
Thornburg Mortgage Securities Trust 2005-4 | 4.570% | 12/25/35 | 2,400 | 2,400 | |||||||||||||
Thornburg Mortgage Securities Trust 2005-4 | 4.580% | 12/25/35 | 2,400 | 2,400 | |||||||||||||
WaMu Mortgage Pass-Through Certificates, Series 2004-AR8 | 4.670% | 6/25/44 | 1,857 | 1,858 | |||||||||||||
WaMu Mortgage Pass-Through Certificates, Series 2003-AR10 | 4.066% | 10/25/33 | 2,100 | 2,041 | |||||||||||||
27,155 | |||||||||||||||||
Variable Rate SecuritiesD — 4.9% | |||||||||||||||||
Banc of America Funding Corporation 2004-B | 4.213% | 12/20/34 | 1,638 | 1,631 | |||||||||||||
Countrywide Alternative Loan Trust 2004-33, 1A1 | 5.050% | 12/25/34 | 1,051 | 1,050 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Mortgage-Backed Securities — Continued | |||||||||||||||||
Variable Rate SecuritiesD — Continued | |||||||||||||||||
Countrywide Alternative Loan Trust 2004-33, 2A1 | 4.953% | 12/25/34 | $ | 553 | $ | 551 | |||||||||||
J.P. Morgan Mortgage Trust 2003-A1 | 4.363% | 10/25/33 | 2,482 | 2,414 | |||||||||||||
MASTR Adjustable Rate Mortgages Trust 2004-13 | 3.787% | 11/21/34 | 3,000 | 2,882 | |||||||||||||
MLCC Mortgage Investors, Inc. 2005-1 2A2 | 4.969% | 4/25/35 | 3,048 | 3,019 | |||||||||||||
11,547 | |||||||||||||||||
Total Mortgage-Backed Securities (Identified Cost — $46,856) | 46,431 | ||||||||||||||||
U.S. Government and Agency Obligations — 5.4% | |||||||||||||||||
Fixed Rate Securities — 2.1% | |||||||||||||||||
Freddie Mac | 3.800% | 12/27/06 | 5,000 | 4,954 | |||||||||||||
United States Treasury Notes | 3.500% | 2/15/10 | 5 | 5 | |||||||||||||
4,959 | |||||||||||||||||
Treasury Inflation-Protected SecuritiesE — 3.3% | |||||||||||||||||
United States Treasury Inflation-Protected Security | 0.875% | 4/15/10 | 2,303 | 2,189 | |||||||||||||
United States Treasury Inflation-Protected Security | 3.000% | 7/15/12 | 3,323 | 3,514 | |||||||||||||
United States Treasury Inflation-Protected Security | 2.375% | 1/15/25 | 2,113 | 2,221 | |||||||||||||
7,924 | |||||||||||||||||
Total U.S. Government and Agency Obligations (Identified Cost — $13,101) | 12,883 | ||||||||||||||||
U.S. Government Agency Mortgage-Backed Securities — 23.5% | |||||||||||||||||
Fixed Rate Securities — 12.7% | |||||||||||||||||
Fannie Mae | 8.500% | 6/1/10 to 8/1/11 | 45 | 46 | |||||||||||||
Fannie Mae | 7.000% | 1/1/13 to 1/1/33 | 5,447 | 5,687 | |||||||||||||
Fannie Mae | 6.500% | 7/1/13 to 10/1/32 | 2,264 | 2,325 | |||||||||||||
Fannie Mae | 9.500% | 7/1/14 | 60 | 65 | |||||||||||||
Fannie Mae | 11.000% | 12/1/15 | 65 | 69 |
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
U.S. Government Agency Mortgage-Backed Securities — Continued | |||||||||||||||||
Fixed Rate Securities — Continued | |||||||||||||||||
Fannie Mae | 12.500% | 1/1/18 to 4/1/18 | $ | 45 | $ | 50 | |||||||||||
Fannie Mae | 9.000% | 11/1/21 | 155 | 166 | |||||||||||||
Fannie Mae | 6.000% | 11/1/27 | 0.2 | 0.2 | |||||||||||||
Fannie Mae | 5.000% | 12/1/35 | 18,400 | 17,825 | F | ||||||||||||
Freddie Mac | 8.250% | 2/1/08 | 14 | 14 | |||||||||||||
Freddie Mac | 8.500% | 12/1/08 to 6/1/21 | 54 | 55 | |||||||||||||
Freddie Mac | 9.750% | 11/1/09 to 11/1/14 | 31 | 32 | |||||||||||||
Freddie Mac | 9.000% | 1/1/17 to 1/1/21 | 177 | 187 | |||||||||||||
Freddie Mac | 7.000% | 1/25/21 to 4/1/32 | 2,390 | 2,486 | |||||||||||||
Freddie Mac | 8.000% | 2/1/31 | 467 | 498 | |||||||||||||
Freddie Mac | 5.000% | 12/1/35 | 200 | 194 | F | ||||||||||||
Government National Mortgage Association | 9.000% | 6/15/06 to 9/15/22 | 107 | 109 | |||||||||||||
Government National Mortgage Association | 6.000% | 5/15/14 to 11/15/28 | 275 | 281 | |||||||||||||
30,089 | |||||||||||||||||
Indexed SecuritiesA — 10.6% | |||||||||||||||||
Fannie Mae | 4.327% | 11/1/34 | 1,333 | 1,311 | |||||||||||||
Fannie Mae | 4.211% | 12/1/34 | 1,524 | 1,494 | |||||||||||||
Fannie Mae | 4.329% | 1/1/35 | 1,268 | 1,239 | |||||||||||||
Fannie Mae | 4.875% | 1/1/35 | 2,429 | 2,428 | |||||||||||||
Fannie Mae | 4.817% | 2/1/35 | 5,461 | 5,463 | |||||||||||||
Fannie Mae | 4.548% | 3/1/35 | 2,866 | 2,831 | |||||||||||||
Fannie Mae | 4.972% | 3/1/35 | 5,596 | 5,582 | |||||||||||||
Freddie Mac | 4.350% | 12/1/34 | 591 | 581 | |||||||||||||
Freddie Mac | 4.474% | 12/1/34 | 2,914 | 2,871 | |||||||||||||
Freddie Mac | 4.079% | 1/1/35 | 552 | 538 | |||||||||||||
Freddie Mac | 4.097% | 1/1/35 | 997 | 972 | |||||||||||||
25,310 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
U.S. Government Agency Mortgage-Backed Securities — Continued | |||||||||||||||||
Indexed Securities — Continued | |||||||||||||||||
Stripped Securities — 0.2% | |||||||||||||||||
Government National Mortgage Association | 4.125% | 6/16/26 | $ | 2,399 | $ | 202 | G1 | ||||||||||
Government National Mortgage Association | 4.175% | 8/16/26 | 1,945 | 209 | G1 | ||||||||||||
411 | |||||||||||||||||
Total U.S. Government Agency Mortgage-Backed Securities (Identified Cost — $57,385) | 55,810 | ||||||||||||||||
Yankee BondsC — 3.6% | |||||||||||||||||
Banks — 0.4% | |||||||||||||||||
The Korea Development Bank | 4.750% | 7/20/09 | 1,000 | 991 | |||||||||||||
Energy — 0.4% | |||||||||||||||||
SP PowerAssets Limited Global | 3.800% | 10/22/08 | 1,000 | 971 | B | ||||||||||||
Foreign Governments — 0.8% | |||||||||||||||||
Russian Federation | 3.000% | 5/14/08 | 1,940 | 1,840 | |||||||||||||
Special Purpose — 0.1% | |||||||||||||||||
ChevronTexaco Capital Company | 3.500% | 9/17/07 | 120 | 118 | |||||||||||||
Deutsche Telekom International Finance BV | 3.875% | 7/22/08 | 80 | 78 | |||||||||||||
196 | |||||||||||||||||
Telecommunications — 1.6% | |||||||||||||||||
British Telecommunications plc | 8.375% | 12/15/10 | 1,520 | 1,730 | |||||||||||||
Koninklijke (Royal) KPN NV | 8.000% | 10/1/10 | 900 | 988 | |||||||||||||
Telecom Italia Capital | 4.730% | 2/1/11 | 1,040 | 1,045 | A | ||||||||||||
3,763 | |||||||||||||||||
Maturity | Par/ | ||||||||||||||||
Rate | Date | Shares | Value | ||||||||||||||
Yankee BondsC — Continued | |||||||||||||||||
Telecommunications — Continued | |||||||||||||||||
Telecommunications (Cellular/Wireless) — 0.3% | |||||||||||||||||
Vodafone Group Plc | 3.950% | 1/30/08 | $ | 730 | $ | 717 | |||||||||||
Total Yankee Bonds (Identified Cost — $8,594) | 8,478 | ||||||||||||||||
Municipal Bonds — 0.1% | |||||||||||||||||
Liberty New York Development Corporation Revenue | 5.250% | 10/1/35 | 200 | 225 | |||||||||||||
Total Municipal Bonds (Identified Cost — $221) | 225 | ||||||||||||||||
Preferred Stocks — 2.0% | |||||||||||||||||
Fannie Mae | 7.000% | 77 | shs | 4,221 | A | ||||||||||||
Home Ownership Funding Corporation | 13.331% | 5 | 138 | B,H | |||||||||||||
Home Ownership Funding Corporation II | 13.338% | 14 | 388 | B,H | |||||||||||||
Total Preferred Stocks (Identified Cost — $5,837) | 4,747 | ||||||||||||||||
Total Long-Term Securities (Identified Cost — $240,205) | 235,382 | ||||||||||||||||
Short-Term Securities — 8.0% | |||||||||||||||||
U.S. Government and Agency Obligations — 7.0% | |||||||||||||||||
Fannie Mae | 0.000% | 3/1/06 | $ | 5,000 | 4,965 | I | |||||||||||
Fannie Mae | 0.000% | 5/15/06 | 220 | 216 | I,J | ||||||||||||
Freddie Mac | 0.000% | 3/7/06 | 5,500 | 5,458 | I | ||||||||||||
Freddie Mac | 0.000% | 3/28/06 | 6,000 | 5,938 | I | ||||||||||||
16,577 | |||||||||||||||||
Repurchase Agreements — 1.0% | |||||||||||||||||
Lehman Brothers, Inc. 4.15%, dated 12/30/05, to be repurchased at $1,220 on 1/3/06 (Collateral: $1,205 Federal Home Loan Bank bonds, 5.25%, due 12/11/20, value $1,243) | 1,219 | 1,219 |
Par/ | ||||||||||||||||
Shares | Value | |||||||||||||||
Short-Term Securities — Continued | ||||||||||||||||
Repurchase Agreements — Continued | ||||||||||||||||
Merrill Lynch Government Securities, Inc. 4.24%, dated 12/30/05, to be repurchased at $1,220 on 1/3/06 (Collateral: $1,240 Federal Home Loan Bank notes, 4.75%, due 9/14/09, value $1,248) | $ | 1,220 | $ | 1,220 | ||||||||||||
2,439 | ||||||||||||||||
Total Short-Term Securities (Identified Cost — $19,016) | 19,016 | |||||||||||||||
Total Investments — 107.0% (Identified Cost — $259,221) | 254,398 | |||||||||||||||
Other Assets Less Liabilities — (7.0)% | (16,688 | ) | ||||||||||||||
Net Assets — 100.0% | $ | 237,710 | ||||||||||||||
Actual | Appreciation/ | ||||||||||
Expiration | Contracts | (Depreciation) | |||||||||
Futures Contracts PurchasedK | |||||||||||
Eurodollar Futures | June 2006 | 117 | $ | 1 | |||||||
U.S. Treasury Note Futures | March 2006 | 102 | (4 | ) | |||||||
$ | (3 | ) | |||||||||
Futures Contracts WrittenK | |||||||||||
Eurodollar Futures | March 2006 | 208 | $ | 337 | |||||||
U.S. Treasury Note Futures | March 2006 | 41 | (28 | ) | |||||||
U.S. Treasury Note Futures | March 2006 | 22 | (9 | ) | |||||||
$ | 300 | ||||||||||
A | Indexed Security — The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”) or the ten year Treasury Bill Constant Maturity Rate. The coupon rates are the rates as of December 31, 2005. |
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, which the Fund’s investment adviser has determined to be liquid, represent 8.4% of net assets. |
C | Yankee Bond — A dollar-denominated bond issued in the U.S. by foreign entities. |
D | The coupon rates shown on variable rate securities are the rates at December 31, 2005. These rates vary with the weighted average coupon of the underlying loans. |
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 | Securities 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 | Stepped coupon security — A security with a predetermined schedule of interest or dividend rate charges. |
I | 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. The amount shown as principal is the notional balance used to calculate the amount of interest due. |
J | Collateral to cover futures and options contracts. |
K | 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 – $240,205) | $235,382 | ||||||
Short-term securities at value (Identified Cost – $19,016) | 19,016 | ||||||
Cash | 24 | ||||||
Receivable for fund shares sold | 246 | ||||||
Receivable for futures variation margin | 2 | ||||||
Interest and dividends receivable | 1,456 | ||||||
Other assets | 11 | ||||||
Total assets | 256,137 | ||||||
Liabilities: | |||||||
Payable for securities purchases | $17,810 | ||||||
Payable for fund shares repurchased | 349 | ||||||
Income distribution payable | 44 | ||||||
Accrued management fee | 58 | ||||||
Accrued distribution and service fees | 94 | ||||||
Accrued expenses | 72 | ||||||
Total liabilities | 18,427 | ||||||
Net Assets | $237,710 | ||||||
Net assets consist of: | |||||||
Accumulated paid-in capital applicable to: | |||||||
21,522 Primary Class shares outstanding | $233,909 | ||||||
1,785 Institutional Class shares outstanding | 18,402 | ||||||
Overdistributed net investment income | (97 | ) | |||||
Accumulated net realized loss on investments, options, and futures | (9,979 | ) | |||||
Unrealized appreciation/(depreciation) of investments, options and futures | (4,525 | ) | |||||
Net Assets | $237,710 | ||||||
Net Asset Value Per Share: | |||||||
Primary Class | $10.20 | ||||||
Institutional Class | $10.20 | ||||||
See notes to financial statements.
Statement of Operations
Limited Duration Bond Portfolio
Investment Income: | |||||||||||
Interest | $ | 10,798 | |||||||||
Dividends | 516 | ||||||||||
Total income | $ | 11,314 | |||||||||
Expenses: | |||||||||||
Management fees | 1,208 | ||||||||||
Distribution and service fees | 1,271 | ||||||||||
Audit and legal fees | 75 | ||||||||||
Custodian fees | 108 | ||||||||||
Directors’ fees and expenses | 31 | ||||||||||
Registration fees | 42 | ||||||||||
Reports to shareholders | 47 | ||||||||||
Transfer agent and shareholder servicing expense: | |||||||||||
Primary Class | 187 | ||||||||||
Institutional Class | 3 | ||||||||||
Other expenses | 50 | ||||||||||
3,022 | |||||||||||
Less: Fees waived | (410 | ) | |||||||||
Compensating balance credits | (5 | )A | |||||||||
Total expenses, net of waivers and compensating balance credits | 2,607 | ||||||||||
Net Investment Income | 8,707 | ||||||||||
Net Realized and Unrealized Gain/(Loss) on Investments: | |||||||||||
Realized loss on: | |||||||||||
Investments | (1,005 | ) | |||||||||
Futures | (269 | ) | |||||||||
(1,274 | ) | ||||||||||
Change in unrealized depreciation of investments, and futures | (2,592 | ) | |||||||||
Net Realized and Unrealized Loss on Investments | (3,866 | ) | |||||||||
Change in Net Assets Resulting From Operations | $ | 4,841 | |||||||||
A | See note 1, Compensating Balance Credits, in the notes to financial statements. |
See notes to financial statements.
Statement of Changes in Net Assets
Limited Duration Bond Portfolio
For the Years Ended | ||||||||||
12/31/05 | 12/31/04 | |||||||||
Change in Net Assets: | ||||||||||
Net investment income | $ | 8,707 | $ | 8,628 | ||||||
Net realized gain/(loss) on investments, options and futures | (1,274 | ) | (4,077 | ) | ||||||
Change in unrealized appreciation/(depreciation) of investments, options and futures | (2,592 | ) | 1,121 | |||||||
Change in net assets resulting from operations | 4,841 | 5,672 | ||||||||
Distributions to shareholders from: | ||||||||||
Net investment income: | ||||||||||
Primary Class | (8,515 | ) | (10,465 | ) | ||||||
Institutional Class | (574 | ) | (348 | ) | ||||||
Net realized gain on investments: | ||||||||||
Primary Class | — | (186 | ) | |||||||
Institutional Class | — | (7 | ) | |||||||
Change in net assets from Fund share transactions: | ||||||||||
Primary Class | (51,090 | ) | (47,055 | ) | ||||||
Institutional Class | 8,896 | 1,957 | ||||||||
Change in net assets | (46,442 | ) | (50,432 | ) | ||||||
Net Assets: | ||||||||||
Beginning of year | 284,152 | 334,584 | ||||||||
End of year | $ | 237,710 | $ | 284,152 | ||||||
Overdistributed net investment income | $ | (97 | ) | $ | (106 | ) | ||||
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, | |||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||||
Net asset value, beginning of year | $10.36 | $ | 10.54 | $ | 10.70 | $ | 10.32 | $ | 10.26 | ||||||||||||
Investment operations: | |||||||||||||||||||||
Net investment income | .33 | A | .29 | A | .26 | A | .41 | A | .53 | A | |||||||||||
Net realized and unrealized gain/(loss) on investments, options and futures | (.14 | ) | (.09 | ) | (.14 | ) | .38 | .06 | |||||||||||||
Total from investment operations | .19 | .20 | .12 | .79 | .59 | ||||||||||||||||
Distributions: | |||||||||||||||||||||
From net investment income | (.35 | ) | (.37 | ) | (.28 | ) | (.41 | ) | (.53 | ) | |||||||||||
From net realized gain on investments | — | (.01 | ) | — | — | — | |||||||||||||||
Total distributions | (.35 | ) | (.38 | ) | (.28 | ) | (.41 | ) | (.53 | ) | |||||||||||
Net asset value, end of year | $ | 10.20 | $ | 10.36 | $ | 10.54 | $ | 10.70 | $ | 10.32 | |||||||||||
Ratios/supplemental data: | |||||||||||||||||||||
Total return | 1.83 | % | 1.89 | % | 1.11 | % | 7.79 | % | 5.83 | % | |||||||||||
Total expenses to average net assetsB | 1.00 | % A | 1.00 | % A | 1.00 | % A | 1.00 | % A | 1.00 | % A | |||||||||||
Net expenses to average net assetsC | 1.00 | % A | 1.00 | % A | 1.00 | % A | 1.00 | % A | 1.00 | % A | |||||||||||
Net investment income to average net assets | 3.21 | % A | 2.81 | % A | 2.48 | % A | 3.85 | % A | 5.08 | % A | |||||||||||
Portfolio turnover rate | 81.6 | % | 238.0 | % | 487.3 | % | 204.1 | % | 535.2 | % | |||||||||||
Net assets, end of year (in thousands) | $ | 219,497 | $ | 274,606 | $ | 326,844 | $ | 379,793 | $ | 300,597 | |||||||||||
A | Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 1.00% until April 30, 2006. 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, 2005, 1.15%; 2004, 1.21%; 2003, 1.21%; 2002, 1.19%; and 2001, 1.17%. |
B | This ratio reflects total expenses before compensating balance credits, but net of the voluntary expense waivers described above. |
C | This ratio reflects expenses net of compensating balance credits and voluntary expense waivers described above. |
See notes to financial statements.
Institutional Class:
Years Ended December 31, | |||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||||
Net asset value, beginning of year | $10.37 | $ | 10.55 | $ | 10.70 | $ | 10.32 | $ | 10.27 | ||||||||||||
Investment operations: | |||||||||||||||||||||
Net investment income | .40 | D | .35 | D | .32 | D | .46 | D | .58 | D | |||||||||||
Net realized and unrealized gain/(loss) on investments, options and futures | (.17 | ) | (.10 | ) | (.14 | ) | .38 | .05 | |||||||||||||
Total from investment operations | .23 | .25 | .18 | .84 | .63 | ||||||||||||||||
Distributions: | |||||||||||||||||||||
From net investment income | (.40 | ) | (.42 | ) | (.33 | ) | (.46 | ) | (.58 | ) | |||||||||||
From net realized gain on investments | — | (.01 | ) | — | — | — | |||||||||||||||
Total distributions | (.40 | ) | (.43 | ) | (.33 | ) | (.46 | ) | (.58 | ) | |||||||||||
Net asset value, end of year | $10.20 | $ | 10.37 | $ | 10.55 | $ | 10.70 | $ | 10.32 | ||||||||||||
Ratios/supplemental data: | |||||||||||||||||||||
Total return | 2.29 | % | 2.41 | % | 1.71 | % | 8.35 | % | 6.30 | % | |||||||||||
Total expenses to average net assetsB | .46 | % D | .48 | % D | .46 | % D | .47 | % D | .46 | % D | |||||||||||
Net expenses to average net assetsC | .46 | % D | .48 | % D | .46 | % D | .47 | % D | .46 | % D | |||||||||||
Net investment income to average net assets | 3.85 | % D | 3.22 | % D | 3.03 | % D | 4.38 | % D | 5.63 | % D | |||||||||||
Portfolio turnover rate | 81.6 | % | 238.0 | % | 487.3 | % | 204.1 | % | 535.2 | % | |||||||||||
Net assets, end of year (in thousands) | $ | 18,213 | $ | 9,546 | $ | 7,740 | $ | 9,485 | $ | 7,221 | |||||||||||
D | Net of fees waived by LMFA for expenses in excess of a voluntary expense limitation of 0.50% until April 30, 2006. 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, 2005, 0.62%; 2004, 0.70%; 2003, 0.68%; 2002, 0.66%; and 2001, 0.63%. |
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, 2005, and held through December 31, 2005.
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 | ||||||||||
Value | Value | Period | ||||||||||
7/1/05 | 12/31/05 | 7/1/05 to 12/31/05 | ||||||||||
Actual | $ | 1,000.00 | $ | 1,014.80 | $ | 3.66 | ||||||
Hypothetical (5% return before expenses) | 1,000.00 | $ | 1,021.58 | $ | 3.67 |
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 of 0.72% 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. |
Maturity Schedule (as a percentage of the portfolio)
B | The Fund is actively managed. As a result, the composition of its portfolio holdings and sectors is subject to change at any time. |
Statement of Net Assets
U.S. Government Money Market Portfolio
Maturity | |||||||||||||
Rate | Date | Par | Value | ||||||||||
U.S. Government and Agency Obligations — 41.4% | |||||||||||||
Fannie Mae | 2.25% to 5.50% | 1/04/06 to 8/18/06 | $ | 49,195 | $ | 49,135 | |||||||
Federal Home Loan Bank | 1.00% to 4.20% | 3/28/06 to 11/9/06 | 26,500 | 26,497 | A | ||||||||
Federal Home Loan Bank | 3.70% to 4.50% | 7/13/06 to 12/21/06 | 15,000 | 14,999 | B | ||||||||
Federal Home Loan Bank | 2.00% to 4.00% | 1/18/06 to 12/1/06 | 51,800 | 51,645 | |||||||||
Freddie Mac | 1.66% to 5.25% | 1/3/06 to 7/15/06 | 25,790 | 25,822 | |||||||||
Total U.S. Government and Agency Obligations | |||||||||||||
(Identified Cost — $168,098) | 168,098 | ||||||||||||
Repurchase Agreements — 53.9% | |||||||||||||
Goldman Sachs & Company 4.24%, dated 12/30/05, to be repurchased at $100,803 on 1/3/06 (Collateral: $82,305 Tennessee Valley Authority bonds, 6.75%, due 11/1/25, value $102,778) | 100,756 | 100,756 | |||||||||||
Lehman Brothers, Inc. 4.15%, dated 12/30/05, to be repurchased at $86,127 on 1/3/06 (Collateral: $24,615 Freddie Mac notes, 4.625%, due 9/15/08, value $24,827; $63,415 Federal Home Loan Bank notes, 2.5% to 4.125%, due 3/30/06 to 5/12/14, value $62,982) | 86,087 | 86,087 | |||||||||||
Merrill Lynch Government Securities, Inc. 4.24%, dated 12/30/05, to be repurchased at $32,332 on 1/3/06 (Collateral: $32,885 Freddie Mac notes, 4.75%, due 10/17/08, value $32,967) | 32,317 | 32,317 | |||||||||||
Total Repurchase Agreements (Identified Cost — $219,160) | 219,160 | ||||||||||||
Total Investments — 95.3% (Identified Cost — $387,258) | 387,258 | C | |||||||||||
Other Assets Less Liabilities — 4.7% | 19,150 | ||||||||||||
Net Assets Applicable to 406,409 Shares Outstanding — 100.0% | $ | 406,408 | |||||||||||
Net Asset Value Per Share | $ | 1.00 | |||||||||||
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, 2005. |
B | Stepped coupon security — A security with a predetermined schedule of interest or dividend rate changes. |
C | Also represents cost for income tax purposes. |
See notes to financial statements.
Statement of Operations
U.S. Government Money Market Portfolio
Investment Income: | |||||||||||
Interest | $ | 12,345 | |||||||||
Expenses: | |||||||||||
Management fees | 1,976 | ||||||||||
Distribution and service fees | 395 | ||||||||||
Audit and legal fees | 57 | ||||||||||
Custodian fees | 78 | ||||||||||
Directors’ fees and expenses | 33 | ||||||||||
Registration fees | 60 | ||||||||||
Reports to shareholders | 32 | ||||||||||
Transfer agent and shareholder servicing expense | 197 | ||||||||||
Other expenses | 29 | ||||||||||
2,857 | |||||||||||
Less: Compensating balance credits | (13 | ) | |||||||||
Total expenses, net of compensating balance credits | 2,844 | ||||||||||
Net Investment Income | 9,501 | ||||||||||
Net Realized Gain/(Loss) on Investments: | |||||||||||
Realized gain/(loss) on investments | 1 | ||||||||||
Change in Net Assets Resulting From Operations | $ | 9,502 | |||||||||
See notes to financial statements.
Statement of Changes in Net Assets
U.S. Government Money Market Portfolio
For the Years Ended | ||||||||
12/31/05 | 12/31/04 | |||||||
Change in Net Assets: | ||||||||
Net investment income | $ | 9,501 | $ | 2,864 | ||||
Net realized gain/(loss) on investments | 1 | (1 | ) | |||||
Change in net assets resulting from operations | 9,502 | 2,863 | ||||||
Distributions to shareholders from net investment income | (9,501 | ) | (2,864 | ) | ||||
Change in net assets from Fund share transactions | 13,724 | (51,197 | ) | |||||
Change in net assets | 13,725 | (51,198 | ) | |||||
Net Assets: | ||||||||
Beginning of year | 392,683 | 443,881 | ||||||
End of year | $ | 406,408 | $ | 392,683 | ||||
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, | |||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||||
Net asset value, beginning of year | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | |||||||||||
Investment operations: | |||||||||||||||||||||
Net investment income | .02 | .01 | .0049 | A | .01 | A | .04 | A | |||||||||||||
Total from investment operations | .02 | .01 | .0049 | .01 | .04 | ||||||||||||||||
Distributions: | |||||||||||||||||||||
From net investment income | (.02 | ) | (.01 | ) | ( | .0049 | ) | (.01 | ) | (.04 | ) | ||||||||||
Total distributions | (.02 | ) | (.01 | ) | ( | .0049 | ) | (.01 | ) | (.04 | ) | ||||||||||
Net asset value, end of year | $1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | ||||||||||||
Ratios/supplemental data: | |||||||||||||||||||||
Total return | 2.42 | % | .67 | % | .51 | % | 1.13 | % | 3.57 | % | |||||||||||
Total expenses to average net assetsB | .72 | % | .71 | % | .71 | %A | .72 | %A | .71 | %A | |||||||||||
Net expenses to average net assetsC | .72 | % | .71 | % | .71 | %A | .72 | %A | .72 | %A | |||||||||||
Net investment income to average net assets | 2.40 | % | .65 | % | .49 | % | 1.11 | % | 3.46 | % | |||||||||||
Net assets, end of year (in thousands) | $ | 406,408 | $ | 392,683 | $ | 443,881 | $ | 541,873 | $ | 501,070 | |||||||||||
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% and 2001, 0.81%. |
B | This ratio reflects total expenses before compensating balance credits, but net of the voluntary expense waivers described above. |
C | This ratio reflects expenses net of compensating balance credits and voluntary expense waivers described above. |
See notes to financial statements.
Notes to Financial Statements
Legg Mason Income Trust, Inc.
1. Organization and Significant Accounting Policies:
Security Valuation
Foreign Currency Translation
Security Transactions
Purchases | Proceeds From Sales | |||||||||||||||
U.S. Gov’t. | U.S. Gov’t. | |||||||||||||||
Securities | Other | Securities | Other | |||||||||||||
Core Bond | $ | 363,255 | $ | 37,428 | $ | 345,954 | $ | 11,389 | ||||||||
High Yield | — | 252,998 | — | 288,338 | ||||||||||||
Investment Grade | 62,358 | 142,463 | 56,964 | 156,653 | ||||||||||||
Limited Duration | 113,440 | 99,462 | 123,265 | 117,891 |
Repurchase Agreements
Investment Income and Distributions to Shareholders
Compensating Balance Credits
Other
2. Federal Income Taxes:
Distribution during the years ended December 31, 2005 and 2004, were characterized as follows for tax purposes:
Core Bond | High Yield | Investment Grade | ||||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||
Ordinary income | $ | 2,410 | $ | 1,183 | $ | 14,058 | $ | 14,760 | $ | 19,613 | $ | 19,210 | ||||||||||||
Long-term capital gains | — | — | — | — | 2,957 | 8,438 | ||||||||||||||||||
Total Distribution | $ | 2,410 | $ | 1,183 | $ | 14,058 | $ | 14,760 | $ | 22,570 | $ | 27,648 | ||||||||||||
Limited | Government | |||||||||||||||
Duration | Money Market | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Ordinary income | $ | 9,089 | $ | 11,006 | $ | 9,501 | $ | 2,864 | ||||||||
Long-term capital gains | — | — | — | — | ||||||||||||
Total Distribution | $ | 9,089 | $ | 11,006 | $ | 9,501 | $ | 2,864 | ||||||||
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, 2005, realized capital losses reflected in the accompanying
The tax basis components of net assets at December 31, 2005, were:
Core | High | Investment | Limited | Government | ||||||||||||||||
Bond | Yield | Grade | Duration | Money Market | ||||||||||||||||
Unrealized appreciation | $ | 796 | $ | 3,430 | $ | 10,928 | $ | 442 | $ | — | ||||||||||
Unrealized depreciation | (1,507 | ) | (5,368 | ) | (8,920 | ) | (5,363 | ) | — | |||||||||||
Net unrealized appreciation/depreciation | (711 | ) | (1,938 | ) | 2,008 | (4,921 | ) | — | ||||||||||||
Undistributed ordinary income | 8 | — | 72 | — | — | |||||||||||||||
Undistributed long-term capital gains | — | — | 14 | — | — | |||||||||||||||
Capital loss carryforwards | (582 | ) | (154,639 | ) | — | (8,924 | ) | — | ||||||||||||
Post-October loss push and other loss deferrals | (262 | ) | (12 | ) | (345 | ) | (756 | ) | — | |||||||||||
Paid-in capital | 73,372 | 326,377 | 385,021 | 252,311 | 406,408 | |||||||||||||||
Net assets | $ | 71,825 | $ | 169,788 | $ | 386,770 | $ | 237,710 | $ | 406,408 | ||||||||||
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, 2005, the Funds had capital loss carryforwards as follows:
Expiration | High | Limited | ||||||||||||
Date | Core Bond | Yield | Duration | |||||||||||
2008 | $ | — | $ | (35,788 | ) | $ | (3,833 | ) | ||||||
2009 | — | (83,723 | ) | — | ||||||||||
2010 | — | (32,488 | ) | — | ||||||||||
2011 | — | (2,556 | ) | — | ||||||||||
2012 | — | — | (4,536 | ) | ||||||||||
2013 | (582 | ) | (84 | ) | (555 | ) |
At December 31, 2003, there were no capital loss carryforwards for Government Money Market and Investment Grade.
Core | High | Investment | Limited | Government | ||||||||||||||||
Bond | Yield | Grade | Duration | Money Market | ||||||||||||||||
Undistributed net investment income | $ | 67 | $ | 34 | $ | 1 | $ | 391 | $ | — | ||||||||||
Accumulated realized gain/(loss) | (67 | ) | 36 | (1 | ) | (376 | ) | — | ||||||||||||
Paid-in capital | — | (70 | ) | — | (15 | ) | — |
At December 31, 2005, the cost of investments for federal income tax purposes was $94,037 for Core Bond, $167,936 for High Yield, $380,125 for Investment Grade, $259,319 for Limited Durations, and $387,258 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 Fund:
Calls | Puts | |||||||||||||||
Actual | Actual | |||||||||||||||
Contracts | Premiums | Contracts | Premiums | |||||||||||||
Options outstanding at December 31, 2004 | 76 | $ | 57 | 105 | $ | 97 | ||||||||||
Options written | 600,587 | 393 | 527 | 364 | ||||||||||||
Options closed | (218 | ) | (154 | ) | (293 | ) | (223 | ) | ||||||||
Options expired | (600,296 | ) | (216 | ) | (236 | ) | (173 | ) | ||||||||
Options exercised | (45 | ) | (22 | ) | (35 | ) | (22 | ) | ||||||||
Options outstanding at December 31, 2005 | 104 | $ | 58 | 68 | $ | 43 | ||||||||||
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
Swap Agreements
4. Transactions With Affiliates:
Year Ended | |||||||||||||
December 31, 2005 | |||||||||||||
Expense | Management Fees | ||||||||||||
Fund | Management Fee | Limitation | Waived | ||||||||||
Core Bond | 0.45% | 1.00% | $ | (243 | ) | ||||||||
High Yield | |||||||||||||
— Primary Class | 0.65% | None | — | ||||||||||
— Institutional Class | 0.65% | None | — | ||||||||||
Investment Grade | |||||||||||||
— Primary Class | 0.60% | 1.00% | (1,150 | ) | |||||||||
— Institutional Class | 0.60% | 0.50% | (47 | ) | |||||||||
Limited Duration | |||||||||||||
— Primary Class | 0.45% | 1.00% | (388 | ) | |||||||||
— Institutional Class | 0.45% | 0.50% | (22 | ) | |||||||||
Government Money Market | 0.50% – 0.40% A | 0.72%B | — |
A | 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% |
B | As of December 1, 2005. |
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.
Distribution | Service | |||||||
Fee | Fee | |||||||
Core Bond | 0.25% | 0.25% | ||||||
High Yield | 0.25% | 0.25% | ||||||
Investment Grade | 0.25% | 0.25% | ||||||
Limited Duration | 0.25% | 0.25% | ||||||
Government Money Market | N/A | 0.10% |
On December 1, 2005, Legg Mason Investor Services, LLC (“LMIS”) replaced Legg Mason Wood Walker, Inc. (“Legg Mason”) as Distributor. The compensation arrangements between the Funds and LMIS are identical to the previous arrangements between the Funds and Legg Mason. LMIS 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 year ended December 31, 2005, Legg Mason waived $29 of the Core Bond’s distribution and service fees.
5. Line of Credit:
6. Fund Share Transactions:
Core Bond | |||||||||||||||||
Years Ended | |||||||||||||||||
12/31/05 | 12/31/04A | ||||||||||||||||
Shares | |||||||||||||||||
Sold | 3,168 | 7,274 | |||||||||||||||
Reinvestment of Distributions | 226 | 111 | |||||||||||||||
Repurchased | (2,404 | ) | (977 | ) | |||||||||||||
Net Change | 990 | 6,408 | |||||||||||||||
Amount | |||||||||||||||||
Sold | $ | 31,295 | $ | 72,052 | |||||||||||||
Reinvestment of Distributions | 2,215 | 1,103 | |||||||||||||||
Repurchased | (23,672 | ) | (9,621 | ) | |||||||||||||
Net Change | $ | 9,838 | $ | 63,534 | |||||||||||||
A | For the period February 27, 2004 (commencement of operations) to December 31, 2004. |
High Yield | |||||||||||||||||
Primary Class | Institutional Class | ||||||||||||||||
Years Ended | Years Ended | ||||||||||||||||
12/31/05 | 12/31/04 | 12/31/05 | 12/31/04 | ||||||||||||||
Shares | |||||||||||||||||
Sold | 2,693 | 4,287 | 855 | 608 | |||||||||||||
Reinvestment of Distributions | 1,090 | 1,211 | 94 | 61 | |||||||||||||
Repurchased | (8,012 | ) | (8,220 | ) | (495 | ) | (446 | ) | |||||||||
Net Change | (4,229 | ) | (2,722 | ) | 454 | 223 | |||||||||||
Amount | |||||||||||||||||
Sold | $ | 24,689 | $ | 39,099 | $ | 7,866 | $ | 5,538 | |||||||||
Reinvestment of Distributions | 9,912 | 10,986 | 857 | 558 | |||||||||||||
Repurchased | (73,219 | ) | (74,487 | ) | (4,549 | ) | (4,056 | ) | |||||||||
Net Change | $ | (38,618 | ) | $ | (24,402 | ) | $ | 4,174 | $ | 2,040 | |||||||
Investment Grade | |||||||||||||||||
Primary Class | Institutional Class | ||||||||||||||||
Years Ended | Years Ended | ||||||||||||||||
12/31/05 | 12/31/04 | 12/31/05 | 12/31/04 | ||||||||||||||
Shares | |||||||||||||||||
Sold | 6,762 | 7,793 | 1,449 | 557 | |||||||||||||
Reinvestment of Distributions | 1,834 | 2,253 | 92 | 58 | |||||||||||||
Repurchased | (10,700 | ) | (10,301 | ) | (521 | ) | (213 | ) | |||||||||
Net Change | (2,104 | ) | (255 | ) | 1,020 | 402 | |||||||||||
Amount | |||||||||||||||||
Sold | $ | 72,007 | $ | 84,747 | $ | 15,490 | $ | 6,057 | |||||||||
Reinvestment of Distributions | 19,415 | 24,367 | 970 | 631 | |||||||||||||
Repurchased | (113,694 | ) | (111,468 | ) | (5,546 | ) | (2,318 | ) | |||||||||
Net Change | $ | (22,272 | ) | $ | (2,354 | ) | $ | 10,914 | $ | 4,370 | |||||||
Limited Duration | |||||||||||||||||
Primary Class | Institutional Class | ||||||||||||||||
Years Ended | Years Ended | ||||||||||||||||
12/31/05 | 12/31/04 | 12/31/05 | 12/31/04 | ||||||||||||||
Sold | 3,474 | 5,553 | 1,392 | 499 | |||||||||||||
Reinvestment of Distributions | 743 | 910 | 49 | 33 | |||||||||||||
Repurchased | (9,200 | ) | (10,970 | ) | (577 | ) | (345 | ) | |||||||||
Net Change | (4,983 | ) | (4,507 | ) | 864 | 187 | |||||||||||
Amount | |||||||||||||||||
Sold | $ | 35,740 | $ | 58,022 | $ | 14,310 | $ | 5,222 | |||||||||
Reinvestment of Distributions | 7,624 | 9,486 | 510 | 346 | |||||||||||||
Repurchased | (94,454 | ) | (114,563 | ) | (5,924 | ) | (3,611 | ) | |||||||||
Net Change | $ | (51,090 | ) | $ | (47,055 | ) | $ | 8,896 | $ | 1,957 | |||||||
U.S. Government | |||||||||
Money Market | |||||||||
Years Ended | |||||||||
12/31/05 | 12/31/04 | ||||||||
Shares | |||||||||
Sold | 1,334,100 | 1,461,762 | |||||||
Reinvestment of Distributions | 9,188 | 2,616 | |||||||
Repurchased | (1,329,564 | ) | (1,515,575 | ) | |||||
Net Change | 13,724 | (51,197 | ) | ||||||
Amount | |||||||||
Sold | 1,334,100 | $ | 1,461,762 | ||||||
Reinvestment of Distributions | 9,188 | 2,616 | |||||||
Repurchased | (1,329,564 | ) | (1,515,575 | ) | |||||
Net Change | $ | 13,724 | $ | (51,197 | ) | ||||
7. Subsequent Event:
On January 3, 2006, the Board of Directors of the Legg Mason U.S. Government Money Market Portfolio approved, subject to shareholder approval, a Plan of Liquidation, Dissolution and Termination whereby all the Fund’s assets would be liquidated and the Fund would subsequently be dissolved. A special meeting of the shareholders is scheduled for February 24, 2006, and the estimated time of liquidation is February 27, 2006.
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, 2005, 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, 2005 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.
Office | ||||||||||||
Position(s) | and | |||||||||||
Held with | Length | Other | ||||||||||
Name | the | of Time | Directorships | |||||||||
and Year of Birth | Corporation | ServedA | Number of Funds in Fund Complex Overseen | Held | Principal Occupation(s) During the Past Five Years | |||||||
INDEPENDENT DIRECTORS:B | ||||||||||||
Hearn, Ruby P. 1940 | Director | Since 2004 | Director/Trustee of all Legg Mason funds (consisting of 23 portfolios). | None | 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. 1944 | Director | Since 1987 | Director/Trustee of all Legg Mason funds (consisting of 23 portfolios). | None | 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. 1955 | Director | Since 2002 | Director/Trustee of all Legg Mason funds (consisting of 23 portfolios). | Chairman of the Board of Directors of Cap-a-Laige Ltd. (management company for charitable trust); Director of Cheyne Capital International Limited (investment advisory firm); Director of Cheyne Property Holdings Limited (real estate). | Retired. Director of Bermuda SMARTRISK (non-profit) since 2001. Formerly: Chief Investment Officer of ACE Limited (insurance) (1986-2000). | |||||||
McGovern, Jill E. 1944 | Director | Since 1989 | Director/Trustee of all Legg Mason funds (consisting of 23 portfolios). | None | 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). | |||||||
Office | ||||||||||||
Position(s) | and | |||||||||||
Held with | Length | Other | ||||||||||
Name | the | of Time | Directorships | |||||||||
and Year of Birth | Corporation | ServedA | Number of Funds in Fund Complex Overseen | Held | Principal Occupation(s) During the Past Five Years | |||||||
Mehlman, Arthur S. 1942 | Director | Since 2002 | Director/Trustee of all Legg Mason funds (consisting of 23 portfolios). | Trustee of The Royce Family of Funds (consisting of 23 portfolios); Director of Municipal Mortgage & Equity, LLC. | Retired. Formerly: Partner, KPMG LLP (international accounting firm) (1972-2002). | |||||||
O’Brian, G. Peter 1945 | Director | Since 2002 | Director/Trustee of all Legg Mason funds (consisting of 23 portfolios). | Trustee of The Royce Family of Funds (consisting of 23 portfolios); Director of Technology Investment Capital Corp. | Retired. Trustee Emeritus of Colgate University; Board member of Hill House, Inc. (residential home care). Formerly: Managing Director, Equity Capital Markets Group of Merrill Lynch & Co. (1971-1999). | |||||||
Rowan, S. Ford 1943 | Director | Since 2002 | Director/Trustee of all Legg Mason funds (consisting of 23 portfolios). | None | 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. | |||||||
Tarola, Robert M. 1950 | Director | Since 2004 | Director/Trustee of all Legg Mason funds (consisting of 23 portfolios). | None | Senior Vice President and Chief Financial Officer of W. R. Grace & Co. (specialty chemicals) since 1999. Formerly: Chief Financial Officer of MedStar Health, Inc. (healthcare) (1996-1999); Partner, Price Waterhouse, LLP (accounting and auditing) (1984-1996). | |||||||
INTERESTED DIRECTORS:C | ||||||||||||
Curley Jr., John F. 1939 | Chairman and Director | Since 1987 | Chairman and Director/Trustee of all Legg Mason funds (consisting of 23 portfolios). | None | 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). | |||||||
Office | ||||||||||||
Position(s) | and | |||||||||||
Held with | Length | Other | ||||||||||
Name | the | of Time | Directorships | |||||||||
and Year of Birth | Corporation | ServedA | Number of Funds in Fund Complex Overseen | Held | Principal Occupation(s) During the Past Five Years | |||||||
Fetting, Mark R. 1954 | President and Director | President since 2001 and Director since 2002 | President and Director/Trustee of all Legg Mason funds (consisting of 23 portfolios). | Trustee of The Royce Family of Funds (consisting of 23 portfolios). | Senior Executive Vice President of Legg Mason, Inc.; Director and/or officer of various Legg Mason, Inc. 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. 1949 | Vice President and Treasurer | Since 1987 | Vice President and Treasurer of all Legg Mason funds (consisting of 23 portfolios). | None | Vice President and Treasurer of all Legg Mason funds. Vice President and Treasurer of Legg Mason Fund Adviser, Inc. and Western Asset Funds, Inc.; Treasurer and Principal Financial and Accounting Officer of Western Asset Income Fund, 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. 1958 | Vice President and Chief Legal Officer | Since 2003 | Vice President and Chief Legal Officer of all Legg Mason funds (consisting of 23 portfolios). | None | Vice President and Deputy General Counsel of Legg Mason, Inc. since 2003. Formerly: Associate General Counsel, Fidelity Investments (1993-2002). | |||||||
Office | ||||||||||||
Position(s) | and | |||||||||||
Held with | Length | Other | ||||||||||
Name | the | of Time | Directorships | |||||||||
and Year of Birth | Corporation | ServedA | Number of Funds in Fund Complex Overseen | Held | Principal Occupation(s) During the Past Five Years | |||||||
Olmert, Amy M. 1963 | Vice President and Chief Compliance Officer | Since 2004 | Vice President and Chief Compliance Officer of all Legg Mason funds (consisting of 23 portfolios). | None | Senior Vice President of Legg Mason, Inc. since 2004. Chief Compliance Officer of Western Asset Funds, Inc., Western Asset Income Fund, 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
A | Directors of the Fund 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. |
B | 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). |
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 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 Fund are interested persons (as defined in the 1940 Act). |
At its November 2005 meeting, the Board of Directors, including all of the Independent Directors, approved the continuation of the Management Agreements between Legg Mason Fund Adviser, Inc. (the “Manager”) and Income Trust on behalf of each of its separate series and the Investment Advisory Agreements between the Manager and Western Asset Management Company (the “Adviser”) for each separate series of Income Trust (each an “Agreement”). In voting to approve the continuation of each Agreement, the Board considered whether continuance would be in the best interests of each series of Income Trust and its shareholders, an evaluation largely based on the nature and quality of the services provided under each Agreement and the overall fairness of each Agreement to each series of Income Trust. In considering each Agreement, the Board did not identify any single factor or item of information as all-important or controlling. Based on its evaluation of all material factors, including those described below, the Board concluded that the terms of each Agreement are reasonable and fair and that the continuation of each Agreement is in the best interests of each series of Income Trust and its shareholders.
Prior to the Board action, the Independent Directors met as a committee to consider its recommendation as to continuance of each Agreement. As part of the process to consider each Agreement, legal counsel to Income Trust requested certain information from the Manager and the Adviser on behalf of the Independent Directors, and in response, the Manager and the Adviser provided extensive reports that addressed specific factors designed to inform the Board’s consideration of each Agreement. Counsel also provided the Independent Directors and the Board with a memorandum detailing their responsibilities pertaining to the continuance of each Agreement.
In addition to the November meeting, the Independent Directors meeting as a committee held additional meetings in September and October 2005 at which materials relating to each Agreement were reviewed and analyzed. The Independent Directors also retained an independent consultant to assist them in their review and analysis of each Agreement. The Board meets at least another three times per year in order to oversee the Legg Mason Funds, including meetings at which the portfolio managers of each series of Income Trust or others submit or make presentations and discuss performance, compliance and other applicable issues. The Board also drew upon its long association with the Manager, the Adviser and their personnel, and the Board members’ familiarity with their culture, and the manner in which they have sought to strengthen and enhance themselves.
With respect to the nature, scope and quality of the services provided, the Board considered the experience and commitment of the Manager’s and the Adviser’s personnel and their efforts to build and support a strong service team. The Board also considered the nature and quality of the Adviser’s investment process. In assessing performance, the Board compared the returns of each series of Income Trust to the average of an appropriate Lipper category and a peer group of investment companies pursuing similar strategies, all over
In determining whether the terms of each Agreement are reasonable and fair, the Board considered the terms and fee structure of each Agreement. In that connection, the Board considered the costs to the Manager and the Adviser in providing services to each series of Income Trust and profitability for the Manager and its affiliates from their overall association with each series of Income Trust. The Board reviewed information about the advisory fee schedule and overall expense ratio of each series of Income Trust and comparable fee schedules and expense ratios of a peer group of funds. Although Limited Duration Bond Portfolio, Investment Grade Income Portfolio, High Yield Portfolio and Core Bond Fund had not yet grown to a size where any potential economies of scale might become apparent, the Board satisfied itself that the fees paid by each of these series at its current asset level are appropriate and noted the Manager’s agreement to waive fees for Limited Duration Bond Portfolio, Investment Grade Income Portfolio and Core Bond Fund. In considering whether any economies of scale experienced by the Manager and the Adviser in providing services to U.S. Government Money Market Portfolio were shared with that series, the Board further noted that the advisory fee structure for that series provides for a reduction of the effective fee rate as asset levels increase. The Board also compared the advisory fee schedule for each series of Income Trust to the advisory fees charged by the Adviser to its other accounts managed in a similar style. In that connection, the Board considered the differences in the level of services provided and the differences in responsibility of the Adviser to each series of Income Trust and to the other accounts. Finally, the Board considered the benefits accruing to the Manager, the Adviser and their affiliates by virtue of their relationship to each series of Income Trust.
Legg Mason Fund Adviser, Inc. Baltimore, MD |
Investment Adviser
Western Asset Management Company Pasadena, PA |
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 |
Transfer and Shareholder Servicing Agent
Boston Financial Data Services Braintree, MA |
Custodian
State Street Bank & Trust Company Boston, MA |
Counsel
Kirkpatrick & Lockhart Nicholson Graham 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 | 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 each 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’s (“SEC”) website (http://www.sec.gov). Information regarding how each 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 Legg Mason Funds’ website at www.leggmasonfunds.com/about. Each Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. You may obtain a free copy of each Fund’s portfolio holdings as filed on Form N-Q, by contacting each Fund at the appropriate phone number, address or website listed below. Additionally, each Fund’s Form N-Q is available on the SEC’s website (http://www.sec.gov) or may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information about the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. |
You should consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. For a prospectus, which contains this and other information on any Legg Mason fund, call your financial adviser, call 1-800-577-8589, or visit www.leggmasonfunds.com. Please read the prospectus carefully before investing.
Legg Mason Funds For Primary Class Shareholders c/o BFDS P.O. Box 55214 Boston, MA 02205-8504 800-822-5544 www.leggmasonfunds.com | Legg Mason Institutional Funds For FI and I Class Shareholders P.O. Box 17635 Baltimore, MD 21297-1635 888-425-6432 www.lminstitutionalfunds.com |
Legg Mason Investor Services, LLC, Distributor
LMF-056 (12/05)
(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. |
(b) | No response required. | ||
(c) | Not applicable. | ||
(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. |
(a) | (1 | ) | The Registrant’s board of directors has determined that the Registrant has at least one audit committee financial expert serving on its audit committee. | |||||
(a) | (2 | ) | The audit committee financial experts are Mr. Arthur S. Mehlman and Mr. Robert M. Tarola. They are “independent” as defined in Form N-CSR Item 3(a)(2). |
Page 2 of 6
(a) | Audit Fees | ||
Fiscal Year Ended December 31, 2004 – $139,220 | |||
Fiscal Year Ended December 31, 2005 – $162,725 | |||
(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 preapproval 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, 2004 – $3,480 | |||
Fiscal Year Ended December 31, 2005 – $5,250 | |||
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 preapproval 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 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 preapproval 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 to delegate to its Chairperson the authority to preapprove items prior to the next meeting of the Committee. Such preapprovals 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)(i)(C) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years. |
Page 3 of 6
(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 for services rendered to Registrant or Registrant’s investment manager and any entity controlling, controlled by, or under common control with the investment manager. | ||
Fiscal Year Ended December 31, 2004 – $372,631 | |||
Fiscal Year Ended December 31, 2005 – $279,508 | |||
(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. |
Page 4 of 6
(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 SEC’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. |
(a) | File the exhibits listed below as part of this Form. |
(1) | The Registrant’s Code of Ethics applicable to Registrant’s principal executive officer and principal financial officer is attached hereto. | ||
(2) | Separate certifications for the Registrant’s chief executive officer and chief financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940 are attached hereto. |
(b) | Separate certifications for the Registrant’s chief executive officer and chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. |
Page 5 of 6
By: | Mark R. Fetting | |||
Mark R. Fetting | ||||
President, Legg Mason Income Trust, Inc. |
Date: | March 3, 2006 | |||
By: | Mark R. Fetting | |||
Mark R. Fetting | ||||
President, Legg Mason Income Trust, Inc. |
Date: | March 3, 2006 | |||
By: | Marie K. Karpinski | |||
Marie K. Karpinski | ||||
Chief Financial Officer, Legg Mason Income Trust, Inc. | ||||
Date: | March 2, 2006 |
Page 6 of 6