N-CSRS 1 dncsrs.htm WESTERN ASSET FUNDS, INC
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-06110
Western Asset Funds, Inc.
Name of Registrant:
55 Water Street, New York, NY 10041
Address of Principal Executive Offices:
Robert I. Frenkel, Esq.
Legg Mason & Co., LLC
100 First Stamford Street
Baltimore, MD 21202
Name and address of agent for service:
Registrant’s telephone number, including area code: 1-888-425-6432
Date of fiscal year end: December 31,
Date of reporting period: December 31, 2009
| Item 1. | Report to Shareholders |
The Annual Report to Stockholders is filed herewith.
Annual Report to Shareholders
December 31, 2009
Western Asset Funds, Inc.
Western Asset Core Bond Portfolio
Western Asset Core Plus Bond Portfolio
Contents
For more information, visit us on the web
at www.westernassetfunds.com.
Annual Report to Shareholders
Investment Commentary (Unaudited)
Western Asset Funds, Inc.
Financial Market Overview
While 2008 was characterized by upheaval in the financial markets, periods of extreme volatility, illiquidity and heightened risk aversion, 2009 was largely a return to more normal conditions and increased investor risk appetite.
Looking back at the tail end of 2008, investors fled fixed-income securities that were seen as being risky and flocked to the relative safety of short-term Treasuries, driving the latter’s prices higher and their yields to historically low levels. In contrast, non-Treasury spreads widened to historically wide levels in some cases, as the market priced in worst-case scenarios. This caused nearly every spread sector to lag equal-durationi Treasuries during the year. While this trend continued in early 2009, some encouraging economic data and a thawing of the once frozen credit markets helped bolster investor confidence.
In a stunning turnaround, by the end of the first quarter of 2009, risk aversion had been replaced by robust demand for riskier, and higher-yielding, fixed-income securities. Despite some temporary setbacks, riskier assets continued to perform well during the remainder of the year. Looking at 2009 as a whole, every spread sector outperformed equal-duration Treasuries.
While economic news often surprised on the upside during 2009, incoming economic data did not suggest a dramatic rebound in growth in 2010. As such, the Federal Reserve Board (“Fed”)ii continued its accommodative monetary policy during 2009. The Fed met eight times in 2009 and, on each occasion, kept the federal funds rateiii in a range of 0 to 1/4 percent. This trend continued at the Fed’s meeting in January 2010. At that time, the Fed said that it “will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
Economic Review
While the U.S. economy was weak during the first half of the twelve-month reporting period ended December 31, 2009, the lengthiest recession since the Great Depression finally appeared to have ended during the second half of the year.
Looking back, the U.S. Department of Commerce reported that first quarter 2009 U.S. gross domestic product (“GDP”)iv contracted 6.4%. The economic environment then started to get relatively better during the second quarter, as GDP fell 0.7%. The economy’s more modest contraction was due, in part, to smaller declines in both exports and business spending. After contracting four consecutive quarters, the Commerce Department reported that third quarter 2009 GDP growth was 2.2%. A variety of factors helped the economy to expand, including the government’s $787 billion stimulus program, its “Cash for Clunkers” car rebate program, which helped spur an increase in car sales, and tax credits for first-time home buyers. Economic growth then accelerated during the fourth quarter of 2009, as the advance estimate for GDP growth was 5.7%. The Commerce Department cited a slower drawdown in business inventories and consumer spending as contributing factors spurring the economy’s higher growth rate.
Even before GDP advanced in the third quarter, there were signs that the economy was starting to regain its footing. The manufacturing sector, as measured by the Institute for Supply Management’s PMIv, rose to 52.9 in August 2009, the first time it surpassed 50 since January 2008 (a reading below 50 indicates a contraction, whereas a reading above 50 indicates an expansion). PMI data subsequently showed that manufacturing expanded from September through December as well. In addition, December’s PMI reading of 55.9 was the highest since April 2006.
There were some mixed signals from the housing market toward the end of the reporting period. According to its most recent data, the S&P/Case-Shiller Home Price Indexvi indicated that month-over-month home prices rose for the sixth straight month in November. However, according to the National Association of Realtors, while existing home sales rose 7.4% in November, sales fell by nearly 17% in December.
One area that remained weak—and could hamper the magnitude of economic recovery—was the labor market. While monthly job losses have moderated compared to earlier in the year, the unemployment rate remained elevated during the reporting period. After reaching a twenty-six-year high of 10.1% in October 2009, the unemployment rate fell to 10.0% in November and remained unchanged the following month. Since December 2007, the unemployment rate has more than doubled and the number of unemployed workers has risen by more than eight million.
ii
Annual Report to Shareholders
Market Review
Both short- and long-term Treasury yields fluctuated during the reporting period. When the period began, Treasury yields were extremely low, given numerous “flights to quality” that were triggered by the fallout from the financial crisis in 2008. After starting the period at 0.76% and 2.25%, respectively, two- and ten-year Treasury yields then generally moved higher (and their prices lower) until early June. Two- and ten-year yields peaked at 1.42% and 3.98%, respectively, before falling and ending the reporting period at 1.14% and 3.85%, respectively. Over the twelve months ended December 31, 2009, longer-term yields moved higher than their shorter-term counterparts as economic data improved and there were concerns regarding future inflation given the government’s massive stimulus program. In a reversal from 2008, investor risk aversion faded during the twelve-month reporting period, driving spread sector (non-Treasury) prices higher. For the twelve months ended December 31, 2009, the Barclays Capital U.S. Aggregate Indexvii returned 5.93%.
During the reporting period, there was a shift in terms of expectations for inflation. Fears of inflation had increased in mid-2008 (before the reporting period began). This was, in part, due to sharply rising oil prices, which peaked at $145 a barrel in July 2008. Fears of inflation were then replaced with fears of deflation, as global economic conditions weakened and the financial crisis took hold in the fall of 2008. By the end of 2008, oil prices had fallen to $45 a barrel as demand waned and oil reserves moved higher. While inflation, as measured by the Consumer Price Index for All Urban Consumers (“CPI-U”)viii, was 2.7% during the twelve-month period ended December 31, 2009, there were fears of higher inflation in the future. This was due to central banks’ accommodative monetary policies, signs that the global economy was recovering and rising oil prices, which hit $79 a barrel in December 2009. Inflation expectations led to increased demand for U.S. Treasury Inflation-Protected Securities (“TIPS”)ix, and the Barclays Capital Global Real Index: U.S. TIPSx gained 11.41% during the twelve months ended December 31, 2009.
The investment grade bond market generated solid results during the reporting period. Spreads on these securities had moved to extremely wide levels in late 2008, as the weakening economy and credit crunch triggered fears of escalating default rates. Investment grade bond spreads then significantly narrowed in 2009, as the economic environment improved and corporate profits were often better than expected. All told, the investment grade bond asset class, as measured by the Barclays Capital U.S. Credit Indexxi, returned 16.04% during the twelve-month period ended December 31, 2009.
In the mortgage-backed securities market, both agency and non-agency issues did well during the year. Agencies were supported by the government’s purchase programs of these securities as they sought to keep long-term interest rates low in an attempt to revive the housing market. The non-agency sector improved, particularly later in the year, as housing data stabilized and there was positive sentiment surrounding the launch of the Public-Private Investment Program (“PPIP”).
The high-yield bond market produced very strong results during the twelve months ended December 31, 2009. In sharp contrast to its poor results in 2008, the asset class posted positive returns during eleven of the twelve months of the reporting period. This strong rally was due to a variety of factors, including the unfreezing of the credit markets, improving economic data and strong investor demand. All told, the Barclays Capital U.S. Corporate High Yield 2% Issuer Cap Indexxii returned 58.76% for the twelve months ended December 31, 2009.
Emerging market debt prices rallied sharply—posting positive returns during every month but February of 2009. This rally was triggered by rising commodity prices, optimism that the worst of the global recession was over and increased investor risk appetite. Over the twelve months ended December 31, 2009, the JPMorgan Emerging Markets Bond Index Global (“EMBI Global”)xiii returned 28.18%.
Market Outlook
Some economists have floated the notion of a double-dip economic recession because of the expiration of various fiscal and monetary stimulus programs. However, we believe this economic phenomenon seems unlikely. As long as the Fed maintains the current low rate environment, which we believe it will, access to credit should remain sufficient. Given the elevated levels of unemployment, the recent dip in jobless claims is a positive sign that the labor market is stabilizing. The financial market is focused on consumer spending, but we believe more sustained gains in capital expenditures and exports will be key to the U.S. recovery.
We believe that the Fed is likely to keep the federal funds rate anchored at 0 to 1/4 percent in the near future. A large concern the Fed now faces is excess bank reserves. Government support from the Troubled Asset Relief Program (“TARP”) and the Fed’s various special liquidity programs helped banks restore their balance sheets, but banks then held on to reserves in excess of their capital requirements. As the recovery accelerates, banks may quickly reduce these excess reserves by extending credit. We believe increased lending should stimulate economic activity but, in doing so, might also contribute to inflationary
iii
Annual Report to Shareholders
Investment Commentary—(Unaudited) Continued
pressures. Therefore, as the Fed manages the level of bank reserves, in our opinion, it must be careful not to inhibit economic growth and increase inflation. As long as the economic recovery is still in its infancy, we believe the Fed should continue its current policies.
Although the labor market is stabilizing, the declining trend in jobless claims reflects a drop-off in layoffs rather than an increase in hires. For unemployment to truly decline, we will need to see specific types of job growth. We believe the source of new job growth will probably have to come from the service sector, as the housing market remains weak and is unlikely to contribute significant new jobs any time soon. The recent increase in industrial production and capacity utilization indicates that factory-related jobs could increase in the coming year.
Despite an uptick in consumer spending in November, most likely due to the holidays, we think consumers will likely continue to demonstrate a more conservative mindset with increased savings and less consumption. Businesses, especially those that are export-oriented, should benefit from a lower U.S. dollar and increased future spending. Corporate profits in the fourth quarter of 2009 showed improvement, leading to a better outlook for the business sector compared to a year ago. Therefore, we think that businesses, rather than consumers, are likely to be the primary contributors to future economic growth. Considering current Fed policies, the likelihood of moderate inflation in the months ahead, a stabilizing labor market and an improved business climate, we find fears of a double-dip recession to be exaggerated.
Western Asset Management Company
January 29, 2010
iv
Annual Report to Shareholders
The views expressed in this commentary reflect those solely of Western Asset Management Company (“Western Asset”) as of the date of the commentary and may differ from those of Legg Mason, Inc. or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Western Asset and Legg Mason Investor Services, LLC disclaim any responsibility to update such views. These views are not intended to be a forecast of future events, a guarantee of future results or investment advice. Forecasts are inherently limited and should not be relied upon as an indication of actual or future performance. Because investment decisions for the Funds are based on numerous factors, these views may not be relied upon as an indication of trading intent on behalf of the Funds or any Legg Mason fund. The information contained herein has been prepared from sources believed to be reliable, but is not guaranteed by Western Asset or Legg Mason Investor Services, LLC as to its accuracy or completeness.
All investments are subject to risk including the loss of principal. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
| i | | Duration is the measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows. |
| ii | | The Federal Reserve Board (“Fed”) is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments. |
| iii | | The federal funds rate is the rate charged by one depository institution on an overnight sale of immediately available funds (balances at the Federal Reserve) to another depository institution; the rate may vary from depository institution to depository institution and from day to day. |
| iv | | Gross domestic product (“GDP”) is the market value of all final goods and services produced within a country in a given period of time. |
| v | | The Institute for Supply Management’s PMI is based on a survey of purchasing executives who buy the raw materials for manufacturing at more than 350 companies. It offers an early reading on the health of the manufacturing sector. |
| vi | | The S&P/Case-Shiller Home Price Index measures the residential housing market, tracking changes in the value of the residential real estate market in twenty metropolitan regions across the United States. |
| vii | | The Barclays Capital U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage- and asset-backed issues, rated investment grade or higher, and having at least one year to maturity. |
| viii | | The Consumer Price Index for All Urban Consumers (“CPI-U”) is a measure of the average change in prices over time of goods and services purchased by households, which covers approximately 87% of the total population and includes, in addition to wage earners and clerical worker households, groups such as professional, managerial and technical workers, the self-employed, short-term workers, the unemployed and retirees and others not in the labor force. |
| ix | | U.S. Treasury Inflation-Protected Securities (“TIPS”) are inflation-indexed securities issued by the U.S. Treasury in five-year, ten-year and twenty-year maturities. The principal is adjusted to the Consumer Price Index, the commonly used measure of inflation. The coupon rate is constant, but generates a different amount of interest when multiplied by the inflation-adjusted principal. |
| x | | The Barclays Capital Global Real Index: U.S. TIPS represents an unmanaged market index made up of U.S. Treasury Inflation-Linked Index securities. |
| xi | | The Barclays Capital U.S. Credit Index is an index composed of corporate and non-corporate debt issues that are investment grade (rated Baa3/BBB- or higher). |
| xii | | The Barclays Capital U.S. Corporate High Yield 2% Issuer Cap Index is an index of the 2% Issuer Cap component of the Barclays Capital U.S. Corporate High Yield Index, which covers the U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond market. |
| xiii | | The JPMorgan Emerging Markets Bond Index Global (“EMBI Global”) tracks total returns for U.S. dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans, Eurobonds and local market instruments. |
v
Annual Report to Shareholders
Management’s Discussion of Fund Performance
Western Asset Core Bond Portfolio
Performance Review
For the twelve months ended December 31, 2009, Institutional Class shares of Western Asset Core Bond Portfolio returned 23.68%. The Fund’s unmanaged benchmark, the Barclays Capital U.S. Aggregate Indexi, returned 5.93% for the same period. The Lipper Intermediate Investment Grade Debt Funds Category Average1 returned 12.89% over the same time frame.
PERFORMANCE SNAPSHOT as of December 31, 2009 (unaudited)
| | | | |
| | | 6 MONTHS | | 12 MONTHS |
Western Asset Core Bond Portfolio: | | | | |
Institutional Class | | 13.96% | | 23.68% |
Financial Intermediary Class | | 13.82% | | 23.37% |
Institutional Select Class | | 14.01% | | 23.72% |
Barclays Capital U.S. Aggregate Index | | 3.95% | | 5.93% |
Lipper Intermediate Investment Grade Debt Funds Category Average1 | | 7.11% | | 12.89% |
The performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown above. Principal value, investment returns and yields will fluctuate and investors’ shares, when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent month-end, please visit our website at www.leggmason.com/individualinvestors.
All share class returns assume the reinvestment of all distributions, including returns of capital, if any, at net asset value and the deduction of all Fund expenses. Returns have not been adjusted to include the deduction of taxes that a shareholder would pay on Fund distributions. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.
Performance figures reflect expense reimbursements and/or fee waivers, without which the performance would have been lower.
The 30-Day SEC Yields for the period ended December 31, 2009 for Institutional, Financial Intermediary and Institutional Select Class shares were 4.13%, 3.93% and 4.21%, respectively. Absent current expense reimbursements and/or fee waivers, the 30-Day SEC Yields for Institutional, Financial Intermediary and Institutional Select Class shares would have been 4.13%, 3.91% and 4.21%, respectively. The 30-Day SEC Yield is the average annualized net investment income per share for the 30-day period indicated and is subject to change.
TOTAL ANNUAL OPERATING EXPENSES (unaudited)
As of the Fund’s most current prospectus dated July 1, 2009, the gross total operating expense ratios for Institutional, Financial Intermediary and Institutional Select Class shares were 0.49%, 0.83% and 0.48%, respectively.
Actual expenses may be higher. For example, expenses may be higher than those shown if average net assets decrease. Net assets are more likely to decrease and Fund expense ratios are more likely to increase when markets are volatile.
As a result of contractual expense limitations, the ratio of expenses, other than interest, brokerage, taxes, deferred organizational expenses and extraordinary expenses, to average net assets will not exceed 0.75% for Financial Intermediary Class shares and 0.50% for Institutional Select Class shares until April 30, 2010.
| 1 | | Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the period ended December 31, 2009, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 561 funds for the six-month period and among the 549 funds for the twelve-month period in the Fund’s Lipper category. |
1
Annual Report to Shareholders
Management’s Discussion of Fund Performance—Continued
Western Asset Core Bond Portfolio—Continued
In sharp contrast to 2008 when U.S. Treasuries outperformed the spread sectors (non-Treasuries), the spread sectors generated superior returns in 2009. In this environment, the Fund significantly outperformed its benchmark during the reporting period.
The largest contributor to relative results for the period was our overweight exposure to investment grade bonds. In particular, our Financials holdings performed well as their spreads tightened from their elevated levels in 2008 and early 2009. An exposure to several “fallen angels” (investment grade corporate bonds that were subsequently downgraded to non-investment grade status) also enhanced our returns. Our overweight to non-agency mortgage-backed securities (“MBS”) was another meaningful contributor to performance. The asset class generated strong results as housing data improved and there was positive sentiment surrounding the launch of the Public-Private Investment Program (“PPIP”). Elsewhere, our diversification into U.S. Treasury Inflation-Protected Securities (“TIPS”)ii and our asset-backed security issue selection benefited performance, albeit to a lesser extent. The only meaningful detractor during the year was the portfolio’s underweight to commercial MBS, as the sector performed well during the twelve-month period.
We made several adjustments to the portfolio during the twelve-month reporting period. We increased the portfolio’s exposure to Treasuries, investment grade bonds and government agency bonds. In contrast, we moved from an overweight to an underweight position versus the benchmark in agency MBS, finding them less attractive as their spreads had narrowed given the government’s direct purchase of these securities. With the government set to phase out its purchasing program, we determined that more attractive opportunities could be found in other areas of the market.
During the reporting period, we utilized Eurodollar futures/options and Treasury futures/options to manage the portfolio’s durationiii and yield curveiv exposure. Interest rate swaps/swaptions were used to manage our interest rate exposure throughout the yield curve. We also utilized index credit default swaps/swaptions to manage the portfolio’s exposure to the investment grade, residential MBS and commercial MBS markets. Finally, credit default swaps were used to manage the portfolio’s exposure to specific corporate names. Overall, the use of these derivative instruments was positive for performance.
Western Asset Management Company
January 19, 2010
2
Annual Report to Shareholders
The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.
The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. Portfolio holdings are subject to change at any time and may not be representative of the portfolio managers’ current or future investments. The Fund’s top five sector holdings (as a percentage of net assets) as of December 31, 2009 were: Corporate Bonds and Notes (25.9%), U.S. Government Agency Mortgage-Backed Securities (25.3%), U.S. Government and Agency Obligations (21.8%), Mortgage-Backed Securities (18.6%) and Yankee Bonds (6.3%). The Fund’s portfolio composition is subject to change at any time.
RISKS: All investments are subject to risk including the loss of principal. Bonds are subject to a variety of risks, including interest rate, credit and inflation risk. As interest rates rise, bond prices fall, reducing the value of the Fund’s share price. Mortgage-backed securities involve more risk, including prepayment and extension risks, than other investments in fixed-income securities. The Fund may use derivatives, such as options, futures and swaps, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. Please see the Fund’s prospectus for more information on these and other risks.
All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
| i | | The Barclays Capital U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage- and asset-backed issues, rated investment grade or higher, and having at least one year to maturity. |
| ii | | U.S. Treasury Inflation-Protected Securities (“TIPS”) are inflation-indexed securities issued by the U.S. Treasury in five-year, ten-year and twenty-year maturities. The principal is adjusted to the Consumer Price Index, the commonly used measure of inflation. The coupon rate is constant, but generates a different amount of interest when multiplied by the inflation-adjusted principal. |
| iii | | Duration is the measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows. |
| iv | | The yield curve is the graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities. |
3
Annual Report to Shareholders
Expense Example (Unaudited)
Western Asset Core Bond Portfolio
As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution (12b-1) fees on Financial Intermediary 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.
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 if your shares were held for the entire period. The example are based on an investment of $1,000 invested on July 1, 2009 and held through December 31, 2009. The ending values assume dividends were reinvested at the time they were paid.
Hypothetical Examples 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 this 5% hypothetical example with the 5% hypothetical examples for the relevant classes that appear in the shareholder reports of other funds. Because the example is intended to be comparable to the examples provided by other funds, it is based on a hypothetical investment of $1,000 invested on July 1, 2009 and held through December 31, 2009 for each class. The ending values assume dividends were reinvested at the time they were paid.
| | | | | | | | | |
| | | Beginning
Account Value
7/1/09 | | Ending
Account Value
12/31/09 | | Expenses PaidA
During the Period
7/1/09 to 12/31/09 |
Institutional Class: | | | | | | | | | |
Actual | | $ | 1,000.00 | | $ | 1,139.60 | | $ | 2.64 |
Hypothetical (5% return before expenses) | | | 1,000.00 | | | 1,022.74 | | | 2.50 |
Institutional Select Class: | | | | | | | | | |
Actual | | $ | 1,000.00 | | $ | 1,140.10 | | $ | 2.32 |
Hypothetical (5% return before expenses) | | | 1,000.00 | | | 1,023.04 | | | 2.19 |
Financial Intermediary Class: | | | | | | | | | |
Actual | | $ | 1,000.00 | | $ | 1,138.20 | | $ | 4.04 |
Hypothetical (5% return before expenses) | | | 1,000.00 | | | 1,021.42 | | | 3.82 |
| A | | These calculations are based on expenses incurred from July 1, 2009 to December 31, 2009. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratios of 0.49%, 0.43% and 0.75% for the Institutional Class, Institutional Select Class and Financial Intermediary Class, respectively, multiplied by the average values over the period, multiplied by the number of days in the most recent fiscal period then divided by 365. |
4
Annual Report to Shareholders
Performance Information (Unaudited)
Western Asset Core Bond Portfolio
The graphs compare the Fund’s total returns to that of an appropriate broad-based securities market index. The graphs illustrate the cumulative total return of an initial $1,000,000 investment in the Institutional Class, Institutional Select Class and Financial Intermediary Class of the Fund, 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 investment management or administrative expenses.
Total return measures investment performance in terms of appreciation or depreciation in the Fund’s net asset value per share, plus dividends and any capital gain distributions. It assumes that dividends and distributions were reinvested at the time they were paid. Returns (and the graphs and tables found below) do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.
Bonds are subject to a variety of risks, including interest rate, credit and inflation risk. Non-U.S. investments are subject to currency fluctuations, social, economical and political risk.
Growth of a $1,000,000 Investment—Institutional Class
The performance data quoted represent past performance and do not guarantee future results. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.leggmason.com/individualinvestors. 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 the reinvestment of all distributions, including returns of capital, if any, at net asset value and the deduction of all Fund expenses. Performance would have been lower if fees had not been waived in various periods.
5
Annual Report to Shareholders
Performance Information (Unaudited)—Continued
Growth of a $1,000,000 Investment—Institutional Select Class
The performance data quoted represent past performance and do not guarantee future results. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.leggmason.com/individualinvestors. 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 the reinvestment of all distributions, including returns of capital, if any, at net asset value and the deduction of all Fund expenses. Performance would have been lower if fees had not been waived in various periods.
6
Annual Report to Shareholders
Growth of a $1,000,000 Investment—Financial Intermediary Class
The performance data quoted represent past performance and do not guarantee future results. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.leggmason.com/individualinvestors. 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 the reinvestment of all distributions, including returns of capital, if any, at net asset value and the deduction of all Fund expenses. Performance would have been lower if fees had not been waived in various periods.
7
Annual Report to Shareholders
Performance Information (Unaudited)—Continued
Portfolio Composition (as of December 31, 2009)A
Standard & Poor’s Debt RatingsB
(as a percentage of the portfolio)
Maturity Schedule
(as a percentage of the portfolio)
| A | | The pie charts above represent the composition of the Fund’s portfolio as of December 31, 2009 and do not include derivatives such as Futures Contracts, Options Written, and Swaps. The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time. |
| B | | Source: Standard & Poor’s. These ratings are the opinions of S&P and not absolute measures of quality or guarantees of performance. |
| C | | Preferred stocks do not have defined maturity dates. |
8
Annual Report to Shareholders
Spread Duration
Western Asset Core Bond Portfolio
December 31, 2009 (Unaudited)
Economic Exposure
Spread duration is defined as the change in value for a 100 basis point change in the spread relative to Treasuries. The spread over Treasuries is the annual risk-premium demanded by investors to hold non-Treasury securities. This chart highlights the market sector exposure of the Fund’s portfolio and the exposure relative to the selected benchmark as of the end of the reporting period.
ABS—Asset Backed Securities
BAI—Barclays Capital U.S. Aggregate Index
CMBS—Commercial Mortgage Backed Securities
HY—High Yield
IG Credit—Investment Grade Credit
MBS—Mortgage Backed Securities
9
Annual Report to Shareholders
Effective Duration
Western Asset Core Bond Portfolio
December 31, 2009 (Unaudited)
Interest Rate Exposure
Effective duration is defined as the change in value for a 100 basis point change in Treasury yields. This chart highlights the interest rate exposure of the Fund’s portfolio relative to the selected benchmark as of the end of the reporting period.
ABS—Asset Backed Securities
BAI—Barclays Capital U.S. Aggregate Index
CMBS—Commercial Mortgage Backed Securities
HY—High Yield
IG Credit—Investment Grade Credit
MBS—Mortgage Backed Securities
10
Annual Report to Shareholders
Portfolio of Investments
Western Asset Core Bond Portfolio
December 31, 2009
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
Long-Term Securities | | 102.4% | | | | | | | | | | | |
| | | | | |
Corporate Bonds and Notes | | 25.9% | | | | | | | | | | | |
| | | | | |
Aerospace and Defense | | 0.2% | | | | | | | | | | | |
The Boeing Co. | | | | 4.875% | | 2/15/20 | | $ | 5,210,000 | | $ | 5,224,124 | |
United Technologies Corp. | | | | 5.400% | | 5/1/35 | | | 1,460,000 | | | 1,421,900 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 6,646,024 | |
| | | | | | | | | | | | | |
Airlines | | 1.7% | | | | | | | | | | | |
Continental Airlines Inc. | | | | 6.900% | | 1/2/18 | | | 2,356,249 | | | 2,279,671 | |
Continental Airlines Inc. | | | | 6.820% | | 5/1/18 | | | 548,237 | | | 498,895 | |
Continental Airlines Inc. | | | | 6.545% | | 2/2/19 | | | 3,458,037 | | | 3,388,876 | |
Continental Airlines Inc. | | | | 5.983% | | 4/19/22 | | | 4,000,000 | | | 3,860,000 | |
Continental Airlines Inc. | | | | 6.703% | | 12/15/22 | | | 3,022,557 | | | 2,810,978 | |
Delta Air Lines Inc. | | | | 7.379% | | 5/18/10 | | | 247,478 | | | 246,859 | |
Delta Air Lines Inc. | | | | 7.570% | | 11/18/10 | | | 7,136,000 | | | 7,234,120 | |
Delta Air Lines Inc. | | | | 7.111% | | 9/18/11 | | | 15,600,000 | | | 15,736,500 | |
Delta Air Lines Inc. | | | | 6.821% | | 8/10/22 | | | 10,152,332 | | | 9,695,477 | |
Northwest Airlines Corp. | | | | 7.575% | | 9/1/20 | | | 4,933,801 | | | 4,440,421 | |
Northwest Airlines Inc. | | | | 1.019% | | 5/20/14 | | | 2,288,335 | | | 1,922,202 | A |
Southwest Airlines Co. | | | | 5.125% | | 3/1/17 | | | 2,640,000 | | | 2,533,822 | |
US Airways Pass-Through Trust | | | | 6.850% | | 1/30/18 | | | 9,677,173 | | | 7,935,282 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 62,583,103 | |
| | | | | | | | | | | | | |
Automobiles | | N.M. | | | | | | | | | | | |
DaimlerChrysler NA Holding Corp. | | | | 5.875% | | 3/15/11 | | | 700,000 | | | 731,902 | |
Motors Liquidation Co. | | | | 9.450% | | 11/1/11 | | | 160,000 | | | 42,000 | B |
Motors Liquidation Co. | | | | 9.400% | | 7/15/21 | | | 43,000 | | | 11,234 | B |
Motors Liquidation Co. | | | | 8.100% | | 6/15/24 | | | 23,000 | | | 5,980 | B |
Motors Liquidation Co. | | | | 0.000% | | 3/15/36 | | | 567,000 | | | 76,545 | B,C |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 867,661 | |
| | | | | | | | | | | | | |
Beverages | | 0.2% | | | | | | | | | | | |
Anheuser-Busch InBev Worldwide Inc. | | | | 5.375% | | 1/15/20 | | | 6,620,000 | | | 6,754,115 | D |
| | | | | | | | | | | | | |
| | | | | |
Building Products | | 0.2% | | | | | | | | | | | |
Masco Corp. | | | | 7.125% | | 8/15/13 | | | 3,320,000 | | | 3,455,688 | |
Masco Corp. | | | | 6.125% | | 10/3/16 | | | 4,120,000 | | | 3,926,117 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 7,381,805 | |
| | | | | | | | | | | | | |
Capital Markets | | 1.1% | | | | | | | | | | | |
Goldman Sachs Capital II | | | | 5.793% | | 12/29/49 | | | 770,000 | | | 596,750 | C |
Lehman Brothers Holdings Capital Trust VII | | | | 5.857% | | 11/29/49 | | | 1,300,000 | | | 390 | B,C |
11
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
Corporate Bonds and Notes—Continued | | | | | | | | | | | | | |
| | | | | |
Capital Markets—Continued | | | | | | | | | | | | | |
Lehman Brothers Holdings Inc. | | | | 6.200% | | 9/26/14 | | $ | 4,370,000 | | $ | 852,150 | B |
Lehman Brothers Holdings Inc. | | | | 6.500% | | 7/19/17 | | | 11,920,000 | | | 3,576 | B |
Lehman Brothers Holdings Inc. | | | | 6.750% | | 12/28/17 | | | 29,990,000 | | | 8,997 | B |
Merrill Lynch and Co. Inc. | | | | 6.110% | | 1/29/37 | | | 3,510,000 | | | 3,235,946 | |
Morgan Stanley | | | | 4.750% | | 4/1/14 | | | 3,070,000 | | | 3,087,643 | |
Morgan Stanley | | | | 0.734% | | 10/18/16 | | | 4,040,000 | | | 3,742,244 | A |
The Bear Stearns Cos. Inc. | | | | 6.400% | | 10/2/17 | | | 17,120,000 | | | 18,662,187 | |
The Goldman Sachs Group Inc. | | | | 5.625% | | 1/15/17 | | | 9,935,000 | | | 10,147,212 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 40,337,095 | |
| | | | | | | | | | | | | |
Commercial Banks | | 1.2% | | | | | | | | | | | |
Bank One Corp. | | | | 7.875% | | 8/1/10 | | | 4,500,000 | | | 4,691,655 | |
Bank One Corp. | | | | 5.900% | | 11/15/11 | | | 2,000,000 | | | 2,134,584 | |
HBOS Treasury Services PLC | | | | 5.250% | | 2/21/17 | | | 2,500,000 | | | 2,479,135 | D |
SunTrust Capital VIII | | | | 6.100% | | 12/15/36 | | | 14,970,000 | | | 10,426,844 | C |
Wachovia Capital Trust III | | | | 5.800% | | 3/15/49 | | | 6,130,000 | | | 4,689,450 | C |
Wachovia Corp. | | | | 5.750% | | 6/15/17 | | | 16,100,000 | | | 16,743,324 | |
Wells Fargo Capital X | | | | 5.950% | | 12/15/36 | | | 1,890,000 | | | 1,644,300 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 42,809,292 | |
| | | | | | | | | | | | | |
Commercial Services and Supplies | | 0.4% | | | | | | | | | | | |
Waste Management Inc. | | | | 6.375% | | 11/15/12 | | | 2,530,000 | | | 2,783,286 | |
Waste Management Inc. | | | | 5.000% | | 3/15/14 | | | 3,440,000 | | | 3,627,022 | |
Waste Management Inc. | | | | 7.125% | | 12/15/17 | | | 6,000,000 | | | 6,652,368 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 13,062,676 | |
| | | | | | | | | | | | | |
Communications Equipment | | 0.2% | | | | | | | | | | | |
Motorola Inc. | | | | 8.000% | | 11/1/11 | | | 5,600,000 | | | 5,989,133 | |
| | | | | | | | | | | | | |
| | | | | |
Consumer Finance | | 2.2% | | | | | | | | | | | |
American Express Co. | | | | 6.800% | | 9/1/66 | | | 4,460,000 | | | 3,991,700 | C |
American Express Credit Corp. | | | | 5.125% | | 8/25/14 | | | 15,020,000 | | | 15,827,070 | |
American General Finance Corp. | | | | 6.900% | | 12/15/17 | | | 4,070,000 | | | 2,826,021 | |
Capital One Financial Corp. | | | | 6.150% | | 9/1/16 | | | 3,170,000 | | | 3,184,312 | |
Ford Motor Credit Co. | | | | 7.375% | | 2/1/11 | | | 6,435,000 | | | 6,566,184 | |
Ford Motor Credit Co. | | | | 7.250% | | 10/25/11 | | | 5,910,000 | | | 5,968,462 | |
GMAC LLC | | | | 7.750% | | 1/19/10 | | | 3,493,000 | | | 3,493,000 | D |
GMAC LLC | | | | 7.250% | | 3/2/11 | | | 519,000 | | | 513,810 | D |
GMAC LLC | | | | 7.500% | | 12/31/13 | | | 1,449,000 | | | 1,398,285 | D |
GMAC LLC | | | | 0.000% | | 6/15/15 | | | 220,000 | | | 120,725 | E |
SLM Corp. | | | | 5.375% | | 5/15/14 | | | 3,000,000 | | | 2,767,110 | |
SLM Corp. | | | | 5.625% | | 8/1/33 | | | 42,895,000 | | | 32,341,071 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 78,997,750 | |
| | | | | | | | | | | | | |
12
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
Corporate Bonds and Notes—Continued | | | | | | | | | | | | | |
| | | | | |
Diversified Financial Services | | 4.3% | | | | | | | | | | | |
Air 2 US | | | | 8.027% | | 10/1/19 | | $ | 7,708,190 | | $ | 6,643,497 | D |
BAC Capital Trust XIV | | | | 5.630% | | 12/31/49 | | | 500,000 | | | 345,000 | C |
Boeing Capital Corp. | | | | 4.700% | | 10/27/19 | | | 2,620,000 | | | 2,556,051 | |
Citigroup Inc. | | | | 6.375% | | 8/12/14 | | | 2,170,000 | | | 2,271,788 | |
Citigroup Inc. | | | | 5.500% | | 10/15/14 | | | 1,740,000 | | | 1,761,804 | |
Citigroup Inc. | | | | 6.010% | | 1/15/15 | | | 8,630,000 | | | 8,812,076 | |
Citigroup Inc. | | | | 8.500% | | 5/22/19 | | | 2,420,000 | | | 2,794,502 | |
Citigroup Inc. | | | | 6.125% | | 8/25/36 | | | 2,000,000 | | | 1,715,188 | |
Citigroup Inc. | | | | 5.875% | | 5/29/37 | | | 17,000,000 | | | 14,980,145 | |
Citigroup Inc. | | | | 6.875% | | 3/5/38 | | | 17,330,000 | | | 17,295,652 | |
General Electric Capital Corp. | | | | 2.125% | | 12/21/12 | | | 21,370,000 | | | 21,389,810 | |
General Electric Capital Corp. | | | | 6.875% | | 1/10/39 | | | 23,700,000 | | | 24,474,634 | |
General Electric Capital Corp. | | | | 6.375% | | 11/15/67 | | | 22,960,000 | | | 19,917,800 | C |
HSBC Finance Corp. | | | | 8.000% | | 7/15/10 | | | 690,000 | | | 715,061 | |
HSBC Finance Corp. | | | | 7.000% | | 5/15/12 | | | 700,000 | | | 761,153 | |
HSBC Finance Corp. | | | | 6.375% | | 11/27/12 | | | 440,000 | | | 479,174 | |
ILFC E-Capital Trust I | | | | 5.900% | | 12/21/65 | | | 10,600,000 | | | 5,512,000 | C,D |
ILFC E-Capital Trust II | | | | 6.250% | | 12/21/65 | | | 4,160,000 | | | 2,163,200 | C,D |
JP Morgan and Co. Inc. | | | | 1.714% | | 2/15/12 | | | 2,000,000 | | | 1,930,840 | A |
JPMorgan Chase and Co. | | | | 5.750% | | 1/2/13 | | | 3,770,000 | | | 4,020,660 | |
JPMorgan Chase and Co. | | | | 6.125% | | 6/27/17 | | | 7,855,000 | | | 8,302,531 | |
PHH Corp. | | | | 7.125% | | 3/1/13 | | | 3,410,000 | | | 3,154,250 | |
Unilever Capital Corp. | | | | 7.125% | | 11/1/10 | | | 1,730,000 | | | 1,823,577 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 153,820,393 | |
| | | | | | | | | | | | | |
Diversified Telecommunication Services | | 0.8% | | | | | | | | | | | |
AT&T Inc. | | | | 5.100% | | 9/15/14 | | | 4,960,000 | | | 5,335,274 | |
AT&T Inc. | | | | 6.550% | | 2/15/39 | | | 11,120,000 | | | 11,716,722 | |
BellSouth Corp. | | | | 4.750% | | 11/15/12 | | | 440,000 | | | 469,834 | |
BellSouth Corp. | | | | 5.200% | | 9/15/14 | | | 4,270,000 | | | 4,573,140 | |
CenturyTel Inc. | | | | 6.000% | | 4/1/17 | | | 4,120,000 | | | 4,230,568 | |
Verizon Global Funding Corp. | | | | 7.250% | | 12/1/10 | | | 2,220,000 | | | 2,346,043 | |
Verizon Global Funding Corp. | | | | 7.375% | | 9/1/12 | | | 5,000 | | | 5,636 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 28,677,217 | |
| | | | | | | | | | | | | |
Electric Utilities | | 0.6% | | | | | | | | | | | |
Exelon Corp. | | | | 5.625% | | 6/15/35 | | | 345,000 | | | 311,978 | |
FirstEnergy Corp. | | | | 6.450% | | 11/15/11 | | | 13,000 | | | 13,939 | |
FirstEnergy Corp. | | | | 7.375% | | 11/15/31 | | | 10,610,000 | | | 11,500,200 | |
Pacific Gas and Electric Co. | | | | 6.050% | | 3/1/34 | | | 940,000 | | | 981,392 | |
13
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
Corporate Bonds and Notes—Continued | | | | | | | | | | | | | |
| | | | | |
Electric Utilities—Continued | | | | | | | | | | | | | |
Pacific Gas and Electric Co. | | | | 5.800% | | 3/1/37 | | $ | 7,330,000 | | $ | 7,428,992 | |
Progress Energy Inc. | | | | 7.100% | | 3/1/11 | | | 1,488,000 | | | 1,574,935 | |
The Detroit Edison Co. | | | | 6.125% | | 10/1/10 | | | 920,000 | | | 955,989 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 22,767,425 | |
| | | | | | | | | | | | | |
Food and Staples Retailing | | 1.5% | | | | | | | | | | | |
CVS Lease Pass-Through Trust | | | | 6.117% | | 1/10/13 | | | 3,059,746 | | | 3,266,676 | D |
CVS Lease Pass-Through Trust | | | | 6.036% | | 12/10/28 | | | 33,986,757 | | | 32,163,028 | |
The Kroger Co. | | | | 6.400% | | 8/15/17 | | | 580,000 | | | 633,606 | |
The Kroger Co. | | | | 6.150% | | 1/15/20 | | | 850,000 | | | 909,711 | |
Wal-Mart Stores Inc. | | | | 5.800% | | 2/15/18 | | | 9,150,000 | | | 10,154,240 | |
Wal-Mart Stores Inc. | | | | 6.200% | | 4/15/38 | | | 5,410,000 | | | 5,966,115 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 53,093,376 | |
| | | | | | | | | | | | | |
Food Products | | 0.2% | | | | | | | | | | | |
Sara Lee Corp. | | | | 6.250% | | 9/15/11 | | | 5,500,000 | | | 5,867,923 | |
| | | | | | | | | | | | | |
| | | | | |
Gas Utilities | | 0.2% | | | | | | | | | | | |
Southern Natural Gas Co. | | | | 8.000% | | 3/1/32 | | | 7,390,000 | | | 8,498,286 | |
| | | | | | | | | | | | | |
| | | | | |
Health Care Providers and Services | | 1.5% | | | | | | | | | | | |
AmerisourceBergen Corp. | | | | 5.625% | | 9/15/12 | | | 3,520,000 | | | 3,747,930 | |
AmerisourceBergen Corp. | | | | 5.875% | | 9/15/15 | | | 3,050,000 | | | 3,323,951 | |
HCA Inc. | | | | 5.750% | | 3/15/14 | | | 35,430,000 | | | 33,304,200 | |
Tenet Healthcare Corp. | | | | 7.375% | | 2/1/13 | | | 6,584,000 | | | 6,600,460 | |
Tenet Healthcare Corp. | | | | 9.000% | | 5/1/15 | | | 1,250,000 | | | 1,350,000 | D |
Tenet Healthcare Corp. | | | | 10.000% | | 5/1/18 | | | 1,250,000 | | | 1,400,000 | D |
WellPoint Inc. | | | | 5.875% | | 6/15/17 | | | 900,000 | | | 927,227 | |
WellPoint Inc. | | | | 7.000% | | 2/15/19 | | | 2,780,000 | | | 3,109,230 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 53,762,998 | |
| | | | | | | | | | | | | |
Hotels, Restaurants and Leisure | | 0.1% | | | | | | | | | | | |
Marriott International Inc. | | | | 5.810% | | 11/10/15 | | | 4,400,000 | | | 4,285,455 | |
| | | | | | | | | | | | | |
| | | | | |
Independent Power Producers and Energy Traders | | 0.1% | | | | | | | | | | | |
TXU Corp. | | | | 6.500% | | 11/15/24 | | | 1,090,000 | | | 511,990 | |
TXU Corp. | | | | 6.550% | | 11/15/34 | | | 9,930,000 | | | 4,603,757 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 5,115,747 | |
| | | | | | | | | | | | | |
Industrial Conglomerates | | 0.3% | | | | | | | | | | | |
Tyco International Ltd./Tyco International Finance SA | | | | 7.000% | | 12/15/19 | | | 2,590,000 | | | 2,926,115 | |
14
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
Corporate Bonds and Notes—Continued | | | | | | | | | | | | | |
| | | | | |
Industrial Conglomerates—Continued | | | | | | | | | | | | | |
Tyco International Ltd./Tyco International Finance SA | | | | 6.875% | | 1/15/21 | | $ | 6,965,000 | | $ | 7,814,354 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 10,740,469 | |
| | | | | | | | | | | | | |
Insurance | | 2.6% | | | | | | | | | | | |
American International Group Inc. | | | | 5.850% | | 1/16/18 | | | 2,370,000 | | | 1,944,654 | |
American International Group Inc. | | | | 6.250% | | 3/15/37 | | | 12,690,000 | | | 6,979,500 | |
ASIF Global Financing XIX | | | | 4.900% | | 1/17/13 | | | 1,210,000 | | | 1,113,506 | D |
Marsh and McLennan Cos. Inc. | | | | 5.150% | | 9/15/10 | | | 3,070,000 | | | 3,147,229 | |
MetLife Inc. | | | | 6.400% | | 12/15/36 | | | 46,870,000 | | | 41,011,250 | |
Teachers Insurance & Annuity Association of America | | | | 6.850% | | 12/16/39 | | | 5,990,000 | | | 6,192,091 | D |
The Travelers Cos. Inc. | | | | 6.250% | | 3/15/37 | | | 37,460,000 | | | 34,125,685 | C |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 94,513,915 | |
| | | | | | | | | | | | | |
Leisure Equipment and Products | | 0.2% | | | | | | | | | | | |
Eastman Kodak Co. | | | | 7.250% | | 11/15/13 | | | 9,130,000 | | | 7,532,250 | |
| | | | | | | | | | | | | |
| | | | | |
Media | | 1.1% | | | | | | | | | | | |
CBS Corp. | | | | 7.625% | | 1/15/16 | | | 2,750,000 | | | 2,955,848 | |
Comcast Corp. | | | | 6.500% | | 1/15/15 | | | 1,200,000 | | | 1,344,425 | |
Comcast Corp. | | | | 6.500% | | 1/15/17 | | | 1,500,000 | | | 1,660,596 | |
Comcast Corp. | | | | 6.950% | | 8/15/37 | | | 3,130,000 | | | 3,411,365 | |
News America Inc. | | | | 6.200% | | 12/15/34 | | | 105,000 | | | 105,527 | |
News America Inc. | | | | 6.650% | | 11/15/37 | | | 700,000 | | | 739,415 | |
Reed Elsevier Capital Inc. | | | | 8.625% | | 1/15/19 | | | 4,740,000 | | | 5,767,485 | |
Time Warner Cable Inc. | | | | 6.200% | | 7/1/13 | | | 6,470,000 | | | 7,107,010 | |
Time Warner Cable Inc. | | | | 8.750% | | 2/14/19 | | | 1,180,000 | | | 1,438,153 | |
Time Warner Cable Inc. | | | | 8.250% | | 4/1/19 | | | 8,630,000 | | | 10,279,141 | |
Time Warner Cable Inc. | | | | 6.750% | | 6/15/39 | | | 2,950,000 | | | 3,089,550 | |
Viacom Inc. | | | | 6.250% | | 4/30/16 | | | 3,400,000 | | | 3,705,599 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 41,604,114 | |
| | | | | | | | | | | | | |
Multi-Utilities | | 0.1% | | | | | | | | | | | |
Dominion Resources Inc. | | | | 4.750% | | 12/15/10 | | | 570,000 | | | 586,726 | |
Dominion Resources Inc. | | | | 5.700% | | 9/17/12 | | | 2,050,000 | | | 2,215,250 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 2,801,976 | |
| | | | | | | | | | | | | |
Multiline Retail | | 0.1% | | | | | | | | | | | |
Target Corp. | | | | 4.000% | | 6/15/13 | | | 4,445,000 | | | 4,632,112 | |
| | | | | | | | | | | | | |
15
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
Corporate Bonds and Notes—Continued | | | | | | | | | | | | | |
| | | | | |
Oil, Gas and Consumable Fuels | | 3.3% | | | | | | | | | | | |
Anadarko Petroleum Corp. | | | | 5.950% | | 9/15/16 | | $ | 14,503,000 | | $ | 15,687,852 | |
Conoco Inc. | | | | 6.950% | | 4/15/29 | | | 2,780,000 | | | 3,151,255 | |
El Paso Natural Gas Co. | | | | 8.375% | | 6/15/32 | | | 3,610,000 | | | 4,287,160 | |
Hess Corp. | | | | 8.125% | | 2/15/19 | | | 5,610,000 | | | 6,765,419 | |
Hess Corp. | | | | 7.875% | | 10/1/29 | | | 3,840,000 | | | 4,605,519 | |
Hess Corp. | | | | 7.300% | | 8/15/31 | | | 8,215,000 | | | 9,335,411 | |
Kerr-McGee Corp. | | | | 6.875% | | 9/15/11 | | | 17,000,000 | | | 18,277,244 | |
Kerr-McGee Corp. | | | | 6.950% | | 7/1/24 | | | 650,000 | | | 703,942 | |
Kinder Morgan Energy Partners LP | | | | 7.125% | | 3/15/12 | | | 4,650,000 | | | 5,070,630 | |
Kinder Morgan Energy Partners LP | | | | 5.000% | | 12/15/13 | | | 3,180,000 | | | 3,338,396 | |
Kinder Morgan Energy Partners LP | | | | 6.000% | | 2/1/17 | | | 990,000 | | | 1,039,415 | |
Kinder Morgan Energy Partners LP | | | | 6.950% | | 1/15/38 | | | 410,000 | | | 436,963 | |
Pemex Project Funding Master Trust | | | | 6.625% | | 6/15/35 | | | 13,199,000 | | | 12,567,441 | |
Sonat Inc. | | | | 7.625% | | 7/15/11 | | | 5,000,000 | | | 5,153,505 | |
Tennessee Gas Pipeline Co. | | | | 8.375% | | 6/15/32 | | | 1,110,000 | | | 1,318,213 | |
The Williams Cos. Inc. | | | | 8.125% | | 3/15/12 | | | 3,240,000 | | | 3,542,823 | |
The Williams Cos. Inc. | | | | 7.500% | | 1/15/31 | | | 7,262,000 | | | 7,833,759 | |
The Williams Cos. Inc. | | | | 8.750% | | 3/15/32 | | | 3,240,000 | | | 3,877,214 | |
XTO Energy Inc. | | | | 7.500% | | 4/15/12 | | | 10,379,000 | | | 11,572,917 | |
XTO Energy Inc. | | | | 6.750% | | 8/1/37 | | | 320,000 | | | 376,925 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 118,942,003 | |
| | | | | | | | | | | | | |
Pharmaceuticals | | 0.4% | | | | | | | | | | | |
Roche Holdings Inc. | | | | 6.000% | | 3/1/19 | | | 4,330,000 | | | 4,758,025 | D |
Wyeth | | | | 5.950% | | 4/1/37 | | | 9,750,000 | | | 10,167,085 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 14,925,110 | |
| | | | | | | | | | | | | |
Real Estate Investment Trusts (REITs) | | 0.1% | | | | | | | | | | | |
Health Care Property Investors Inc. | | | | 6.450% | | 6/25/12 | | | 3,550,000 | | | 3,654,892 | |
| | | | | | | | | | | | | |
| | | | | |
Specialty Retail | | 0.4% | | | | | | | | | | | |
Autozone Inc. | | | | 6.950% | | 6/15/16 | | | 5,620,000 | | | 6,092,564 | |
Home Depot Inc. | | | | 5.250% | | 12/16/13 | | | 2,740,000 | | | 2,933,326 | |
Home Depot Inc. | | | | 5.400% | | 3/1/16 | | | 4,250,000 | | | 4,449,155 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 13,475,045 | |
| | | | | | | | | | | | | |
Thrifts and Mortgage Finance | | 0.5% | | | | | | | | | | | |
Countrywide Financial Corp. | | | | 6.250% | | 5/15/16 | | | 18,400,000 | | | 18,715,854 | |
| | | | | | | | | | | | | |
| | | | | |
Tobacco | | 0.1% | | | | | | | | | | | |
Reynolds American Inc. | | | | 7.250% | | 6/1/12 | | | 4,535,000 | | | 4,985,384 | |
| | | | | | | | | | | | | |
16
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
Corporate Bonds and Notes—Continued | | | | | | | | | | | | | |
| | | | | |
Wireless Telecommunication Services | | N.M. | | | | | | | | | | | |
Sprint Capital Corp. | | | | 8.750% | | 3/15/32 | | $ | 45,000 | | $ | 42,413 | |
| | | | | | | | | | | | | |
Total Corporate Bonds and Notes
(Cost—$993,716,797) | | | | | | | | | | | | 937,883,011 | |
Asset-Backed Securities | | 3.9% | | | | | | | | | | | |
| | | | | |
Fixed Rate Securities | | 1.0% | | | | | | | | | | | |
Conseco Finance Securitizations Corp. 2000-5 | | | | 7.960% | | 2/1/32 | | | 3,351,040 | | | 2,711,516 | |
Drive Auto Receivables Trust 2006-2 A3 | | | | 5.330% | | 4/15/14 | | | 15,390,379 | | | 15,441,613 | D |
E-Trade RV and Marine Trust A3-1 | | | | 3.620% | | 10/8/18 | | | 100,827 | | | 101,515 | |
Equity One ABS Inc. 2003-3 | | | | 4.995% | | 12/25/33 | | | 4,068,582 | | | 3,375,853 | |
Green Tree Financial Corp. 1996-5 | | | | 8.100% | | 7/15/26 | | | 346,895 | | | 33,803 | |
Hertz Vehicle Financing LLC 2009-2A A2 | | | | 5.290% | | 3/25/16 | | | 6,560,000 | | | 6,545,188 | D |
Patrons’ Legacy 2003-IV | | | | 5.775% | | 12/23/63 | | | 5,800,000 | | | 5,140,100 | D,F |
Structured Asset Securities Corp. 2004-6XS A5B | | | | 5.550% | | 3/25/34 | | | 2,495,479 | | | 2,180,007 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 35,529,595 | |
| | | | | | | | | | | | | |
Indexed SecuritiesA | | 2.9% | | | | | | | | | | | |
Amortizing Residential Collateral Trust 2005-BC5 M1 | | | | 1.266% | | 7/25/32 | | | 2,202,524 | | | 1,421,020 | |
Asset-Backed Funding Certificates 2002-SB1 | | | | 0.661% | | 12/25/30 | | | 1,087,646 | | | 767,928 | |
Bear Stearns Asset Backed Securities Trust 2007-HE6 1A1 | | | | 1.481% | | 8/25/37 | | | 8,852,776 | | | 5,498,928 | |
CDC Mortgage Capital Trust 2002-HE1 | | | | 0.851% | | 1/25/33 | | | 427,749 | | | 326,327 | |
CIT Group Home Equity Loan Trust 2002-1 | | | | 0.521% | | 3/25/33 | | | 225,057 | | | 205,609 | |
Citigroup Mortgage Loan Trust Inc. 2007-SHL1 A | | | | 0.631% | | 11/25/46 | | | 4,126,534 | | | 1,959,291 | D |
Countrywide Asset-Backed Certificates 2003-BC3 | | | | 0.851% | | 9/25/33 | | | 467,213 | | | 339,093 | |
Countrywide Home Equity Loan Trust 2006-HW 2A1B | | | | 0.383% | | 11/15/36 | | | 9,060,920 | | | 6,795,690 | |
Countrywide Home Equity Loan Trust 2007-GW A | | | | 0.983% | | 8/15/37 | | | 651,844 | | | 460,773 | |
GMAC Mortgage Corp. Loan Trust 2004-VF1 A1 | | | | 0.981% | | 2/25/31 | | | 40,066,071 | | | 24,179,273 | D |
GMAC Mortgage Corp. Loan Trust 2005-HE3 A1VN | | | | 0.496% | | 2/25/36 | | | 17,726,534 | | | 7,799,675 | |
GSAMP Trust 2006-S4 | | | | 0.321% | | 5/25/36 | | | 1,554,859 | | | 133,476 | |
Lehman XS Trust 2005-5N | | | | 0.531% | | 11/25/35 | | | 6,503,963 | | | 4,088,428 | |
17
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Bond Portfolio—Continued
| | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE |
| | | | | | | | | | | | |
Asset-Backed Securities—Continued | | | | | | | | | | | | |
| | | | | |
Indexed Securities—Continued | | | | | | | | | | | | |
Lehman XS Trust 2006-2N 1A1 | | | | 0.491% | | 2/25/46 | | $ | 12,910,263 | | $ | 6,707,830 |
Lehman XS Trust 2006-GP4 | | | | 0.301% | | 8/25/46 | | | 883,312 | | | 792,810 |
Long Beach Mortgage Loan Trust 2000-1 | | | | 0.757% | | 1/21/31 | | | 168,939 | | | 110,175 |
Long Beach Mortgage Loan Trust 2006-9 2A3 | | | | 0.391% | | 10/25/36 | | | 3,200,000 | | | 1,127,092 |
Merrill Lynch Mortgage Investors Trust 2007-SD1 A1 | | | | 0.681% | | 2/25/47 | | | 39,563,402 | | | 16,902,301 |
MSDWCC Heloc Trust 2005-1 | | | | 0.421% | | 7/25/17 | | | 1,409,635 | | | 657,605 |
Provident Bank Home Equity Loan Trust 1999-3 | | | | 1.011% | | 1/25/31 | | | 575,409 | | | 257,075 |
RAAC 2007-SP3 A1 | | | | 1.431% | | 9/25/37 | | | 710,114 | | | 455,328 |
Residential Asset Mortgage Products Inc. 2003-RS2 | | | | 0.911% | | 3/25/33 | | | 141,171 | | | 89,482 |
Residential Asset Securities Corp. 2001-KS2 | | | | 0.691% | | 6/25/31 | | | 223,782 | | | 124,149 |
Residential Asset Securities Corp. 2001-KS3 AII | | | | 0.691% | | 9/25/31 | | | 86,183 | | | 56,284 |
SACO I Trust 2005-10 1A | | | | 0.491% | | 6/25/36 | | | 3,133,294 | | | 1,069,492 |
SACO I Trust 2005-8 A1 | | | | 0.511% | | 11/25/20 | | | 884,832 | | | 407,128 |
Securitized Asset Backed Receivables LLC Trust 2007-BR2 A2 | | | | 0.461% | | 2/25/37 | | | 39,872,568 | | | 17,613,376 |
SLM Student Loan Trust 2006-5 | | | | 0.272% | | 7/25/17 | | | 3,551,935 | | | 3,550,798 |
| | | | | | | | | | | | |
| | | | | | | | | | | | 103,896,436 |
| | | | | | | | | | | | |
Total Asset-Backed Securities
(Cost—$229,781,703) | | | | | | | | | | | | 139,426,031 |
Mortgage-Backed Securities | | 18.6% | | | | | | | | | | |
| | | | | |
Fixed Rate Securities | | 6.7% | | | | | | | | | | |
Banc of America Commercial Mortgage Inc. 2006-3 A4 | | | | 5.889% | | 7/10/44 | | | 15,400,000 | | | 14,013,278 |
Banc of America Commercial Mortgage Inc. 2007-5 A3 | | | | 5.620% | | 2/10/51 | | | 3,710,000 | | | 3,600,742 |
Commercial Mortgage Asset Trust 1999-C1 A3 | | | | 6.640% | | 1/17/32 | | | 631,408 | | | 632,423 |
Countrywide Alternative Loan Trust 2003-20CB 1A1 | | | | 5.500% | | 10/25/33 | | | 8,468,336 | | | 8,186,500 |
Credit Suisse Mortgage Capital Certificates 2006-C5 A3 | | | | 5.311% | | 12/15/39 | | | 13,000,000 | | | 10,844,800 |
GE Capital Commercial Mortgage Corp. 2007-C1 A4 | | | | 5.543% | | 12/10/49 | | | 1,330,000 | | | 1,078,831 |
GMAC Commercial Mortgage Securities Inc 2006-C1 A4 | | | | 5.238% | | 11/10/45 | | | 3,800,000 | | | 3,684,741 |
18
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
Mortgage-Backed Securities—Continued | | | | | | | | | | | | | |
| | | | | |
Fixed Rate Securities—Continued | | | | | | | | | | | | | |
GS Mortgage Securities Corp. II 2005-GG4 | | | | 4.680% | | 7/10/39 | | $ | 12,900,000 | | $ | 12,954,015 | |
GSR Mortgage Loan Trust 2005-4F 1A1 | | | | 4.500% | | 4/25/20 | | | 5,340,702 | | | 5,225,543 | |
JP Morgan Chase Commercial Mortgage Securities Corp. 2007-LDPX A3 | | | | 5.420% | | 5/15/49 | | | 31,000,000 | | | 26,150,239 | |
LB-UBS Commercial Mortgage Trust 2005-C3 AAB | | | | 4.664% | | 7/15/30 | | | 15,000,000 | | | 15,107,931 | |
LB-UBS Commercial Mortgage Trust 2005-C5 | | | | 4.954% | | 9/15/30 | | | 9,730,000 | | | 9,428,422 | |
MASTR Reperforming Loan Trust 2005-1 1A2 | | | | 6.500% | | 8/25/34 | | | 864,867 | | | 796,489 | D |
MASTR Reperforming Loan Trust 2005-1 1A3 | | | | 7.000% | | 8/25/34 | | | 6,960,202 | | | 6,582,828 | D |
Morgan Stanley Capital I 2005-HQ6 | | | | 4.989% | | 8/13/42 | | | 8,370,000 | | | 8,101,951 | |
Prime Mortgage Trust 2006-DR1 1A1 | | | | 5.500% | | 5/25/35 | | | 19,570,787 | | | 18,739,028 | D |
Prime Mortgage Trust 2006-DR1 1A2 | | | | 6.000% | | 5/25/35 | | | 8,358,675 | | | 8,080,488 | D |
Prime Mortgage Trust 2006-DR1 2A2 | | | | 6.000% | | 5/25/35 | | | 39,120,580 | | | 32,824,612 | D |
Residential Accredit Loans Inc. 2007-QS4 3A9 | | | | 6.000% | | 3/25/37 | | | 8,300,000 | | | 5,725,815 | |
Residential Asset Mortgage Products Inc. 2005-SL2 | | | | 7.500% | | 2/25/32 | | | 2,831,635 | | | 2,536,526 | |
Residential Asset Securitization Trust 2003-A14 | | | | 4.750% | | 2/25/19 | | | 29,009,466 | | | 27,994,134 | |
Structured Asset Securities Corp. 2003-29 1A1 | | | | 4.750% | | 9/25/18 | | | 17,442,804 | | | 17,530,018 | |
WaMu Mortgage Pass-Through Certificates 2003-S7 A1 | | | | 4.500% | | 8/25/18 | | | 2,999,653 | | | 2,964,969 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 242,784,323 | |
| | | | | | | | | | | | | |
Indexed SecuritiesA | | 8.1% | | | | | | | | | | | |
American Home Mortgage Assets 2006-4 | | | | 0.441% | | 10/25/46 | | | 825,913 | | | 419,247 | |
American Home Mortgage Investment Trust 2006-2 1A1 | | | | 0.311% | | 6/25/46 | | | 520,882 | | | 485,815 | |
Amortizing Residential Collateral Trust 2002-BC1M | | | | 0.511% | | 1/1/32 | | | 1,521,041 | | | 741,508 | F |
Banc of America Funding Corp. 2005-E | | | | 1.663% | | 6/20/35 | | | 10,700,511 | | | 5,034,533 | |
Bear Stearns Adjustable Rate Mortgage Trust 2004-9 24A1 | | | | 5.405% | | 11/25/34 | | | 13,054,302 | | | 12,459,166 | |
Bear Stearns Mortgage Funding Trust 2007-AR5 1A1A | | | | 0.401% | | 6/25/47 | | | 6,805,389 | | | 3,284,979 | |
Citigroup Mortgage Loan Trust Inc. 2005-HE2 | | | | 0.631% | | 5/25/35 | | | 1,845,158 | | | 1,473,358 | D |
19
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
Mortgage-Backed Securities—Continued | | | | | | | | | | | | | |
| | | | | |
Indexed Securities—Continued | | | | | | | | | | | | | |
Countrywide Alternative Loan Trust 2005-14 | | | | 0.441% | | 5/25/35 | | $ | 6,147,084 | | $ | 3,456,807 | |
Countrywide Alternative Loan Trust 2005-17 1A1 | | | | 0.491% | | 7/25/35 | | | 7,821,989 | | | 4,230,477 | |
Countrywide Alternative Loan Trust 2005-17 2A1 | | | | 0.471% | | 7/25/35 | | | 16,611,216 | | | 8,709,113 | |
Countrywide Alternative Loan Trust 2005-38 A3 | | | | 0.581% | | 9/25/35 | | | 5,075,915 | | | 2,647,412 | |
Countrywide Alternative Loan Trust 2005-56 3A1 | | | | 0.521% | | 11/25/35 | | | 712,429 | | | 377,102 | |
Countrywide Alternative Loan Trust 2005-59 1A1 | | | | 0.563% | | 11/20/35 | | | 2,215,789 | | | 1,163,022 | |
Countrywide Alternative Loan Trust 2005-85CB 2A5 | | | | 1.331% | | 2/25/36 | | | 7,995,846 | | | 5,238,508 | |
Countrywide Alternative Loan Trust 2006-0A7 | | | | 0.441% | | 6/25/46 | | | 9,935,788 | | | 4,757,561 | |
Countrywide Alternative Loan Trust 2006-OA2 A1 | | | | 0.443% | | 5/20/46 | | | 4,768,450 | | | 2,312,049 | |
Countrywide Home Loans 2005-03 1A2 | | | | 0.521% | | 4/25/35 | | | 8,699,827 | | | 4,873,595 | |
Countrywide Home Loans 2005-09 1A1 | | | | 0.531% | | 5/25/35 | | | 8,623,335 | | | 4,687,150 | |
Countrywide Home Loans 2005-09 2A1 | | | | 0.451% | | 5/25/35 | | | 4,849,845 | | | 2,846,953 | |
Countrywide Home Loans 2005-R3 AF | | | | 0.631% | | 9/25/35 | | | 1,813,557 | | | 1,360,316 | D |
Deutsche Mortgage Securities Inc. 2004-4 7AR2 | | | | 0.681% | | 6/25/34 | | | 1,633,258 | | | 1,214,946 | |
Downey Savings and Loan Association Mortgage Loan Trust 2005-AR6 | | | | 0.523% | | 10/19/45 | | | 2,990,325 | | | 1,542,375 | |
First Horizon Alternative Mortgage Securities 2006-FA8 1A8 | | | | 0.601% | | 2/25/37 | | | 3,803,953 | | | 1,880,713 | |
GMAC Mortgage Corp. Loan Trust 2004-AR2 3A | | | | 4.359% | | 8/19/34 | | | 21,828,878 | | | 20,759,354 | |
Greenpoint Mortgage Funding Trust 2005-AR1 | | | | 0.451% | | 6/25/45 | | | 5,972,497 | | | 3,098,788 | |
Greenpoint Mortgage Funding Trust 2005-AR4 | | | | 0.491% | | 10/25/45 | | | 1,135,952 | | | 584,506 | |
Greenpoint Mortgage Funding Trust 2006-AR4 | | | | 0.331% | | 9/25/46 | | | 11,544,475 | | | 11,089,689 | |
Greenpoint Mortgage Funding Trust 2006-AR5 | | | | 0.311% | | 10/25/46 | | | 16,190,441 | | | 14,080,438 | |
GSMPS Mortgage Loan Trust 2005-RP2 | | | | 0.581% | | 3/25/35 | | | 13,273,180 | | | 10,712,114 | D |
Harborview Mortgage Loan Trust 2005-7 | | | | 3.122% | | 6/19/45 | | | 11,513,073 | | | 5,727,364 | |
20
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
Mortgage-Backed Securities—Continued | | | | | | | | | | | | | |
| | | | | |
Indexed Securities—Continued | | | | | | | | | | | | | |
Harborview Mortgage Loan Trust 2005-9 | | | | 0.573% | | 6/20/35 | | $ | 899,997 | | $ | 607,021 | |
Harborview Mortgage Loan Trust 2006-14 2A1A | | | | 0.383% | | 3/19/38 | | | 640,989 | | | 311,607 | |
Harborview Mortgage Loan Trust 2006-9 2A1A | | | | 0.443% | | 11/19/36 | | | 813,848 | | | 477,720 | |
Harborview Mortgage Loan Trust 2007-7 2A1A | | | | 1.231% | | 11/25/47 | | | 33,826,240 | | | 17,592,107 | |
Impac Secured Assets Corp. 2005-2 | | | | 0.551% | | 3/25/36 | | | 1,051,117 | | | 404,694 | |
Impac Secured Assets Corp. 2006-2 2A1 | | | | 0.581% | | 8/25/36 | | | 2,487,963 | | | 1,975,536 | |
IndyMac Inda Mortgage Loan Trust 2007-AR7 1A1 | | | | 6.158% | | 11/25/37 | | | 5,898,438 | | | 4,092,265 | |
Luminent Mortgage Trust 2007-2 2A1 | | | | 0.461% | | 5/25/37 | | | 331,733 | | | 173,140 | |
MASTR Adjustable Rate Mortgages Trust 2007-3 22A2 | | | | 0.441% | | 5/25/47 | | | 32,721,063 | | | 15,478,074 | |
Medallion Trust 2003-1G | | | | 0.443% | | 12/21/33 | | | 1,160,069 | | | 1,095,643 | |
Merrill Lynch Mortgage Investors Inc. 2005-A3 A1 | | | | 0.501% | | 4/25/35 | | | 570,578 | | | 330,769 | |
MLCC Mortgage Investors Inc. 2003-B | | | | 0.571% | | 4/25/28 | | | 1,647,477 | | | 1,306,183 | |
MLCC Mortgage Investors Inc. 2006-1 1A | | | | 3.763% | | 2/25/36 | | | 537,171 | | | 391,361 | |
Residential Accredit Loans Inc. 2006-QO10 A1 | | | | 0.391% | | 1/25/37 | | | 14,348,367 | | | 7,440,960 | |
Structured Adjustable Rate Mortgage Loan Trust 2005-19XS | | | | 0.551% | | 10/25/35 | | | 1,275,299 | | | 767,423 | |
Structured Asset Mortgage Investments Inc. 2002-AR5 A1 | | | | 0.683% | | 5/19/33 | | | 1,085,261 | | | 918,367 | |
Structured Asset Mortgage Investments Inc. 2006-AR6 | | | | 0.421% | | 7/25/46 | | | 14,772,315 | | | 7,378,139 | |
Structured Asset Mortgage Investments Inc. 2006-AR7 A1A | | | | 0.441% | | 8/25/36 | | | 32,211,249 | | | 15,577,096 | |
Structured Asset Securities Corp. 2005-RF3 1A | | | | 0.581% | | 6/25/35 | | | 720,518 | | | 540,332 | D |
WaMu Alternative Mortgage Pass-Through Certificates 2007-OA4 A1A | | | | 1.304% | | 4/25/47 | | | 21,813,049 | | | 10,763,239 | |
WaMu Mortgage Pass-Through Certificates 2005-AR06 2A1A | | | | 0.461% | | 4/25/45 | | | 7,650,038 | | | 5,627,552 | |
WaMu Mortgage Pass-Through Certificates 2005-AR08 1A1A | | | | 0.501% | | 7/25/45 | | | 8,295,198 | | | 6,026,460 | |
WaMu Mortgage Pass-Through Certificates 2005-AR1 A2A1 | | | | 0.571% | | 1/25/45 | | | 853,174 | | | 527,872 | |
21
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
Mortgage-Backed Securities—Continued | | | | | | | | | | | | | |
| | | | | |
Indexed Securities—Continued | | | | | | | | | | | | | |
WaMu Mortgage Pass-Through Certificates 2005-AR11 | | | | 0.551% | | 8/25/45 | | $ | 21,292,060 | | $ | 14,851,666 | |
WaMu Mortgage Pass-Through Certificates 2005-AR13 A1A1 | | | | 0.521% | | 10/25/45 | | | 12,832,972 | | | 9,190,234 | |
WaMu Mortgage Pass-Through Certificates 2005-AR13 B10 | | | | 1.431% | | 10/25/45 | | | 3,692,373 | | | 39,051 | D |
WaMu Mortgage Pass-Through Certificates 2005-AR17 A1A2 | | | | 0.521% | | 12/25/45 | | | 7,874,496 | | | 4,233,661 | |
WaMu Mortgage Pass-Through Certificates 2005-AR19 A1A1 | | | | 0.501% | | 12/25/45 | | | 15,239,860 | | | 10,647,436 | |
WaMu Mortgage Pass-Through Certificates 2005-AR19 A1A2 | | | | 0.534% | | 12/25/45 | | | 16,446,104 | | | 10,453,446 | |
Wells Fargo Mortgage Backed Securities Trust 2006-AR8 3A2 | | | | 5.242% | | 4/25/36 | | | 2,200,000 | | | 1,515,285 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 291,983,297 | |
| | | | | | | | | | | | | |
Stripped Securities | | N.M. | | | | | | | | | | | |
FFCA Secured Lending Corp. 1999-1A | | | | 1.251% | | 9/18/25 | | | 2,218,173 | | | 44,132 | D,G1,H |
LB-UBS Commercial Mortgage Trust 2001-C3 X | | | | 0.918% | | 6/15/36 | | | 15,026,850 | | | 160,300 | D,G1,H |
Structured Mortgage Asset Residential Trust 1991-8 | | | | 0.000% | | 1/25/23 | | | 208,000 | | | 20 | G1,H |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 204,452 | |
| | | | | | | | | | | | | |
Variable Rate SecuritiesI | | 3.8% | | | | | | | | | | | |
Banc of America Commercial Mortgage Inc. 2005-5 A4 | | | | 5.115% | | 10/10/45 | | | 10,000 | | | 9,802 | |
Citigroup Mortgage Loan Trust Inc. 2005-5 3A2A | | | | 5.571% | | 10/25/35 | | | 3,939,701 | | | 2,352,805 | |
Credit Suisse Mortgage Capital Certificates 2006-C1 A4 | | | | 5.548% | | 2/15/39 | | | 4,180,000 | | | 4,117,481 | |
Credit Suisse Mortgage Capital Certificates A3-C2 | | | | 5.658% | | 3/15/39 | | | 24,000,000 | | | 20,726,407 | |
Deutsche Mortgage Securities Inc. 2005-WF1 1A3 | | | | 5.158% | | 6/26/35 | | | 12,130,000 | | | 8,343,293 | D |
GE Capital Commercial Mortgage Corp. 2005-C4 | | | | 5.334% | | 11/10/45 | | | 10,000 | | | 9,766 | |
Greenwich Capital Commercial Funding Corp. 2006-GG7 | | | | 5.918% | | 7/10/38 | | | 8,370,000 | | | 7,631,278 | |
IndyMac INDX Mortgage Loan Trust 2005-AR15 | | | | 5.099% | | 9/25/35 | | | 5,914,148 | | | 4,327,723 | |
22
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
Mortgage-Backed Securities—Continued | | | | | | | | | | | | | |
| | | | | |
Variable Rate Securities—Continued | | | | | | | | | | | | | |
JP Morgan Chase Commercial Mortgage Securities Corp. 2005-CB13 | | | | 5.280% | | 1/12/43 | | $ | 3,420,000 | | $ | 3,256,121 | |
JP Morgan Chase Commercial Mortgage Securities Corp. 2007-CB20 A4 | | | | 5.794% | | 2/12/51 | | | 30,000,000 | | | 26,169,987 | |
JP Morgan Mortgage Trust 2007-A2 4A2 | | | | 6.024% | | 4/25/37 | | | 11,550,000 | | | 8,549,218 | |
LB-UBS Commercial Mortgage Trust 2007-C7 A3 | | | | 5.866% | | 9/15/45 | | | 3,620,000 | | | 3,177,309 | |
MASTR Adjustable Rate Mortgages Trust 2004-15 | | | | 3.936% | | 12/25/34 | | | 144,108 | | | 88,437 | |
Merrill Lynch Mortgage Investors Inc. 1998-C1 A3 | | | | 6.720% | | 11/15/26 | | | 2,317,247 | | | 2,495,010 | |
Merrill Lynch Mortgage Investors Inc. 2006-A1 1A1 | | | | 5.651% | | 3/25/36 | | | 1,581,560 | | | 921,442 | |
Morgan Stanley Mortgage Loan Trust 2005-3AR | | | | 3.205% | | 7/25/35 | | | 2,703,766 | | | 1,735,490 | |
Thornburg Mortgage Securities Trust 2007-4 2A1 | | | | 6.200% | | 9/25/37 | | | 18,228,405 | | | 14,560,662 | |
Thornburg Mortgage Securities Trust 2007-4 3A1 | | | | 6.220% | | 9/25/37 | | | 19,217,609 | | | 15,357,178 | |
Wachovia Bank Commercial Mortgage Trust 2005-C20 | | | | 5.118% | | 7/15/42 | | | 4,000,000 | | | 3,864,399 | |
WaMu Mortgage Pass-Through Certificates 2005-AR4 | | | | 4.651% | | 4/25/35 | | | 2,500,000 | | | 1,969,568 | |
WaMu Mortgage Pass-Through Certificates 2007-HY7 2A3 | | | | 5.792% | | 7/25/37 | | | 13,000,000 | | | 7,994,295 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 137,657,671 | |
| | | | | | | | | | | | | |
Total Mortgage-Backed Securities
(Cost—$864,706,069) | | | | | | | | | | | | 672,629,743 | |
Municipal Bonds | | 0.1% | | | | | | | | | | | |
| | | | | |
California | | 0.1% | | | | | | | | | | | |
State of California Series 2009 | | | | 7.300% | | 10/1/39 | | | 3,760,000 | | | 3,541,394 | |
| | | | | | | | | | | | | |
Total Municipal Bonds
(Cost—$3,790,880) | | | | | | | | | | | | 3,541,394 | |
U.S. Government and Agency Obligations | | 21.8% | | | | | | | | | | | |
| | | | | |
Fixed Rate Securities | | 18.8% | | | | | | | | | | | |
Fannie Mae | | | | 6.250% | | 2/1/11 | | | 3,260,000 | | | 3,424,858 | J |
Fannie Mae | | | | 5.250% | | 8/1/12 | | | 2,610,000 | | | 2,785,209 | J |
23
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
U.S. Government and Agency Obligations —Continued | | | | | | | | | | | |
| | | | | |
Fixed Rate Securities—Continued | | | | | | | | | | | | | |
Fannie Mae | | | | 0.000% | | 10/9/19 | | $ | 25,670,000 | | $ | 13,938,810 | E,J |
Freddie Mac | | | | 5.300% | | 5/12/20 | | | 53,095,000 | | | 53,234,321 | J,K |
Freddie Mac | | | | 5.625% | | 11/23/35 | | | 12,290,000 | | | 12,089,046 | J |
Tennessee Valley Authority | | | | 7.125% | | 5/1/30 | | | 2,450,000 | | | 3,005,082 | |
Tennessee Valley Authority | | | | 5.250% | | 9/15/39 | | | 3,550,000 | | | 3,517,535 | |
United States Treasury Bonds | | | | 3.500% | | 2/15/39 | | | 12,578,000 | | | 10,302,162 | |
United States Treasury Bonds | | | | 4.250% | | 5/15/39 | | | 15,660,000 | | | 14,691,038 | |
United States Treasury Bonds | | | | 4.500% | | 8/15/39 | | | 43,090,000 | | | 42,113,753 | |
United States Treasury Bonds | | | | 4.375% | | 11/15/39 | | | 59,980,000 | | | 57,412,136 | |
United States Treasury Notes | | | | 2.125% | | 11/30/14 | | | 182,000,000 | | | 177,692,060 | |
United States Treasury Notes | | | | 2.625% | | 12/31/14 | | | 5,870,000 | | | 5,853,036 | |
United States Treasury Notes | | | | 3.125% | | 10/31/16 | | | 33,370,000 | | | 32,950,272 | |
United States Treasury Notes | | | | 2.750% | | 11/30/16 | | | 52,810,000 | | | 50,841,983 | |
United States Treasury Notes | | | | 3.250% | | 12/31/16 | | | 57,080,000 | | | 56,598,359 | |
United States Treasury Notes | | | | 2.750% | | 2/15/19 | | | 8,590,000 | | | 7,908,169 | K |
United States Treasury Notes | | | | 3.125% | | 5/15/19 | | | 7,000 | | | 6,629 | |
United States Treasury Notes | | | | 3.625% | | 8/15/19 | | | 47,590,000 | | | 46,786,919 | |
United States Treasury Notes | | | | 3.375% | | 11/15/19 | | | 88,375,000 | | | 85,006,145 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 680,157,522 | |
| | | | | | | | | | | | | |
Stripped Securities | | 0.1% | | | | | | | | | | | |
United States Treasury Notes | | | | 0.000% | | 5/15/18 | | | 7,530,000 | | | 5,486,764 | G2 |
| | | | | | | | | | | | | |
| | | | | |
Treasury Inflation-Protected SecuritiesL | | 2.9% | | | | | | | | | | | |
United States Treasury Inflation-Protected Security | | | | 2.375% | | 1/15/25 | | | 29,667,975 | | | 31,304,342 | K |
United States Treasury Inflation-Protected Security | | | | 2.000% | | 1/15/26 | | | 15,106,372 | | | 15,171,284 | |
United States Treasury Inflation-Protected Security | | | | 2.375% | | 1/15/27 | | | 31,922,075 | | | 33,593,004 | K |
United States Treasury Inflation-Protected Security | | | | 1.750% | | 1/15/28 | | | 11,192,585 | | | 10,732,637 | K |
United States Treasury Inflation-Protected Security | | | | 3.875% | | 4/15/29 | | | 9,796,452 | | | 12,606,045 | M |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 103,407,312 | |
| | | | | | | | | | | | | |
Total U.S. Government and Agency Obligations (Cost—$799,065,758) | | | | | | | | | | | | 789,051,598 | |
24
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
U.S. Government Agency Mortgage-Backed Securities | | 25.3% | | | | | | | | | | | |
| | | | | |
Fixed Rate Securities | | 21.0% | | | | | | | | | | | |
Fannie Mae | | | | 7.000% | | 6/1/10 to 2/1/33 | | $ | 6,557,958 | | $ | 7,283,944 | J |
Fannie Mae | | | | 8.000% | | 5/1/15 | | | 5,777 | | | 6,325 | J |
Fannie Mae | | | | 5.500% | | 4/1/18 to 11/1/35 | | | 55,651,320 | | | 58,502,332 | J |
Fannie Mae | | | | 4.500% | | 7/1/18 to 3/1/38 | | | 8,801,721 | | | 8,923,632 | J |
Fannie Mae | | | | 4.000% | | 8/1/20 to 9/1/20 | | | 3,814,091 | | | 3,849,071 | J |
Fannie Mae | | | | 5.000% | | 8/1/20 to 8/1/34 | | | 330,808,476 | | | 341,792,711 | J |
Fannie Mae | | | | 6.000% | | 12/1/24 to 12/1/39 | | | 55,070,000 | | | 58,386,633 | J,N |
Fannie Mae | | | | 7.500% | | 6/1/25 to 5/1/28 | | | 412,554 | | | 465,058 | J |
Fannie Mae | | | | 6.000% | | 1/1/26 to 8/1/37 | | | 29,427,150 | | | 31,349,191 | J |
Fannie Mae | | | | 6.500% | | 7/1/28 to 8/1/33 | | | 3,136,639 | | | 3,394,122 | J |
Fannie Mae | | | | 4.500% | | 12/1/39 | | | 125,400,000 | | | 125,164,875 | J,N |
Fannie Mae | | | | 5.500% | | 12/1/39 | | | 6,400,000 | | | 6,699,002 | J,N |
Freddie Mac | | | | 6.000% | | 9/1/13 to 5/1/29 | | | 595,036 | | | 637,418 | J |
Freddie Mac | | | | 5.500% | | 12/1/13 to 8/1/35 | | | 23,670,573 | | | 24,894,144 | J |
Freddie Mac | | | | 9.300% | | 4/15/19 | | | 72,735 | | | 80,168 | J |
Freddie Mac | | | | 5.000% | | 9/1/20 to 8/1/33 | | | 11,919,120 | | | 12,493,618 | J |
Freddie Mac | | | | 7.000% | | 4/1/24 to 5/1/32 | | | 1,973,247 | | | 2,182,131 | J |
Freddie Mac | | | | 6.500% | | 6/1/32 | | | 30,955 | | | 33,431 | J |
Government National Mortgage Association | | | | 8.000% | | 10/15/16 to 7/15/17 | | | 84,741 | | | 94,314 | |
Government National Mortgage Association | | | | 7.500% | | 10/15/22 to 8/15/32 | | | 140,942 | | | 158,574 | |
Government National Mortgage Association | | | | 7.000% | | 6/15/23 to 5/15/32 | | | 210,238 | | | 233,361 | |
Government National Mortgage Association | | | | 6.500% | | 10/15/23 to 3/15/33 | | | 10,274,427 | | | 11,072,332 | |
Government National Mortgage Association | | | | 6.000% | | 3/15/26 to 8/15/35 | | | 18,182,989 | | | 19,371,299 | |
Government National Mortgage Association | | | | 5.500% | | 1/15/33 | | | 174,769 | | | 184,417 | |
Government National Mortgage Association | | | | 5.000% | | 6/15/35 | | | 561,130 | | | 580,049 | |
Government National Mortgage Association | | | | 4.000% | | 12/1/39 | | | 15,000,000 | | | 14,454,750 | N |
Government National Mortgage Association | | | | 4.500% | | 12/1/39 | | | 25,600,000 | | | 25,581,368 | N |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 757,868,270 | |
| | | | | | | | | | | | | |
25
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
U.S. Government Agency Mortgage-Backed Securities—Continued | | | | | | | |
| | | | | |
Indexed SecuritiesA | | 3.5% | | | | | | | | | | | |
Fannie Mae | | | | 4.075% | | 6/1/35 | | $ | 6,682,643 | | $ | 6,937,264 | J |
Fannie Mae | | | | 4.565% | | 7/1/35 | | | 3,188,560 | | | 3,319,274 | J |
Fannie Mae | | | | 3.344% | | 8/1/35 | | | 767,406 | | | 789,086 | J |
Fannie Mae | | | | 3.256% | | 9/1/35 | | | 1,700,366 | | | 1,740,722 | J |
Fannie Mae | | | | 3.371% | | 9/1/35 | | | 3,659,042 | | | 3,757,462 | J |
Fannie Mae | | | | 2.655% | | 10/1/35 | | | 13,588,619 | | | 13,667,131 | J |
Fannie Mae | | | | 3.147% | | 10/1/35 | | | 1,208,443 | | | 1,241,597 | J |
Fannie Mae | | | | 3.187% | | 10/1/35 | | | 1,647,787 | | | 1,684,770 | J |
Fannie Mae | | | | 3.194% | | 10/1/35 | | | 1,417,699 | | | 1,453,812 | J |
Fannie Mae | | | | 3.838% | | 10/1/35 | | | 1,308,542 | | | 1,361,272 | J |
Fannie Mae | | | | 2.628% | | 11/1/35 | | | 5,522,908 | | | 5,554,407 | J |
Fannie Mae | | | | 2.629% | | 11/1/35 | | | 6,076,143 | | | 6,110,798 | J |
Fannie Mae | | | | 2.634% | | 11/1/35 | | | 5,158,943 | | | 5,188,495 | J |
Fannie Mae | | | | 2.638% | | 11/1/35 | | | 5,427,629 | | | 5,458,720 | J |
Fannie Mae | | | | 2.657% | | 11/1/35 | | | 6,083,811 | | | 6,118,962 | J |
Fannie Mae | | | | 5.494% | | 2/1/37 | | | 39,953,204 | | | 42,086,598 | J |
Freddie Mac | | | | 4.632% | | 10/1/35 | | | 1,834,320 | | | 1,880,946 | J |
Freddie Mac | | | | 5.832% | | 8/1/37 | | | 17,734,055 | | | 18,819,426 | J |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 127,170,742 | |
| | | | | | | | | | | | | |
Stripped Securities | | 0.8% | | | | | | | | | | | |
Fannie Mae | | | | 9.500% | | 2/1/17 | | | 7,964 | | | 1,608 | G1,H,J |
Fannie Mae | | | | 1,009.500% | | 2/25/20 | | | 5 | | | 102 | G1,H,J |
Fannie Mae | | | | 1,009.250% | | 8/25/21 | | | 270 | | | 6,254 | G1,H,J |
Fannie Mae | | | | 0.000% | | 5/25/22 | | | 48,261 | | | 45,403 | G2,H,J |
Financing Corp. | | | | 0.000% | | 2/8/18 to 9/26/19 | | | 41,060,000 | | | 27,758,243 | G2 |
Financing Corp. | | | | 0.000% | | 4/5/19 | | | 1,150,000 | | | 744,195 | G2,H |
Freddie Mac | | | | 10.000% | | 3/1/21 | | | 42,256 | | | 9,719 | G1,H,J |
Freddie Mac | | | | 0.000% | | 7/15/22 | | | 8,426 | | | 7,734 | G2,H,J |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 28,573,258 | |
| | | | | | | | | | | | | |
Total U.S. Government Agency Mortgage-Backed Securities (Cost—$891,759,860) | | | | | | | | | | | | 913,612,270 | |
Yankee BondsO | | 6.3% | | | | | | | | | | | |
| | | | | |
Aerospace and Defense | | 0.2% | | | | | | | | | | | |
Systems 2001 Asset Trust Pass-Thru | | | | 6.664% | | 9/15/13 | | | 8,180,410 | | | 8,368,723 | D |
| | | | | | | | | | | | | |
26
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
Yankee Bonds—Continued | | | | | | | | | | | | | |
| | | | | |
Beverages | | 0.1% | | | | | | | | | | | |
Diageo Finance BV | | | | 3.250% | | 1/15/15 | | $ | 4,990,000 | | $ | 4,956,797 | |
| | | | | | | | | | | | | |
| | | | | |
Commercial Banks | | 2.3% | | | | | | | | | | | |
Barclays Bank PLC | | | | 5.200% | | 7/10/14 | | | 2,060,000 | | | 2,183,616 | |
Barclays Bank PLC | | | | 6.050% | | 12/4/17 | | | 4,750,000 | | | 4,834,085 | D |
Commonwealth Bank of Australia | | | | 3.750% | | 10/15/14 | | | 4,450,000 | | | 4,460,822 | D |
Commonwealth Bank of Australia | | | | 5.000% | | 10/15/19 | | | 1,900,000 | | | 1,886,379 | D |
Credit Agricole SA | | | | 8.375% | | 10/13/19 | | | 9,970,000 | | | 10,568,200 | C,D |
Glitnir Banki Hf | | | | 6.330% | | 7/28/11 | | | 6,080,000 | | | 1,276,800 | B,D,H |
Glitnir Banki Hf | | | | 6.375% | | 9/25/12 | | | 8,920,000 | | | 1,873,200 | B,D,H |
Glitnir Banki Hf | | | | 6.693% | | 6/15/16 | | | 11,830,000 | | | 1,183 | B,C,D,H |
Glitnir Banki Hf | | | | 7.451% | | 9/14/49 | | | 1,600,000 | | | 160 | B,C,D,H |
HBOS Capital Funding LP | | | | 6.071% | | 6/30/49 | | | 3,105,000 | | | 2,018,250 | C,D |
HSBC Capital Funding LP | | | | 4.610% | | 6/27/49 | | | 1,630,000 | | | 1,391,348 | C,D |
Kaupthing Bank Hf | | | | 5.750% | | 10/4/11 | | | 2,960,000 | | | 732,600 | B,D,H |
Kaupthing Bank Hf | | | | 7.625% | | 2/28/15 | | | 20,280,000 | | | 5,019,300 | B,D,H |
Kaupthing Bank Hf | | | | 7.125% | | 5/19/16 | | | 30,520,000 | | | 3,052 | B,D,H |
Landsbanki Islands Hf | | | | 6.100% | | 8/25/11 | | | 17,170,000 | | | 772,650 | B,D,H |
Nordea Bank AB | | | | 3.700% | | 11/13/14 | | | 6,410,000 | | | 6,397,642 | D |
Rabobank Nederland NV | | | | 11.000% | | 6/30/19 | | | 7,003,000 | | | 8,538,436 | C,D |
Resona Preferred Global Securities | | | | 7.191% | | 12/29/49 | | | 13,670,000 | | | 11,181,117 | C,D |
Royal Bank of Scotland Group PLC | | | | 6.400% | | 10/21/19 | | | 7,650,000 | | | 7,625,443 | |
Royal Bank of Scotland Group PLC | | | | 7.640% | | 3/31/49 | | | 3,700,000 | | | 1,998,000 | C |
RSHB Capital SA | | | | 6.299% | | 5/15/17 | | | 2,430,000 | | | 2,447,010 | D |
Shinsei Finance Cayman Ltd. | | | | 6.418% | | 1/29/49 | | | 11,080,000 | | | 6,454,100 | C,D |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 81,663,393 | |
| | | | | | | | | | | | | |
Consumer Finance | | 0.1% | | | | | | | | | | | |
Aiful Corp. | | | | 5.000% | | 8/10/10 | | | 4,030,000 | | | 3,465,800 | D |
| | | | | | | | | | | | | |
| | | | | |
Diversified Financial Services | | 0.6% | | | | | | | | | | | |
MUFG Capital Finance 1 Ltd. | | | | 6.346% | | 7/29/49 | | | 4,660,000 | | | 4,241,280 | C |
SMFG Preferred Capital | | | | 6.078% | | 1/29/49 | | | 13,800,000 | | | 11,855,994 | C,D |
TNK-BP Finance SA | | | | 7.500% | | 7/18/16 | | | 2,420,000 | | | 2,480,500 | D |
TNK-BP Finance SA | | | | 6.625% | | 3/20/17 | | | 3,470,000 | | | 3,391,925 | D |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 21,969,699 | |
| | | | | | | | | | | | | |
Diversified Telecommunication Services | | 0.6% | | | | | | | | | | | |
British Telecommunications PLC | | | | 9.125% | | 12/15/10 | | | 1,755,000 | | | 1,880,166 | P |
Deutsche Telekom International Finance BV | | | | 5.750% | | 3/23/16 | | | 5,370,000 | | | 5,702,151 | |
27
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | VALUE | |
| | | | | | | | | | | | | |
Yankee Bonds—Continued | | | | | | | | | | | | | |
| | |
Diversified Telecommunication Services—Continued | | | | | | | |
Koninklijke (Royal) KPN NV | | | | 8.000% | | 10/1/10 | | $ | 8,240,000 | | $ | 8,652,000 | |
Telecom Italia Capital SpA | | | | 5.250% | | 11/15/13 | | | 965,000 | | | 1,014,978 | |
Telecom Italia Capital SpA | | | | 4.950% | | 9/30/14 | | | 2,570,000 | | | 2,663,746 | |
Telecom Italia Capital SpA | | | | 5.250% | | 10/1/15 | | | 2,060,000 | | | 2,153,827 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 22,066,868 | |
| | | | | | | | | | | | | |
Electric Utilities | | N.M. | | | | | | | | | | | |
Hydro-Quebec | | | | 6.300% | | 5/11/11 | | | 570,000 | | | 608,826 | |
| | | | | | | | | | | | | |
| | | | | |
Foreign Governments | | 0.4% | | | | | | | | | | | |
Russian Federation | | | | 7.500% | | 3/31/30 | | | 13,412,860 | | | 15,139,766 | |
United Mexican States | | | | 5.625% | | 1/15/17 | | | 160,000 | | | 166,800 | |
United Mexican States | | | | 7.500% | | 4/8/33 | | | 302,000 | | | 346,545 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 15,653,111 | |
| | | | | | | | | | | | | |
Industrial Conglomerates | | 1.1% | | | | | | | | | | | |
Tyco International Group SA | | | | 6.750% | | 2/15/11 | | | 26,549,000 | | | 27,864,582 | |
Tyco International Group SA | | | | 6.375% | | 10/15/11 | | | 6,560,000 | | | 7,034,288 | |
Tyco International Group SA | | | | 6.000% | | 11/15/13 | | | 2,950,000 | | | 3,231,383 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 38,130,253 | |
| | | | | | | | | | | | | |
Insurance | | 0.4% | | | | | | | | | | | |
Merna Reinsurance Ltd. | | | | 2.001% | | 7/7/10 | | | 13,500,000 | | | 13,298,850 | A,D |
| | | | | | | | | | | | | |
| | | | | |
Metals and Mining | | 0.2% | | | | | | | | | | | |
Corporacion Nacional del Cobre—Codelco | | | | 4.750% | | 10/15/14 | | | 1,750,000 | | | 1,873,715 | D |
Vale Overseas Ltd. | | | | 8.250% | | 1/17/34 | | | 10,000 | | | 11,455 | |
Vale Overseas Ltd. | | | | 6.875% | | 11/21/36 | | | 6,059,000 | | | 6,053,916 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 7,939,086 | |
| | | | | | | | | | | | | |
Oil, Gas and Consumable Fuels | | 0.2% | | | | | | | | | | | |
Conoco Funding Co. | | | | 6.350% | | 10/15/11 | | | 400,000 | | | 435,184 | |
Conoco Funding Co. | | | | 7.250% | | 10/15/31 | | | 350,000 | | | 405,565 | |
Gazprom | | | | 6.212% | | 11/22/16 | | | 850,000 | | | 813,875 | D |
Petrobras International Finance Co. | | | | 6.125% | | 10/6/16 | | | 3,020,000 | | | 3,238,950 | |
Petrobras International Finance Co. | | | | 5.750% | | 1/20/20 | | | 2,118,000 | | | 2,154,614 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 7,048,188 | |
| | | | | | | | | | | | | |
Wireless Telecommunication Services | | 0.1% | | | | | | | | | | | |
America Movil SA de CV | | | | 5.625% | | 11/15/17 | | | 2,710,000 | | | 2,805,769 | |
| | | | | | | | | | | | | |
Total Yankee Bonds
(Cost—$322,167,160) | | | | | | | | | | | | 227,975,363 | |
28
Annual Report to Shareholders
| | | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES | | | VALUE | |
| | | | | | | | | | | | | | |
Preferred Stocks | | 0.5% | | | | | | | | | | | | |
Fannie Mae | | | | 5.375% | | | | | 44 | shs | | $ | 121,000 | J,P,R |
Fannie Mae | | | | 7.000% | | | | | 26,600 | | | | 35,910 | A,J,R |
Fannie Mae | | | | 8.250% | | | | | 578,475 | | | | 636,322 | C,J,R |
Freddie Mac | | | | 8.375% | | | | | 844,875 | | | | 887,119 | C,J,R |
Motors Liquidation Co. | | | | 1.500% | | | | | 27,922 | | | | 157,759 | Q,R |
Motors Liquidation Co. | | | | 6.250% | | | | | 1,514,912 | | | | 8,559,253 | Q,R |
Motors Liquidation Co. | | | | 4.500% | | | | | 1,606 | | | | 8,994 | Q |
Motors Liquidation Co. | | | | 5.250% | | | | | 814,445 | | | | 4,642,337 | Q |
GMAC Inc. | | | | 7.000% | | | | | 726 | | | | 478,525 | D |
Home Ownership Funding Corp. | | | | 1.000% | | | | | 5,575 | | | | 535,653 | D,F,H |
Home Ownership Funding Corp. II | | | | 1.000% | | | | | 5,000 | | | | 480,406 | D,F,H |
| | | | | | | | | | | | | | |
Total Preferred Stocks (Cost—$62,158,287) | | | | | | | | | | | | | 16,543,278 | |
| | | | | | | | | | | | | | |
Total Long-Term Securities
(Cost—$4,167,146,514) | | | | | | | | | | | | | 3,700,662,688 | |
Short-Term Securities | | 4.4% | | | | | | | | | | | | |
| | | | | |
U.S. Government and Agency Obligations | | 4.3% | | | | | | | | | | | | |
Fannie Mae | | | | 0.220% | | 1/11/10 | | $ | 100,000,000 | | | | 99,993,888 | J.T |
Fannie Mae | | | | 0.095% | | 1/25/10 | | | 2,850,000 | | | | 2,849,814 | J,M,T |
United States Treasury Bill | | | | 0.160% | | 4/29/10 | | | 53,000,000 | | | | 52,985,267 | T |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | 155,828,969 | |
| | | | | | | | | | | | | | |
Options Purchased | | 0.1% | | | | | | | | | | | | |
Credit Suisse First Boston Swaption Put, April 2011, Strike Price $5.18 | | | | | | | | | 33,700,000 | S | | | 1,150,043 | |
Credit Suisse First Boston Swaption Put, April 2012, Strike Price $5.20 | | | | | | | | | 16,800,000 | S | | | 1,497,265 | |
Credit Suisse First Boston Swaption Put, May 2011, Strike Price $5.12 | | | | | | | | | 16,800,000 | S | | | 623,429 | |
U.S. Treasury Note Futures Put, February 2010, Strike Price $116.50 | | | | | | | | | 1,177 | S | | | 1,655,156 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | 4,925,893 | |
| | | | | | | | | | | | | | |
Total Short-Term Securities
(Cost—$158,000,917) | | | | | | | | | | | | | 160,754,862 | |
Total Investments (Cost—$4,325,147,431)U | | 106.8% | | | | | | | | | | | 3,861,417,550 | |
Other Assets Less Liabilities | | (6.8)% | | | | | | | | | | | (244,982,245 | ) |
| | | | | | | | | | | | | | |
| | | | | |
Net Assets | | 100.0% | | | | | | | | | | $ | 3,616,435,305 | |
| | | | | | | | | | | | | | |
29
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Bond Portfolio—Continued
| | | | | | | | |
| | | EXPIRATION | | ACTUAL
CONTRACTS | | APPRECIATION/
(DEPRECIATION) | |
Futures Contracts PurchasedV | | | | | | | | |
Eurodollar Futures | | March 2010 | | 2,614 | | $ | 5,006,333 | |
Eurodollar Futures | | June 2010 | | 462 | | | 797,026 | |
Eurodollar Futures | | September 2010 | | 197 | | | 362,028 | |
U.S. Treasury Bond Futures | | March 2010 | | 869 | | | (4,191,535 | ) |
U.S. Treasury Note Futures | | March 2010 | | 1,182 | | | (1,172,638 | ) |
U.S. Treasury Note Futures | | March 2010 | | 7,081 | | | (12,760,603 | ) |
| | | | | | | | |
| | | | | | $ | (11,959,389 | ) |
| | | | | | | | |
Futures Contracts WrittenV | | | | | | | | |
U.S. Treasury Note Futures | | March 2010 | | 3,742 | | $ | 10,579,683 | |
| | | | | | | | |
Options WrittenV | | | | | | | | |
Banc of America Swaption Call, Strike Price $3.58 | | February 2010 | | 22,080,000 | | $ | 381,324 | |
Banc of America Swaption Put, Strike Price $3.58 | | February 2010 | | 22,080,000 | | | (474,539 | ) |
Barclays Swaption Call, Strike Price $4.86 | | October 2013 | | 31,920,000 | | | 175,308 | |
Barclays Swaption Put, Strike Price $4.86 | | October 2013 | | 31,920,000 | | | (694,104 | ) |
Credit Suisse First Boston Swaption Call, Strike Price $4.70 | | August 2014 | | 15,610,000 | | | 179,189 | |
Credit Suisse First Boston Swaption Put, Strike Price $4.70 | | August 2014 | | 15,610,000 | | | (107,678 | ) |
Credit Suisse First Boston Swaption Put, Strike Price $5.03 | | April 2010 | | 16,800,000 | | | (16,308 | ) |
Deutsche Bank Swaption Call, Strike Price $4.70 | | September 2014 | | 4,740,000 | | | 55,383 | |
Deutsche Bank Swaption Put, Strike Price $4.70 | | September 2014 | | 4,740,000 | | | (31,810 | ) |
Eurodollar Futures Call, Strike Price $99.00 | | March 2010 | | 322 | | | (312,735 | ) |
Eurodollar Futures Call, Strike Price $99.13 | | September 2010 | | 529 | | | 154,056 | |
Eurodollar Futures Call, Strike Price $99.38 | | June 2010 | | 434 | | | 14,952 | |
Eurodollar Futures Put, Strike Price $98.75 | | March 2010 | | 193 | | | 118,454 | |
Eurodollar Futures Put, Strike Price $98.88 | | March 2010 | | 129 | | | 75,143 | |
Eurodollar Futures Put, Strike Price $99.13 | | September 2010 | | 529 | | | (187,607 | ) |
Eurodollar Futures Put, Strike Price $99.38 | | March 2010 | | 219 | | | 73,726 | |
Eurodollar Futures Put, Strike Price $99.38 | | June 2010 | | 435 | | | (29,189 | ) |
Greenwich Swaption Call, Strike Price $4.97 | | October 2013 | | 57,220,000 | | | 32,003 | |
Greenwich Swaption Put, Strike Price $4.97 | | October 2013 | | 57,220,000 | | | (1,097,108 | ) |
JP Morgan Swaption Call, Strike Price $4.86 | | October 2013 | | 25,300,000 | | | 131,360 | |
JP Morgan Swaption Put, Strike Price $4.86 | | October 2013 | | 25,300,000 | | | (542,561 | ) |
U.S. Treasury Note Futures Put, Strike Price $115.00 | | February 2010 | | 1,177 | | | (629,106 | ) |
U.S. Treasury Note Futures Put, Strike Price $116.00 | | March 2010 | | 193 | | | (127,283 | ) |
| | | | | | | | |
| | | | | | $ | (2,859,130 | ) |
| | | | | | | | |
| | | | | | | | | |
30
Annual Report to Shareholders
N.M.—Not Meaningful.
| A | | Indexed Security – The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Euro Interbank Offered Rate (“EURIBOR”) Index, the Consumer Price Index (“CPI”), the one-year Treasury Bill Rate or the ten-year Japanese Government Bond Rate. The coupon rates are the rates as of December 31, 2009. |
| B | | The coupon payment on these securities is currently in default as of December 31, 2009. |
| C | | Stepped Coupon Security – A security with a predetermined schedule of interest or dividend rate changes at which time it begins to accrue interest or pay dividends according to the predetermined schedule. |
| D | | 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, unless otherwise noted, represent 8.49% of net assets. |
| E | | 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. |
| F | | Security is valued in good faith at fair value by or under the direction of the Board of Directors (See Note 1). |
| G | | Stripped Security – Security with interest-only or principal-only payment streams, denoted by a 1 or 2, respectively. For interest-only securities, the amount shown as principal is the notional balance used to calculate the amount of interest due. |
| I | | The coupon rates shown on variable rate securities are the rates at December 31, 2009. These rates vary with the weighted average coupon of the underlying loans. |
| J | | On September 7, 2008, the Federal Housing Finance Agency placed Fannie Mae (FNMA) and Freddie Mac (FHLMC) into conservatorship. |
| K | | All or a portion of this security is collateral for swaps. |
| L | | 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. |
| M | | All or a portion of this security is collateral to cover futures and options contracts written. |
| N | | When-issued Security – Security purchased on a delayed delivery basis. Final settlement amount and maturity date have not yet been announced. |
| O | | Yankee Bond – A dollar-denominated bond issued in the U.S. by foreign entities. |
| P | | Credit Linked Security – The rates of interest earned on these securities are tied to the credit rating assigned by Standard & Poor’s Rating Service and/or Moody’s Investors Services. |
| Q | | Convertible Security – Security may be converted into the issuer’s common stock. |
| S | | Par represents actual number of contracts. |
| T | | Rate shown represents yield-to-maturity. |
| U | | Aggregate cost for federal income tax purposes is $4,326,982,355. |
| V | | Options written and futures are described in more detail in the notes to financial statements. |
See notes to financial statements.
31
Annual Report to Shareholders
Statement of Assets and Liabilities
Western Asset Core Bond Portfolio
December 31, 2009
| | | | | | | |
Assets: | | | | | | | |
Investment securities at value (Cost—$4,167,146,514) | | | | | $ | 3,700,662,688 | |
Short-term securities at value (Cost—$158,000,917) | | | | | | 160,754,862 | |
Cash | | | | | | 182,023 | |
Receivable for securities sold | | | | | | 124,381,385 | |
Premiums paid on open swaps | | | | | | 60,442,382 | |
Unrealized appreciation of swaps | | | | | | 47,428,627 | |
Interest receivable | | | | | | 29,671,164 | |
Receivable for fund shares sold | | | | | | 2,423,177 | |
Amounts receivable for open swaps | | | | | | 1,123,187 | |
Other assets | | | | | | 2,101 | |
| | | | | | | |
Total assets | | | | | | 4,127,071,596 | |
| | | | | | | |
| | |
Liabilities: | | | | | | | |
Payable for securities purchased | | $ | 357,140,488 | | | | |
Unrealized depreciation of swaps | | | 79,345,585 | | | | |
Premiums received on open swaps | | | 32,653,132 | | | | |
Options written (Proceeds—$18,613,082) | | | 21,472,212 | | | | |
Payable for fund shares repurchased | | | 8,692,098 | | | | |
Amounts payable for open swaps | | | 3,733,504 | | | | |
Income distribution payable | | | 3,393,521 | | | | |
Futures variation margin payable | | | 1,242,640 | | | | |
Accrued management fees | | | 1,227,994 | | | | |
Accrued distribution fees | | | 256,710 | | | | |
Accrued expenses | | | 1,478,407 | | | | |
| | | | | | | |
Total liabilities | | | | | | 510,636,291 | |
| | | | | | | |
| | |
Net Assets | | | | | $ | 3,616,435,305 | |
| | | | | | | |
| | |
Net assets consist of: | | | | | | | |
Accumulated paid-in-capital | | | | | $ | 4,472,841,243 | |
Undistributed net investment income | | | | | | 20,953,368 | |
Accumulated net realized loss on investments, options, futures and swaps | | | | | | (377,473,631 | ) |
Net unrealized depreciation of investments, options, futures and swaps | | | | | | (499,885,675 | ) |
| | | | | | | |
| | |
Net Assets | | | | | $ | 3,616,435,305 | |
| | | | | | | |
| | |
Net Asset Value Per Share: | | | | | | | |
Institutional Class (204,316,750 shares outstanding) | | | | | | $10.62 | |
| | | | | | | |
Institutional Select Class (23,244,337 shares outstanding) | | | | | | $10.63 | |
| | | | | | | |
Financial Intermediary Class (112,890,288 shares outstanding) | | | | | | $10.62 | |
| | | | | | | |
| | | | | | | | |
See notes to financial statements.
32
Annual Report to Shareholders
Statement of Operations
Western Asset Core Bond Portfolio
| | | | | | | | |
| | | FOR THE
YEAR ENDED
DECEMBER 31, 2009 | |
Investment Income: | | | | | | | | |
Interest | | $ | 191,733,399 | | | | | |
Dividends | | | 262,429 | | | | | |
| | | | | | | | |
Total income | | | | | | $ | 191,995,828 | |
Expenses: | | | | | | | | |
Management fees (Note 2) | | | 14,437,236 | | | | | |
Distribution fees (Notes 2 and 6) | | | 2,800,092 | | | | | |
Transfer agent and shareholder servicing expense (Note 6) | | | 1,989,617 | | | | | |
Reports to shareholders (Note 6) | | | 420,195 | | | | | |
Custodian fees | | | 286,957 | | | | | |
Audit and legal fees | | | 180,244 | | | | | |
Directors’ fees and expenses | | | 172,057 | | | | | |
Registration fees | | | 51,064 | | | | | |
Other expenses | | | 76,946 | | | | | |
| | | | | | | | |
| | | 20,414,408 | | | | | |
Less: Fees waived (Notes 2 and 6) | | | (381,799 | ) | | | | |
| | | | | | | | |
Net expenses | | | | | | | 20,032,609 | |
| | | | | | | | |
Net Investment Income | | | | | | | 171,963,219 | |
Net Realized and Unrealized Gain/(Loss) on Investments (Notes 1, 3 and 4): | | | | | | | | |
Net realized gain/(loss) on: | | | | | | | | |
Investments | | | (21,157,903 | ) | | | | |
Options written | | | 36,760,869 | | | | | |
Futures | | | (998,297 | ) | | | | |
Swaps | | | (195,029,691 | ) | | | | |
| | | | | | | | |
| | | | | | | (180,425,022 | ) |
Change in unrealized appreciation/(depreciation) of: | | | | | | | | |
Investments | | | 462,427,526 | | | | | |
Options written | | | 6,386,958 | | | | | |
Futures | | | (58,355,147 | ) | | | | |
Swaps | | | 299,714,103 | | | | | |
| | | | | | | | |
| | | | | | | 710,173,440 | |
| | | | | | | | |
Net Realized and Unrealized Gain on Investments | | | | | | | 529,748,418 | |
| | | | | | | | | |
Change in Net Assets Resulting From Operations | | | | | | $ | 701,711,637 | |
| | | | | | | | | |
See notes to financial statements.
33
Annual Report to Shareholders
Statement of Changes in Net Assets
Western Asset Core Bond Portfolio
| | | | | | | | | | | | |
| | | FOR THE
YEAR ENDED
DECEMBER 31, 2009 | | | FOR THE
PERIOD ENDED
DECEMBER 31, 2008A | | | FOR THE
YEAR ENDED
MARCH 31, 2008 | |
| Change in Net Assets: | | | | | | | | | |
Net investment income | | $ | 171,963,219 | | | $ | 240,010,805 | | | $ | 361,354,213 | |
| | | |
Net realized loss | | | (180,425,022 | ) | | | (25,480,961 | ) | | | (77,680,995 | ) |
| | | |
Change in unrealized appreciation/(depreciation) | | | 710,173,440 | | | | (803,419,816 | ) | | | (418,890,141 | ) |
| | | | | | | | | | | | |
Change in net assets resulting from operations | | | 701,711,637 | | | | (588,889,972 | ) | | | (135,216,923 | ) |
| | | |
Distributions to shareholders from (Note 1): | | | | | | | | | | | | |
Net investment income: | | | | | | | | | | | | |
Institutional Class | | | (120,818,761 | ) | | | (212,870,311 | ) | | | (279,146,241 | ) |
Institutional Select Class | | | (14,404,830 | ) | | | (4,754,933 | ) | | | N/A | |
Financial Intermediary Class | | | (60,417,660 | ) | | | (73,545,140 | ) | | | (77,801,855 | ) |
| | | |
Net realized gain on investments: | | | | | | | | | | | | |
Institutional Class | | | — | | | | — | | | | (22,347,640 | ) |
Financial Intermediary Class | | | — | | | | — | | | | (6,284,549 | ) |
| | | |
Change in net assets from fund share transactions (Note 7): | | | | | | | | | | | | |
Institutional Class | | | (684,733,238 | ) | | | (1,908,390,929 | ) | | | 567,219,859 | |
Institutional Select Class | | | (33,626,861 | ) | | | 230,873,479 | | | | N/A | |
Financial Intermediary Class | | | (139,726,615 | ) | | | (241,647,090 | ) | | | 343,480,947 | |
| | | | | | | | | | | | |
Change in net assets | | | (352,016,328 | ) | | | (2,799,224,896 | ) | | | 389,903,598 | |
| | | |
Net Assets: | | | | | | | | | | | | |
Beginning of year | | | 3,968,451,633 | | | | 6,767,676,529 | | | | 6,377,772,931 | |
| | | | | | | | | | | | |
| | | |
End of year | | $ | 3,616,435,305 | | | $ | 3,968,451,633 | | | $ | 6,767,676,529 | |
| | | | | | | | | | | | |
| | | |
Undistributed net investment income | | $ | 20,953,368 | | | $ | 22,102,922 | | | $ | 16,291,168 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| A | | For the period April 1, 2008 to December 31, 2008. |
N/A—Not applicable.
See notes to financial statements.
34
Annual Report to Shareholders
Financial Highlights
Western Asset Core Bond Portfolio
For a share of each class of capital stock outstanding:
Institutional Class:
| | | | | | | | | | | | | | | | | | |
| | | YEAR ENDED
DECEMBER 31,
2009 | | | PERIOD ENDED
DECEMBER 31,
2008A | | | YEARS ENDED MARCH 31, | |
| | | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of year | | $9.08 | | | $10.54 | | | $11.37 | | | $11.05 | | | $11.29 | | | $11.81 | |
| | | | | | | | | | | | | | | | | | |
Investment operations: | | | | | | | | | | | | | | | | | | |
Net investment income | | .48 | B | | .42 | B | | .58 | B | | .55 | B | | .49 | C | | .39 | C |
Net realized and unrealized gain/(loss) | | 1.61 | | | (1.34 | ) | | (.78 | ) | | .34 | | | (.22 | ) | | (.21 | ) |
| | | | | | | | | | | | | | | | | | |
Total from investment operations | | 2.09 | | | (.92 | ) | | (.20 | ) | | .89 | | | .27 | | | .18 | |
| | | | | | | | | | | | | | | | | | |
Distributions from: | | | | | | | | | | | | | | | | | | |
Net investment income | | (.55 | ) | | (.54 | ) | | (.58 | ) | | (.57 | ) | | (.51 | ) | | (.39 | ) |
Net realized gain on investments | | — | | | — | | | (.05 | ) | | — | | | — | D | | (.31 | ) |
| | | | | | | | | | | | | | | | | | |
Total distributions | | (.55 | ) | | (.54 | ) | | (.63 | ) | | (.57 | ) | | (.51 | ) | | (.70 | ) |
| | | | | | | | | | | | | | | | | | |
Net asset value, end of year | | $10.62 | | | $9.08 | | | $10.54 | | | $11.37 | | | $11.05 | | | $11.29 | |
| | | | | | | | | | | | | | | | | | |
Total returnE | | 23.68 | % | | (8.88 | )% | | (1.88 | )% | | 8.23 | % | | 2.46 | % | | 1.68 | % |
| | | | | | |
Ratios to Average Net Assets: | | | | | | | | | | | | | | | | | | |
Total expensesF | | .49 | % | | .47 | %G | | .44 | % | | .47 | % | | .45 | % | | .46 | % |
Expenses net of waivers, if anyF | | .49 | % | | .47 | %G | | .44 | % | | .47 | % | | .45 | % | | .46 | % |
Expenses net of all reductionsF | | .49 | % | | .47 | %G | | .44 | % | | .47 | % | | .45 | % | | .46 | % |
Net investment income | | 5.0 | % | | 5.6 | %G | | 5.3 | % | | 4.9 | % | | 4.3 | % | | 3.4 | % |
| | | | | | |
Supplemental Data: | | | | | | | | | | | | | | | | | | |
Portfolio turnover rate | | 220.8 | % | | 140.8 | %H | | 455.0 | % | | 431.7 | % | | 540.4 | % | | 407.2 | % |
Net assets, end of year (in thousands) | | $2,170,146 | | | $2,558,597 | | | $5,140,277 | | | $4,975,052 | | | $4,243,248 | | | $3,277,782 | |
| | | | | | | | | | | | | | | | | | | |
| A | | For the period April 1, 2008 to December 31, 2008. |
| B | | Computed using average daily shares outstanding. |
| C | | Computed using SEC method. |
| D | | Amount less than $.01 per share. |
| E | | Performance figures may reflect compensating balance credits, fee waivers and/or expense reimbursements. In the absence of compensating balance credits, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| F | | Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers. As of the most current prospectus, the Institutional Class has no limit on expenses. |
See notes to financial statements.
35
Annual Report to Shareholders
Financial Highlights—Continued
Western Asset Core Bond Portfolio
For a share of each class of capital stock outstanding:
Institutional Select Class:
| | | | | | |
| | | YEAR ENDED
DECEMBER 31,
2009 | | | PERIOD ENDED
DECEMBER 31,
2008A | |
Net asset value, beginning of year | | $9.09 | | | $10.11 | |
| | | | | | |
Investment operations: | | | | | | |
Net investment incomeB | | .48 | | | .15 | |
Net realized and unrealized gain/(loss) | | 1.61 | | | (.87 | ) |
| | | | | | |
Total from investment operations | | 2.09 | | | (.72 | ) |
| | | | | | |
Distributions from: | | | | | | |
Net investment income | | (.55 | ) | | (.30 | ) |
| | | | | | |
Total distributions | | (.55 | ) | | (.30 | ) |
| | | | | | |
Net asset value, end of year | | $10.63 | | | $9.09 | |
| | | | | | |
Total returnC | | 23.72 | % | | (7.08 | )% |
| | |
Ratios to Average Net Assets: | | | | | | |
Total expensesD | | .44 | % | | .45 | %E |
Expenses net of waivers, if anyD | | .44 | % | | .45 | %E |
Expenses net of all reductionsD | | .44 | % | | .45 | %E |
Net investment income | | 5.0 | % | | 5.2 | %E |
| | |
Supplemental Data: | | | | | | |
Portfolio turnover rate | | 220.8 | % | | 140.8 | %F |
Net assets, end of year (in thousands) | | $247,070 | | | $240,681 | |
| | | | | | | |
| A | | For the period August 29, 2008 (commencement of operations) to December 31, 2008. |
| B | | Computed using average daily shares outstanding. |
| C | | Performance figures may reflect compensating balance credits, fee waivers and/or expense reimbursements. In the absence of compensating balance credits, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| D | | Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers. |
See notes to financial statements.
36
Annual Report to Shareholders
Financial Intermediary Class:
| | | | | | | | | | | | | | | | | | |
| | | YEAR ENDED
DECEMBER 31,
2009 | | | PERIOD ENDED
DECEMBER 31,
2008A | | | YEARS ENDED MARCH 31, | |
| | | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of year | | $9.08 | | | $10.54 | | | $11.37 | | | $11.05 | | | $11.29 | | | $11.81 | |
| | | | | | | | | | | | | | | | | | |
Investment operations: | | | | | | | | | | | | | | | | | | |
Net investment income | | .45 | B | | .40 | B | | .56 | B | | .51 | B | | .47 | C | | .38 | C |
Net realized and unrealized gain/(loss) | | 1.61 | | | (1.34 | ) | | (.79 | ) | | .35 | | | (.22 | ) | | (.23 | ) |
| | | | | | | | | | | | | | | | | | |
Total from investment operations | | 2.06 | | | (.94 | ) | | (.23 | ) | | .86 | | | .25 | | | .15 | |
| | | | | | | | | | | | | | | | | | |
Distributions from: | | | | | | | | | | | | | | | | | | |
Net investment income | | (.52 | ) | | (.52 | ) | | (.55 | ) | | (.54 | ) | | (.49 | ) | | (.36 | ) |
Net realized gain on investments | | — | | | — | | | (.05 | ) | | — | | | — | D | | (.31 | ) |
| | | | | | | | | | | | | | | | | | |
Total distributions | | (.52 | ) | | (.52 | ) | | (.60 | ) | | (.54 | ) | | (.49 | ) | | (.67 | ) |
| | | | | | | | | | | | | | | | | | |
Net asset value, end of year | | $10.62 | | | $9.08 | | | $10.54 | | | $11.37 | | | $11.05 | | | $11.29 | |
| | | | | | | | | | | | | | | | | | |
Total returnE | | 23.37 | % | | (9.06 | )% | | (2.12 | )% | | 7.95 | % | | 2.19 | % | | 1.42 | % |
| | | | | | |
Ratios to Average Net Assets: | | | | | | | | | | | | | | | | | | |
Total expensesF | | .78 | % | | .77 | %G | | .69 | % | | .72 | % | | .70 | % | | .72 | % |
Expenses net of waivers, if anyF | | .75 | % | | .72 | %G | | .69 | % | | .72 | % | | .70 | % | | .72 | % |
Expenses net of all reductionsF | | .75 | % | | .72 | %G | | .69 | % | | .72 | % | | .70 | % | | .72 | % |
Net investment income | | 4.7 | % | | 5.3 | %G | | 5.1 | % | | 4.6 | % | | 4.1 | % | | 4.2 | % |
| | | | | | |
Supplemental Data: | | | | | | | | | | | | | | | | | | |
Portfolio turnover rate | | 220.8 | % | | 140.8 | %H | | 455.0 | % | | 431.7 | % | | 540.4 | % | | 407.2 | % |
Net assets, end of year (in thousands) | | $1,199,219 | | | $1,169,174 | | | $1,627,400 | | | $1,402,721 | | | $360,819 | | | $265,518 | |
| | | | | | | | | | | | | | | | | | | |
| A | | For the period April 1, 2008 to December 31, 2008. |
| B | | Computed using average daily shares outstanding. |
| C | | Computed using SEC method. |
| D | | Amount less than $.01 per share. |
| E | | Performance figures may reflect compensating balance credits, fee waivers and/or expense reimbursements. In the absence of compensating balance credits, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| F | | Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers. |
See notes to financial statements.
37
Annual Report to Shareholders
Management’s Discussion of Fund Performance
Western Asset Core Plus Bond Portfolio
Performance Review
For the twelve months ended December 31, 2009, Institutional Class shares of Western Asset Core Plus Bond Portfolio returned 26.20%. The Fund’s unmanaged benchmark, the Barclays Capital U.S. Aggregate Indexi, returned 5.93% for the same period. The Lipper Intermediate Investment Grade Debt Funds Category Average 1 returned 12.89% over the same time frame.
PERFORMANCE SNAPSHOT as of December 31, 2009 (unaudited)
| | | | |
| | | 6 MONTHS | | 12 MONTHS |
Western Asset Core Plus Bond Portfolio: | | | | |
Institutional Class | | 14.51% | | 26.20% |
Financial Intermediary Class | | 14.26% | | 25.78% |
Institutional Select Class | | 14.41% | | 26.11% |
Barclays Capital U.S. Aggregate Index | | 3.95% | | 5.93% |
Lipper Intermediate Investment Grade Debt Funds Category Average1 | | 7.11% | | 12.89% |
The performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown above. Principal value, investment returns and yields will fluctuate and investors’ shares, when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent month-end, please visit our website at www.leggmason.com/individualinvestors.
All share class returns assume the reinvestment of all distributions, including returns of capital, if any, at net asset value and the deduction of all Fund expenses. Returns have not been adjusted to include the deduction of taxes that a shareholder would pay on Fund distributions. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.
Performance figures reflect expense reimbursements and/or fee waivers, without which the performance would have been lower.
The 30-Day SEC Yields for the period ended December 31, 2009 for Institutional, Financial Intermediary and Institutional Select Class shares were 4.42%, 4.15% and 4.40%, respectively. Absent current expense reimbursements and/or fee waivers, the 30-Day SEC Yields for Institutional, Financial Intermediary and Institutional Select Class shares would have been 4.42%, 4.15% and 4.40%, respectively. The 30-Day SEC Yield is the average annualized net investment income per share for the 30-day period indicated and is subject to change.
TOTAL ANNUAL OPERATING EXPENSES (unaudited)
As of the Fund’s most current prospectus dated July 1, 2009, the gross total operating expense ratios for Institutional, Financial Intermediary and Institutional Select Class shares were 0.47%, 0.85% and 0.44%, respectively.
Actual expenses may be higher. For example, expenses may be higher than those shown if average net assets decrease. Net assets are more likely to decrease and Fund expense ratios are more likely to increase when markets are volatile.
As a result of contractual expense limitations, the ratio of expenses, other than interest, brokerage, taxes, deferred organizational expenses and extraordinary expenses, will not exceed 0.70% for Financial Intermediary Class shares and 0.45% for Institutional Select Class shares until April 30, 2010.
| 1 | | Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the period ended December 31, 2009, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 561 funds for the six-month period and among the 549 funds for the twelve-month period in the Fund’s Lipper category. |
38
Annual Report to Shareholders
In 2009, the financial markets stabilized and economic conditions improved. As the year progressed, investor risk aversion was replaced with increased risk appetite, leading to strong demand for the spread sectors and underperformance of U.S. Treasuries. Against this backdrop, the Fund significantly outperformed its benchmark.
The largest contributors to relative results for the period were our overweight exposures to investment grade and high-yield bonds. In particular, our Financials holdings performed well as their spreads tightened from their elevated level in 2008 and early 2009. Our overweight to non-agency mortgage-backed securities (“MBS”) was another meaningful contributor to performance. The asset class generated strong results as housing data improved and there was positive sentiment surrounding the launch of the Public-Private Investment Program (“PPIP”). Our overweight to U.S. Treasury Inflation-Protected Securities (“TIPS”)ii was also rewarded as inflation expectations increased. Elsewhere, our durationiii position, agency MBS exposure, non-dollar investments and emerging market debt holdings also contributed to performance, albeit to a lesser extent. Detracting from relative performance was our underweight to government agency debt, which performed well during the twelve-month period.
We made several adjustments to the portfolio during the twelve-month reporting period. We increased the portfolio’s exposure to Treasuries, investment grade bonds and government agency bonds. In contrast, we moved from an overweight to an underweight position versus the benchmark in agency MBS, finding them less attractive as their spreads had narrowed given the government’s direct purchase of these securities. With the government set to phase out its purchasing program, we determined that more attractive opportunities could be found in other areas of the market.
During the reporting period, we utilized Eurodollar futures/options and Treasury futures/options to manage the Portfolio’s duration and yield curveiv exposure. Interest rate swaps/swaptions were used to manage our interest rate exposure throughout the yield curve. We also utilized index credit default swaps/swaptions to manage the portfolio’s exposure to the investment grade, high-yield, residential MBS and commercial MBS. Credit default swaps were used to manage the portfolio’s exposure to specific corporate names. We employed Euro-bund futures/options to manage our euro interest rate exposure. Canadian futures contracts were employed to manage interest rate exposure to the Canadian yield curve. Finally, we used currency forward contracts to manage our currency exposure. Overall, the use of these derivative instruments positively contributed to performance.
Western Asset Management Company
January 19, 2010
39
Annual Report to Shareholders
Management’s Discussion of Fund Performance—Continued
Western Asset Core Plus Bond Portfolio—Continued
The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.
The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. Portfolio holdings are subject to change at any time and may not be representative of the portfolio managers’ current or future investments. The Fund’s top five sector holdings (as a percentage of net assets) as of December 31, 2009 were: U.S. Government Agency Mortgage-Backed Securities (26.7%), Corporate Bonds and Notes (24.2%), U.S. Government and Agency Obligations (20.8%), Mortgage-Backed Securities (12.1%) and Yankee Bonds (7.5%). The Fund’s portfolio composition is subject to change at any time.
RISKS: All investments are subject to risk including the loss of principal. Bonds are subject to a variety of risks, including interest rate, credit and inflation risk. As interest rates rise, bond prices fall, reducing the value of the Fund’s share price. The Fund may invest in high-yield bonds, which are rated below investment grade and carry more risk than higher-rated securities. Mortgage-backed securities involve more risk, including prepayment and extension risks, than other investments in fixed-income securities. Non-U.S. investments are subject to currency fluctuations, social, economic and political risk. These risks are magnified in emerging markets. The Fund may use derivatives, such as options, futures and swaps, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. Please see the Fund’s prospectus for more information on these and other risks.
All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
| i | | The Barclays Capital U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage- and asset-backed issues, rated investment grade or higher, and having at least one year to maturity. |
| ii | | U.S. Treasury Inflation-Protected Securities (“TIPS”) are inflation-indexed securities issued by the U.S. Treasury in five-year, ten-year and twenty-year maturities. The principal is adjusted to the Consumer Price Index, the commonly used measure of inflation. The coupon rate is constant, but generates a different amount of interest when multiplied by the inflation-adjusted principal. |
| iii | | Duration is the measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows. |
| iv | | The yield curve is the graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities. |
40
Annual Report to Shareholders
Special Shareholder Notice
Western Asset Core Plus Portfolio
Effective August 20, 2009, the Fund is managed by a team of portfolio managers, sector specialists and other investment professionals. S. Kenneth Leech, Stephen A. Walsh, Mark S. Lindbloom, Edward A. Moody, Carl L. Eichstaedt, Michael C. Buchanan and Keith J.Gardner serve as co-leaders of this team and are responsible for the day-to-day strategic oversight of the Fund’s investments and for supervising the day-to-day operations of the various sector specialist teams dedicated to the specific asset classes in which the Fund invests. As portfolio managers, their focus is on portfolio structure, including sector allocation, durationi weighting and term structure decisions. Messrs. Leech, Walsh, Lindbloom, Moody, Eichstaedt, Buchanan and Gardner are employed by Western Asset Management Company. Messrs. Leech, Walsh, Moody, Eichstaedt and Gardner have served as portfolio managers to the Fund since its inception in 1998. Messrs. Lindbloom and Buchanan have served as portfolio managers to the Fund since 2006 and 2005, respectively.
| i | | Duration is the measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows. |
41
Annual Report to Shareholders
Expense Example (Unaudited)
Western Asset Core Plus Bond Portfolio
As a shareholder of the Fund, you incur ongoing costs, including management fees, distribution (12b-1) fees on Financial Intermediary 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.
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 if your shares were held for the period. The example are based on an investment of $1,000 invested on July 1, 2009 and held through December 31, 2009. The ending values assume dividends were reinvested at the time they were paid.
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 this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds. Because the example is intended to be comparable to the examples provided by other funds, it is based on a hypothetical investment of $1,000 invested on July 1, 2009 and held through December 31, 2009 for each class. The ending values assume dividends were reinvested at the time they were paid.
| | | | | | | | | |
| | | Beginning
Account Value
7/1/09 | | Ending
Account Value
12/31/09 | | Expenses PaidA
During the Period
7/1/09 to 12/31/09 |
Institutional Class: | | | | | | | | | |
Actual | | $ | 1,000.00 | | $ | 1,145.10 | | $ | 2.43 |
Hypothetical (5% return before expenses) | | | 1,000.00 | | | 1,022.94 | | | 2.29 |
Institutional Select Class: | | | | | | | | | |
Actual | | $ | 1,000.00 | | $ | 1,144.10 | | $ | 2.32 |
Hypothetical (5% return before expenses) | | | 1,000.00 | | | 1,023.04 | | | 2.19 |
Financial Intermediary Class: | | | | | | | | | |
Actual | | $ | 1,000.00 | | $ | 1,142.60 | | $ | 3.78 |
Hypothetical (5% return before expenses) | | | 1,000.00 | | | 1,021.68 | | | 3.57 |
| A | | These calculations are based on expenses incurred from July 1, 2009 to December 31, 2009. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratios of 0.45%, 0.43% and 0.70% for the Institutional Class, Institutional Select Class and Financial Intermediary Class, respectively, multiplied by the average values over the period, multiplied by the number of days in the most recent fiscal period then divided by 365. |
42
Annual Report to Shareholders
Performance Information (Unaudited)
Western Asset Core Plus Bond Portfolio
The graphs compare the Fund’s total returns to that of an appropriate broad-based securities market index. The graphs illustrate the cumulative total return of an initial $1,000,000 investment in the Institutional Class, Institutional Select Class and Financial Intermediary 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 investment management or administrative expenses.
Total return measures investment performance in terms of appreciation or depreciation in the Fund’s net asset value per share, plus dividends and any capital gain distributions. It assumes that dividends and distributions were reinvested at the time they were paid. Returns (and the graphs and tables found below) do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Average annual returns tend to smooth out variations in a fund’s return, so that they differ from actual year-to-year results.
Bonds are subject to a variety of risks, including interest rate, credit and inflation risk. Non-U.S. investment are subject to currency fluctuations, social, economical and political risk.
Growth of a $1,000,000 Investment—Institutional Class
The performance data quoted represent past performance and do not guarantee future results. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.leggmason.com/individualinvestors. 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 the reinvestment of all distributions, including returns of capital, if any, at net asset value and the deduction of all Fund expenses. Performance would have been lower if fees had not been waived in various periods.
43
Annual Report to Shareholders
Performance Information (Unaudited)—Continued
Growth of a $1,000,000 Investment—Institutional Select Class
The performance data quoted represent past performance and do not guarantee future results. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.leggmason.com/individualinvestors. 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 the reinvestment of all distributions, including returns of capital, if any, at net asset value and the deduction of all Fund expenses. Performance would have been lower if fees had not been waived in various periods.
44
Annual Report to Shareholders
Growth of a $1,000,000 Investment—Financial Intermediary Class
The performance data quoted represent past performance and do not guarantee future results. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance information, please visit www.leggmason.com/individualinvestors. 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 the reinvestment of all distributions, including returns of capital, if any, at net asset value and the deduction of all Fund expenses. Performance would have been lower if fees had not been waived in various periods.
45
Annual Report to Shareholders
Spread Duration
Western Asset Core Plus Bond Portfolio
December 31, 2009 (Unaudited)
Economic Exposure
Spread duration is defined as the change in value for a 100 basis point change in the spread relative to Treasuries. The spread over Treasuries is the annual risk-premium demanded by investors to hold non-Treasury securities. This chart highlights the market sector exposure of the Fund’s portfolio and the exposure relative to the selected benchmark as of the end of the reporting period.
ABS—Asset Backed Securities
BAI—Barclays Capital U.S. Aggregate Index
CMBS—Commercial Mortgage Backed Securities
HY—High Yield
IG Credit—Investment Grade Credit
MBS—Mortgage Backed Securities
46
Annual Report to Shareholders
Effective Duration
Western Asset Core Plus Bond Portfolio
December 31, 2009 (Unaudited)
Interest Rate Exposure
Effective duration is defined as the change in value for a 100 basis point change in Treasury yields. This chart highlights the interest rate exposure of the Fund’s portfolio relative to the selected benchmark as of the end of the reporting period.
47
ABS—Asset Backed Securities
BAI—Barclays Capital U.S. Aggregate Index
CMBS—Commercial Mortgage Backed Securities
HY—High Yield
IG Credit—Investment Grade Credit
MBS—Mortgage Backed Securities
Annual Report to Shareholders
Performance Information (Unaudited)—Continued
Portfolio Composition (Unaudited) (as of December 31, 2009)A
Standard & Poor’s Debt RatingsB
(as a percentage of the portfolio)
Maturity Schedule
(as a percentage of the portfolio)
| A | | The pie charts above represent the composition of the Fund’s Portfolio as of December 31, 2009 and do not include derivatives such as Futures Contracts, Options Written, and Swaps. The Fund is actively managed. As a result, the composition of the portfolio holdings and sectors are subject to change at any time. |
| B | | Source: Standard & Poor’s. These ratings are the opinions of S&P and not absolute measures of quality or guarantees of performance. |
| C | | Common Stocks, Preferred Stocks and Warrants do not have a defined maturity date. |
48
Annual Report to Shareholders
Portfolio of Investments
Western Asset Core Plus Bond Portfolio
December 31, 2009
| | | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | | VALUE | |
| | | | | | | | | | | | | | |
Long-Term Securities | | 97.9% | | | | | | | | | | | | |
| | | | | |
Corporate Bonds and Notes | | 24.2% | | | | | | | | | | | | |
| | | | | |
Aerospace and Defense | | 0.2% | | | | | | | | | | | | |
L-3 Communications Corp. | | | | 5.875% | | 1/15/15 | | $ | 800,000 | | | $ | 799,000 | |
L-3 Communications Corp. | | | | 6.375% | | 10/15/15 | | | 3,780,000 | | | | 3,794,175 | |
The Boeing Co. | | | | 6.000% | | 3/15/19 | | | 8,200,000 | | | | 8,898,345 | |
The Boeing Co. | | | | 4.875% | | 2/15/20 | | | 3,100,000 | | | | 3,108,404 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | 16,599,924 | |
| | | | | | | | | | | | | | |
Air Freight and Logistics | | N.M. | | | | | | | | | | | | |
United Parcel Service Inc. | | | | 4.500% | | 1/15/13 | | | 270,000 | | | | 287,063 | |
| | | | | | | | | | | | | | |
| | | | | |
Airlines | | 1.0% | | | | | | | | | | | | |
Continental Airlines Inc. | | | | 6.503% | | 12/15/12 | | | 1,065,000 | | | | 1,065,000 | |
Continental Airlines Inc. | | | | 6.900% | | 7/2/19 | | | 53,416 | | | | 51,680 | |
Continental Airlines Inc. | | | | 6.545% | | 8/2/20 | | | 9,256,532 | | | | 9,071,401 | |
Continental Airlines Inc. | | | | 5.983% | | 4/19/22 | | | 9,410,000 | | | | 9,080,650 | |
Continental Airlines Inc. | | | | 6.703% | | 12/15/22 | | | 203,503 | | | | 189,258 | |
DAE Aviation Holdings Inc. | | | | 11.250% | | 8/1/15 | | | 1,950,000 | | | | 1,647,750 | A |
Delta Air Lines Inc. | | | | 6.619% | | 3/18/11 | | | 2,259,656 | | | | 2,259,656 | |
Delta Air Lines Inc. | | | | 7.570% | | 5/18/12 | | | 11,140,000 | | | | 11,293,175 | |
Delta Air Lines Inc. | | | | 7.111% | | 3/18/13 | | | 1,300,000 | | | | 1,311,375 | |
Delta Air Lines Inc. | | | | 6.821% | | 8/10/22 | | | 15,631,160 | | | | 14,927,758 | |
Northwest Airlines Corp. | | | | 7.575% | | 9/1/20 | | | 9,902,104 | | | | 8,911,893 | |
Northwest Airlines Inc. | | | | 0.951% | | 8/6/13 | | | 1,066,665 | | | | 927,998 | B |
Northwest Airlines Inc. | | | | 1.019% | | 5/20/14 | | | 3,926,698 | | | | 3,298,426 | B |
Southwest Airlines Co. | | | | 5.125% | | 3/1/17 | | | 5,320,000 | | | | 5,106,035 | |
United Air Lines Inc. | | | | 7.032% | | 4/1/12 | | | 360,716 | | | | 360,716 | |
United Air Lines Inc. | | | | 7.186% | | 10/1/12 | | | 1,746,160 | | | | 1,754,891 | |
United Air Lines Inc. | | | | 9.750% | | 1/15/17 | | | 6,040,000 | | | | 6,160,800 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | 77,418,462 | |
| | | | | | | | | | | | | | |
Automobiles | | 0.1% | | | | | | | | | | | | |
DaimlerChrysler NA Holding Corp. | | | | 5.875% | | 3/15/11 | | | 500,000 | | | | 522,787 | |
DaimlerChrysler NA Holding Corp. | | | | 7.300% | | 1/15/12 | | | 3,315,000 | | | | 3,603,876 | |
DaimlerChrysler NA Holding Corp. | | | | 6.500% | | 11/15/13 | | | 1,390,000 | | | | 1,523,767 | |
Motors Liquidation Co. | | | | 9.450% | | 11/1/11 | | | 2,514,000 | | | | 659,925 | C |
Motors Liquidation Co. | | | | 9.400% | | 7/15/21 | | | 674,000 | | | | 176,082 | C |
Motors Liquidation Co. | | | | 8.250% | | 7/15/23 | | | 1,040,000 | | | | 275,600 | C |
Motors Liquidation Co. | | | | 8.100% | | 6/15/24 | | | 368,000 | | | | 95,680 | C |
Motors Liquidation Co. | | | | 8.375% | | 7/5/33 | | | 9,520,000 | EUR | | | 2,797,716 | C |
Motors Liquidation Co. | | | | 0.000% | | 3/15/36 | | | 8,887,000 | | | | 1,199,745 | C,D |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | 10,855,178 | |
| | | | | | | | | | | | | | |
49
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Corporate Bonds and Notes—Continued | | | | | | | | | | | |
| | | | | |
Beverages | | 0.3% | | | | | | | | | | | |
Anheuser-Busch InBev Worldwide Inc. | | | | 5.375% | | 1/15/20 | | $ | 14,670,000 | | $ | 14,967,199 | A |
Dr. Pepper Snapple Group Inc. | | | | 6.820% | | 5/1/18 | | | 6,100,000 | | | 6,843,090 | E |
PepsiCo Inc. | | | | 7.900% | | 11/1/18 | | | 210,000 | | | 257,724 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 22,068,013 | |
| | | | | | | | | | | | | |
Building Products | | 0.2% | | | | | | | | | | | |
Masco Corp. | | | | 7.125% | | 8/15/13 | | | 5,830,000 | | | 6,068,272 | |
Masco Corp. | | | | 6.125% | | 10/3/16 | | | 8,270,000 | | | 7,880,822 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 13,949,094 | |
| | | | | | | | | | | | | |
Capital Markets | | 1.0% | | | | | | | | | | | |
Goldman Sachs Capital II | | | | 5.793% | | 12/29/49 | | | 1,810,000 | | | 1,402,750 | D |
Goldman Sachs Group LP | | | | 4.500% | | 6/15/10 | | | 1,760,000 | | | 1,791,721 | |
Lehman Brothers Holdings Capital
Trust VII | | | | 5.857% | | 11/29/49 | | | 5,530,000 | | | 1,659 | C,D |
Lehman Brothers Holdings Inc. | | | | 5.250% | | 2/6/12 | | | 1,690,000 | | | 329,550 | C |
Lehman Brothers Holdings Inc. | | | | 6.200% | | 9/26/14 | | | 8,690,000 | | | 1,694,550 | C |
Lehman Brothers Holdings Inc. | | | | 6.500% | | 7/19/17 | | | 5,280,000 | | | 1,584 | C |
Merrill Lynch and Co. Inc. | | | | 6.050% | | 5/16/16 | | | 390,000 | | | 393,509 | |
Morgan Stanley | | | | 5.625% | | 1/9/12 | | | 470,000 | | | 496,001 | |
Morgan Stanley | | | | 4.750% | | 4/1/14 | | | 8,460,000 | | | 8,508,620 | |
Morgan Stanley | | | | 0.734% | | 10/18/16 | | | 7,380,000 | | | 6,836,079 | B |
The Bear Stearns Cos. Inc. | | | | 6.400% | | 10/2/17 | | | 12,645,000 | | | 13,784,074 | |
The Bear Stearns Cos. Inc. | | | | 7.250% | | 2/1/18 | | | 32,890,000 | | | 37,752,885 | |
The Goldman Sachs Group Inc. | | | | 6.600% | | 1/15/12 | | | 2,810,000 | | | 3,054,861 | |
The Goldman Sachs Group Inc. | | | | 5.625% | | 1/15/17 | | | 1,420,000 | | | 1,450,331 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 77,498,174 | |
| | | | | | | | | | | | | |
Chemicals | | N.M. | | | | | | | | | | | |
Westlake Chemical Corp. | | | | 6.625% | | 1/15/16 | | | 810,000 | | | 774,563 | |
| | | | | | | | | | | | | |
| | | | | |
Commercial Banks | | 0.6% | | | | | | | | | | | |
Bank One Corp. | | | | 7.875% | | 8/1/10 | | | 150,000 | | | 156,389 | |
Bank One Corp. | | | | 5.900% | | 11/15/11 | | | 2,000,000 | | | 2,134,584 | |
HBOS Treasury Services PLC | | | | 5.250% | | 2/21/17 | | | 4,570,000 | | | 4,531,859 | A |
SunTrust Capital VIII | | | | 6.100% | | 12/15/36 | | | 3,140,000 | | | 2,187,060 | D |
Wachovia Capital Trust III | | | | 5.800% | | 3/15/42 | | | 9,700,000 | | | 7,420,500 | D |
Wachovia Corp. | | | | 5.250% | | 8/1/14 | | | 720,000 | | | 745,388 | |
Wachovia Corp. | | | | 5.750% | | 2/1/18 | | | 23,000,000 | | | 24,002,064 | |
Wells Fargo and Co. | | | | 5.300% | | 8/26/11 | | | 75,000 | | | 79,431 | |
Wells Fargo and Co. | | | | 5.000% | | 11/15/14 | | | 130,000 | | | 133,524 | |
Wells Fargo Capital X | | | | 5.950% | | 12/15/36 | | | 6,995,000 | | | 6,085,650 | D |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 47,476,449 | |
| | | | | | | | | | | | | |
50
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Corporate Bonds and Notes—Continued | | | | | | | | | | | |
| | | | | |
Commercial Services and Supplies | | 0.2% | | | | | | | | | | | |
RCS Equipment Rental Inc. | | | | 9.500% | | 12/1/14 | | $ | 1,900,000 | | $ | 1,902,375 | |
Waste Management Inc. | | | | 7.375% | | 8/1/10 | | | 6,055,000 | | | 6,272,157 | |
Waste Management Inc. | | | | 6.375% | | 11/15/12 | | | 2,110,000 | | | 2,321,238 | |
Waste Management Inc. | | | | 5.000% | | 3/15/14 | | | 6,938,000 | | | 7,315,198 | |
Waste Management Inc. | | | | 7.125% | | 12/15/17 | | | 500,000 | | | 554,364 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 18,365,332 | |
| | | | | | | | | | | | | |
Communications Equipment | | 0.3% | | | | | | | | | | | |
EchoStar DBS Corp. | | | | 7.000% | | 10/1/13 | | | 6,340,000 | | | 6,522,275 | |
EchoStar DBS Corp. | | | | 6.625% | | 10/1/14 | | | 1,185,000 | | | 1,195,369 | |
EchoStar DBS Corp. | | | | 7.750% | | 5/31/15 | | | 2,745,000 | | | 2,875,387 | |
Motorola Inc. | | | | 8.000% | | 11/1/11 | | | 10,850,000 | | | 11,603,945 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 22,196,976 | |
| | | | | | | | | | | | | |
Computers and Peripherals | | N.M. | | | | | | | | | | | |
International Business Machines Corp. | | | | 4.750% | | 11/29/12 | | | 40,000 | | | 42,974 | |
| | | | | | | | | | | | | |
| | | | | |
Consumer Finance | | 1.4% | | | | | | | | | | | |
American Express Co. | | | | 6.800% | | 9/1/66 | | | 10,485,000 | | | 9,384,075 | D |
American Express Credit Corp. | | | | 5.125% | | 8/25/14 | | | 34,430,000 | | | 36,280,027 | |
American General Finance Corp. | | | | 6.900% | | 12/15/17 | | | 8,600,000 | | | 5,971,444 | |
Caterpillar Financial Services Corp. | | | | 6.200% | | 9/30/13 | | | 290,000 | | | 323,160 | |
Ford Motor Credit Co. | | | | 7.250% | | 10/25/11 | | | 2,525,000 | | | 2,549,977 | |
Ford Motor Credit Co. | | | | 7.000% | | 10/1/13 | | | 12,000,000 | | | 11,981,928 | |
GMAC LLC | | | | 6.625% | | 5/15/12 | | | 177,000 | | | 173,460 | A |
GMAC LLC | | | | 8.000% | | 12/31/18 | | | 1,535,000 | | | 1,350,800 | A |
SLM Corp. | | | | 5.000% | | 10/1/13 | | | 17,665,000 | | | 16,250,740 | |
SLM Corp. | | | | 5.375% | | 5/15/14 | | | 25,005,000 | | | 23,063,862 | |
SLM Corp. | | | | 5.050% | | 11/14/14 | | | 4,690,000 | | | 4,230,282 | |
SLM Corp. | | | | 5.000% | | 4/15/15 | | | 740,000 | | | 644,637 | |
SLM Corp. | | | | 5.625% | | 8/1/33 | | | 4,160,000 | | | 3,136,470 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 115,340,862 | |
| | | | | | | | | | | | | |
Diversified Consumer Services | | 0.1% | | | | | | | | | | | |
Service Corp. International | | | | 7.625% | | 10/1/18 | | | 400,000 | | | 396,000 | |
Service Corp. International | | | | 7.500% | | 4/1/27 | | | 5,385,000 | | | 4,792,650 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 5,188,650 | |
| | | | | | | | | | | | | |
Diversified Financial Services | | 3.8% | | | | | | | | | | | |
AAC Group Holding Corp. | | | | 10.250% | | 10/1/12 | | | 770,000 | | | 771,925 | A |
Air 2 US | | | | 8.027% | | 10/1/19 | | | 11,071,030 | | | 9,541,844 | A |
51
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Corporate Bonds and Notes—Continued | | | | | | | | | | | |
| | | | |
Diversified Financial Services—Continued | | | | | | | | | | | |
BAC Capital Trust XIV | | | | 5.630% | | 12/31/49 | | $ | 2,240,000 | | $ | 1,545,600 | D |
Bank of America Corp. | | | | 5.420% | | 3/15/17 | | | 2,030,000 | | | 2,003,817 | |
Bank of America Corp. | | | | 5.750% | | 12/1/17 | | | 480,000 | | | 491,529 | |
Boeing Capital Corp. | | | | 4.700% | | 10/27/19 | | | 5,760,000 | | | 5,619,410 | |
Citigroup Inc. | | | | 4.125% | | 2/22/10 | | | 860,000 | | | 863,128 | |
Citigroup Inc. | | | | 6.500% | | 8/19/13 | | | 150,000 | | | 159,779 | |
Citigroup Inc. | | | | 6.375% | | 8/12/14 | | | 5,040,000 | | | 5,276,411 | |
Citigroup Inc. | | | | 5.000% | | 9/15/14 | | | 270,000 | | | 260,286 | |
Citigroup Inc. | | | | 5.500% | | 10/15/14 | | | 3,220,000 | | | 3,260,350 | |
Citigroup Inc. | | | | 6.010% | | 1/15/15 | | | 16,390,000 | | | 16,735,796 | |
Citigroup Inc. | | | | 8.500% | | 5/22/19 | | | 35,295,000 | | | 40,757,007 | |
Citigroup Inc. | | | | 6.125% | | 8/25/36 | | | 1,560,000 | | | 1,337,847 | |
Citigroup Inc. | | | | 5.875% | | 5/29/37 | | | 6,040,000 | | | 5,322,357 | |
Citigroup Inc. | | | | 6.875% | | 3/5/38 | | | 36,010,000 | | | 35,938,628 | |
DI Finance LLC | | | | 9.500% | | 2/15/13 | | | 1,004,000 | | | 1,016,550 | |
General Electric Capital Corp. | | | | 2.125% | | 12/21/12 | | | 53,010,000 | | | 53,059,140 | |
General Electric Capital Corp. | | | | 5.450% | | 1/15/13 | | | 1,175,000 | | | 1,249,125 | |
General Electric Capital Corp. | | | | 5.625% | | 5/1/18 | | | 530,000 | | | 543,113 | |
General Electric Capital Corp. | | | | 6.875% | | 1/10/39 | | | 48,530,000 | | | 50,116,203 | |
General Electric Capital Corp. | | | | 6.375% | | 11/15/67 | | | 47,395,000 | | | 41,115,163 | D |
HSBC Finance Corp. | | | | 8.000% | | 7/15/10 | | | 70,000 | | | 72,542 | |
HSBC Finance Corp. | | | | 6.375% | | 8/1/10 | | | 1,000,000 | | | 1,027,933 | |
HSBC Finance Corp. | | | | 7.000% | | 5/15/12 | | | 160,000 | | | 173,978 | |
HSBC Finance Corp. | | | | 6.375% | | 11/27/12 | | | 520,000 | | | 566,297 | |
ILFC E-Capital Trust I | | | | 5.900% | | 12/21/65 | | | 24,400,000 | | | 12,688,000 | A,D |
ILFC E-Capital Trust II | | | | 6.250% | | 12/21/65 | | | 7,220,000 | | | 3,754,400 | A,D |
JPMorgan Chase and Co. | | | | 5.750% | | 1/2/13 | | | 4,430,000 | | | 4,724,542 | |
JPMorgan Chase and Co. | | | | 5.125% | | 9/15/14 | | | 920,000 | | | 970,382 | |
JPMorgan Chase and Co. | | | | 5.150% | | 10/1/15 | | | 490,000 | | | 507,417 | |
JPMorgan Chase and Co. | | | | 6.125% | | 6/27/17 | | | 60,000 | | | 63,418 | |
PHH Corp. | | | | 7.125% | | 3/1/13 | | | 5,940,000 | | | 5,494,500 | |
Unilever Capital Corp. | | | | 7.125% | | 11/1/10 | | | 1,450,000 | | | 1,528,432 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 308,556,849 | |
| | | | | | | | | | | | | |
Diversified Telecommunication Services | | 1.2% | | | | | | | | | | | |
AT&T Inc. | | | | 5.100% | | 9/15/14 | | | 8,640,000 | | | 9,293,702 | |
AT&T Inc. | | | | 5.600% | | 5/15/18 | | | 25,000,000 | | | 26,198,975 | |
AT&T Inc. | | | | 6.400% | | 5/15/38 | | | 3,257,000 | | | 3,347,118 | |
BellSouth Corp. | | | | 4.750% | | 11/15/12 | | | 640,000 | | | 683,395 | |
BellSouth Corp. | | | | 5.200% | | 9/15/14 | | | 8,250,000 | | | 8,835,692 | |
52
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Corporate Bonds and Notes—Continued | | | | | | | | | | | |
| | | |
Diversified Telecommunication Services—Continued | | | | | | | | | |
CenturyTel Inc. | | | | 6.000% | | 4/1/17 | | $ | 8,270,000 | | $ | 8,491,942 | |
Citizens Communications Co. | | | | 7.875% | | 1/15/27 | | | 243,000 | | | 223,560 | |
Intelsat Corp. | | | | 9.250% | | 8/15/14 | | | 1,840,000 | | | 1,890,600 | |
Level 3 Financing Inc. | | | | 9.250% | | 11/1/14 | | | 2,465,000 | | | 2,329,425 | |
Qwest Communications International Inc. | | | | 7.500% | | 2/15/14 | | | 2,754,000 | | | 2,764,328 | |
Qwest Corp. | | | | 7.500% | | 10/1/14 | | | 2,680,000 | | | 2,783,850 | |
Qwest Corp. | | | | 6.875% | | 9/15/33 | | | 5,600,000 | | | 4,928,000 | |
Verizon Communications Inc. | | | | 8.750% | | 11/1/18 | | | 14,140,000 | | | 17,661,129 | |
Verizon Global Funding Corp. | | | | 7.375% | | 9/1/12 | | | 155,000 | | | 174,719 | |
Verizon New York Inc. | | | | 6.875% | | 4/1/12 | | | 3,942,000 | | | 4,288,955 | |
Windstream Corp. | | | | 8.625% | | 8/1/16 | | | 574,000 | | | 584,045 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 94,479,435 | |
| | | | | | | | | | | | | |
Electric Utilities | | 1.6% | | | | | | | | | | | |
Duke Energy Corp. | | | | 5.625% | | 11/30/12 | | | 1,010,000 | | | 1,102,626 | |
Energy Future Holdings Corp. | | | | 10.875% | | 11/1/17 | | | 1,096,000 | | | 895,980 | |
Energy Future Holdings Corp. | | | | 11.250% | | 11/1/17 | | | 113,667,764 | | | 80,419,944 | F |
Exelon Corp. | | | | 5.625% | | 6/15/35 | | | 455,000 | | | 411,449 | |
FirstEnergy Corp. | | | | 6.450% | | 11/15/11 | | | 142,000 | | | 152,260 | |
FirstEnergy Corp. | | | | 7.375% | | 11/15/31 | | | 23,775,000 | | | 25,769,770 | |
Pacific Gas and Electric Co. | | | | 8.250% | | 10/15/18 | | | 40,000 | | | 48,842 | |
Pacific Gas and Electric Co. | | | | 6.050% | | 3/1/34 | | | 5,180,000 | | | 5,408,096 | |
Pacific Gas and Electric Co. | | | | 5.800% | | 3/1/37 | | | 11,790,000 | | | 11,949,224 | |
Progress Energy Inc. | | | | 7.100% | | 3/1/11 | | | 52,000 | | | 55,038 | |
The Detroit Edison Co. | | | | 5.200% | | 10/15/12 | | | 10,000 | | | 10,737 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 126,223,966 | |
| | | | | | | | | | | | | |
Energy Equipment and Services | | 0.1% | | | | | | | | | | | |
Baker Hughes Inc. | | | | 7.500% | | 11/15/18 | | | 280,000 | | | 334,231 | |
Complete Production Services Inc. | | | | 8.000% | | 12/15/16 | | | 5,355,000 | | | 5,281,369 | |
Pride International Inc. | | | | 7.375% | | 7/15/14 | | | 1,440,000 | | | 1,486,800 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 7,102,400 | |
| | | | | | | | | | | | | |
Food and Staples Retailing | | 0.7% | | | | | | | | | | | |
CVS Caremark Corp. | | | | 6.600% | | 3/15/19 | | | 16,900,000 | | | 18,493,484 | |
CVS Pass-Through Trust | | | | 5.789% | | 1/10/26 | | | 108,764 | | | 100,567 | A |
CVS Pass-Through Trust | | | | 5.298% | | 1/11/27 | | | 528,339 | | | 481,859 | A,G |
CVS Lease Pass-Through Trust | | | | 5.880% | | 1/10/28 | | | 5,507,786 | | | 5,152,754 | |
CVS Lease Pass-Through Trust | | | | 6.036% | | 12/10/28 | | | 19,526,539 | | | 18,478,744 | �� |
CVS Pass-Through Trust | | | | 6.943% | | 1/10/30 | | | 3,141,756 | | | 3,158,251 | |
Safeway Inc. | | | | 6.350% | | 8/15/17 | | | 310,000 | | | 339,283 | |
53
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Corporate Bonds and Notes—Continued | | | | | | | | | | | |
| | | | |
Food and Staples Retailing—Continued | | | | | | | | | | | |
The Kroger Co. | | | | 6.400% | | 8/15/17 | | $ | 1,270,000 | | $ | 1,387,378 | |
The Kroger Co. | | | | 6.150% | | 1/15/20 | | | 1,830,000 | | | 1,958,554 | |
Wal-Mart Stores Inc. | | | | 5.800% | | 2/15/18 | | | 180,000 | | | 199,756 | |
Wal-Mart Stores Inc. | | | | 6.200% | | 4/15/38 | | | 2,260,000 | | | 2,492,314 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 52,242,944 | |
| | | | | | | | | | | | | |
Food Products | | 0.1% | | | | | | | | | | | |
Sara Lee Corp. | | | | 6.250% | | 9/15/11 | | | 9,750,000 | | | 10,402,226 | |
| | | | | | | | | | | | | |
| | | | | |
Gas Utilities | | 0.2% | | | | | | | | | | | |
Southern Natural Gas Co. | | | | 5.900% | | 4/1/17 | | | 50,000 | | | 51,347 | A |
Southern Natural Gas Co. | | | | 8.000% | | 3/1/32 | | | 9,410,000 | | | 10,821,227 | |
Suburban Propane Partners LP | | | | 6.875% | | 12/15/13 | | | 2,000,000 | | | 2,000,000 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 12,872,574 | |
| | | | | | | | | | | | | |
Health Care Equipment and Supplies | | N.M. | | | | | | | | | | | |
Biomet Inc. | | | | 10.375% | | 10/15/17 | | | 1,800,000 | | | 1,953,000 | F |
| | | | | | | | | | | | | |
| | | | | |
Health Care Providers and Services | | 1.2% | | | | | | | | | | | |
AmerisourceBergen Corp. | | | | 5.625% | | 9/15/12 | | | 6,445,000 | | | 6,862,333 | |
AmerisourceBergen Corp. | | | | 5.875% | | 9/15/15 | | | 5,350,000 | | | 5,830,537 | |
Community Health Systems Inc. | | | | 8.875% | | 7/15/15 | | | 5,820,000 | | | 6,023,700 | |
DaVita Inc. | | | | 6.625% | | 3/15/13 | | | 4,435,000 | | | 4,446,087 | |
Fresenius Medical Care Capital Trust IV | | | | 7.875% | | 6/15/11 | | | 681,000 | | | 705,686 | |
HCA Inc. | | | | 8.750% | | 9/1/10 | | | 256,000 | | | 262,080 | |
HCA Inc. | | | | 7.875% | | 2/1/11 | | | 1,000,000 | | | 1,028,750 | |
HCA Inc. | | | | 6.300% | | 10/1/12 | | | 299,000 | | | 299,000 | |
HCA Inc. | | | | 6.250% | | 2/15/13 | | | 1,243,000 | | | 1,208,818 | |
HCA Inc. | | | | 5.750% | | 3/15/14 | | | 311,000 | | | 292,340 | |
HCA Inc. | | | | 9.125% | | 11/15/14 | | | 70,000 | | | 73,850 | |
HCA Inc. | | | | 9.625% | | 11/15/16 | | | 2,865,000 | | | 3,101,362 | F |
HCA Inc. | | | | 7.690% | | 6/15/25 | | | 723,000 | | | 662,053 | |
HCA Inc. | | | | 7.500% | | 11/6/33 | | | 1,105,000 | | | 966,363 | |
HCA Inc. | | | | 7.500% | | 11/15/95 | | | 15,410,000 | | | 12,175,749 | |
Tenet Healthcare Corp. | | | | 7.375% | | 2/1/13 | | | 6,222,000 | | | 6,237,555 | |
Tenet Healthcare Corp. | | | | 9.250% | | 2/1/15 | | | 11,570,000 | | | 12,322,050 | |
Tenet Healthcare Corp. | | | | 9.000% | | 5/1/15 | | | 1,250,000 | | | 1,350,000 | A |
Tenet Healthcare Corp. | | | | 8.875% | | 7/1/19 | | | 1,220,000 | | | 1,317,600 | A |
UnitedHealth Group Inc. | | | | 4.875% | | 2/15/13 | | | 180,000 | | | 188,328 | |
UnitedHealth Group Inc. | | | | 4.875% | | 4/1/13 | | | 18,130,000 | | | 18,998,790 | |
54
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Corporate Bonds and Notes—Continued | | | | | | | | | | | |
| | | | |
Health Care Providers and Services—Continued | | | | | | | | | | | |
WellPoint Inc. | | | | 5.875% | | 6/15/17 | | $ | 3,040,000 | | $ | 3,131,966 | |
WellPoint Inc. | | | | 7.000% | | 2/15/19 | | | 5,500,000 | | | 6,151,354 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 93,636,351 | |
| | | | | | | | | | | | | |
Hotels, Restaurants and Leisure | | 0.2% | | | | | | | | | | | |
Boyd Gaming Corp. | | | | 6.750% | | 4/15/14 | | | 10,000 | | | 9,013 | |
Boyd Gaming Corp. | | | | 7.125% | | 2/1/16 | | | 20,000 | | | 17,400 | |
Inn of the Mountain Gods Resort
and Casino | | | | 12.000% | | 11/15/10 | | | 1,070,000 | | | 442,712 | C,H |
Marriott International Inc. | | | | 5.810% | | 11/10/15 | | | 7,950,000 | | | 7,743,038 | |
McDonald’s Corp. | | | | 5.350% | | 3/1/18 | | | 310,000 | | | 332,388 | |
MGM MIRAGE | | | | 6.750% | | 9/1/12 | | | 435,000 | | | 388,238 | |
MGM MIRAGE | | | | 10.375% | | 5/15/14 | | | 710,000 | | | 770,350 | A |
MGM MIRAGE | | | | 6.625% | | 7/15/15 | | | 380,000 | | | 295,450 | |
MGM MIRAGE | | | | 7.625% | | 1/15/17 | | | 1,270,000 | | | 987,425 | |
MGM MIRAGE | | | | 11.125% | | 11/15/17 | | | 1,645,000 | | | 1,821,837 | A |
Mohegan Tribal Gaming Authority | | | | 8.000% | | 4/1/12 | | | 245,000 | | | 208,556 | |
River Rock Entertainment Authority | | | | 9.750% | | 11/1/11 | | | 220,000 | | | 207,350 | |
Station Casinos Inc. | | | | 7.750% | | 8/15/16 | | | 9,760,000 | | | 1,525,000 | C,H |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 14,748,757 | |
| | | | | | | | | | | | | |
Household Products | | 0.1% | | | | | | | | | | | |
American Achievement Corp. | | | | 8.250% | | 4/1/12 | | | 250,000 | | | 249,375 | A |
Reynolds Group DL Escrow Inc./Reynolds Group Escrow LLC | | | | 7.750% | | 10/15/16 | | | 9,565,000 | | | 9,780,213 | A |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 10,029,588 | |
| | | | | | | | | | | | | |
Independent Power Producers and
Energy Traders | | 1.0% | | | | | | | | | | | |
Calpine Corp. | | | | 8.000% | | 6/1/16 | | | 7,205,000 | | | 7,421,150 | A |
Dynegy Holdings Inc. | | | | 7.750% | | 6/1/19 | | | 5,740,000 | | | 4,979,450 | |
NRG Energy Inc. | | | | 7.250% | | 2/1/14 | | | 3,130,000 | | | 3,169,125 | |
NRG Energy Inc. | | | | 7.375% | | 2/1/16 | | | 2,546,000 | | | 2,549,182 | |
NRG Energy Inc. | | | | 7.375% | | 1/15/17 | | | 595,000 | | | 596,488 | |
The AES Corp. | | | | 8.750% | | 5/15/13 | | | 7,421,000 | | | 7,606,525 | A |
The AES Corp. | | | | 7.750% | | 3/1/14 | | | 20,549,000 | | | 20,857,235 | |
The AES Corp. | | | | 7.750% | | 10/15/15 | | | 7,490,000 | | | 7,602,350 | |
The AES Corp. | | | | 8.000% | | 10/15/17 | | | 25,444,000 | | | 26,111,905 | |
The AES Corp. | | | | 8.000% | | 6/1/20 | | | 3,299,000 | | | 3,356,732 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 84,250,142 | |
| | | | | | | | | | | | | |
55
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Corporate Bonds and Notes—Continued | | | | | | | | | | | |
| | | | | |
Industrial Conglomerates | | 0.2% | | | | | | | | | | | |
General Electric Co. | | | | 5.000% | | 2/1/13 | | $ | 7,055,000 | | $ | 7,463,908 | |
Tyco International Ltd./Tyco International Finance SA | | | | 7.000% | | 12/15/19 | | | 725,000 | | | 819,086 | |
Tyco International Ltd./Tyco International Finance SA | | | | 6.875% | | 1/15/21 | | | 9,769,000 | | | 10,960,290 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 19,243,284 | |
| | | | | | | | | | | | | |
Insurance | | 0.4% | | | | | | | | | | | |
American International Group Inc. | | | | 5.850% | | 1/16/18 | | | 5,390,000 | | | 4,422,651 | |
American International Group Inc. | | | | 6.250% | | 3/15/37 | | | 360,000 | | | 198,000 | D |
ASIF Global Financing XIX | | | | 4.900% | | 1/17/13 | | | 2,180,000 | | | 2,006,152 | A |
Marsh and McLennan Cos. Inc. | | | | 5.150% | | 9/15/10 | | | 6,070,000 | | | 6,222,697 | |
MetLife Capital Trust IV | | | | 7.875% | | 12/15/37 | | | 13,000,000 | | | 12,935,000 | A,D |
MetLife Inc. | | | | 6.400% | | 12/15/66 | | | 2,905,000 | | | 2,541,875 | D |
The Travelers Cos. Inc. | | | | 6.250% | | 3/15/67 | | | 2,760,000 | | | 2,514,332 | D |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 30,840,707 | |
| | | | | | | | | | | | | |
IT Services | | N.M. | | | | | | | | | | | |
Electronic Data Systems Corp. | | | | 6.000% | | 8/1/13 | | | 775,000 | | | 856,701 | E |
| | | | | | | | | | | | | |
| | | | | |
Media | | 1.6% | | | | | | | | | | | |
CBS Corp. | | | | 7.625% | | 1/15/16 | | | 5,500,000 | | | 5,911,697 | |
Charter Communications Operating LLC | | | | 10.875% | | 9/15/14 | | | 3,670,000 | | | 4,110,400 | A |
Comcast Cable Communications Inc. | | | | 6.750% | | 1/30/11 | | | 210,000 | | | 221,627 | |
Comcast Cable Communications Inc. | | | | 8.875% | | 5/1/17 | | | 40,000 | | | 47,925 | |
Comcast Corp. | | | | 6.500% | | 1/15/15 | | | 3,760,000 | | | 4,212,531 | |
Comcast Corp. | | | | 6.500% | | 1/15/17 | | | 3,660,000 | | | 4,051,854 | |
Comcast Corp. | | | | 5.875% | | 2/15/18 | | | 10,000 | | | 10,616 | |
Comcast Corp. | | | | 6.450% | | 3/15/37 | | | 14,000,000 | | | 14,434,980 | |
Comcast Corp. | | | | 6.950% | | 8/15/37 | | | 7,470,000 | | | 8,141,501 | |
CSC Holdings Inc. | | | | 6.750% | | 4/15/12 | | | 500,000 | | | 516,250 | I |
CSC Holdings Inc. | | | | 8.625% | | 2/15/19 | | | 1,105,000 | | | 1,189,256 | A |
Gannett Co. Inc. | | | | 6.375% | | 4/1/12 | | | 4,560,000 | | | 4,560,000 | |
Lamar Media Corp. | | | | 6.625% | | 8/15/15 | | | 460,000 | | | 441,600 | |
News America Inc. | | | | 6.200% | | 12/15/34 | | | 260,000 | | | 261,304 | |
News America Inc. | | | | 6.650% | | 11/15/37 | | | 1,330,000 | | | 1,404,888 | |
News America Inc. | | | | 6.750% | | 1/9/38 | | | 200,000 | | | 207,464 | |
Reed Elsevier Capital Inc. | | | | 8.625% | | 1/15/19 | | | 12,655,000 | | | 15,398,212 | |
Time Warner Cable Inc. | | | | 8.750% | | 2/14/19 | | | 15,640,000 | | | 19,061,625 | |
Time Warner Cable Inc. | | | | 8.250% | | 4/1/19 | | | 20,250,000 | | | 24,119,653 | |
56
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Corporate Bonds and Notes—Continued | | | | | | | | | | | |
| | | | | |
Media—Continued | | | | | | | | | | | | | |
Time Warner Cable Inc. | | | | 6.750% | | 6/15/39 | | $ | 6,785,000 | | $ | 7,105,964 | |
Time Warner Entertainment Co. LP | | | | 8.375% | | 7/15/33 | | | 20,000 | | | 23,909 | |
Time Warner Inc. | | | | 6.875% | | 5/1/12 | | | 4,460,000 | | | 4,882,554 | |
Viacom Inc. | | | | 6.250% | | 4/30/16 | | | 6,750,000 | | | 7,356,704 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 127,672,514 | |
| | | | | | | | | | | | | |
Metals and Mining | | 0.3% | | | | | | | | | | | |
Freeport-McMoRan Copper & Gold Inc. | | | | 8.375% | | 4/1/17 | | | 14,195,000 | | | 15,543,525 | |
Steel Dynamics Inc. | | | | 6.750% | | 4/1/15 | | | 5,890,000 | | | 5,838,462 | |
Steel Dynamics Inc. | | | | 7.750% | | 4/15/16 | | | 1,980,000 | | | 2,061,675 | G |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 23,443,662 | |
| | | | | | | | | | | | | |
Multi-Utilities | | 0.1% | | | | | | | | | | | |
Dominion Resources Inc. | | | | 4.750% | | 12/15/10 | | | 1,010,000 | | | 1,039,637 | |
Dominion Resources Inc. | | | | 5.700% | | 9/17/12 | | | 5,495,000 | | | 5,937,952 | |
Dominion Resources Inc. | | | | 8.875% | | 1/15/19 | | | 90,000 | | | 112,159 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 7,089,748 | |
| | | | | | | | | | | | | |
Multiline Retail | | 0.1% | | | | | | | | | | | |
J.C. Penney Co. Inc. | | | | 7.400% | | 4/1/37 | | | 690,000 | | | 684,825 | |
Target Corp. | | | | 4.000% | | 6/15/13 | | | 5,340,000 | | | 5,564,787 | |
The Neiman-Marcus Group Inc. | | | | 9.000% | | 10/15/15 | | | 4,414,018 | | | 4,314,703 | F |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 10,564,315 | |
| | | | | | | | | | | | | |
Oil, Gas and Consumable Fuels | | 3.5% | | | | | | | | | | | |
Anadarko Petroleum Corp. | | | | 8.700% | | 3/15/19 | | | 15,000 | | | 18,659 | |
Anadarko Petroleum Corp. | | | | 6.450% | | 9/15/36 | | | 26,105,000 | | | 27,263,253 | |
Apache Corp. | | | | 6.000% | | 1/15/37 | | | 240,000 | | | 255,372 | |
Chesapeake Energy Corp. | | | | 6.375% | | 6/15/15 | | | 1,205,000 | | | 1,180,900 | |
Chesapeake Energy Corp. | | | | 6.250% | | 1/15/18 | | | 1,970,000 | | | 1,891,200 | |
Chesapeake Energy Corp. | | | | 7.250% | | 12/15/18 | | | 5,855,000 | | | 5,898,912 | |
Conoco Inc. | | | | 6.950% | | 4/15/29 | | | 638,000 | | | 723,202 | |
ConocoPhillips | | | | 8.750% | | 5/25/10 | | | 3,100,000 | | | 3,203,286 | |
ConocoPhillips | | | | 5.900% | | 10/15/32 | | | 10,000 | | | 10,201 | |
Devon Energy Corp. | | | | 6.300% | | 1/15/19 | | | 14,500,000 | | | 16,145,126 | |
Devon Energy Corp. | | | | 7.950% | | 4/15/32 | | | 210,000 | | | 266,965 | |
El Paso Corp. | | | | 7.000% | | 6/15/17 | | | 19,000,000 | | | 18,844,048 | |
El Paso Corp. | | | | 7.800% | | 8/1/31 | | | 3,267,000 | | | 3,075,662 | |
Energy Transfer Partners LP | | | | 6.125% | | 2/15/17 | | | 5,305,000 | | | 5,502,447 | |
Energy Transfer Partners LP | | | | 6.700% | | 7/1/18 | | | 320,000 | | | 342,624 | |
Energy Transfer Partners LP | | | | 9.700% | | 3/15/19 | | | 15,000,000 | | | 18,526,545 | |
Enterprise Products Operating LLP | | | | 6.300% | | 9/15/17 | | | 4,300,000 | | | 4,629,049 | |
57
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Corporate Bonds and Notes—Continued | | | | | | | | | | | |
| | | | |
Oil, Gas and Consumable Fuels—Continued | | | | | | | | | | | |
Hess Corp. | | | | 8.125% | | 2/15/19 | | $ | 22,800,000 | | $ | 27,495,820 | |
Hess Corp. | | | | 7.875% | | 10/1/29 | | | 5,290,000 | | | 6,344,583 | |
Hess Corp. | | | | 7.300% | | 8/15/31 | | | 12,445,000 | | | 14,142,324 | |
Kerr-McGee Corp. | | | | 6.875% | | 9/15/11 | | | 800,000 | | | 860,106 | |
Kerr-McGee Corp. | | | | 6.950% | | 7/1/24 | | | 2,780,000 | | | 3,010,704 | |
Kerr-McGee Corp. | | | | 7.875% | | 9/15/31 | | | 10,555,000 | | | 12,310,666 | |
Kinder Morgan Energy Partners LP | | | | 6.750% | | 3/15/11 | | | 40,000 | | | 42,301 | |
Kinder Morgan Energy Partners LP | | | | 7.125% | | 3/15/12 | | | 7,670,000 | | | 8,363,813 | |
Kinder Morgan Energy Partners LP | | | | 5.850% | | 9/15/12 | | | 20,000 | | | 21,523 | |
Kinder Morgan Energy Partners LP | | | | 5.000% | | 12/15/13 | | | 1,879,000 | | | 1,972,593 | |
Kinder Morgan Energy Partners LP | | | | 6.000% | | 2/1/17 | | | 5,190,000 | | | 5,449,054 | |
Kinder Morgan Energy Partners LP | | | | 6.950% | | 1/15/38 | | | 1,697,000 | | | 1,808,600 | |
Noble Energy Inc. | | | | 8.250% | | 3/1/19 | | | 14,600,000 | | | 17,467,163 | |
Occidental Petroleum Corp. | | | | 7.000% | | 11/1/13 | | | 360,000 | | | 413,634 | |
Peabody Energy Corp. | | | | 6.875% | | 3/15/13 | | | 125,000 | | | 126,406 | |
Peabody Energy Corp. | | | | 5.875% | | 4/15/16 | | | 880,000 | | | 858,000 | |
Pemex Project Funding Master Trust | | | | 0.855% | | 12/3/12 | | | 104,000 | | | 100,360 | A,B |
Pemex Project Funding Master Trust | | | | 6.625% | | 6/15/35 | | | 21,623,000 | | | 20,588,361 | |
SandRidge Energy Inc. | | | | 9.875% | | 5/15/16 | | | 6,450,000 | | | 6,788,625 | A |
SandRidge Energy Inc. | | | | 8.750% | | 1/15/20 | | | 470,000 | | | 470,000 | A |
Seariver Maritime Inc. | | | | 0.000% | | 9/1/12 | | | 70,000 | | | 64,983 | J |
The Williams Cos. Inc. | | | | 8.750% | | 1/15/20 | | | 9,050,000 | | | 10,796,387 | |
The Williams Cos. Inc. | | | | 7.875% | | 9/1/21 | | | 3,160,000 | | | 3,624,583 | |
The Williams Cos. Inc. | | | | 7.500% | | 1/15/31 | | | 990,000 | | | 1,067,946 | |
The Williams Cos. Inc. | | | | 7.750% | | 6/15/31 | | | 530,000 | | | 581,206 | |
XTO Energy Inc. | | | | 7.500% | | 4/15/12 | | | 971,000 | | | 1,082,696 | |
XTO Energy Inc. | | | | 5.500% | | 6/15/18 | | | 7,710,000 | | | 8,224,002 | |
XTO Energy Inc. | | | | 6.500% | | 12/15/18 | | | 12,341,000 | | | 14,102,061 | |
XTO Energy Inc. | | | | 6.750% | | 8/1/37 | | | 2,570,000 | | | 3,027,182 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 278,983,133 | |
| | | | | | | | | | | | | |
Paper and Forest Products | | N.M. | | | | | | | | | | | |
Georgia-Pacific Corp. | | | | 8.125% | | 5/15/11 | | | 9,000 | | | 9,450 | |
| | | | | | | | | | | | | |
| | | | | |
Pharmaceuticals | | 1.0% | | | | | | | | | | | |
Abbott Laboratories | | | | 5.125% | | 4/1/19 | | | 29,920,000 | | | 31,295,363 | |
Merck and Co. Inc. | | | | 6.000% | | 9/15/17 | | | 340,000 | | | 377,653 | |
Pfizer Inc. | | | | 6.200% | | 3/15/19 | | | 17,695,000 | | | 19,670,151 | |
Roche Holdings Inc. | | | | 6.000% | | 3/1/19 | | | 9,990,000 | | | 10,977,522 | A |
Wyeth | | | | 5.950% | | 4/1/37 | | | 19,955,000 | | | 20,808,635 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 83,129,324 | |
| | | | | | | | | | | | | |
58
Annual Report to Shareholders
| | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Corporate Bonds and Notes—Continued | | | | | | | | | | |
| | | | | |
Real Estate Investment Trusts (REITs) | | 0.1% | | | | | | | | | | |
Health Care Property Investors Inc. | | | | 6.450% | | 6/25/12 | | $ | 6,240,000 | | $ | 6,424,373 |
Ventas Inc. | | | | 9.000% | | 5/1/12 | | | 1,240,000 | | | 1,295,800 |
Ventas Inc. | | | | 6.750% | | 4/1/17 | | | 850,000 | | | 822,375 |
| | | | | | | | | | | | |
| | | | | | | | | | | | 8,542,548 |
| | | | | | | | | | | | |
Real Estate Management and Development | | N.M. | | | | | | | | | | |
Forest City Enterprises Inc. | | | | 6.500% | | 2/1/17 | | | 597,000 | | | 453,720 |
| | | | | | | | | | | | |
| | | | | |
Semiconductors and Semiconductor Equipment | | N.M. | | | | | | | | | | |
Freescale Semiconductor Inc. | | | | 8.875% | | 12/15/14 | | | 10,000 | | | 9,175 |
| | | | | | | | | | | | |
| | | | | |
Specialty Retail | | 0.3% | | | | | | | | | | |
Autozone Inc. | | | | 6.950% | | 6/15/16 | | | 10,890,000 | | | 11,805,696 |
Home Depot Inc. | | | | 5.250% | | 12/16/13 | | | 5,510,000 | | | 5,898,769 |
Home Depot Inc. | | | | 5.400% | | 3/1/16 | | | 8,230,000 | | | 8,615,658 |
| | | | | | | | | | | | |
| | | | | | | | | | | | 26,320,123 |
| | | | | | | | | | | | |
Thrifts and Mortgage Finance | | N.M. | | | | | | | | | | |
Countrywide Financial Corp. | | | | 5.800% | | 6/7/12 | | | 350,000 | | | 371,529 |
Countrywide Financial Corp. | | | | 6.250% | | 5/15/16 | | | 290,000 | | | 294,978 |
| | | | | | | | | | | | |
| | | | | | | | | | | | 666,507 |
| | | | | | | | | | | | |
Tobacco | | 0.1% | | | | | | | | | | |
Reynolds American Inc. | | | | 7.250% | | 6/1/12 | | | 1,720,000 | | | 1,890,818 |
Reynolds American Inc. | | | | 7.625% | | 6/1/16 | | | 100,000 | | | 109,018 |
Reynolds American Inc. | | | | 6.750% | | 6/15/17 | | | 8,430,000 | | | 8,730,159 |
| | | | | | | | | | | | |
| | | | | | | | | | | | 10,729,995 |
| | | | | | | | | | | | |
Wireless Telecommunication Services | | 0.9% | | | | | | | | | | |
Cellco Partnership/Verizon Wireless Capital LLC | | | | 8.500% | | 11/15/18 | | | 36,325,000 | | | 45,056,876 |
Cricket Communications Inc. | | | | 7.750% | | 5/15/16 | | | 6,215,000 | | | 6,199,463 |
Sprint Capital Corp. | | | | 8.375% | | 3/15/12 | | | 17,545,000 | | | 18,159,075 |
Sprint Capital Corp. | | | | 6.900% | | 5/1/19 | | | 720,000 | | | 662,400 |
Sprint Capital Corp. | | | | 8.750% | | 3/15/32 | | | 3,440,000 | | | 3,242,200 |
| | | | | | | | | | | | |
| | | | | | | | | | | | 73,320,014 |
| | | | | | | | | | | | |
Total Corporate Bonds and Notes
(Cost—$1,933,047,721) | | | | | | | | | | | | 1,946,434,866 |
59
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Asset-Backed Securities | | 3.7% | | | | | | | | | | | |
| | | | | |
Fixed Rate Securities | | 0.6% | | | | | | | | | | | |
Chase Issuance Trust 2007-A17 A | | | | 5.120% | | 10/15/14 | | $ | 100,000 | | $ | 107,724 | |
Conseco Finance Securitizations Corp. 2000-4 | | | | 8.310% | | 5/1/32 | | | 1,797,869 | | | 1,400,522 | |
Contimortgage Home Equity Trust 1997-4 B1F | | | | 7.330% | | 10/15/28 | | | 912,128 | | | 791,470 | |
Credit-Based Asset Servicing and Securitization LLC 2006-MH1 AF2 | | | | 5.650% | | 10/25/36 | | | 528,253 | | | 533,702 | A,D |
Green Tree Financial Corp. 1992-2 B | | | | 9.150% | | 1/15/18 | | | 102,834 | | | 69,077 | |
Green Tree Financial Corp. 1993-2 | | | | 8.000% | | 7/15/18 | | | 309,449 | | | 305,433 | |
Green Tree Financial Corp. 1996-5 | | | | 8.100% | | 7/15/27 | | | 1,871,690 | | | 193,545 | |
Green Tree Home Improvement Loan Trust 1996-A | | | | 7.400% | | 2/15/26 | | | 164,530 | | | 107,686 | |
Hertz Vehicle Financing LLC 2009-2A A2 | | | | 5.290% | | 3/25/16 | | | 14,890,000 | | | 14,856,380 | A |
Honda Auto Receivables Owner Trust 2009-2 A3 | | | | 2.790% | | 1/15/13 | | | 80,000 | | | 81,621 | |
Lehman ABS Manufactured Housing Contract 2001-B A3 | | | | 4.350% | | 5/15/14 | | | 2,686,109 | | | 2,390,627 | |
Lehman ABS Manufactured Housing Contract 2001-B A6 | | | | 6.467% | | 8/15/28 | | | 1,827,285 | | | 1,644,842 | |
Merrill Lynch Mortgage Investors Inc. 2005-SD1 A2 | | | | 5.666% | | 5/25/46 | | | 692,346 | | | 638,048 | |
Nissan Auto Receivables Owner Trust 2009-A A3 | | | | 3.200% | | 2/15/13 | | | 55,000 | | | 56,495 | |
Origen Manufactured Housing Contract Trust 2005-B | | | | 5.910% | | 1/15/37 | | | 4,797,000 | | | 4,255,784 | |
Origen Manufactured Housing Contract Trust 2005-B | | | | 5.990% | | 1/15/37 | | | 1,500,000 | | | 1,226,570 | |
Origen Manufactured Housing Contract Trust 2005-B | | | | 6.480% | | 1/15/37 | | | 2,100,000 | | | 1,670,245 | |
Patrons’ Legacy 2003-IV | | | | 5.775% | | 12/23/63 | | | 8,900,000 | | | 7,887,395 | A,G |
Pegasus Aviation Lease Securitization 2000-1 A2 | | | | 8.370% | | 3/25/30 | | | 4,475,000 | | | 1,387,250 | A,G |
Structured Asset Securities Corp. 2004-6XS A5B | | | | 5.550% | | 3/25/34 | | | 8,560,228 | | | 7,478,065 | |
UCFC Home Equity Loan 1998-C | | | | 5.935% | | 1/15/30 | | | 3,580 | | | 3,112 | |
Vanderbilt Mortgage Finance 1997-B 1B2 | | | | 8.155% | | 10/7/26 | | | 158,879 | | | 132,174 | |
WEF Issuer LLC 2006-A | | | | 5.190% | | 12/15/14 | | | 74,486 | | | 74,210 | A |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 47,291,977 | |
| | | | | | | | | | | | | |
60
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Asset-Backed Securities—Continued | | | | | | | | | | | |
| | | | | |
Indexed SecuritiesB | | 3.0% | | | | | | | | | | | |
ACE Securities Corp. 2006-GP1 A | | | | 0.361% | | 2/25/31 | | $ | 382,749 | | $ | 286,798 | |
Ace Securities Corp. Home Equity Loan Trust 2006-SL3 | | | | 0.331% | | 6/25/36 | | | 927,843 | | | 102,797 | |
AFC Home Equity Loan Trust 2002-2 | | | | 0.531% | | 6/25/30 | | | 369,422 | | | 169,176 | |
Asset Backed Securities Corp. Home Equity Loan Trust 2001-HE3 | | | | 0.773% | | 11/15/31 | | | 222,712 | | | 172,136 | |
Bear Stearns Asset Backed Securities Inc. 2005-CL1 | | | | 0.731% | | 9/25/34 | | | 7,649,857 | | | 5,111,058 | |
Bear Stearns Asset Backed Securities Inc. 2006-1 A | | | | 0.511% | | 2/25/36 | | | 1,353,308 | | | 1,142,738 | |
CDC Mortgage Capital Trust 2002-HE1 | | | | 0.851% | | 1/25/33 | | | 407,871 | | | 311,163 | |
Chase Issuance Trust 2009-A2 A2 | | | | 1.783% | | 4/15/14 | | | 160,000 | | | 163,685 | |
Countrywide Asset-Backed Certificates 2002-BC1 | | | | 0.891% | | 4/25/32 | | | 126,253 | | | 61,499 | |
Countrywide Asset-Backed Certificates 2003-1 | | | | 0.911% | | 6/25/33 | | | 259,708 | | | 182,868 | |
Countrywide Asset-Backed Certificates 2003-BC3 | | | | 0.851% | | 9/25/33 | | | 637,078 | | | 462,378 | |
Countrywide Asset-Backed Certificates 2004-2 M1 | | | | 0.731% | | 5/25/34 | | | 390,000 | | | 245,016 | |
Countrywide Asset-Backed Certificates 2006-SD4 A1 | | | | 0.571% | | 12/25/36 | | | 206,393 | | | 89,389 | A |
Countrywide Home Equity Loan Trust 2002-F | | | | 0.583% | | 11/15/28 | | | 286,499 | | | 184,182 | |
Countrywide Home Equity Loan Trust 2004-I A | | | | 0.523% | | 2/15/34 | | | 348,207 | | | 150,916 | |
Countrywide Home Equity Loan Trust 2006-E 2A | | | | 0.373% | | 7/15/36 | | | 362,581 | | | 128,863 | |
Countrywide Home Equity Loan Trust 2006-HW 2A1B | | | | 0.383% | | 11/15/36 | | | 2,275,766 | | | 1,706,824 | |
Countrywide Home Equity Loan Trust 2006-RES | | | | 0.493% | | 6/15/29 | | | 443,797 | | | 101,097 | A |
Credit-Based Asset Servicing and Securitization 2007-RP1 A | | | | 0.541% | | 5/25/46 | | | 29,841,854 | | | 14,680,700 | A,G |
EMC Mortgage Loan Trust 2002-B A1 | | | | 0.881% | | 2/25/41 | | | 451,986 | | | 321,926 | A |
Fairbanks Capital Mortgage Loan Trust 1999-1 A | | | | 1.431% | | 5/25/28 | | | 710,755 | | | 567,600 | A |
GMAC Mortgage Corp. Loan Trust 2004-HE3 A2VN | | | | 0.471% | | 10/25/34 | | | 42,645,181 | | | 23,700,401 | |
GMAC Mortgage Corp. Loan Trust 2004-VF1 A1 | | | | 0.981% | | 2/25/31 | | | 4,285,603 | | | 2,586,297 | A |
61
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Asset-Backed Securities—Continued | | | | | | | | | | | |
| | | | |
Indexed Securities—Continued | | | | | | | | | | | |
GMAC Mortgage Corp. Loan Trust 2006-HE1 A | | | | 0.441% | | 11/25/36 | | $ | 1,714,981 | | $ | 647,071 | |
Greenpoint Mortgage Funding Trust 2005-HE1 | | | | 0.631% | | 9/25/34 | | | 3,397,402 | | | 1,802,210 | |
GSAA Home Equity Trust 2005-6 A3 | | | | 0.601% | | 6/25/35 | | | 5,000,000 | | | 2,745,788 | |
GSAA Home Equity Trust 2007-6 A4 | | | | 0.531% | | 5/25/47 | | | 24,440,000 | | | 13,225,290 | |
GSAMP Trust 2006-S4 | | | | 0.321% | | 5/25/36 | | | 150,030 | | | 12,879 | |
IndyMac Home Equity Loan Asset-Backed Trust 2001-A | | | | 0.491% | | 3/25/31 | | | 69,272 | | | 36,424 | |
IndyMac Seconds Asset Backed Trust A-A | | | | 0.361% | | 6/25/36 | | | 527,997 | | | 50,112 | |
Lehman XS Trust 2005-5N | | | | 0.531% | | 11/25/35 | | | 15,949,551 | | | 10,025,978 | |
Lehman XS Trust 2005-5N 3A1A | | | | 0.531% | | 11/25/35 | | | 4,421,089 | | | 2,525,249 | |
Lehman XS Trust 2006-2N 1A1 | | | | 0.491% | | 2/25/46 | | | 3,542,922 | | | 1,840,809 | |
Lehman XS Trust 2006-4N A2A | | | | 0.451% | | 4/25/46 | | | 5,758,630 | | | 2,643,688 | |
Lehman XS Trust 2007-8H A1 | | | | 0.361% | | 6/25/37 | | | 64,200,066 | | | 34,563,961 | |
Lehman XS Trust 2007-9 1A1 | | | | 0.351% | | 6/25/37 | | | 575,244 | | | 330,353 | |
Long Beach Mortgage Loan Trust 2006-8 2A4 | | | | 0.471% | | 9/25/36 | | | 7,500,000 | | | 2,721,096 | |
Long Beach Mortgage Loan Trust 2006-9 2A3 | | | | 0.391% | | 10/25/36 | | | 6,200,000 | | | 2,183,740 | |
Merrill Lynch Mortgage Investors Trust 2007-SD1 A1 | | | | 0.681% | | 2/25/37 | | | 76,288,175 | | | 32,591,880 | |
Morgan Stanley ABS Capital I
2003-HE3 M1 | | | | 0.911% | | 10/25/33 | | | 1,400,000 | | | 942,763 | |
Morgan Stanley Mortgage Loan Trust 2006-4SL A1 | | | | 0.381% | | 3/25/36 | | | 285,117 | | | 42,935 | |
MSDWCC Heloc Trust 2005-1 | | | | 0.421% | | 7/25/17 | | | 1,640,606 | | | 765,354 | |
Nelnet Student Loan Trust 2008-4 A4 | | | | 1.762% | | 4/25/24 | | | 430,000 | | | 448,918 | |
Option One Mortgage Loan Trust 2003-1 | | | | 1.071% | | 2/25/33 | | | 12,484 | | | 8,570 | |
Provident Bank Home Equity Loan Trust 2000-2 | | | | 0.771% | | 8/25/31 | | | 215,023 | | | 64,934 | |
RAAC 2006-RP2 A | | | | 0.481% | | 2/25/37 | | | 329,714 | | | 203,630 | A |
RAAC 2006-RP3 A | | | | 0.501% | | 5/25/36 | | | 34,824 | | | 16,713 | A |
RAAC 2006-RP4 A | | | | 0.521% | | 1/25/46 | | | 23,272,793 | | | 14,029,301 | A |
RAAC 2007-RP2 M1 | | | | 0.881% | | 2/25/46 | | | 600,000 | | | 9,524 | A |
RAAC 2007-SP3 A1 | | | | 1.431% | | 9/25/37 | | | 710,114 | | | 455,328 | |
Renaissance Home Equity Loan Trust 2003-4 A3 | | | | 0.851% | | 3/25/34 | | | 15,420,885 | | | 12,512,626 | |
Renaissance Home Equity Loan Trust 2005-1 | | | | 0.561% | | 5/25/35 | | | 2,246,331 | | | 1,651,893 | |
Residential Asset Mortgage Products Inc. 2003-RS4 | | | | 0.891% | | 5/25/33 | | | 660,046 | | | 407,113 | |
62
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Asset-Backed Securities—Continued | | | | | | | | | | | |
| | | | |
Indexed Securities—Continued | | | | | | | | | | | |
Residential Funding Mortgage Securities II 2003-HS3 | | | | 0.521% | | 8/25/33 | | $ | 173,066 | | $ | 99,739 | |
Residential Funding Securities Corp. 2002-RP2 A1 | | | | 0.981% | | 10/25/32 | | | 5,161,297 | | | 2,832,262 | A,G |
SACO I Trust 2006-3 A3 | | | | 0.461% | | 4/25/36 | | | 2,951,454 | | | 487,738 | |
SACO I Trust 2006-5 1A | | | | 0.381% | | 4/25/36 | | | 250,247 | | | 32,531 | |
SACO I Trust 2006-6 A | | | | 0.361% | | 6/25/36 | | | 386,676 | | | 65,976 | |
Salomon Brothers Mortgage Securities VII 2002-CIT1 | | | | 0.831% | | 3/25/32 | | | 121,420 | | | 116,793 | |
Securitized Asset Backed Receivables LLC 2007-BR3 A2B | | | | 0.451% | | 4/25/37 | | | 51,787,000 | | | 17,768,891 | |
Securitized Asset Backed Receivables LLC Trust 2007-BR2 A2 | | | | 0.461% | | 2/25/37 | | | 30,069,462 | | | 13,282,935 | |
SLM Student Loan Trust 2006-5 | | | | 0.272% | | 7/25/17 | | | 72,894 | | | 72,871 | |
Southern Pacific Secured Asset Corp. 1998-2 | | | | 0.571% | | 7/25/29 | | | 17,170 | | | 7,501 | |
Structured Asset Securities Corp. 2006-ARS1 A1 | | | | 0.341% | | 2/25/36 | | | 676,977 | | | 49,315 | A |
Truman Capital Mortgage Loan Trust 2006-1 | | | | 0.491% | | 3/25/36 | | | 18,632,833 | | | 9,502,745 | A,G |
Vanderbilt Mortgage Finance 1999-D | | | | 3.485% | | 1/7/30 | | | 4,100,000 | | | 2,866,625 | |
Wachovia Asset Securitization Inc. 2002-HE1 | | | | 0.601% | | 9/27/32 | | | 531,983 | | | 314,983 | |
Wachovia Asset Securitization Inc. 2002-HE2 | | | | 0.661% | | 12/25/32 | | | 56,195 | | | 36,432 | |
Wachovia Asset Securitization Inc. 2003-HE1 | | | | 0.521% | | 3/25/33 | | | 12,205 | | | 7,490 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 239,680,464 | |
| | | | | | | | | | | | | |
Variable Rate SecuritiesI | | 0.1% | | | | | | | | | | | |
Countrywide Asset-Backed Certificates 2004-15 | | | | 4.614% | | 12/25/32 | | | 7,701,220 | | | 7,216,071 | |
Structured Asset Securities Corp. 2005-SC1 1A2 | | | | 9.113% | | 5/25/31 | | | 597,870 | | | 425,760 | A |
Terwin Mortgage Trust 2006-10SL A1 | | | | 3.212% | | 10/25/37 | | | 24,997,547 | | | 4,986,508 | A |
Vanderbilt Mortgage Finance 1997-C | | | | 7.830% | | 8/7/27 | | | 365,650 | | | 281,059 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 12,909,398 | |
| | | | | | | | | | | | | |
Total Asset-Backed Securities
(Cost—$523,937,305) | | | | | | | | | | | | 299,881,839 | |
63
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Mortgage-Backed Securities | | 12.1% | | | | | | | | | | | |
| | | | | |
Fixed Rate Securities | | 3.1% | | | | | | | | | | | |
Banc of America Commercial Mortgage Inc. 2006-1 A4 | | | | 5.372% | | 9/10/45 | | $ | 310,000 | | $ | 299,804 | |
Banc of America Commercial Mortgage Inc. 2007-5 A3 | | | | 5.620% | | 2/10/51 | | | 2,430,000 | | | 2,358,437 | |
Banc of America Funding Corp. 2003-1 | | | | 6.000% | | 5/20/33 | | | 293,572 | | | 296,232 | |
Banc of America Funding Corp. 2006-8T2 A2 | | | | 5.791% | | 10/25/36 | | | 32,450 | | | 31,767 | |
Bear Stearns Commercial Mortgage Securities 2007-PW17 A3 | | | | 5.736% | | 6/11/50 | | | 6,250,000 | | | 6,104,067 | |
Commercial Capital Access One Inc. 2I | | | | 12.000% | | 11/15/27 | | | 1,828,674 | | | 321,461 | A |
Commercial Mortgage Pass-Through Certificates 2001-J1A A2 | | | | 6.457% | | 2/14/34 | | | 400,084 | | | 411,209 | A |
Countrywide Alternative Loan Trust 2003-20CB 1A1 | | | | 5.500% | | 10/25/33 | | | 18,744,144 | | | 18,120,316 | |
GE Capital Commercial Mortgage Corp. 2007-C1 A4 | | | | 5.543% | | 12/10/49 | | | 14,000,000 | | | 11,356,117 | |
GS Mortgage Securities Corp. II 2005-GG4 | | | | 4.680% | | 7/10/39 | | | 18,650,000 | | | 18,728,091 | |
JP Morgan Chase Commercial Mortgage Pass-Through Certificates
2005-CIBC12 | | | | 4.895% | | 9/12/37 | | | 3,000,000 | | | 2,894,239 | |
JP Morgan Chase Commercial Mortgage Securities Corp. 2006-LDP9 A3 | | | | 5.336% | | 5/15/47 | | | 25,134,000 | | | 21,797,886 | |
JP Morgan Chase Commercial Mortgage Securities Corp. 2007-LDPX A3 | | | | 5.420% | | 5/15/49 | | | 24,000,000 | | | 20,245,346 | |
LB-UBS Commercial Mortgage Trust 2000-C3 A2 | | | | 7.950% | | 5/15/25 | | | 13,316 | | | 13,334 | |
LB-UBS Commercial Mortgage Trust 2005-C3 A5 | | | | 4.739% | | 7/15/30 | | | 3,000,000 | | | 2,902,187 | |
LB-UBS Commercial Mortgage Trust 2005-C3 AAB | | | | 4.664% | | 7/15/30 | | | 4,100,000 | | | 4,129,501 | |
LB-UBS Commercial Mortgage Trust 2005-C5 | | | | 4.954% | | 9/15/30 | | | 1,570,000 | | | 1,521,338 | |
MASTR Reperforming Loan Trust 2005-1 1A1 | | | | 6.000% | | 8/25/34 | | | 4,288,754 | | | 3,898,745 | A |
MASTR Reperforming Loan Trust 2005-1 1A3 | | | | 7.000% | | 8/25/34 | | | 6,133,871 | | | 5,801,300 | A |
Merrill Lynch/Countrywide Commercial Mortgage 2007-6 A4 | | | | 5.485% | | 3/12/51 | | | 22,470,000 | | | 18,278,945 | |
Morgan Stanley Capital I 2005-HQ6 | | | | 4.989% | | 8/13/42 | | | 21,070,000 | | | 20,395,233 | |
Morgan Stanley Capital I
2007-HQ11 A31 | | | | 5.439% | | 2/12/44 | | | 3,995,000 | | | 3,954,085 | |
64
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Mortgage-Backed Securities—Continued | | | | | | | | | | | | | |
| | | | | |
Fixed Rate Securities—Continued | | | | | | | | | | | | | |
Morgan Stanley Capital I 2007-IQ14 A4 | | | | 5.692% | | 4/15/49 | | $ | 15,200,000 | | $ | 12,808,044 | |
Morgan Stanley Mortgage Loan Trust 2006-2 5A2 | | | | 5.500% | | 2/25/36 | | | 108,503 | | | 106,506 | |
Prime Mortgage Trust 2006-DR1 2A2 | | | | 6.000% | | 11/25/36 | | | 66,590,540 | | | 55,873,625 | A |
Residential Accredit Loans Inc. 2007-QS4 3A9 | | | | 6.000% | | 3/25/37 | | | 9,200,000 | | | 6,346,686 | |
Residential Asset Mortgage Products Inc. 2004-SL2 | | | | 8.500% | | 10/25/31 | | | 191,554 | | | 181,737 | |
Residential Asset Mortgage Products Inc. 2004-SL4 | | | | 7.500% | | 7/25/32 | | | 1,812,953 | | | 1,717,773 | |
Residential Asset Mortgage Products Inc. 2005-SL2 | | | | 7.500% | | 3/25/32 | | | 8,848,860 | | | 7,926,643 | |
Residential Asset Securitization Trust 2003-A14 | | | | 4.750% | | 2/25/19 | | | 1,678,024 | | | 1,619,293 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 250,439,947 | |
| | | | | | | | | | | | | |
Indexed SecuritiesB | | 5.5% | | | | | | | | | | | |
American Home Mortgage Assets Trust 2006-3 | | | | 0.421% | | 7/25/46 | | | 16,323,712 | | | 7,801,241 | |
American Home Mortgage Investment Trust 2005-4 | | | | 0.521% | | 11/25/45 | | | 13,537,729 | | | 7,433,861 | |
Bayview Commercial Asset Trust 2006-2A A1 | | | | 0.461% | | 7/25/36 | | | 1,569,193 | | | 1,007,961 | A |
Bayview Commercial Asset Trust 2006-SP1 A1 | | | | 0.501% | | 4/25/36 | | | 1,456,071 | | | 1,262,019 | A |
Bear Stearns Second Lien Trust 2007-SV1A A1 | | | | 0.451% | | 12/25/36 | | | 4,756,163 | | | 3,289,564 | A |
Chevy Chase Mortgage Funding Corp. 2005-4A A1 | | | | 0.431% | | 10/25/36 | | | 1,514,097 | | | 711,079 | A |
Citigroup Mortgage Loan Trust Inc. 2005-5 | | | | 5.388% | | 8/25/35 | | | 206,987 | | | 117,035 | |
Citigroup Mortgage Loan Trust Inc. 2005-HE2 | | | | 0.631% | | 7/25/35 | | | 6,645,551 | | | 5,306,473 | A |
Citigroup Mortgage Loan Trust Inc. 2006-AR9 1A3 | | | | 0.476% | | 11/25/36 | | | 37,346,000 | | | 16,299,001 | |
Countrywide Alternative Loan Trust 2004-J9 3A4 | | | | 0.621% | | 10/25/34 | | | 83,061 | | | 46,302 | |
Countrywide Alternative Loan Trust 2005-38 A3 | | | | 0.581% | | 9/25/35 | | | 15,373,831 | | | 8,018,431 | |
Countrywide Alternative Loan Trust 2005-44 1A1 | | | | 0.561% | | 10/25/35 | | | 18,936,646 | | | 9,882,782 | |
65
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Mortgage-Backed Securities—Continued | | | | | | | | | | | |
| | | | |
Indexed Securities—Continued | | | | | | | | | | | |
Countrywide Alternative Loan Trust 2005-44 2A1 | | | | 0.541% | | 10/25/35 | | $ | 9,816,229 | | $ | 5,231,761 | |
Countrywide Alternative Loan Trust 2005-56 3A1 | | | | 0.521% | | 11/25/35 | | | 11,940,302 | | | 6,320,227 | |
Countrywide Alternative Loan Trust 2005-56 4A1 | | | | 0.541% | | 11/25/35 | | | 6,129,571 | | | 3,170,338 | |
Countrywide Alternative Loan Trust 2005-59 1A1 | | | | 0.563% | | 11/20/35 | | | 5,891,983 | | | 3,092,580 | |
Countrywide Alternative Loan Trust 2005-72 A1 | | | | 0.501% | | 1/25/36 | | | 4,108,637 | | | 2,172,959 | |
Countrywide Alternative Loan Trust 2005-J12 | | | | 0.501% | | 8/25/35 | | | 702,031 | | | 353,058 | |
Countrywide Alternative Loan Trust 2006-0A10 4A1 | | | | 0.421% | | 8/25/46 | | | 638,191 | | | 317,483 | |
Countrywide Alternative Loan Trust 2006-0A11 A4 | | | | 0.421% | | 9/25/46 | | | 679,864 | | | 303,543 | |
Countrywide Alternative Loan Trust 2006-0A2 A5 | | | | 0.463% | | 5/20/46 | | | 7,068,734 | | | 3,385,589 | |
Countrywide Alternative Loan Trust 2006-0A9 2A1B | | | | 0.433% | | 7/20/46 | | | 709,870 | | | 315,147 | |
Countrywide Alternative Loan Trust 2006-OA1 2A1 | | | | 0.443% | | 3/20/46 | | | 149,559 | | | 73,196 | |
Countrywide Alternative Loan Trust 2006-OA18 A2 | | | | 0.471% | | 12/25/36 | | | 284,041 | | | 67,631 | |
Countrywide Alternative Loan Trust 2006-OA2 A1 | | | | 0.443% | | 5/20/46 | | | 13,845,883 | | | 6,713,367 | |
Countrywide Alternative Loan Trust 2006-OC2 2A3 | | | | 0.521% | | 2/25/36 | | | 10,000,000 | | | 2,029,063 | |
Countrywide Home Loans 2005-09 1A1 | | | | 0.531% | | 5/25/35 | | | 7,263,211 | | | 3,947,865 | |
Countrywide Home Loans 2005-R3 | | | | 0.631% | | 9/25/35 | | | 5,352,206 | | | 4,014,590 | A |
Countrywide Home Loans 2006-OA5 1A1 | | | | 0.431% | | 4/25/46 | | | 4,523,417 | | | 2,170,874 | |
DSLA Mortgage Loan Trust
2006-AR1 1A1A | | | | 1.464% | | 3/19/46 | | | 1,854,184 | | | 789,057 | |
First Horizon Alternative Mortgage Securities 2006-FA8 1A8 | | | | 0.601% | | 2/25/37 | | | 633,992 | | | 313,452 | |
GMAC Mortgage Corp. Loan Trust 2005-AR6 2A1 | | | | 5.196% | | 11/19/35 | | | 289,181 | | | 226,118 | |
Greenpoint Mortgage Funding Trust 2005-AR5 2A2 | | | | 0.501% | | 11/25/46 | | | 4,809,448 | | | 1,434,047 | |
Greenpoint Mortgage Funding Trust 2006-AR3 3A1 | | | | 0.461% | | 4/25/36 | | | 4,858,648 | | | 2,049,755 | |
66
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Mortgage-Backed Securities—Continued | | | | | | | | | | | |
| | | | |
Indexed Securities—Continued | | | | | | | | | | | |
Greenpoint Mortgage Funding Trust 2007-AR2 1A1 | | | | 0.361% | | 4/25/47 | | $ | 46,343,265 | | $ | 33,055,261 | |
GSMPS Mortgage Loan Trust 2005-RP2 | | | | 0.581% | | 3/25/35 | | | 17,682,104 | | | 14,270,333 | A |
GSMPS Mortgage Loan Trust 2005-RP3 | | | | 0.581% | | 9/25/35 | | | 27,433,006 | | | 20,339,242 | A |
Harborview Mortgage Loan Trust 2005-3 | | | | 0.473% | | 6/19/35 | | | 14,627,994 | | | 8,428,893 | |
Harborview Mortgage Loan Trust 2005-7 | | | | 3.122% | | 6/19/45 | | | 5,575,099 | | | 2,773,423 | |
Harborview Mortgage Loan Trust 2006-13 A | | | | 0.413% | | 11/19/46 | | | 674,342 | | | 321,474 | |
Harborview Mortgage Loan Trust 2006-7 | | | | 0.433% | | 10/19/37 | | | 3,269,315 | | | 1,669,792 | |
Harborview Mortgage Loan Trust 2007-4 2A1 | | | | 0.453% | | 7/19/47 | | | 29,430,111 | | | 14,826,487 | |
Impac CMB Trust 2003-4 1A1 | | | | 0.871% | | 10/25/33 | | | 111,197 | | | 69,455 | |
Impac Secured Assets Corp. 2005-2 | | | | 0.551% | | 3/25/36 | | | 385,410 | | | 148,388 | |
Impac Secured Assets Corp. 2006-1 1A2B | | | | 0.431% | | 5/25/36 | | | 144,423 | | | 38,763 | |
Impac Secured Assets Corp. 2006-2 2A1 | | | | 0.581% | | 8/25/36 | | | 4,146,606 | | | 3,292,559 | |
IndyMac Inda Mortgage Loan Trust 2007-AR7 1A1 | | | | 6.158% | | 11/25/37 | | | 11,570,013 | | | 8,027,136 | |
IndyMac Index Mortgage Loan Trust 2004-AR2 2A1 | | | | 0.851% | | 6/25/34 | | | 35,236 | | | 24,415 | |
IndyMac Index Mortgage Loan Trust 2006-AR15 A1 | | | | 0.351% | | 7/25/36 | | | 248,087 | | | 115,176 | |
IndyMac Index Mortgage Loan Trust 2006-AR6 2A1A | | | | 0.431% | | 6/25/47 | | | 576,355 | | | 292,905 | |
La Hipotecaria SA 2007-1GA A | | | | 5.500% | | 12/23/36 | | | 323,465 | | | 284,614 | A,G |
Lehman XS Trust 2006-GP2 1A1A | | | | 0.301% | | 6/25/46 | | | 25,132 | | | 24,865 | |
Luminent Mortgage Trust 2006-4 A1A | | | | 0.421% | | 5/25/46 | | | 488,051 | | | 215,920 | |
Luminent Mortgage Trust 2006-7 2A1 | | | | 0.401% | | 12/25/36 | | | 4,624,932 | | | 2,139,708 | |
MASTR Adjustable Rate Mortgages Trust 2004-13 | | | | 3.096% | | 11/21/34 | | | 1,830,000 | | | 1,484,999 | |
MASTR Adjustable Rate Mortgages Trust 2006-0A1 1A1 | | | | 0.441% | | 4/25/46 | | | 484,214 | | | 219,243 | |
MASTR Adjustable Rate Mortgages Trust 2007-3 12A1 | | | | 0.431% | | 5/25/47 | | | 874,795 | | | 413,700 | |
MASTR Reperforming Loan Trust 2005-2 1A1F | | | | 0.581% | | 5/25/35 | | | 5,040,113 | | | 3,999,936 | A |
MLCC Mortgage Investors Inc. 2003-B | | | | 0.571% | | 4/25/28 | | | 2,285,210 | | | 1,811,803 | |
MLCC Mortgage Investors Inc. 2006-1 1A | | | | 3.763% | | 2/25/36 | | | 716,228 | | | 521,814 | |
Novastar Mortgage-Backed Notes 2006-MTA1 2A1A | | | | 0.421% | | 9/25/46 | | | 484,558 | | | 227,418 | |
RBSGC Mortgage Pass-Through Certificates 2007-B 1A4 | | | | 0.681% | | 1/25/37 | | | 37,873,930 | | | 18,630,341 | |
67
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Mortgage-Backed Securities—Continued | | | | | | | | | | | |
| | | | |
Indexed Securities—Continued | | | | | | | | | | | |
Residential Accredit Loans Inc. 2005-QO3 A1 | | | | 0.631% | | 10/24/45 | | $ | 2,219,436 | | $ | 1,140,607 | |
Residential Accredit Loans Inc. 2006-QO10 A1 | | | | 0.391% | | 1/25/37 | | | 12,000,793 | | | 6,223,525 | |
Residential Accredit Loans Inc. 2006-QO8 1A1A | | | | 0.321% | | 10/25/46 | | | 1,254,093 | | | 1,187,149 | |
Residential Accredit Loans Inc. 2007-QO4 A1A | | | | 0.421% | | 5/25/47 | | | 12,533,200 | | | 6,542,428 | |
Sequoia Mortgage Trust A4 | | | | 0.592% | | 11/25/24 | | | 8,166 | | | 6,673 | |
Structured Adjustable Rate Mortgage Loan Trust 2004-20 2A1 | | | | 3.991% | | 1/25/35 | | | 307,553 | | | 213,643 | |
Structured Adjustable Rate Mortgage Loan Trust 2005-19XS | | | | 0.531% | | 10/25/35 | | | 369,044 | | | 227,939 | |
Structured Asset Mortgage Investments Inc. 2002-AR5 A1 | | | | 0.683% | | 5/19/33 | | | 1,703,961 | | | 1,441,923 | |
Structured Asset Mortgage Investments Inc. 2003-AR1 A1 | | | | 0.985% | | 10/19/33 | | | 583,738 | | | 461,690 | |
Structured Asset Mortgage Investments Inc. 2006-AR3 11A1 | | | | 0.441% | | 4/25/36 | | | 5,077,112 | | | 2,909,159 | |
Structured Asset Mortgage Investments Inc. 2006-AR6 1A1 | | | | 0.411% | | 7/25/46 | | | 440,965 | | | 222,298 | |
Structured Asset Mortgage Investments Inc. 2006-AR7 A1A | | | | 0.441% | | 8/25/36 | | | 37,562,726 | | | 18,165,026 | |
Structured Asset Mortgage Investments Inc. 2007-AR4 GA4B | | | | 0.411% | | 9/25/47 | | | 994,067 | | | 524,439 | |
Terwin Mortgage Trust 2006-9HGA A1 | | | | 0.311% | | 10/25/37 | | | 151,214 | | | 151,286 | A |
Thornburg Mortgage Securities Trust 2004-3 A | | | | 0.601% | | 9/25/44 | | | 1,230,408 | | | 1,064,536 | |
WaMu Mortgage Pass-Through Certificates 2005-AR06 2A1A | | | | 0.461% | | 4/25/45 | | | 9,750,174 | | | 7,172,462 | |
WaMu Mortgage Pass-Through Certificates 2005-AR08 1A1A | | | | 0.501% | | 7/25/45 | | | 9,505,165 | | | 6,905,501 | |
WaMu Mortgage Pass-Through Certificates 2005-AR1 A1A | | | | 0.551% | | 1/25/45 | | | 2,275,131 | | | 1,586,294 | |
WaMu Mortgage Pass-Through Certificates 2005-AR11 | | | | 0.551% | | 8/25/45 | | | 30,769,898 | | | 21,462,659 | |
WaMu Mortgage Pass-Through Certificates 2005-AR13 A1A1 | | | | 0.521% | | 10/25/45 | | | 17,661,082 | | | 12,647,848 | |
WaMu Mortgage Pass-Through Certificates 2005-AR13 B10 | | | | 1.431% | | 10/25/45 | | | 5,785,305 | | | 61,187 | A |
68
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Mortgage-Backed Securities—Continued | | | | | | | | | | | |
| | | | |
Indexed Securities—Continued | | | | | | | | | | | |
WaMu Mortgage Pass-Through Certificates 2005-AR15 A1A1 | | | | 0.491% | | 11/25/45 | | $ | 16,482,792 | | $ | 11,793,414 | |
WaMu Mortgage Pass-Through Certificates 2005-AR15 A1A2 | | | | 0.511% | | 11/25/45 | | | 26,224,391 | | | 15,383,388 | |
WaMu Mortgage Pass-Through Certificates 2005-AR17 A1A1 | | | | 0.501% | | 12/25/45 | | | 380,538 | | | 257,554 | |
WaMu Mortgage Pass-Through Certificates 2005-AR17 A1A2 | | | | 0.521% | | 12/25/45 | | | 15,779,134 | | | 8,483,527 | |
WaMu Mortgage Pass-Through Certificates 2005-AR19 A1A1 | | | | 0.501% | | 12/25/45 | | | 22,921,573 | | | 16,014,320 | |
WaMu Mortgage Pass-Through Certificates 2005-AR19 A1A2 | | | | 0.521% | | 12/25/45 | | | 25,007,492 | | | 15,895,222 | |
WaMu Mortgage Pass-Through Certificates 2007-0A5 1A | | | | 1.294% | | 6/25/47 | | | 12,033,307 | | | 6,483,193 | |
Wells Fargo Alternative Loan Trust 2007-PA2 2A1 | | | | 0.661% | | 6/25/37 | | | 46,281,741 | | | 22,884,803 | |
Wells Fargo Mortgage Backed Securities Trust 2006-AR8 3A2 | | | | 5.242% | | 4/25/36 | | | 5,713,000 | | | 3,934,919 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 438,784,124 | |
| | | | | | | | | | | | | |
Stripped Securities | | N.M. | | | | | | | | | | | |
Diversified REIT Trust 2001-1A | | | | 1.666% | | 3/8/10 | | | 3,705,380 | | | 118,202 | A,H,K1 |
FFCA Secured Lending Corp. 1999-1A | | | | 1.251% | | 9/18/25 | | | 135,254 | | | 2,691 | A,H,K1 |
LB-UBS Commercial Mortgage Trust 2001-C3 X | | | | 0.918% | | 6/15/36 | | | 7,964,231 | | | 84,959 | A,H,K1 |
Voyager Delaware Trust 2009-1 UGL2 | | | | 1.464% | | 3/20/47 | | | 1,358,551 | | | 127,315 | A,G,H,K1 |
Voyager Delaware Trust UAU7 | | | | 0.481% | | 12/26/36 | | | 1,950,006 | | | 638,627 | A,H,K1 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 971,794 | |
| | | | | | | | | | | | | |
Variable Rate SecuritiesI | | 3.5% | | | | | | | | | | | |
Banc of America Commercial Mortgage Inc. 2005-5 A4 | | | | 5.115% | | 10/10/45 | | | 6,990,000 | | | 6,851,541 | |
Banc of America Commercial Mortgage Inc. 2006-2 A4 | | | | 5.738% | | 5/10/45 | | | 12,000,000 | | | 11,792,723 | |
Banc of America Funding Corp.
2005-F 2A1 | | | | 3.823% | | 9/20/35 | | | 17,136,989 | | | 7,579,965 | |
Bear Stearns Adjustable Rate Mortgage Trust 2005-12 11A1 | | | | 3.541% | | 2/25/36 | | | 544,465 | | | 328,292 | |
Citigroup Mortgage Loan Trust Inc. 2005-10 1A1A | | | | 3.544% | | 12/25/35 | | | 320,288 | | | 176,280 | |
Commercial Mortgage Asset Trust 1999-C2 | | | | 7.546% | | 11/17/32 | | | 56,571 | | | 56,688 | |
69
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Mortgage-Backed Securities—Continued | | | | | | | | | | | |
| | | | |
Variable Rate Securities—Continued | | | | | | | | | | | |
Countrywide Alternative Loan Trust 2004-33 2A1 | | | | 3.571% | | 12/25/34 | | $ | 37,009 | | $ | 22,870 | |
Countrywide Home Loan Mortgage Pass Through Trust 2006-HYB1 2A1 | | | | 5.238% | | 3/20/36 | | | 203,704 | | | 116,914 | |
Countrywide Home Loan Mortgage Pass Through Trust 2006-HYB3 2A1A | | | | 5.667% | | 5/20/36 | | | 799,008 | | | 527,499 | |
Credit Suisse Mortgage Capital Certificates 2006-C1 A4 | | | | 5.548% | | 2/15/39 | | | 2,130,000 | | | 2,098,142 | |
Credit Suisse Mortgage Capital Certificates 2007-C4 A3 | | | | 5.809% | | 9/15/39 | | | 8,600,000 | | | 7,779,687 | |
Credit Suisse Mortgage Capital Certificates 2007-C5 A3 | | | | 5.694% | | 9/15/40 | | | 2,740,000 | | | 2,598,233 | |
Deutsche Mortgage Securities Inc. 2005-WF1 1A3 | | | | 5.158% | | 6/26/35 | | | 29,770,000 | | | 20,476,491 | A |
GE Capital Commercial Mortgage Corp. 2005-C4 | | | | 5.334% | | 11/10/45 | | | 15,020,000 | | | 14,668,407 | |
GSR Mortgage Loan Trust 2005-AR7 1A1 | | | | 3.771% | | 11/25/35 | | | 2,326,102 | | | 1,571,561 | |
Harborview Mortgage Loan Trust 2006-2 | | | | 3.985% | | 2/25/36 | | | 4,644,495 | | | 2,786,697 | |
IndyMac INDX Mortgage Loan Trust 2004-AR15 | | | | 4.220% | | 2/25/35 | | | 393,284 | | | 226,891 | |
IndyMac INDX Mortgage Loan Trust 2005-AR1 1A1 | | | | 3.919% | | 3/25/35 | | | 279,422 | | | 177,044 | |
IndyMac INDX Mortgage Loan Trust 2005-AR13 | | | | 3.307% | | 8/25/35 | | | 603,332 | | | 334,250 | |
IndyMac INDX Mortgage Loan Trust 2005-AR15 | | | | 5.099% | | 9/25/35 | | | 8,733,035 | | | 6,390,465 | |
IndyMac INDX Mortgage Loan Trust 2005-AR9 1A1 | | | | 3.282% | | 7/25/35 | | | 120,946 | | | 64,274 | |
JP Morgan Chase Commercial Mortgage Securities Corp. 2005-CB13 | | | | 5.280% | | 1/12/43 | | | 11,800,000 | | | 11,234,570 | |
JP Morgan Chase Commercial Mortgage Securities Corp. 2006-LDP9 HS | | | | 5.816% | | 5/15/47 | | | 5,000,000 | | | 393,732 | A |
JP Morgan Mortgage Trust 2004-A3 SF3 | | | | 4.572% | | 6/25/34 | | | 245,379 | | | 234,696 | |
JP Morgan Mortgage Trust 2007-A2 4A2 | | | | 6.024% | | 4/25/37 | | | 10,700,000 | | | 7,920,054 | |
LB-UBS Commercial Mortgage Trust 2007-C7 A3 | | | | 5.866% | | 9/15/45 | | | 1,500,000 | | | 1,316,565 | |
MASTR Adjustable Rate Mortgages Trust 2004-15 | | | | 3.936% | | 12/25/34 | | | 28,822 | | | 17,687 | |
MASTR Adjustable Rate Mortgages Trust 2004-4 3A1 | | | | 2.874% | | 5/25/34 | | | 1,621,863 | | | 1,503,425 | |
70
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Mortgage-Backed Securities—Continued | | | | | | | | | | | |
| | | | |
Variable Rate Securities—Continued | | | | | | | | | | | |
MASTR Adjustable Rate Mortgages Trust 2005-1 7A1 | | | | 4.313% | | 2/25/35 | | $ | 547,030 | | $ | 374,747 | |
MASTR Adjustable Rate Mortgages Trust 2006-2 3A1 | | | | 4.845% | | 1/25/36 | | | 2,299,593 | | | 1,853,384 | |
MASTR Adjustable Rate Mortgages Trust 2007-R5 A1 | | | | 5.617% | | 11/25/35 | | | 6,884,601 | | | 3,866,918 | A |
Merrill Lynch Mortgage Investors Inc. 2006-A1 1A1 | | | | 5.651% | | 3/25/36 | | | 31,103,070 | | | 18,121,143 | |
Merrill Lynch Mortgage Investors Trust 2005-A2 A4 | | | | 4.258% | | 2/25/35 | | | 158,351 | | | 137,710 | |
Merrill Lynch Mortgage Trust 2005-CKI1 | | | | 5.233% | | 11/12/37 | | | 18,940,000 | | | 18,748,681 | |
Merrill Lynch Mortgage Trust 2005-MCP1 | | | | 4.747% | | 6/12/43 | | | 12,230,000 | | | 11,571,254 | |
Merrill Lynch Mortgage Trust 2006-C1 A4 | | | | 5.656% | | 5/12/39 | | | 510,000 | | | 498,416 | |
Merrill Lynch/Countrywide Commercial Mortgage Trust 2007-8 A3 | | | | 5.957% | | 8/12/49 | | | 2,800,000 | | | 2,416,588 | |
Morgan Stanley Mortgage Loan Trust 2004-10AR 4A | | | | 5.519% | | 11/25/34 | | | 4,023,282 | | | 3,669,474 | |
Morgan Stanley Mortgage Loan Trust 2004-8AR 4A1 | | | | 3.386% | | 10/25/34 | | | 8,829 | | | 6,882 | |
Morgan Stanley Mortgage Loan Trust 2005-3AR | | | | 3.205% | | 7/25/35 | | | 5,909,261 | | | 3,793,031 | |
Morgan Stanley Mortgage Loan Trust 2006-6AR 3A1 | | | | 6.057% | | 5/25/36 | | | 9,172,333 | | | 4,310,365 | |
Prime Mortgage Trust 2005-2 | | | | 7.461% | | 10/25/32 | | | 879,981 | | | 772,183 | |
Structured Adjustable Rate Mortgage Loan Trust 2004-16 5A2 | | | | 5.070% | | 11/25/34 | | | 30,529,684 | | | 25,445,552 | |
Thornburg Mortgage Securities Trust 2004-1 | | | | 3.609% | | 3/25/44 | | | 81,615 | | | 77,267 | |
Thornburg Mortgage Securities Trust 2007-4 2A1 | | | | 6.200% | | 9/25/37 | | | 38,020,466 | | | 30,370,357 | |
Thornburg Mortgage Securities Trust 2007-4 3A1 | | | | 6.198% | | 9/25/37 | | | 37,930,521 | | | 30,311,041 | |
WaMu Mortgage Pass-Through Certificates 2005-AR14 1A1 | | | | 5.046% | | 12/25/35 | | | 451,213 | | | 412,513 | |
WaMu Mortgage Pass-Through Certificates 2006-AR10 1A1 | | | | 5.920% | | 9/25/36 | | | 488,095 | | | 370,222 | |
WaMu Mortgage Pass-Through Certificates 2007-HY4 4A1 | | | | 5.512% | | 9/25/36 | | | 117,276 | | | 92,062 | G |
WaMu Mortgage Pass-Through Certificates 2007-HY7 2A3 | | | | 5.792% | | 7/25/37 | | | 23,300,000 | | | 14,328,237 | |
71
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Mortgage-Backed Securities—Continued | | | | | | | | | | |
| | | | |
Variable Rate Securities—Continued | | | | | | | | | | |
Wells Fargo Mortgage Backed Securities Trust 2006-AR8 2A3 | | | | 5.240% | | 4/25/36 | | $ | 267,133 | | $ | 234,014 |
| | | | | | | | | | | | |
| | | | | | | | | | | | 281,027,684 |
| | | | | | | | | | | | |
Total Mortgage-Backed Securities (Cost—$1,276,763,930) | | | | | | | | | | | | 971,223,549 |
Loan Participations and AssignmentsB | | 0.6% | | | | | | | | | | |
Auto Components | | N.M. | | | | | | | | | | |
Allison Transmission Inc., Term Loan, Tranche B | | | | 2.990% to 3.040% | | 2/10/10 | | | 956,866 | | | 875,771 |
| | | | | | | | | | | | |
| | | | | |
Communications Equipment | | N.M. | | | | | | | | | | |
Panamsat Corp., Term Loan, Tranche A | | | | 2.735% | | 1/4/10 | | | 1,150,000 | | | 1,099,400 |
| | | | | | | | | | | | |
| | | | | |
Computers and Peripherals | | 0.1% | | | | | | | | | | |
SunGard Data Systems Inc., Term Loan, Tranche B | | | | 1.985% to 3.900% | | 2/9/10 | | | 1,930,202 | | | 1,819,517 |
| | | | | | | | | | | | |
| | | | | |
Containers and Packaging | | N.M. | | | | | | | | | | |
Amscan Holdings Inc., Term Loan, Tranche B | | | | 2.501% | | 3/25/10 | | | 972,500 | | | 875,250 |
| | | | | | | | | | | | |
| | | | | |
Diversified Consumer Services | | N.M. | | | | | | | | | | |
Thomson Medical Education, First Lien Term Loan | | | | 2.750% | | 3/31/10 | | | 977,500 | | | 889,525 |
| | | | | | | | | | | | |
| | | | | |
Diversified Financial Services | | N.M. | | | | | | | | | | |
CCM Merger Inc., Term Loan, Tranche B | | | | 8.500% | | 3/31/10 | | | 864,462 | | | 840,690 |
Vanguard Health Holding
Co. II, Replacement
Term Loan | | | | 2.481% | | 1/29/10 | | | 995,006 | | | 973,613 |
| | | | | | | | | | | | |
| | | | | | | | | | | | 1,814,303 |
| | | | | | | | | | | | |
Electric Utilities | | N.M. | | | | | | | | | | |
TXU, Term Loan, Tranche B2 | | | | 3.735% to 3.751% | | 3/31/10 | | | 1,221,875 | | | 992,773 |
| | | | | | | | | | | | |
72
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Loan Participations and Assignments—Continued | | | | | | | | | |
| | | | | |
Hotels, Restaurants and Leisure | | N.M. | | | | | | | | | | | |
Metro-Goldwyn-Mayer Studios Inc., Term Loan, Tranche B | | | | 20.500% | | 3/31/10 | | $ | 1,447,368 | | $ | 924,247 | |
| | | | | | | | | | | | | |
| | | | | |
IT Services | | 0.4% | | | | | | | | | | | |
First Data Corp., Term Loan, Tranche B1 | | | | 2.999% to 3.001% | | 3/31/10 | | | 35,937,118 | | | 31,921,145 | |
| | | | | | | | | | | | | |
| | | | | |
Media | | 0.1% | | | | | | | | | | | |
Carmike Cinemas Inc., Delayed Draw Term Loan | | | | 4.240% | | 1/11/10 | | | 600,819 | | | 582,044 | |
Charter Communications Operating LLC, Term Loan | | | | 2.260% | | 2/26/10 | | | 1,960,000 | | | 1,835,050 | |
Citadel Communication Group, Term Loan, Tranche B | | | | 1.990% | | 1/29/10 | | | 996,220 | | | 733,757 | C |
Idearc Inc., Term Loan | | | | 10.250% | | 3/31/10 | | | 385,750 | | | 379,000 | C |
Nielsen Finance LLC,
Term Loan, Tranche B | | | | 2.235% | | 1/11/10 | | | 1,673,326 | | | 1,562,468 | |
Univision Communications, Term Loan, Tranche B | | | | 2.501% | | 3/31/10 | | | 1,000,000 | | | 867,000 | C |
UPC Broadband Holding,
Term Loan, Tranche N1 | | | | 1.985% | | 1/4/10 | | | 648,288 | | | 605,609 | |
UPC, Term Loan | | | | 3.735% | | 1/4/10 | | | 351,712 | | | 340,985 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 6,905,913 | |
| | | | | | | | | | | | | |
Paper and Forest Products | | N.M. | | | | | | | | | | | |
Georgia-Pacific Corp.,
First Lien Term Loan | | | | 2.251% to 3.506% | | 3/31/10 | | | 727,109 | | | 701,206 | |
| | | | | | | | | | | | | |
| | | | | |
Road and Rail | | N.M. | | | | | | | | | | | |
Swift Transportation,
Term Loan | | | | 3.563% | | 1/8/10 | | | 878,721 | | | 795,609 | |
| | | | | | | | | | | | | |
| | | | | |
Semiconductors and Semiconductor Equipment | | N.M. | | | | | | | | | | | |
Sensata Technologies,
Term Loan, Tranche B | | | | 2.031% | | 1/29/10 | | | 1,447,500 | | | 1,283,752 | |
| | | | | | | | | | | | | |
Total Loan Participations and Assignments
(Cost—$56,461,776) | | | | | | | | | | | | 50,898,411 | |
73
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Municipal Bonds | | 0.1% | | | | | | | | | | | |
| | | | | |
California | | 0.1% | | | | | | | | | | | |
State of California Series 2009 | | | | 7.300% | | 10/1/39 | | $ | 8,300,000 | | $ | 7,817,438 | |
| | | | | | | | | | | | | |
Total Municipal Bonds
(Cost—$8,368,166) | | | | | | | | | | | | 7,817,438 | |
U.S. Government and Agency Obligations | | 20.8% | | | | | | | | | | | |
| | | | | |
Fixed Rate Securities | | 17.7% | | | | | | | | | | | |
Fannie Mae | | | | 6.250% | | 2/1/11 | | | 6,960,000 | | | 7,311,967 | L |
Fannie Mae | | | | 5.250% | | 8/1/12 | | | 6,110,000 | | | 6,520,164 | L |
Fannie Mae | | | | 2.625% | | 11/20/14 | | | 52,500,000 | | | 52,092,915 | L |
Fannie Mae | | | | 0.000% | | 10/9/19 | | | 58,470,000 | | | 31,749,210 | J,L |
Fannie Mae | | | | 5.000% | | 5/20/24 | | | 75,000,000 | | | 73,675,875 | L |
Federal Home Loan Bank | | | | 5.500% | | 7/15/36 | | | 3,040,000 | | | 3,118,608 | |
Freddie Mac | | | | 4.875% | | 2/9/10 | | | 20,000,000 | | | 20,092,000 | L |
Tennessee Valley Authority | | | | 7.125% | | 5/1/30 | | | 840,000 | | | 1,030,314 | |
Tennessee Valley Authority | | | | 5.980% | | 4/1/36 | | | 120,000 | | | 127,574 | |
Tennessee Valley Authority | | | | 5.250% | | 9/15/39 | | | 7,700,000 | | | 7,629,584 | |
United States Treasury Bonds | | | | 8.750% | | 5/15/17 | | | 10,000 | | | 13,516 | |
United States Treasury Bonds | | | | 3.500% | | 2/15/39 | | | 37,140,000 | | | 30,419,963 | |
United States Treasury Bonds | | | | 4.250% | | 5/15/39 | | | 130,740,000 | | | 122,650,462 | |
United States Treasury Bonds | | | | 4.500% | | 8/15/39 | | | 137,185,000 | | | 134,076,937 | |
United States Treasury Bonds | | | | 4.375% | | 11/15/39 | | | 134,430,000 | | | 128,674,783 | |
United States Treasury Notes | | | | 1.125% | | 12/15/12 | | | 200,000 | | | 196,796 | |
United States Treasury Notes | | | | 2.125% | | 11/30/14 | | | 295,460,000 | | | 288,466,462 | |
United States Treasury Notes | | | | 3.125% | | 10/31/16 | | | 75,520,000 | | | 74,570,109 | |
United States Treasury Notes | | | | 2.750% | | 11/30/16 | | | 96,500,000 | | | 92,903,831 | |
United States Treasury Notes | | | | 3.250% | | 12/31/16 | | | 16,670,000 | | | 16,529,339 | |
United States Treasury Notes | | | | 2.750% | | 2/15/19 | | | 32,000,000 | | | 29,460,000 | |
United States Treasury Notes | | | | 3.125% | | 5/15/19 | | | 7,595,000 | | | 7,192,700 | |
United States Treasury Notes | | | | 3.625% | | 8/15/19 | | | 103,420,000 | | | 101,674,788 | |
United States Treasury Notes | | | | 3.375% | | 11/15/19 | | | 206,975,000 | | | 199,085,113 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 1,429,263,010 | |
| | | | | | | | | | | | | |
Stripped Securities | | 0.2% | | | | | | | | | | | |
United States Treasury Bonds | | | | 0.000% | | 11/15/24 | | | 510,000 | | | 251,776 | K2 |
United States Treasury Notes | | | | 0.000% | | 5/15/18 | | | 17,210,000 | | | 12,540,135 | K2 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 12,791,911 | |
| | | | | | | | | | | | | |
74
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
U.S. Government and Agency Obligations—Continued | | | | | | | | | |
| | | | | |
Treasury Inflation-Protected SecuritiesM | | 2.9% | | | | | | | | | | | |
United States Treasury Inflation-Protected Security | | | | 2.375% | | 1/15/25 | | $ | 38,785,114 | | $ | 40,924,346 | |
United States Treasury Inflation-Protected Security | | | | 2.000% | | 1/15/26 | | | 37,629,787 | | | 37,791,482 | |
United States Treasury Inflation-Protected Security | | | | 2.375% | | 1/15/27 | | | 94,576,384 | | | 99,526,890 | |
United States Treasury Inflation-Protected Security | | | | 1.750% | | 1/15/28 | | | 12,980,799 | | | 12,447,366 | |
United States Treasury Inflation-Protected Security | | | | 3.625% | | 4/15/28 | | | 6,642,554 | | | 8,210,303 | |
United States Treasury Inflation-Protected Security | | | | 3.875% | | 4/15/29 | | | 29,363,057 | | | 37,784,294 | N |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 236,684,681 | |
| | | | | | | | | | | | | |
Total U.S. Government and Agency Obligations
(Cost—$1,702,086,544) | | | | | | | | | | | | 1,678,739,602 | |
U.S. Government Agency Mortgage-Backed Securities | | 26.7% | | | | | | | | | | | |
| | | | | |
Fixed Rate Securities | | 23.9% | | | | | | | | | | | |
Fannie Mae | | | | 6.500% | | 5/1/14 to 4/1/36 | | | 9,244,274 | | | 9,945,762 | L |
Fannie Mae | | | | 5.500% | | 1/1/17 to 3/1/37 | | | 264,527,420 | | | 277,580,952 | L |
Fannie Mae | | | | 9.500% | | 11/1/21 | | | 855 | | | 947 | L |
Fannie Mae | | | | 6.000% | | 4/1/24 to 8/1/37 | | | 7,256,699 | | | 7,730,540 | L |
Fannie Mae | | | | 4.500% | | 12/1/24 | | | 15,500,000 | | | 15,940,789 | L,O |
Fannie Mae | | | | 5.000% | | 12/1/24 | | | 34,500,000 | | | 36,052,500 | L,O |
Fannie Mae | | | | 6.000% | | 12/1/24 to 12/1/39 | | | 74,430,000 | | | 78,891,299 | L,O |
Fannie Mae | | | | 7.000% | | 8/1/29 to 6/1/32 | | | 3,042,591 | | | 3,373,675 | L |
Fannie Mae | | | | 7.500% | | 11/1/29 | | | 14,990 | | | 16,912 | L |
Fannie Mae | | | | 5.000% | | 10/1/35 | | | 1,077,639,416 | | | 1,110,529,919 | L |
Fannie Mae | | | | 6.500% | | 12/1/39 | | | 119,200,000 | | | 127,655,810 | L,O |
Freddie Mac | | | | 6.000% | | 4/1/11 to 11/1/36 | | | 4,103,157 | | | 4,380,292 | L |
Freddie Mac | | | | 5.500% | | 12/1/13 to 7/1/20 | | | 805,613 | | | 858,515 | L |
Freddie Mac | | | | 7.000% | | 10/1/16 to 4/1/32 | | | 963,190 | | | 1,063,605 | L |
Freddie Mac | | | | 6.500% | | 7/1/29 | | | 230,100 | | | 249,084 | L |
Freddie Mac | | | | 5.000% | | 11/1/36 | | | 35,890,738 | | | 36,873,994 | L |
Government National Mortgage Association | | | | 7.500% | | 3/15/23 to 9/15/31 | | | 187,222 | | | 210,725 | |
75
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
U.S. Government Agency Mortgage-Backed Securities—Continued | | | | | | | |
| | | | |
Fixed Rate Securities—Continued | | | | | | | | | | | |
Government National Mortgage Association | | | | 7.000% | | 7/15/23 to 7/15/31 | | $ | 490,972 | | $ | 545,572 | |
Government National Mortgage Association | | | | 6.500% | | 4/15/28 to 4/15/33 | | | 10,271,453 | | | 11,064,847 | |
Government National Mortgage Association | | | | 6.000% | | 1/15/29 to 11/15/35 | | | 48,833,427 | | | 52,026,369 | |
Government National Mortgage Association | | | | 8.000% | | 12/15/30 to 1/15/31 | | | 23,376 | | | 26,890 | |
Government National Mortgage Association | | | | 5.000% | | 7/15/33 to 11/15/35 | | | 53,950,663 | | | 55,796,204 | |
Government National Mortgage Association | | | | 5.500% | | 7/15/33 to 6/15/35 | | | 13,960,962 | | | 14,725,979 | |
Government National Mortgage Association | | | | 4.000% | | 12/1/39 | | | 85,000,000 | | | 81,909,730 | O |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 1,927,450,911 | |
| | | | | | | | | | | | | |
Indexed SecuritiesB | | 2.0% | | | | | | | | | | | |
Fannie Mae | | | | 4.610% | | 5/1/35 | | | 3,552,204 | | | 3,681,150 | L |
Fannie Mae | | | | 4.075% | | 6/1/35 | | | 9,805,046 | | | 10,178,637 | L |
Fannie Mae | | | | 5.330% | | 6/1/35 | | | 2,456,439 | | | 2,590,416 | L |
Fannie Mae | | | | 3.344% | | 8/1/35 | | | 1,157,166 | | | 1,189,856 | L |
Fannie Mae | | | | 3.256% | | 9/1/35 | | | 2,562,380 | | | 2,623,195 | L |
Fannie Mae | | | | 3.371% | | 9/1/35 | | | 5,571,419 | | | 5,721,278 | L |
Fannie Mae | | | | 3.147% | | 10/1/35 | | | 1,810,620 | | | 1,860,296 | L |
Fannie Mae | | | | 3.187% | | 10/1/35 | | | 2,473,163 | | | 2,528,670 | L |
Fannie Mae | | | | 3.194% | | 10/1/35 | | | 2,111,138 | | | 2,164,914 | L |
Fannie Mae | | | | 3.838% | | 10/1/35 | | | 1,966,618 | | | 2,045,867 | L |
Fannie Mae | | | | 2.628% | | 11/1/35 | | | 309,696 | | | 311,462 | L |
Fannie Mae | | | | 2.629% | | 11/1/35 | | | 268,856 | | | 270,389 | L |
Fannie Mae | | | | 2.634% | | 11/1/35 | | | 250,278 | | | 251,711 | L |
Fannie Mae | | | | 2.638% | | 11/1/35 | | | 242,305 | | | 243,693 | L |
Fannie Mae | | | | 2.657% | | 11/1/35 | | | 269,195 | | | 270,751 | L |
Fannie Mae | | | | 5.298% | | 12/1/35 | | | 3,481,985 | | | 3,668,972 | L |
Fannie Mae | | | | 5.500% | | 2/1/36 | | | 564,502 | | | 591,603 | L |
Fannie Mae | | | | 5.494% | | 2/1/37 | | | 24,787,093 | | | 26,110,657 | L |
Fannie Mae | | | | 5.736% | | 8/1/37 | | | 949,086 | | | 1,007,376 | L |
Fannie Mae | | | | 5.498% | | 11/1/37 | | | 368,838 | | | 391,025 | L |
Freddie Mac | | | | 4.668% | | 8/1/35 | | | 11,271,698 | | | 11,753,346 | L |
Freddie Mac | | | | 4.772% | | 9/1/35 | | | 4,344,494 | | | 4,512,171 | L |
Freddie Mac | | | | 5.154% | | 9/1/35 | | | 1,499,801 | | | 1,577,598 | L |
76
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
U.S. Government Agency Mortgage-Backed Securities—Continued | | | | | | | |
| | | | |
Indexed Securities—Continued | | | | | | | | | | | |
Freddie Mac | | | | 3.147% | | 10/1/35 | | $ | 2,716,566 | | $ | 2,785,617 | L |
Freddie Mac | | | | 5.105% | | 12/1/35 | | | 5,099,522 | | | 5,336,387 | L |
Freddie Mac | | | | 5.188% | | 12/1/35 | | | 351,567 | | | 369,729 | L |
Freddie Mac | | | | 5.692% | | 2/1/37 | | | 39,792 | | | 42,097 | L |
Freddie Mac | | | | 5.777% | | 5/1/37 | | | 4,750,835 | | | 5,039,088 | L |
Freddie Mac | | | | 5.825% | | 5/1/37 | | | 12,415,717 | | | 13,191,258 | L |
Freddie Mac | | | | 5.883% | | 5/1/37 | | | 84,694 | | | 89,956 | L |
Freddie Mac | | | | 5.904% | | 5/1/37 | | | 438,274 | | | 466,494 | L |
Freddie Mac | | | | 5.375% | | 6/1/37 | | | 845,392 | | | 892,434 | L |
Freddie Mac | | | | 5.814% | | 6/1/37 | | | 2,053,706 | | | 2,178,898 | L |
Freddie Mac | | | | 5.905% | | 7/1/37 | | | 31,980,888 | | | 34,085,437 | L |
Freddie Mac | | | | 5.846% | | 8/1/37 | | | 10,734,675 | | | 11,396,352 | L |
Freddie Mac | | | | 6.083% | | 9/1/37 | | | 219,688 | | | 234,136 | L |
Government National Mortgage Association | | | | 0.633% | | 8/20/31 | | | 1,894 | | | 1,881 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 161,654,797 | |
| | | | | | | | | | | | | |
Stripped Securities | | 0.8% | | | | | | | | | | | |
Financing Corp. | | | | 0.000% | | 11/30/17 to 4/5/19 | | | 1,570,000 | | | 1,089,343 | H,K2 |
Financing Corp. | | | | 0.000% | | 2/8/18 to 9/26/19 | | | 93,804,000 | | | 63,413,566 | K2 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 64,502,909 | |
| | | | | | | | | | | | | |
Total U.S. Government Agency Mortgage-Backed Securities
(Cost—$2,086,306,358) | | | | | | | | | | | | 2,153,608,617 | |
Yankee BondsP | | 7.5% | | | | | | | | | | | |
| | | | | |
Aerospace and Defense | | 0.1% | | | | | | | | | | | |
Systems 2001 Asset Trust | | | | 6.664% | | 9/15/13 | | | 6,978,700 | | | 7,139,349 | A |
| | | | | | | | | | | | | |
| | | | | |
Beverages | | 0.2% | | | | | | | | | | | |
Diageo Finance BV | | | | 3.250% | | 1/15/15 | | | 11,360,000 | | | 11,284,411 | |
| | | | | | | | | | | | | |
| | | | | |
Capital Markets | | N.M. | | | | | | | | | | | |
Credit Suisse Guernsey Ltd. | | | | 5.860% | | 5/29/49 | | | 150,000 | | | 130,500 | D |
| | | | | | | | | | | | | |
| | | | | |
Commercial Banks | | 2.2% | | | | | | | | | | | |
Barclays Bank PLC | | | | 5.200% | | 7/10/14 | | | 3,955,000 | | | 4,192,332 | |
Barclays Bank PLC | | | | 6.050% | | 12/4/17 | | | 11,715,000 | | | 11,922,379 | A |
Commonwealth Bank of Australia | | | | 3.750% | | 10/15/14 | | | 10,260,000 | | | 10,284,952 | A |
77
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Yankee Bonds—Continued | | | | | | | | | | | |
| | | | |
Commercial Banks—Continued | | | | | | | | | | | |
Commonwealth Bank of Australia | | | | 5.000% | | 10/15/19 | | $ | 4,390,000 | | $ | 4,358,528 | A |
Credit Agricole SA | | | | 8.375% | | 12/31/49 | | | 22,940,000 | | | 24,316,400 | A,D |
Glitnir Banki Hf | | | | 6.330% | | 7/28/11 | | | 10,670,000 | | | 2,240,700 | A,C,H |
Glitnir Banki Hf | | | | 6.375% | | 9/25/12 | | | 18,040,000 | | | 3,788,400 | A,C,H |
HBOS Capital Funding LP | | | | 6.071% | | 6/30/49 | | | 60,000 | | | 39,000 | A,D |
HSBC Capital Funding LP | | | | 4.610% | | 6/27/49 | | | 2,090,000 | | | 1,783,999 | A,D |
Hypothekenbank in Essen AG | | | | 5.000% | | 1/20/12 | | | 1,380,000 | | | 1,462,383 | A |
ICICI Bank Ltd. | | | | 6.375% | | 4/30/22 | | | 4,969,000 | | | 4,460,736 | A,D |
ICICI Bank Ltd. | | | | 6.375% | | 4/30/22 | | | 7,003,000 | | | 6,286,684 | D |
Kaupthing Bank Hf | | | | 5.750% | | 10/4/11 | | | 5,550,000 | | | 1,373,625 | A,C,H |
Kaupthing Bank Hf | | | | 7.625% | | 2/28/15 | | | 80,340,000 | | | 19,884,150 | A,C,H |
Korea Development Bank | | | | 5.500% | | 11/13/12 | | | 60,000 | | | 63,736 | |
Landsbanki Islands Hf | | | | 6.100% | | 8/25/11 | | | 28,520,000 | | | 1,283,400 | A,C,H |
Nordea Bank AB | | | | 3.700% | | 11/13/14 | | | 14,170,000 | | | 14,142,680 | A |
Rabobank Nederland NV | | | | 11.000% | | 6/30/19 | | | 13,172,000 | | | 16,060,014 | A,D |
Resona Preferred Global Securities | | | | 7.191% | | 12/29/49 | | | 12,200,000 | | | 9,978,758 | A,D |
Royal Bank of Scotland Group PLC | | | | 6.400% | | 10/21/19 | | | 17,600,000 | | | 17,543,504 | |
Royal Bank of Scotland Group PLC | | | | 7.640% | | 3/31/49 | | | 7,500,000 | | | 4,050,000 | D |
RSHB Capital SA | | | | 6.299% | | 5/15/17 | | | 5,615,000 | | | 5,654,305 | A |
Shinsei Finance Cayman Ltd. | | | | 6.418% | | 1/29/49 | | | 26,025,000 | | | 15,159,563 | A,D |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 180,330,228 | |
| | | | | | | | | | | | | |
Consumer Finance | | 0.1% | | | | | | | | | | | |
Aiful Corp. | | | | 5.000% | | 8/10/10 | | | 10,500,000 | | | 9,030,000 | A |
| | | | | | | | | | | | | |
| | | | | |
Diversified Financial Services | | 0.3% | | | | | | | | | | | |
European Investment Bank | | | | 4.000% | | 3/3/10 | | | 100,000 | | | 100,622 | |
European Investment Bank | | | | 4.625% | | 3/21/12 | | | 50,000 | | | 53,294 | |
MUFG Capital Finance 1 Ltd. | | | | 6.346% | | 7/29/49 | | | 7,400,000 | | | 6,735,080 | D |
Pemex Finance Ltd. | | | | 9.030% | | 2/15/11 | | | 2,500 | | | 2,575 | |
SMFG Preferred Capital | | | | 6.078% | | 1/29/49 | | | 350,000 | | | 300,696 | A,D |
TNK-BP Finance SA | | | | 7.500% | | 7/18/16 | | | 436,000 | | | 448,535 | |
TNK-BP Finance SA | | | | 7.500% | | 7/18/16 | | | 5,649,000 | | | 5,790,225 | A |
TNK-BP Finance SA | | | | 6.625% | | 3/20/17 | | | 7,445,000 | | | 7,277,487 | A |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 20,708,514 | |
| | | | | | | | | | | | | |
Diversified Telecommunication Services | | 0.9% | | | | | | | | | | | |
British Telecommunications PLC | | | | 9.125% | | 12/15/10 | | | 2,315,000 | | | 2,480,106 | E |
British Telecommunications PLC | | | | 9.625% | | 12/15/30 | | | 11,210,000 | | | 14,283,961 | E |
Deutsche Telekom International Finance BV | | | | 5.750% | | 3/23/16 | | | 20,180,000 | | | 21,428,194 | |
78
Annual Report to Shareholders
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Yankee Bonds—Continued | | | | | | | | | | | |
| | | | |
Diversified Telecommunication Services—Continued | | | | | | | | | | | |
Intelsat Jackson Holdings Ltd. | | | | 9.500% | | 6/15/16 | | $ | 1,367,000 | | $ | 1,462,690 | |
Intelsat Jackson Holdings Ltd. | | | | 8.500% | | 11/1/19 | | | 2,460,000 | | | 2,533,800 | A |
Koninklijke (Royal) KPN NV | | | | 8.000% | | 10/1/10 | | | 14,800,000 | | | 15,540,000 | |
Telecom Italia Capital SpA | | | | 5.250% | | 11/15/13 | | | 1,260,000 | | | 1,325,257 | |
Telecom Italia Capital SpA | | | | 4.950% | | 9/30/14 | | | 3,730,000 | | | 3,866,059 | |
Telecom Italia Capital SpA | | | | 5.250% | | 10/1/15 | | | 6,280,000 | | | 6,566,035 | |
Wind Acquisition Finance SA | | | | 12.000% | | 12/1/15 | | | 4,800,000 | | | 5,136,000 | A |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 74,622,102 | |
| | | | | | | | | | | | | |
Electric Utilities | | N.M. | | | | | | | | | | | |
Hydro-Quebec | | | | 6.300% | | 5/11/11 | | | 1,720,000 | | | 1,837,158 | |
| | | | | | | | | | | | | |
| | | | | |
Energy Equipment and Services | | 0.2% | | | | | | | | | | | |
Compagnie Generale de Geophysique-Veritas | | | | 7.500% | | 5/15/15 | | | 1,970,000 | | | 1,955,225 | |
Compagnie Generale de Geophysique-Veritas | | | | 7.750% | | 5/15/17 | | | 8,594,000 | | | 8,529,545 | |
Transocean Inc. | | | | 5.250% | | 3/15/13 | | | 360,000 | | | 385,790 | |
Transocean Ltd. | | | | 6.000% | | 3/15/18 | | | 6,015,000 | | | 6,417,650 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 17,288,210 | |
| | | | | | | | | | | | | |
Food and Staples Retailing | | N.M. | | | | | | | | | | | |
Delhaize Group | | | | 6.500% | | 6/15/17 | | | 120,000 | | | 130,324 | |
| | | | | | | | | | | | | |
| | | | | |
Foreign Governments | | 0.4% | | | | | | | | | | | |
Province of British Columbia | | | | 4.300% | | 5/30/13 | | | 180,000 | | | 188,141 | |
Russian Federation | | | | 7.500% | | 3/31/30 | | | 19,632,840 | | | 22,160,568 | |
United Mexican States | | | | 5.625% | | 1/15/17 | | | 374,000 | | | 389,895 | |
United Mexican States | | | | 6.750% | | 9/27/34 | | | 7,443,000 | | | 7,852,365 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 30,590,969 | |
| | | | | | | | | | | | | |
Industrial Conglomerates | | 0.8% | | | | | | | | | | | |
Tyco International Group SA | | | | 6.750% | | 2/15/11 | | | 35,798,000 | | | 37,571,898 | |
Tyco International Group SA | | | | 6.375% | | 10/15/11 | | | 15,948,000 | | | 17,101,041 | |
Tyco International Group SA | | | | 6.000% | | 11/15/13 | | | 5,398,000 | | | 5,912,883 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 60,585,822 | |
| | | | | | | | | | | | | |
Insurance | | 0.3% | | | | | | | | | | | |
Merna Reinsurance Ltd. | | | | 2.001% | | 6/30/12 | | | 26,450,000 | | | 26,055,895 | A,B |
| | | | | | | | | | | | | |
79
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | VALUE | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Yankee Bonds—Continued | | | | | | | | | | | |
| | | | | |
Media | | N.M. | | | | | | | | | | | |
Rogers Cable Inc. | | | | 7.875% | | 5/1/12 | | $ | 687,000 | | $ | 769,921 | |
Rogers Cable Inc. | | | | 6.750% | | 3/15/15 | | | 130,000 | | | 146,971 | |
Sun Media Corp. | | | | 7.625% | | 2/15/13 | | | 1,125,000 | | | 1,025,156 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 1,942,048 | |
| | | | | | | | | | | | | |
Metals and Mining | | 0.8% | | | | | | | | | | | |
Barrick Gold Corp. | | | | 6.950% | | 4/1/19 | | | 7,165,000 | | | 8,067,382 | |
BHP Billiton Finance USA Ltd. | | | | 6.500% | | 4/1/19 | | | 23,410,000 | | | 26,852,604 | |
Corporacion Nacional del Cobre-Codelco | | | | 4.750% | | 10/15/14 | | | 2,590,000 | | | 2,773,098 | A |
Rio Tinto Finance USA Ltd. | | | | 5.875% | | 7/15/13 | | | 3,732,000 | | | 4,026,966 | |
Rio Tinto Finance USA Ltd. | | | | 6.500% | | 7/15/18 | | | 6,528,000 | | | 7,170,877 | |
Teck Resources Ltd. | | | | 9.750% | | 5/15/14 | | | 800,000 | | | 923,000 | |
Teck Resources Ltd. | | | | 10.250% | | 5/15/16 | | | 640,000 | | | 745,600 | |
Teck Resources Ltd. | | | | 10.750% | | 5/15/19 | | | 1,330,000 | | | 1,589,350 | |
Vale Overseas Ltd. | | | | 8.250% | | 1/17/34 | | | 20,000 | | | 22,910 | |
Vale Overseas Ltd. | | | | 6.875% | | 11/21/36 | | | 14,286,000 | | | 14,274,014 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 66,445,801 | |
| | | | | | | | | | | | | |
Oil, Gas and Consumable Fuels | | 1.0% | | | | | | | | | | | |
Anadarko Finance Co. | | | | 7.500% | | 5/1/31 | | | 16,297,000 | | | 18,282,724 | |
BP Capital Markets PLC | | | | 5.250% | | 11/7/13 | | | 19,410,000 | | | 21,141,935 | |
BP Capital Markets PLC | | | | 3.875% | | 3/10/15 | | | 6,440,000 | | | 6,616,546 | |
Conoco Funding Co. | | | | 6.350% | | 10/15/11 | | | 590,000 | | | 641,897 | |
Conoco Funding Co. | | | | 7.250% | | 10/15/31 | | | 810,000 | | | 938,593 | |
Gazprom | | | | 6.212% | | 11/22/16 | | | 1,996,000 | | | 1,911,170 | A |
OPTI Canada Inc. | | | | 8.250% | | 12/15/14 | | | 2,405,000 | | | 1,981,119 | |
Petrobras International Finance Co. | | | | 6.125% | | 10/6/16 | | | 6,970,000 | | | 7,475,325 | |
Petrobras International Finance Co. | | | | 5.750% | | 1/20/20 | | | 4,737,000 | | | 4,818,889 | |
Shell International Finance BV | | | | 6.375% | | 12/15/38 | | | 11,845,000 | | | 13,353,792 | |
Teekay Shipping Corp. | | | | 8.875% | | 7/15/11 | | | 1,729,000 | | | 1,791,676 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 78,953,666 | |
| | | | | | | | | | | | | |
Road and Rail | | 0.1% | | | | | | | | | | | |
Kansas City Southern de Mexico SA de CV | | | | 12.500% | | 4/1/16 | | | 6,295,000 | | | 7,239,250 | |
| | | | | | | | | | | | | |
| | | | | |
Thrifts and Mortgage Finance | | N.M. | | | | | | | | | | | |
Willow Re Ltd. | | | | 6.295% | | 6/16/10 | | | 250,000 | | | 165,000 | A,B,C |
| | | | | | | | | | | | | |
| | | | | |
Wireless Telecommunication Services | | 0.1% | | | | | | | | | | | |
America Movil SA de CV | | | | 5.625% | | 11/15/17 | | | 6,290,000 | | | 6,512,282 | |
Rogers Wireless Inc. | | | | 6.375% | | 3/1/14 | | | 1,850,000 | | | 2,048,309 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | 8,560,591 | |
| | | | | | | | | | | | | |
Total Yankee Bonds (Cost—$699,684,847) | | | | | | | | | | | | 603,039,838 | |
80
Annual Report to Shareholders
| | | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | | VALUE | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Foreign Government Obligations | | 1.0% | | | | | | | | | | | | |
Brazil Notas do Tesouro Nacional
Series F | | | | 10.000% | | 1/1/12 | | | 148,902,000 | BRL | | $ | 82,806,960 | |
| | | | | | | | | | | | | | |
Total Foreign Government Obligations (Cost—$61,174,148) | | | | | | | | | | | | | 82,806,960 | |
Common Stocks and Equity Interests | | N.M. | | | | | | | | | | | | |
| | | | | |
Media | | N.M. | | | | | | | | | | | | |
SuperMedia, Inc. | | | | | | | | | 1,788 | shs | | | 69,160 | Q |
| | | | | | | | | | | | | | |
Total Common Stocks and Equity Interests (Cost—$117,183) | | | | | | | | | | | | | 69,160 | |
Preferred Stocks | | 1.2% | | | | | | | | | | | | |
AES Trust III | | | | 6.750% | | | | | 71,200 | | | | 3,293,000 | R |
Fannie Mae | | | | 5.375% | | | | | 29 | | | | 79,750 | L,Q,R |
Fannie Mae | | | | 7.000% | | | | | 53,100 | | | | 71,685 | B,L,Q |
Fannie Mae | | | | 8.250% | | | | | 1,193,775 | | | | 1,313,152 | D,L,Q |
Freddie Mac | | | | 8.375% | | | | | 1,737,615 | | | | 1,824,495 | D,L,Q |
Motors Liquidation Co. | | | | 1.500% | | | | | 836,487 | | | | 4,726,152 | Q |
Motors Liquidation Co. | | | | 4.500% | | | | | 25,191 | | | | 141,070 | Q,R |
Motors Liquidation Co. | | | | 5.250% | | | | | 3,790,025 | | | | 21,603,142 | Q,R |
Motors Liquidation Co. | | | | 6.250% | | | | | 8,565,662 | | | | 48,395,990 | Q,R |
Motors Liquidation Co. | | | | 7.250% | | | | | 127,900 | | | | 652,290 | Q |
Motors Liquidation Co. | | | | 7.250% | | | | | 56,300 | | | | 301,205 | Q |
Motors Liquidation Co. | | | | 7.250% | | | | | 45,400 | | | | 236,080 | Q |
Motors Liquidation Co. | | | | 7.375% | | | | | 327,800 | | | | 1,763,564 | Q |
Motors Liquidation Co. | | | | 7.500% | | | | | 259,700 | | | | 1,389,395 | Q |
GMAC Inc. | | | | 7.000% | | | | | 17,342 | | | | 11,430,546 | A |
Home Ownership Funding Corp. | | | | 1.000% | | | | | 1,500 | | | | 144,122 | A,G,H |
Home Ownership Funding Corp. II | | | | 1.000% | | | | | 1,300 | | | | 124,906 | A,G,H |
| | | | | | | | | | | | | | |
Total Preferred Stocks
(Cost—$211,683,738) | | | | | | | | | | | | | 97,490,544 | |
Warrants | | N.M. | | | | | | | | | | | | |
Bear Stearns Trust Certficates 2001-2, Strike Price $97.72 | | | | | | | | | 10,000 | wts | | $ | 119,111 | A,G,Q |
| | | | | | | | | | | | | | |
Total Warrants (Cost—$55,800) | | | | | | | | | | | | | 119,111 | |
| | | | | | | | | | | | | | |
Total Long-Term Securities
(Cost—$8,559,687,516) | | | | | | | | | | | | | 7,892,129,935 | |
Short-Term Securities | | 5.9% | | | | | | | | | | | | |
| | | | | |
U.S. Government and Agency Obligations | | 3.9% | | | | | | | | | | | | |
Fannie Mae | | | | 0.22% | | 1/11/10 | | $ | 100,000,000 | | | | 99,993,889 | L,T |
Freddie Mac | | | | 0.11% | | 1/27/10 | | | 775,000 | | | | 774,938 | L,N,T |
81
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| | | | | | | | | | | | | | |
| | | % OF
NET ASSETS | | RATE | | MATURITY
DATE | | PAR/
SHARES† | | | VALUE | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Short-Term Securities—Continued | | | | | | | | | | | | |
| | | |
U.S. Government and Agency Obligations—Continued | | | | | | | | | | |
United States Treasury Bill | | | | 0.16% to 0.17% | | 4/29/10 | | $ | 80,000,000 | | | $ | 79,977,760 | T |
United States Treasury Bill | | | | 0.16% | | 6/17/10 | | | 130,000,000 | | | | 129,889,240 | T |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | 310,635,827 | |
| | | | | | | | | | | | | | |
Options Purchased | | 0.2% | | | | | | | | | | | | |
Credit Suisse First Boston Swaption Put, April 2011, Strike Price $5.18 | | | | | | | | | 79,800,000 | S | | | 2,723,247 | |
Credit Suisse First Boston Swaption Put, April 2012, Strike Price $5.20 | | | | | | | | | 40,000,000 | S | | | 3,564,916 | |
Credit Suisse First Boston Swaption Put, May 2011, Strike Price $5.12 | | | | | | | | | 40,000,000 | S | | | 1,484,356 | |
U.S. Treasury Note Futures Put, February 2010, Strike Price $116.50 | | | | | | | | | 2,621 | S | | | 3,685,781 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | 11,458,300 | |
| | | | | | | | | | | | | | |
Repurchase Agreement | | 1.8% | | | | | | | | | | | | |
Morgan Stanley repurchase agreement dated 12/31/09, 0.005% due 1/4/10; Proceeds at maturity—$147,580,082; (Fully collateralized by U.S. government agency obligations, 2.150% to 3.125% due 7/9/12 to 9/29/14; Market value—$150,531,566) | | | | | | | | | 147,580,000 | | | | 147,580,000 | |
| | | | | | | | | | | | | | |
Total Short-Term Securities
(Cost—$463,335,672) | | | | | | | | | | | | | 469,674,127 | |
Total Investments (Cost—$9,023,023,188)U | | 103.8% | | | | | | | | | | | 8,361,804,062 | |
Other Assets Less Liabilities | | (3.8)% | | | | | | | | | | | (302,280,976 | ) |
| | | | | | | | | | | | | | |
| | | | | |
Net Assets | | 100.0% | | | | | | | | | | $ | 8,059,523,086 | |
| | | | | | | | | | | | | | |
| | | | | | | |
| | | EXPIRATION | | ACTUAL
CONTRACTS | | APPRECIATION/
(DEPRECIATION) |
Futures Contracts PurchasedV | | | | | | | |
Eurodollar Futures | | March 2010 | | 5,437 | | $ | 10,844,285 |
Eurodollar Futures | | June 2010 | | 900 | | | 1,594,700 |
82
Annual Report to Shareholders
| | | | | | | | |
| | | EXPIRATION | | ACTUAL
CONTRACTS | | APPRECIATION/
(DEPRECIATION) | |
| | | |
Futures Contracts Purchased—Continued | | | | | | | | |
Eurodollar Futures | | September 2010 | | 340 | | $ | 643,312 | |
U.S. Treasury Bond Futures | | March 2010 | | 1,953 | | | (8,484,761 | ) |
U.S. Treasury Note Futures | | March 2010 | | 2,728 | | | (2,707,725 | ) |
U.S. Treasury Note Futures | | March 2010 | | 12,953 | | | (23,377,108 | ) |
| | | | | | | | |
| | | | | | $ | (21,487,297 | ) |
| | | | | | | | |
Futures Contracts WrittenV | | | | | | | | |
U.S. Treasury Note Futures | | March 2010 | | 5,089 | | $ | 14,183,774 | |
| | | | | | | | |
Options WrittenV | | | | | | | | |
Banc of America Swaption Call, Strike Price $3.58 | | February 2010 | | 86,940,000 | | $ | 1,501,462 | |
Banc of America Swaption Put, Strike Price $3.58 | | February 2010 | | 86,940,000 | | | (1,868,497 | ) |
Barclays Swaption Call, Strike Price $4.70 | | September 2014 | | 1,370,000 | | | 15,802 | |
Barclays Swaption Call, Strike Price $4.95 | | October 2013 | | 124,690,000 | | | 136,224 | |
Barclays Swaption Put, Strike Price $4.70 | | September 2014 | | 1,370,000 | | | (9,399 | ) |
Barclays Swaption Put, Strike Price $4.95 | | October 2013 | | 124,690,000 | | | (2,456,381 | ) |
Credit Suisse First Boston Swaption Call, Strike
Price $4.70 | | August 2014 | | 61,530,000 | | | 706,309 | |
Credit Suisse First Boston Swaption Put, Strike
Price $4.70 | | August 2014 | | 61,530,000 | | | (424,434 | ) |
Credit Suisse First Boston Swaption Put, Strike
Price $5.03 | | April 2010 | | 40,000,000 | | | (38,828 | ) |
Deutsche Bank Swaption Call, Strike Price $4.70 | | September 2014 | | 17,800,000 | | | 207,979 | |
Deutsche Bank Swaption Put, Strike Price $4.70 | | September 2014 | | 17,800,000 | | | (119,454 | ) |
Eurodollar Futures Call, Strike Price $99.00 | | March 2010 | | 738 | | | (716,940 | ) |
Eurodollar Futures Call, Strike Price $99.13 | | September 2010 | | 1,192 | | | 346,201 | |
Eurodollar Futures Call, Strike Price $99.38 | | June 2010 | | 969 | | | 33,376 | |
Eurodollar Futures Put, Strike Price $98.75 | | March 2010 | | 447 | | | 274,346 | |
Eurodollar Futures Put, Strike Price $98.88 | | March 2010 | | 291 | | | 169,508 | |
Eurodollar Futures Put, Strike Price $99.13 | | September 2010 | | 1,192 | | | (422,549 | ) |
Eurodollar Futures Put, Strike Price $99.38 | | March 2010 | | 464 | | | 157,117 | |
Eurodollar Futures Put, Strike Price $99.38 | | June 2010 | | 968 | | | (64,996 | ) |
JP Morgan Swaption Call, Strike Price $4.86 | | October 2013 | | 124,700,000 | | | 647,455 | |
JP Morgan Swaption Put, Strike Price $4.86 | | October 2013 | | 124,700,000 | | | (2,674,204 | ) |
U.S. Treasury Note Futures Put, Strike Price $115.00 | | February 2010 | | 2,621 | | | (1,400,925 | ) |
U.S. Treasury Note Futures Put, Strike Price $116.00 | | March 2010 | | 429 | | | (282,926 | ) |
| | | | | | | | |
| | | | | | $ | (6,283,754 | ) |
| | | | | | | | |
| | | | | | | | | |
N.M.—Not Meaningful.
ARule 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, unless otherwise noted, represent 7.06% of net assets.
BIndexed Security – The rates of interest earned on these securities are tied to the London Interbank Offered Rate (“LIBOR”), the Euro Interbank Offered Rate (“EURIBOR”) Index, the Consumer Price Index (“CPI”), the one-year Treasury Bill Rate or the ten-year Japanese Government Bond Rate. The coupon rates are the rates as of December 31, 2009.
83
Annual Report to Shareholders
Portfolio of Investments—Continued
Western Asset Core Plus Bond Portfolio—Continued
| C | | The coupon payment on these securities is currently in default as of December 31, 2009. |
| D | | Stepped Coupon Security – A security with a predetermined schedule of interest or dividend rate changes at which time it begins to accrue interest or pay dividends according to the predetermined schedule. |
| E | | Credit Linked Security – The rates of interest earned on these securities are tied to the credit rating assigned by Standard & Poor’s Rating Service and/or Moody’s Investors Services. |
| F | | 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. |
| G | | Security is valued in good faith at fair value by or under the direction of the Board of Directors (See Note 1). |
| I | | The coupon rates shown on variable rate securities are the rates at December 31, 2009. These rates vary with the weighted average coupon of the underlying loans. |
| 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 | | 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. |
| L | | On September 7, 2008, the Federal Housing Finance Agency placed Fannie Mae (FNMA) and Freddie Mac (FHLMC) into conservatorship. |
| M | | 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. |
| N | | All or a portion of this security is collateral to cover futures and options contracts written. |
| O | | When-issued Security – Security purchased on a delayed delivery basis. Final settlement amount and maturity date have not yet been announced. |
| P | | Yankee Bond – A dollar-denominated bond issued in the U.S. by foreign entities. |
| R | | Convertible Security – Security may be converted into the issuer’s common stock. |
| S | | Par represents actual number of contracts. |
| T | | Rate shown represents yield-to-maturity. |
| U | | Aggregate cost for federal income tax purposes is $9,025,646,238. |
| V | | Options written and futures are described in more detail in the notes to financial statements. |
| † | | Securities are denominated in U.S. Dollars, unless otherwise noted. |
BRL—Brazilian Real
EUR—Euro
See notes to financial statements.
84
Annual Report to Shareholders
Statement of Assets and Liabilities
Western Asset Core Plus Bond Portfolio
December 31, 2009
| | | | | | | |
Assets: | | | | | | | |
Investment securities at value (Cost—$8,559,687,516) | | | | | $ | 7,892,129,935 | |
Short-term securities at value (Cost—$463,335,672) | | | | | | 469,674,127 | |
Cash | | | | | | 807 | |
Foreign currency at value (Cost—$451,997) | | | | | | 370,074 | |
Restricted cash pledged as collateral for swaps | | | | | | 106,320,000 | |
Interest and dividends receivable | | | | | | 69,933,932 | |
Unrealized appreciation of swaps | | | | | | 60,544,124 | |
Premiums paid on open swaps | | | | | | 42,151,765 | |
Unrealized appreciation of forward foreign currency contracts | | | | | | 18,924,774 | |
Receivable for fund shares sold | | | | | | 4,339,406 | |
Amounts receivable for open swaps | | | | | | 2,838,530 | |
Deposits with brokers for open futures contracts | | | | | | 2,672,286 | |
Receivable for securities sold | | | | | | 1,169,745 | |
| | | | | | | |
Total assets | | | | | | 8,671,069,505 | |
| | | | | | | |
| | |
Liabilities: | | | | | | | |
Payable for securities purchased | | $ | 345,491,199 | | | | |
Unrealized depreciation of swaps | | | 106,731,345 | | | | |
Premiums received on open swaps | | | 53,409,528 | | | | |
Options written (Proceeds—$45,455,876) | | | 51,739,630 | | | | |
Payable for fund shares repurchased | | | 18,815,356 | | | | |
Income distribution payable | | | 15,944,469 | | | | |
Amounts payable for open swaps | | | 7,964,930 | | | | |
Futures variation margin payable | | | 3,253,736 | | | | |
Unrealized depreciation of forward foreign currency contracts | | | 3,167,659 | | | | |
Accrued management fee | | | 1,906,627 | | | | |
Accrued distribution fees | | | 899,740 | | | | |
Accrued expenses | | | 2,222,200 | | | | |
| | | | | | | |
Total liabilities | | | | | | 611,546,419 | |
| | | | | | | |
| | |
Net Assets | | | | | $ | 8,059,523,086 | |
| | | | | | | |
| | |
Net assets consist of: | | | | | | | |
Accumulated paid-in-capital | | | | | $ | 9,309,928,681 | |
Undistributed net investment income | | | | | | 104,833,740 | |
Accumulated net realized loss on investments, options, futures, swaps and foreign currency transactions | | | | | | (650,057,919 | ) |
Net unrealized depreciation of investments, options, futures, swaps and foreign currency translations | | | | | | (705,181,416 | ) |
| | | | | | | |
| | |
Net Assets | | | | | $ | 8,059,523,086 | |
| | | | | | | |
| | |
Net Asset Value Per Share: | | | | | | | |
Institutional Class (539,257,876 shares outstanding) | | | | | | $10.14 | |
Institutional Select Class (181,208,912 shares outstanding) | | | | | | $10.13 | |
Financial Intermediary Class (74,703,277 shares outstanding) | | | | | | $10.13 | |
| | | | | | | | |
See notes to financial statements.
85
Annual Report to Shareholders
Statement of Operations
Western Asset Core Plus Bond Portfolio
| | | | | | | | |
| | | FOR THE
YEAR ENDED
DECEMBER 31, 2009 | |
Investment Income: | | | | | | | | |
Interest | | $ | 453,021,542 | | | | | |
Dividends | | | 2,545,744 | | | | | |
| | | | | | | | |
Total income | | | | | | $ | 455,567,286 | |
Expenses: | | | | | | | | |
Management fees (Note 2) | | | 32,822,162 | | | | | |
Transfer agent and shareholder servicing expense (Note 6) | | | 2,473,077 | | | | | |
Distribution fees (Notes 2 and 6) | | | 1,707,060 | | | | | |
Custodian fees | | | 867,676 | | | | | |
Reports to shareholders (Note 6) | | | 509,906 | | | | | |
Directors’ fees and expenses | | | 438,367 | | | | | |
Audit and legal fees | | | 302,663 | | | | | |
Registration fees | | | 161,952 | | | | | |
Other expenses | | | 169,185 | | | | | |
| | | | | | | | |
| | | 39,452,048 | | | | | |
Less: Fees waived (Notes 2 and 6) | | | (1,106,908 | ) | | | | |
| | | | | | | | |
Net expenses | | | | | | | 38,345,140 | |
| | | | | | | | |
Net Investment Income | | | | | | | 417,222,146 | |
Net Realized and Unrealized Gain/(Loss) on Investments (Notes 1, 3 and 4): | | | | | | | | |
Net realized gain/(loss) on: | | | | | | | | |
Investments | | | (80,486,175 | ) | | | | |
Options written | | | 85,322,429 | | | | | |
Futures | | | 25,847,481 | | | | | |
Swaps | | | (367,270,786 | ) | | | | |
Foreign currency transactions | | | 7,528,646 | | | | | |
| | | | | | | | |
| | | | | | | (329,058,405 | ) |
Change in unrealized appreciation/(depreciation) of: | | | | | | | | |
Investments | | | 1,012,191,779 | | | | | |
Options written | | | 11,676,577 | | | | | |
Futures | | | (179,345,203 | ) | | | | |
Swaps | | | 861,815,576 | | | | | |
Foreign currency translations | | | 9,467,673 | | | | | |
| | | | | | | | |
| | | | | | | 1,715,806,402 | |
| | | | | | | | |
Net Realized and Unrealized Gain on Investments | | | | | | | 1,386,747,997 | |
| | | | | | | | | |
Change in Net Assets Resulting From Operations | | | | | | $ | 1,803,970,143 | |
| | | | | | | | | |
See notes to financial statements.
86
Annual Report to Shareholders
Statement of Changes in Net Assets
Western Asset Core Plus Bond Portfolio
| | | | | | | | | | | | |
| | | FOR THE
YEAR ENDED
DECEMBER 31, 2009 | | | FOR THE
PERIOD ENDED
DECEMBER 31, 2008A | | | FOR THE
YEAR ENDED
MARCH 31, 2008 | |
| Change in Net Assets: | | | | | | | | | |
Net investment income | | $ | 417,222,146 | | | $ | 509,974,272 | | | $ | 738,844,157 | |
| | | |
Net realized gain/(loss) | | | (329,058,405 | ) | | | 148,460,048 | | | | (139,242,624 | ) |
| | | |
Change in unrealized appreciation/(depreciation) | | | 1,715,806,402 | | | | (1,797,666,497 | ) | | | (693,893,653 | ) |
| | | | | | | | | | | | |
Change in net assets resulting from operations | | | 1,803,970,143 | | | | (1,139,232,177 | ) | | | (94,292,120 | ) |
| | | |
Distributions to shareholders from (Note 1): | | | | | | | | | | | | |
Net investment income: | | | | | | | | | | | | |
Institutional Class | | | (349,841,866 | ) | | | (476,291,179 | ) | | | (661,064,696 | ) |
Institutional Select Class | | | (98,821,329 | ) | | | (32,587,186 | ) | | | N/A | |
Financial Intermediary Class | | | (40,043,412 | ) | | | (47,328,816 | ) | | | (51,232,414 | ) |
| | | |
Net realized gain on investments: | | | | | | | | | | | | |
Institutional Class | | | (82,194,816 | ) | | | — | | | | (92,868,453 | ) |
Institutional Select Class | | | (22,083,719 | ) | | | — | | | | N/A | |
Financial Intermediary Class | | | (9,199,687 | ) | | | — | | | | (6,596,142 | ) |
| | | |
Change in net assets from fund share transactions (Note 7): | | | | | | | | | | | | |
Institutional Class | | | (2,012,366,908 | ) | | | (4,840,376,183 | ) | | | 2,284,647,990 | |
Institutional Select Class | | | 32,921,627 | | | | 1,625,591,241 | | | | N/A | |
Financial Intermediary Class | | | (170,291,833 | ) | | | (242,167,517 | ) | | | 517,528,015 | |
| | | | | | | | | | | | |
Change in net assets | | | (947,951,800 | ) | | | (5,152,391,817 | ) | | | 1,896,122,180 | |
| | | |
Net Assets: | | | | | | | | | | | | |
Beginning of year | | | 9,007,474,886 | | | | 14,159,866,703 | | | | 12,263,744,523 | |
| | | | | | | | | | | | |
| | | |
End of year | | $ | 8,059,523,086 | | | $ | 9,007,474,886 | | | $ | 14,159,866,703 | |
| | | | | | | | | | | | |
| | | |
Undistributed net investment income | | $ | 104,833,740 | | | $ | 43,770,526 | | | $ | 21,015,663 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
| A | | For the period April 1, 2008 to December 31, 2008. |
N/A—Not applicable.
See notes to financial statements.
87
Annual Report to Shareholders
Financial Highlights
Western Asset Core Plus Bond Portfolio
For a share of each class of capital stock outstanding:
Institutional Class :
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | YEAR
ENDED
DECEMBER 31, 2009 | | | PERIOD
ENDED
DECEMBER 31, 2008A | | | YEARS ENDED MARCH 31, | |
| | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of year | | | $8.66 | | | | $9.87 | | | | $10.55 | | | | $10.24 | | | | $10.52 | | | | $10.71 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Investment operations: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | .48 | B | | | .39 | B | | | .55 | B | | | .51 | B | | | .45 | C | | | .37 | C |
Net realized and unrealized gain/(loss) | | | 1.71 | | | | (1.17 | ) | | | (.62 | ) | | | .33 | | | | (.18 | ) | | | .04 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total from investment operations | | | 2.19 | | | | (.78 | ) | | | (.07 | ) | | | .84 | | | | .27 | | | | .41 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | (.57 | ) | | | (.43 | ) | | | (.53 | ) | | | (.53 | ) | | | (.52 | ) | | | (.35 | ) |
Net realized gain on investments | | | (.14 | ) | | | — | | | | (.08 | ) | | | — | D | | | (.03 | ) | | | (.25 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total distributions | | | (.71 | ) | | | (.43 | ) | | | (.61 | ) | | | (.53 | ) | | | (.55 | ) | | | (.60 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net asset value, end of year | | | $10.14 | | | | $8.66 | | | | $9.87 | | | | $10.55 | | | | $10.24 | | | | $10.52 | |
| | | | | | | | | | | | | | | | | | | | | | | | �� |
Total returnE | | | 26.20 | % | | | (8.01 | )% | | | (.72 | )% | | | 8.48 | % | | | 2.57 | % | | | 4.01 | % |
| | | | | | |
Ratios to Average Net Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Total expensesF | | | .46 | % | | | .46 | %G | | | .43 | % | | | .44 | % | | | .45 | % | | | .45 | % |
Expenses net of waivers, if anyF | | | .46 | % | | | .46 | %G | | | .43 | % | | | .44 | % | | | .45 | % | | | .45 | % |
Expenses net of all reductionsF | | | .46 | % | | | .46 | %G | | | .43 | % | | | .44 | % | | | .45 | % | | | .45 | % |
Net investment income | | | 5.2 | % | | | 5.5 | %G | | | 5.4 | % | | | 4.9 | % | | | 4.3 | % | | | 3.3 | % |
| | | | | | |
Supplemental Data: | | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio turnover rate | | | 201.7 | % | | | 124.4 | %H | | | 488.2 | % | | | 448.6 | % | | | 549.4 | % | | | 586.1 | % |
Net assets, end of year (in thousands) | | $ | 5,466,554 | | | $ | 6,607,180 | | | $ | 12,943,882 | | | $ | 11,495,842 | | | $ | 6,896,815 | | | $ | 4,565,054 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| A | | For the period April 1, 2008 to December 31, 2008. |
| B | | Computed using average daily shares outstanding. |
| C | | Computed using SEC method. |
| D | | Amount less than $.01 per share. |
| E | | Performance figures may reflect compensating balance credits, fee waivers and/or expense reimbursements. In the absence of compensating balance credits, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| F | | Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers. As of the most current prospectus, the Institutional Class has no limit on expenses. |
See notes to financial statements.
88
Annual Report to Shareholders
Institutional Select Class :
| | | | | | | | |
| | | YEAR ENDED
DECEMBER 31, 2009 | | | PERIOD ENDED
DECEMBER 31, 2008A | |
Net asset value, beginning of year | | | $8.66 | | | | $9.34 | |
| | | | | | | | |
Investment operations: | | | | | | | | |
Net investment incomeB | | | .48 | | | | .20 | |
Net realized and unrealized gain/(loss) | | | 1.70 | | | | (.62 | ) |
| | | | | | | | |
Total from investment operations | | | 2.18 | | | | (.42 | ) |
| | | | | | | | |
Distributions from: | | | | | | | | |
Net investment income | | | (.57 | ) | | | (.26 | ) |
Net realized gain on investments | | | (.14 | ) | | | — | |
| | | | | | | | |
Total distributions | | | (.71 | ) | | | (.26 | ) |
| | | | | | | | |
Net asset value, end of year | | | $10.13 | | | | $8.66 | |
| | | | | | | | |
Total returnC | | | 26.11 | % | | | (4.54 | )% |
| | |
Ratios to Average Net Assets: | | | | | | | | |
Total expensesD | | | .43 | % | | | .44 | %E |
Expenses net of waivers, if anyD | | | .43 | % | | | .44 | %E |
Expenses net of all reductionsD | | | .43 | % | | | .44 | %E |
Net investment income | | | 5.2 | % | | | 5.7 | %E |
| | |
Supplemental Data: | | | | | | | | |
Portfolio turnover rate | | | 201.7 | % | | | 124.4 | %F |
Net assets, end of year (in thousands) | | $ | 1,835,921 | | | $ | 1,559,843 | |
| | | | | | | | | |
| A | | For the period August 4, 2008 (commencement of operations) to December 31, 2008. |
| B | | Computed using average daily shares outstanding. |
| C | | Performance figures may reflect compensating balance credits, fee waivers and/or expense reimbursements. In the absence of compensating balance credits, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| D | | Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers. |
See notes to financial statements.
89
Annual Report to Shareholders
Financial Highlights—Continued
Western Asset Core Plus Bond Portfolio
For a share of each class of capital stock outstanding:
Financial Intermediary Class :
| | | | | | | | | | | | | | | | | | |
| | | YEAR ENDED
DECEMBER 31, 2009 | | | PERIOD ENDED
DECEMBER 31, 2008A | | | YEARS ENDED MARCH 31, | |
| | | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Net asset value, beginning of year | | $8.66 | | | $9.88 | | | $10.56 | | | $10.24 | | | $10.52 | | | $10.71 | |
| | | | | | | | | | | | | | | | | | |
Investment operations: | | | | | | | | | | | | | | | | | | |
Net investment income | | .45 | B | | .37 | B | | .52 | B | | .48 | B | | .42 | C | | .35 | C |
Net realized and unrealized gain/(loss) | | 1.71 | | | (1.17 | ) | | (.62 | ) | | .35 | | | (.18 | ) | | .04 | |
| | | | | | | | | | | | | | | | | | |
Total from investment operations | | 2.16 | | | (.80 | ) | | (.10 | ) | | .83 | | | .24 | | | .39 | |
| | | | | | | | | | | | | | | | | | |
Distributions from: | | | | | | | | | | | | | | | | | | |
Net investment income | | (.55 | ) | | (.42 | ) | | (.50 | ) | | (.51 | ) | | (.49 | ) | | (.33 | ) |
Net realized gain on investments | | (.14 | ) | | — | | | (.08 | ) | | — | D | | (.03 | ) | | (.25 | ) |
| | | | | | | | | | | | | | | | | | |
Total distributions | | (.69 | ) | | (.42 | ) | | (.58 | ) | | (.51 | ) | | (.52 | ) | | (.58 | ) |
| | | | | | | | | | | | | | | | | | |
Net asset value, end of year | | $10.13 | | | $8.66 | | | $9.88 | | | $10.56 | | | $10.24 | | | $10.52 | |
| | | | | | | | | | | | | | | | | | |
Total returnE | | 25.78 | % | | (8.28 | )% | | (.97 | )% | | 8.30 | % | | 2.32 | % | | 3.77 | % |
| | | | | | |
Ratios to Average Net Assets: | | | | | | | | | | | | | | | | | | |
Total expensesF | | .86 | % | | .77 | %G | | .68 | % | | .69 | % | | .70 | % | | .70 | % |
Expenses net of waivers, if anyF | | .70 | % | | .70 | %G | | .68 | % | | .69 | % | | .70 | % | | .70 | % |
Expenses net of all reductionsF | | .70 | % | | .70 | %G | | .68 | % | | .69 | % | | .70 | % | | .70 | % |
Net investment income | | 4.9 | % | | 5.2 | %G | | 5.1 | % | | 4.7 | % | | 4.0 | % | | 2.9 | % |
| | | | | | |
Supplemental Data: | | | | | | | | | | | | | | | | | | |
Portfolio turnover rate | | 201.7 | % | | 124.4 | %H | | 488.2 | % | | 448.6 | % | | 549.4 | % | | 586.1 | % |
Net assets, end of year (in thousands) | | $757,048 | | | $840,452 | | | $1,215,985 | | | $767,903 | | | $503,217 | | | $191,085 | |
| | | | | | | | | | | | | | | | | | | |
| A | | For the period April 1, 2008 to December 31, 2008. |
| B | | Computed using average daily shares outstanding. |
| C | | Computed using SEC method. |
| D | | Amount less than $.01 per share. |
| E | | Performance figures may reflect compensating balance credits, fee waivers and/or expense reimbursements. In the absence of compensating balance credits, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| F | | Total expenses reflects operating expenses prior to any voluntary expense waivers and/or compensating balance credits. Expenses net of waivers reflects total expenses before compensating balance credits but net of any voluntary expense waivers. Expenses net of all reductions reflects expenses less any compensating balance credits and/or voluntary expense waivers. |
See notes to financial statements.
90
Annual Report to Shareholders
Notes to Financial Statements
1. Organization and Significant Accounting Policies
Western Asset Funds, Inc. (“Corporation”), consisting of Western Asset Absolute Return Portfolio (“Absolute Return”), Western Asset Core Bond Portfolio (“Core”), Western Asset Core Plus Bond Portfolio (“Core Plus”), Western Asset High Yield Portfolio (“High Yield”), Western Asset Inflation Indexed Plus Bond Portfolio (“Inflation Indexed”), Western Asset Intermediate Bond Portfolio (“Intermediate”), Western Asset Intermediate Plus Bond Portfolio (“Intermediate Plus”), Western Asset Limited Duration Bond Portfolio (“Limited Duration”) and Western Asset Non-U.S. Opportunity Bond Portfolio (“Non-U.S.”) (individually a “Fund,” collectively the “Funds”), is registered under the Investment Company Act of 1940, as amended (“the 1940 Act”), as a diversified, open-end management investment company with the exception of Non-U.S., which is non-diversified. Financial Statements for Absolute Return, High Yield, Inflation Indexed, Intermediate, Intermediate Plus, Limited Duration and Non-U.S. are contained in a separate report to shareholders.
Each Fund offers three classes of shares: Institutional Class, Institutional Select Class and Financial Intermediary Class. Shares in the Financial Intermediary Class bear a distribution fee. The income and expenses of each of the Funds are allocated proportionately to the three classes of shares based on daily net assets, except for Rule 12b-1 distribution fees, which are charged only on the Financial Intermediary Class shares, and transfer agent and shareholder servicing expenses, and certain other expenses, which are determined separately for each class.
The following are significant accounting policies consistently followed by the Funds and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through February 23, 2010, the issuance date of the financial statements.
(a) Investment Valuation. Debt securities are valued at the last quoted bid provided by an independent pricing service that are based on transactions in debt obligations, quotations from bond dealers, market transactions in comparable securities and various other relationships between securities. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the primary market or exchange on which they trade. When prices are not readily available, or are determined not to reflect fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before each Fund calculates its net asset value, the Funds value these securities at fair value as determined in accordance with procedures approved by the Funds’ Board of Directors.
The Funds have adopted Financial Accounting Standards Board Codification Topic 820 (formerly, Statement of Financial Accounting Standards No. 157) ("ASC Topic 820"). ASC Topic 820 establishes a single definition of fair value, creates a three-tier hierarchy as a framework for measuring fair value based on inputs used to value each Fund's investments, and requires additional disclosure about fair value. The hierarchy of inputs is summarized below.
| | • | | Level 1—quoted prices in active markets for identical investments |
| | • | | Level 2—other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) |
| | • | | Level 3—significant unobservable inputs (including each Fund's own assumptions in determining the fair value of investments) |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The Funds use valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of the security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to convert future amounts to a single present amount.
91
Annual Report to Shareholders
Notes to Financial Statements—Continued
The following is a summary of the inputs used in valuing the Funds' assets carried at fair value:
Core
| | | | | | | | | | | | | | | |
| Description | | Quoted Prices
(Level 1) | | | Other Significant
Observable
Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | | Total | |
Long-Term Securities†: | | | | | | | | | | | | | | | |
Corporate Bonds and Notes | | | — | | | $ | 937,883,011 | | | | — | | $ | 937,883,011 | |
Asset-Backed Securities | | | — | | | | 139,426,031 | | | | — | | | 139,426,031 | |
Mortgage-Backed Securities | | | — | | | | 672,629,743 | | | | — | | | 672,629,743 | |
Municipal Bonds | | | — | | | | 3,541,394 | | | | — | | | 3,541,394 | |
U.S. Government and Agency Obligations | | | — | | | | 789,051,598 | | | | — | | | 789,051,598 | |
U.S. Government Agency Mortgage-Backed Securities | | | — | | | | 913,612,270 | | | | — | | | 913,612,270 | |
Yankee Bonds | | | — | | | | 227,975,363 | | | | — | | | 227,975,363 | |
Preferred Stocks | | $ | 1,559,351 | | | | 13,967,868 | | | $ | 1,016,059 | | | 16,543,278 | |
Total Long-Term Securities | | | 1,559,351 | | | | 3,698,087,278 | | | | 1,016,059 | | | 3,700,662,688 | |
Short-Term Securities: | | | | | | | | | | | | | | | |
U.S. Government and Agency Obligations | | | — | | | | 155,828,969 | | | | — | | | 155,828,969 | |
Options Purchased | | | 1,655,156 | | | | 3,270,737 | | | | — | | | 4,925,893 | |
Total Short-Term Securities | | | 1,655,156 | | | | 159,099,706 | | | | — | | | 160,754,862 | |
Total Investments | | $ | 3,214,507 | | | $ | 3,857,186,984 | | | $ | 1,016,059 | | $ | 3,861,417,550 | |
Other Financial Instruments: | | | | | | | | | | | | | | | |
Futures Contracts | | | (1,379,706 | ) | | | — | | | | — | | | (1,379,706 | ) |
Options Written | | | (2,860,162 | ) | | | (18,612,050 | ) | | | | | | (21,472,212 | ) |
Swaps: | | | | | | | | | | | | | | | |
Interest Rate Swaps‡ | | | — | | | | (5,162,121 | ) | | | — | | | (5,162,121 | ) |
Credit Default Swaps on Corporate Issues—Sell Protection‡ | | | — | | | | (1,095,443 | ) | | | — | | | (1,095,443 | ) |
Credit Default Swaps on Corporate Issues—Buy Protection‡ | | | — | | | | 15,447,011 | | | | — | | | 15,447,011 | |
Credit Default Swaps on Credit Indices—Sell Protection‡ | | | — | | | | (49,836,403 | ) | | | — | | | (49,836,403 | ) |
Credit Default Swaps on Credit Indices—Buy Protection‡ | | | — | | | | 36,519,248 | | | | — | | | 36,519,248 | |
Total Other Financial Instruments | | | (4,239,868 | ) | | | (22,739,758 | ) | | | — | | | (26,979,626 | ) |
Total | | $ | (1,025,361 | ) | | $ | 3,834,447,226 | | | $ | 1,016,059 | | $ | 3,834,437,924 | |
| | | | | | | | | | | | | | | | |
| † | | See Portfolio of Investments for additional detailed categorizations. |
| ‡ | | Values include any premiums paid or received with respect to swap contracts. |
92
Annual Report to Shareholders
Following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value:
| | | | | | | | | | | | | | | | | | | | |
| | | Corporate
Bonds | | | Mortgage-Backed
Securities | | | Yankee
Bonds | | | Preferred
Stocks | | | Total | |
Investments in Securities | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2008 | | $ | 4,043,832 | | | $ | 2,503,942 | | | $ | 1,216,800 | | | $ | 1,042,166 | | | $ | 8,806,740 | |
Accrued Premiums/Discounts | | | 255,250 | | | | (475 | ) | | | 365,186 | | | | — | | | | 619,961 | |
Realized Gain/(Loss)(1) | | | 37,780 | | | | 6,344 | | | | — | | | | — | | | | 44,124 | |
Change in Unrealized Appreciation | | | | | | | | | | | | | | | | | | | | |
(Depreciation)(2) | | | 3,089,504 | | | | 1,030,875 | | | | 3,437,314 | | | | (26,107 | ) | | | 7,531,586 | |
Net Purchases (Sales) | | | 2,269,111 | | | | (612,800 | ) | | | — | | | | — | | | | 1,656,311 | |
Net Transfers in and/or out of Level 3 | | | (9,695,477 | ) | | | (2,927,886 | ) | | | (5,019,300 | ) | | | — | | | | (17,642,663 | ) |
Balance as of December 31, 2009 | | $ | — | | | $ | — | | | $ | — | | | $ | 1,016,059 | | | $ | 1,016,059 | |
Net Change in Unrealized Appreciation (Depreciation) for Investments in securities still held at December 31, 2009(2) | | | — | | | | — | | | | — | | | $ | (26,107 | ) | | $ | (26,107 | ) |
| (1) | | This amount is included in net realized gain (loss) from investment transactions in the accompanying Statement of Operations. |
| (2) | | This amount is included in the change in net unrealized appreciation (depreciation) in the accompanying Statement of Operations. Change in unrealized appreciation (depreciation) includes net unrealized appreciation (depreciation) resulting from changes in investment values during the reporting period and the reversal of previously recorded unrealized appreciation (depreciation) when gains or losses are realized. |
93
Annual Report to Shareholders
Notes to Financial Statements—Continued
Core Plus
| | | | | | | | | | | | | | | |
| Description | | Quoted Prices
(Level 1) | | | Other Significant
Observable
Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | | Total | |
Long-Term Securities†: | | | | | | | | | | | | | | | |
Corporate Bonds and Notes | | | — | | | $ | 1,944,373,191 | | | $ | 2,061,675 | | $ | 1,946,434,866 | |
Asset-Backed Securities | | | — | | | | 299,881,839 | | | | — | | | 299,881,839 | |
Mortgage-Backed Securities | | | — | | | | 971,131,487 | | | | 92,062 | | | 971,223,549 | |
Loan Participations and Assignments | | | — | | | | 50,898,411 | | | | — | | | 50,898,411 | |
Municipal Bonds | | | — | | | | 7,817,438 | | | | — | | | 7,817,438 | |
U.S. Government and Agency Obligations | | | — | | | | 1,678,739,602 | | | | — | | | 1,678,739,602 | |
U.S. Government Agency Mortgage-Backed Securities | | | — | | | | 2,153,608,617 | | | | — | | | 2,153,608,617 | |
Yankee Bonds | | | — | | | | 603,039,838 | | | | — | | | 603,039,838 | |
Foreign Government Obligations | | | — | | | | 82,806,960 | | | | — | | | 82,806,960 | |
Common Stocks and Equity Interests | | $ | 69,160 | | | | — | | | | — | | | 69,160 | |
Preferred Stocks | | | 6,502,332 | | | | 90,719,184 | | | | 269,028 | | | 97,490,544 | |
Warrants | | | — | | | | 119,111 | | | | — | | | 119,111 | |
Total Long-Term Securities | | | 6,571,492 | | | | 7,883,135,678 | | | | 2,422,765 | | | 7,892,129,935 | |
Short-Term Securities†: | | | | | | | | | | | | | | | |
U.S. Government and Agency Obligations | | | — | | | | 310,635,827 | | | | — | | | 310,635,827 | |
Options Purchased | | | 3,685,781 | | | | 7,772,519 | | | | — | | | 11,458,300 | |
Repurchase Agreement | | | — | | | | 147,580,000 | | | | — | | | 147,580,000 | |
Total Short-Term Securities | | | 3,685,781 | | | | 465,988,346 | | | | — | | | 469,674,127 | |
Total Investments | | $ | 10,257,273 | | | $ | 8,349,124,024 | | | $ | 2,422,765 | | $ | 8,361,804,062 | |
Other Financial Instruments: | | | | | | | | | | | | | | | |
Futures Contracts | | | (7,303,523 | ) | | | — | | | | — | | | (7,303,523 | ) |
Options Written | | | (6,424,425 | ) | | | (45,315,205 | ) | | | — | | | (51,739,630 | ) |
Swaps: | | | | | | | | | | | | | | | |
Interest Rate Swaps‡ | | | — | | | | (12,974,117 | ) | | | — | | | (12,974,117 | ) |
Credit Default Swaps on Corporate Issues—Sell Protection‡ | | | — | | | | (7,460,444 | ) | | | — | | | (7,460,444 | ) |
Credit Default Swaps on Corporate Issues—Buy Protection‡ | | | — | | | | 27,043,592 | | | | — | | | 27,043,592 | |
Credit Default Swaps on Credit Indices—Sell Protection‡ | | | — | | | | (73,880,771 | ) | | | — | | | (73,880,771 | ) |
Credit Default Swaps on Credit Indices—Buy Protection‡ | | | — | | | | 9,826,756 | | | | — | | | 9,826,756 | |
Forward Foreign Currency Contracts | | | — | | | | 15,757,115 | | | | — | | | 15,757,115 | |
Total Other Financial Instruments | | $ | (13,727,948 | ) | | $ | (87,003,074 | ) | | | — | | $ | (100,731,022 | ) |
Total | | $ | (3,470,675 | ) | | $ | 8,262,120,950 | | | $ | 2,422,765 | | $ | 8,261,073,040 | |
| | | | | | | | | | | | | | | | |
| † | | See Portfolio of Investments for additional detailed categorizations. |
| ‡ | | Values include any premiums paid or received with respect to swap contracts. |
94
Annual Report to Shareholders
Following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Corporate
Bonds and
Notes | | | Asset-Backed
Securities | | | Mortgage-Backed
Securities | | | Yankee
Bonds | | | Preferred
Stocks | | | Total | |
Investments in Securities | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2008 | | $ | 8,401,752 | | | $ | 12,803,818 | | | $ | 8,295,524 | | | $ | 4,820,400 | | | $ | 275,940 | | | $ | 34,597,434 | |
Accrued Premiums/Discounts | | | 33,216 | | | | 17 | | | | (10,309 | ) | | | 1,446,700 | | | | — | | | | 1,469,624 | |
Realized Gain/(Loss)(1) | | | 25,226 | | | | 101 | | | | (19,113 | ) | | | — | | | | — | | | | 6,214 | |
Change in Unrealized Appreciation (Depreciation)(2) | | | 5,768,469 | | | | 1,238,002 | | | | 3,368,863 | | | | 13,617,050 | | | | (6,912 | ) | | | 23,985,472 | |
Net Purchases (Sales) | | | 2,760,769 | | | | (4,539,193 | ) | | | (1,924,489 | ) | | | — | | | | — | | | | (3,702,913 | ) |
Net transfers in and/or out of Level 3 | | | (14,927,757 | ) | | | (9,502,745 | ) | | | (9,618,414 | ) | | | (19,884,150 | ) | | | — | | | | (53,933,066 | ) |
Balance as of December 31, 2009 | | $ | 2,061,675 | | | $ | — | | | $ | 92,062 | | | $ | — | | | $ | 269,028 | | | $ | 2,422,765 | |
Net Change in Unrealized Appreciation (Depreciation) for Investments in Securities still held at December 31, 2009(2) | | $ | 81,675 | | | | — | | | | — | | | | — | | | $ | (6,912 | ) | | $ | 74,763 | |
| (1) | | This amount is included in net realized gain (loss) from investment transactions in the accompanying Statement of Operations. |
| (2) | | This amount is included in the change in net unrealized appreciation (depreciation) in the accompanying Statement of Operations. Change in unrealized appreciation (depreciation) includes net unrealized appreciation (depreciation) resulting from changes in investment values during the reporting period and the reversal of previously recorded unrealized appreciation (depreciation) when gains or losses are realized. |
(b) Repurchase Agreements. Each Fund may enter into repurchase agreements with institutions that its investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, a fund takes possession of an underlying debt obligation subject to an obligation of the seller to repurchase, and of the fund to resell, the obligation at an agreed-upon price and time, thereby determining the yield during a fund’s holding period. When entering into repurchase agreements, it is each Fund’s policy that its custodian or a third party custodian, acting on the Fund’s behalf, take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction maturity exceeds one business day, the value of the collateral is marked to market and measured against the value of the agreement to ensure the adequacy of the collateral. If the counterparty defaults, the affected Fund generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during the period in which a Fund seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.
(c) Short Sale Transactions. Short sales are transactions in which a Fund sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, a Fund must borrow the security to deliver to the buyer. The Fund is then obligated to replace the security borrowed by purchasing it in the open market at the time of replacement. The proceeds received by a Fund for the short sale are retained by the broker as collateral until the Fund replaces the borrowed security. The collateral required is determined daily by reference to the market value of the short positions. Liabilities for securities sold short are marked to market daily and reported at market value in the financial statements.
Short sale transactions may result in a risk of loss that may exceed the amount shown on the Statement of Assets and Liabilities. A gain, limited to the price at which the Fund sold the security short, or a loss, potentially unlimited in size, will be recognized upon termination of a short sale. Dividends on short positions are recorded as a liability on the ex-dividend date and are shown in the Statement of Operations as Dividend Expense because the Fund must pay the dividend to the lender of the security.
95
Annual Report to Shareholders
Notes to Financial Statements—Continued
Short selling is a technique that may be considered speculative, involves risk beyond the amount of money used to secure each transaction and may represent a form of leverage.
(d) Securities Traded on a When-Issue Basis. Each Fund may trade securities on a when-issue basis. In a when-issue transaction, the securities are purchased or sold by each Fund with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and yield to the Fund at the time of entering into the transaction.
Purchasing such securities involves risk of loss if the value of the securities declines prior to settlement. These securities are subject to market fluctuations and their current value is determined in the same manner as for other securities.
(e) Securities Traded on a To-Be-Announced Basis. Each Fund may trade securities on a to-be-announced (“TBA”) basis. In a TBA transaction, a Fund commits to purchasing or selling securities which have not yet been issued by the issuer and for which specific information, such as the face amount, maturity date and underlying pool of investments in U.S. government agency mortgage pass-through securities, is not announced. Securities purchased on a TBA basis are not settled until they are delivered to the Fund. Beginning on the date a Fund enters into a TBA transaction, cash, U.S. government securities or other liquid high-grade debt obligations are segregated in an amount equal in value to the purchase price of the TBA security. These securities are subject to market fluctuations and their current value is determined in the same manner as for other securities.
(f) Mortgage Dollar Rolls. Each Fund may enter into mortgage dollar rolls in which a Fund sells mortgage-backed securities for delivery in the current month, realizing a gain or loss, and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities to settle on a specified future date.
Each Fund executes its mortgage dollar rolls entirely in the TBA market, whereby a Fund makes a forward commitment to purchase a security and, instead of accepting delivery, the position is offset by a sale of the security with a simultaneous agreement to repurchase at a future date. Each Fund accounts for mortgage dollar rolls as purchases and sales.
The risk of entering into mortgage dollar rolls is that the market value of the securities the Funds are obligated to repurchase under the agreement may decline below the repurchase price. In the event the buyer of securities under a mortgage dollar roll files for bankruptcy or becomes insolvent, a Fund’s use of the proceeds of the mortgage dollar roll may be restricted pending a determination by the counterparty, or its trustee or receiver, whether to enforce the Fund’s obligation to repurchase the securities.
(g) Forward Foreign Currency Contracts. Core Plus may enter into a forward foreign currency contract to hedge against foreign currency exchange rate risk on its non-U.S. dollar denominated securities or to facilitate settlement of a foreign currency denominated portfolio transaction. A forward foreign currency contract is an agreement between two parties to buy and sell a currency at a set price with delivery and settlement at a future date. The contract is marked to market daily and the change in value is recorded by a Fund as an unrealized gain or loss. When a forward foreign currency contract is closed, through either delivery or offset by entering into another forward foreign currency contract, the Fund recognizes a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it is closed.
Forward foreign currency contracts involve elements of market risk in excess of the amounts reflected on the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rate underlying the forward foreign currency contract. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.
(h) Loan Participations. Each Fund may invest in loans arranged through private negotiation between one or more financial institutions. Each Fund’s investment in any such loan may be in the form of a participation in or an assignment of the loan. In connection with purchasing participations, each Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement related to the loan, or any rights of off-set against the borrower and each Fund may not benefit directly from any collateral supporting the loan in which it has purchased the participation.
Each Fund assumes the credit risk of the borrower, the lender that is selling the participation and any other persons interpositioned between the Fund and the borrower. In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor of the lender and may not benefit from any off-set between the lender and the borrower.
96
Annual Report to Shareholders
(i) Written Options. When a Fund writes an option, an amount equal to the premium received by the Fund is recorded as a liability, the value of which is marked to market daily to reflect the current market value of the option written. If the option expires, the premium received is recorded as a realized gain. When a written call option is exercised, the difference between the premium received plus the option exercise price and a Fund’s basis in the underlying security (in the case of a covered written call option), or the cost to purchase the underlying security (in the case of an uncovered written call option), including brokerage commission, is recognized as a realized gain or loss. When a written put option is exercised, the amount of the premium received is subtracted from the cost of the security purchased by the Fund from the exercise of the written put option to form the Fund’s basis in the underlying security purchased. The writer or buyer of an option traded on an exchange can liquidate the position before the exercise of the option by entering into a closing transaction. The cost of a closing transaction is deducted from the original premium received resulting in a realized gain or loss to the Fund.
The risk in writing a covered call option is that a Fund may forego the opportunity of profit if the market price of the underlying security increases and the option is exercised. The risk in writing a put option is that a Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. The risk in writing a call option is that a Fund is exposed to the risk of loss if the market price of the underlying security increases. In addition, there is the risk that a Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
(j) Futures Contracts. Each Fund may use futures contracts to gain exposure to, or hedge against, changes in the value of interest rates or foreign currencies. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
Upon entering into a futures contract, the Funds are required to deposit cash or cash equivalents with a broker in an amount equal to a certain percentage of the contract amount. This is known as the ‘‘initial margin’’ and subsequent payments (‘‘variation margin’’) are made or received by the Funds each day, depending on the daily fluctuation in the value of the contract. For certain futures, including foreign denominated futures held in Core Plus, variation margin is not settled daily, but is recorded as a net variation margin payable or receivable. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. The daily changes in contract value are recorded as unrealized gains or losses in the Statement of Operations and the Funds recognize a realized gain or loss when the contract is closed.
Futures contracts involve, to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Funds may not be able to enter into a closing transaction because of an illiquid secondary market.
(k) Swap agreements. Each Fund may invest in swaps for the purpose of managing its exposure to interest rate, credit or market risk, or for other purposes. The use of swaps involves risks that are different from those associated with ordinary portfolio transactions.
Swap contracts are marked to market daily and changes in value are recorded as unrealized appreciation/(depreciation). Gains or losses are realized upon termination of the swap agreement. Periodic payments and premiums received or made by the Funds are recognized in the Statement of Operations as realized gains or losses, respectively. Collateral, in the form of restricted cash or securities, may be required to be held in segregated accounts with the Funds’ custodian in compliance with the terms of the swap contracts. Securities held as collateral for swap contracts are identified in the Schedule of Investments and restricted cash, if any, is identified on the Statement of Assets and Liabilities. Risks may exceed amounts recorded in the Statement of Assets and Liabilities. These risks include changes in the returns of the underlying instruments, failure of the counterparties to perform under the contracts’ terms, and the possible lack of liquidity with respect to the swap agreements.
Payments received or made at the beginning of the measurement period are reflected as a premium or deposit, respectively, on the Statement of Assets and Liabilities. These upfront payments are amortized over the life of the swap and are recognized as realized gain or loss in the Statement of Operations. A liquidation payment received or made at the termination of the swap is recognized as realized gain or loss in the Statement of Operations. Net periodic payments received or paid by the Funds are recognized as realized gain or loss at the time of receipt or payment in the Statement of Operations.
97
Annual Report to Shareholders
Notes to Financial Statements—Continued
As disclosed in each Fund’s summary of open swap contracts, the aggregate fair values of credit default swaps in a net liability position as of December 31, 2009 were $65,217,271 and $111,085,158 for Core and Core Plus, respectively. The aggregate fair value of assets posted as collateral, for all swaps were $43,622,529 and $106,320,000 for Core and Core Plus, respectively. If a defined credit event had occurred as of December 31, 2009, the swaps' credit-risk-related contingent features would have been triggered and the Funds would have been required to pay up to $927,011,196 and $2,442,403,638 for Core and Core Plus, respectively, less the value of the contracts’ related reference obligations.
Credit Default Swaps.
Each Fund may enter into credit default swap (“CDS”) contracts for investment purposes, to manage their credit risk or to add leverage. CDS agreements involve one party making a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party, typically corporate or sovereign issuers, on a specified obligation, or in the event of a write-down, principal shortfall, interest shortfall or default of all or part of the referenced entities comprising a credit index. The Funds may use a CDS to provide protection against defaults of the issuers (i.e., to reduce risk where the Funds have exposure to a sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular issuer’s default. As a seller of protection, the Funds generally receive an upfront payment or a stream of payments throughout the term of the swap provided that there is no credit event. If the Funds are a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the maximum potential amount of future payments (undiscounted) that the Funds could be required to make under a credit default swap agreement would be an amount equal to the notional amount of the agreement. These amounts of potential payments will be partially offset by any recovery of values from the respective referenced obligations. As a seller of protection, the Funds effectively add leverage to their portfolios because, in addition to their total net assets, the Funds are subject to investment exposure on the notional amount of the swap. As a buyer of protection, the Funds generally receive an amount up to the notional value of the swap if a credit event occurs.
Implied spreads are the theoretical prices a lender receives for credit default protection. When spreads rise, market perceived credit risk rises and when spreads fall, market perceived credit risk falls. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to enter into the agreement. Wider credit spreads and decreasing market values, when compared to the notional amount of the swap, represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement. Credit spreads utilized in determining the period end market value of credit default swap agreements on corporate or sovereign issues are disclosed in the Notes to Financial Statements and serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for credit derivatives. For credit default swap agreements on asset-backed securities and credit indices, the quoted market prices and resulting values, particularly in relation to the notional amount of the contract as well as the annual payment rate, serve as an indication of the current status of the payment/performance risk.
The Fund’s maximum risk of loss from counterparty risk, as the protection buyer, is the fair value of the contract (this risk is mitigated by the posting of collateral by the counterparty to the Fund to cover the Fund’s exposure to the counterparty). As the protection seller, the Fund’s maximum risk is the notional amount of the contract. Credit default swaps are considered to have credit risk-related contingent features since they require payment by the protection seller to the protection buyer upon the occurrence of a defined credit event.
Entering into a CDS agreement involves, to varying degrees, elements of credit, market and documentation risk in excess of the related amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreement may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreement, and that there will be unfavorable changes in net interest rates.
Interest Rate Swaps.
Each Fund may enter into interest rate swap contracts. Interest rate swaps are agreements between two parties to exchange cash flows based on a notional principal amount. The Funds may elect to pay a fixed rate and receive a floating rate, or, receive a fixed rate and pay a floating rate on a notional principal amount. The net interest received or paid on interest rate swap agreements is accrued daily as interest income. Interest rate swaps are marked to market daily based upon quotations from market
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Annual Report to Shareholders
makers and the change, if any, is recorded as an unrealized gain or loss in the Statement of Operations. When a swap contract is terminated early, the Funds record a realized gain or loss equal to the difference between the original cost and the settlement amount of the closing transaction.
The risks of interest rate swaps include changes in market conditions that will affect the value of the contract or changes in the present value of the future cash flow streams and the possible inability of the counterparty to fulfill its obligations under the agreement. The Funds’ maximum risk of loss from counterparty credit risk is the discounted net value of the cash flows to be received from the counterparty over the contract’s remaining life, to the extent that amount is positive. This risk is mitigated by the posting of collateral by the counterparty to the Funds to cover the Funds’ exposure to the counterparty.
Total Return Swaps.
Each Fund may enter into total return swaps for investment purposes. Total return swaps are agreements to exchange the return generated by one instrument for the return generated by another instrument. For example, the agreement to pay a predetermined or fixed interest rate in exchange for a market-linked return based on a notional amount. To the extent the total return of a referenced index or instrument exceeds the offsetting interest obligation, the Funds will receive a payment from the counterparty. To the extent it is less, the Funds will make a payment to the counterparty. Periodic payments received or made by the Funds are recorded in the Statement of Operations as realized gains or losses, respectively.
(l) Foreign Currency Translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.
The Funds do not isolate that portion of the results of operations resulting from fluctuations in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.
Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on each Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities, on the date of valuation, resulting from changes in exchange rates.
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.
(m) Security Transactions and Investment Income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Foreign dividend income is recorded on the ex-dividend date or as soon as practicable after a Fund determines the existence of a dividend declaration after exercising reasonable due diligence. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or credit event occurs by the issuer, a Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.
(n) Distributions to Shareholders. Distributions from net investment income on the shares of the Funds are declared each business day to shareholders of record, and are paid monthly. Distributions of net realized gains, if any, are declared at least annually. Distributions are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
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Annual Report to Shareholders
Notes to Financial Statements—Continued
(o) Compensating Balance Agreements. Each Fund has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash deposit with the bank.
(p) Credit and Market Risk. Investments in securities that are collateralized by residential real estate mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and foreclosure values of underlying real estate properties are materially below the outstanding amount of these underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments and may result in a lack of correlation between their credit ratings and values.
(q) Other. In the normal course of business, each Fund enters into contracts that provide general indemnifications. Each Fund's maximum exposure under these arrangements is dependent upon claims that may be made against the Fund in the future and, therefore, cannot be estimated; however, based on experience, the risk of material loss from such claims is considered remote.
(r) Federal and Other Taxes. It is each Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Funds intend to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal income tax provision is required in the Funds’ financial statements.
Management has analyzed the Funds’ tax positions taken on federal income tax returns for all open tax years and has concluded that as of December 31, 2009, no provision for income tax is required in the Funds’ financial statements. The Funds’ federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by Internal Revenue Service and state departments of revenue.
Under the applicable foreign tax laws, a withholding tax may be imposed on interest, dividends and capital gains at various rates.
(s) Reclassification. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. During the year, the following reclassifications have been made:
| | | | | | | | | | |
Fund | | | | | Undistributed
Net Investment Income | | Accumulated Net
Realized Loss | |
Core | | (a | ) | | $ | 22,528,478 | | $ | (22,528,478 | ) |
Core Plus | | (b | ) | | | 132,547,675 | | | (132,547,675 | ) |
| | | | | | | | | | | |
| (a) | | Reclassifications are primarily due to losses from mortgage backed securities treated as capital losses for tax purposes, book/tax differences in the treatment of swap contracts and book/tax differences in the treatment of certain securities. |
| (b) | | Reclassifications are primarily due to foreign currency transactions treated as ordinary income for tax purposes, losses from mortgage backed securities treated as capital losses for tax purposes, book/tax differences in the treatment of Treasury Inflation-Protected Securities, book/tax differences in the treatment of swap contracts and book/tax differences in the treatment of certain securities. |
2. Investment Management Agreement and Other Transactions with Affiliates
Each Fund has an investment management agreement with Legg Mason Partners Fund Advisor, LLC (“LMPFA”). Prior to September 30, 2009, Legg Mason Fund Adviser, Inc. (“LMFA”) was the investment manager. Western Asset Management Company (“Western Asset”) is the investment adviser to Core and Core Plus. Western Asset Management Company Limited (“WAML”), Western Asset Management Company Pte. Ltd. (“Western Singapore”) and Western Asset Management Company Ltd (“Western Japan”) share investment advisory responsibilities with Western Asset for Core Plus.
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Annual Report to Shareholders
Pursuant to their respective agreements, LMPFA provides the Funds with management and administrative services for which each Fund pays a fee, computed daily and payable monthly, at annual rates of each Fund’s average daily net assets. From August 1, 2008 through April 30, 2010, the manager is contractually obligated to follow the Fee Cap for the Institutional Select and Financial Intermediary Classes of each Fund. From August 1, 2008 through April 30, 2010, the manager is contractually obligated to waive its compensation (and, to the extent necessary, bear other expenses of the Portfolio) with respect to the Institutional Class of certain Funds in amounts equal to specified annual rates of each such Fund’s average daily net assets attributable to such share class (“Flat Waiver”). Western Asset and WAML also agreed to waive their advisory fees (which are paid by LMPFA, and not the Funds) in corresponding amounts under both the Fee Cap and the Flat Waiver.
Any amounts waived or reimbursed in a particular fiscal year under the Fee Cap will be subject to repayment by a Fund on behalf of the applicable class to LMPFA to the extent that from time to time during the next three fiscal years the repayment will not cause a Fund’s expenses for such class to exceed a limit agreed between the Fund and LMPFA. The following chart shows annual rates of management fees, expense limits or waivers (as applicable), management fees waived and potential fees which may be recaptured for the Funds’ share classes.
| | | | | | | | | | | | | | |
Fund | | Asset
Breakpoint for
Management Fee | | Management
Fee | | | Expense
Limitation
8/1/08-4/30/10 | | | Waiver | | Management
Fees (Waived/
Recaptured) | | Maximum
Amount
Subject to
Recapture |
Core | | | | | | | | | | | | | | |
Institutional Class | | Up to $500 million | | 0.450 | % | | — | | | — | | — | | — |
| | Next $500 million | | 0.425 | % | | | | | | | | | |
| | In excess of $1 billion | | 0.400 | % | | | | | | | | | |
Institutional Select Class | | Up to $500 million | | 0.450 | % | | 0.50 | % | | — | | — | | — |
| | Next $500 million | | 0.425 | % | | | | | | | | | |
| | In excess of $1 billion | | 0.400 | % | | | | | | | | | |
Financial Intermediary Class | | Up to $500 million | | 0.450 | % | | 0.75 | % | | — | | — | | 861,055 |
| | Next $500 million | | 0.425 | % | | | | | | | | | |
| | In excess of $1 billion | | 0.400 | % | | | | | | | | | |
Core Plus | | | | | | | | | | | | | | |
Institutional Class | | Up to $500 million | | 0.450 | % | | — | | | — | | — | | — |
| | Next $500 million | | 0.425 | % | | | | | | | | | |
| | In excess of $1 billion | | 0.400 | % | | | | | | | | | |
Institutional Select Class | | Up to $500 million | | 0.450 | % | | 0.45 | % | | — | | — | | 3,982 |
| | Next $500 million | | 0.425 | % | | | | | | | | | |
| | In excess of $1 billion | | 0.400 | % | | | | | | | | | |
Financial Intermediary Class | | Up to $500 million | | 0.450 | % | | 0.70 | % | | — | | — | | 1,733,796 |
| | Next $500 million | | 0.425 | % | | | | | | | | | |
| | In excess of $1 billion | | 0.400 | % | | | | | | | | | |
Legg Mason Investor Services, LLC (“LMIS”) serves as distributor of the Funds’ shares. LMIS receives from each Fund an annual distribution fee of 0.25% of the average daily net assets of the Financial Intermediary Class of each Fund, computed daily and payable monthly.
As of September 30, 2009, LMPFA replaced LMFA. Effective upon the substitution, LMPFA assumed the rights and responsibilities of LMFA under its investment management agreement with the Fund, including all of the responsibilities to the Fund described in the Fund’s prospectus.
LMPFA, Western Asset, WAML, Western Singapore, Western Japan and LMIS are wholly owned subsidiaries of Legg Mason, Inc.
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Annual Report to Shareholders
Notes to Financial Statements—Continued
3. Investments
During the year ended December 31, 2009, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) and U.S Government & Agency Obligations were as follows:
| | | | | | |
| Core | | Investments | | U.S. Government &
Agency Obligations |
Purchases | | $ | 838,929,801 | | $ | 7,583,485,462 |
Sales | | | 1,184,605,463 | | | 8,639,022,179 |
| | | | | | |
| Core Plus | | Investments | | U.S. Government &
Agency Obligations |
Purchases | | $ | 1,683,164,716 | | $ | 15,313,517,977 |
Sales | | | 2,235,466,043 | | | 17,757,975,923 |
At December 31, 2009, the aggregate gross unrealized apprecition and depreciation of investments for federal income tax purposes were as follows:
| | | | | | | | | | | |
Fund | | Gross Unrealized
Appreciation | | Gross Unrealized
Depreciation | | | Net Unrealized
Appreciation/
Depreciation | |
Core | | $ | 99,707,896 | | $ | (565,272,701 | ) | | $ | (465,564,805 | ) |
Core Plus | | | 310,702,777 | | | (974,544,953 | ) | | | (663,842,176 | ) |
During the year ended December 31, 2009, written option transactions for the Funds were as follows:
| | | | | | | |
| Core | | Number of
Contracts | | | Premiums | |
Written options, outstanding December 31, 2008 | | 647,290,423 | | | $ | 32,385,640 | |
Options written | | 1,251,609,094 | | | | 33,226,867 | |
Options closed | | (261,012,180 | ) | | | (12,755,214 | ) |
Options exercised | | (137,006,387 | ) | | | (8,878,351 | ) |
Options expired | | (1,170,336,790 | ) | | | (25,365,860 | ) |
| | | | | | | |
Written options, outstanding December 31, 2009 | | 330,544,160 | | | $ | 18,613,082 | |
| | | | | | | |
| | | | | | | |
| Core Plus | | Number of
Contracts | | | Premiums | |
Written options, outstanding December 31, 2008 | | 1,404,999,259 | | | $ | 65,919,361 | |
Options written | | 3,074,771,677 | | | | 87,443,970 | |
Options closed | | (611,229,265 | ) | | | (30,418,594 | ) |
Options exercised | | (356,262,250 | ) | | | (17,257,112 | ) |
Options expired | | (2,638,210,110 | ) | | | (60,231,749 | ) |
| | | | | | | |
Written options, outstanding December 31, 2009 | | (874,069,311 | ) | | $ | 45,455,876 | |
| | | | | | | |
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Annual Report to Shareholders
At December 31, 2009, the Funds had the following open forward foreign currency contracts:
Core Plus
| | | | | | | | | | | | | | |
| | | Settlement
Date | | Contract to | | Unrealized
Gain/(Loss) | |
Broker | | | ReceiveA | | DeliverA | |
Deutsche Bank AG London | | 2/17/2010 | | CAD | | 54,164,500 | | USD | | 50,937,124 | | $ | 853,171 | |
JPMorgan Chase Bank | | 2/17/2010 | | CAD | | 18,877,545 | | USD | | 17,769,777 | | | 280,304 | |
Citibank NA | | 2/17/2010 | | EUR | | 4,050,000 | | USD | | 6,032,475 | | | (226,966 | ) |
Credit Suisse First Boston (London) | | 2/17/2010 | | EUR | | 31,793,419 | | USD | | 47,240,570 | | | (1,666,009 | ) |
JPMorgan Chase Bank | | 2/17/2010 | | EUR | | 3,500,000 | | USD | | 5,189,555 | | | (172,449 | ) |
Citibank NA | | 2/17/2010 | | GBP | | 560,000 | | USD | | 933,353 | | | (29,096 | ) |
JPMorgan Chase Bank | | 2/17/2010 | | GBP | | 29,600,000 | | USD | | 48,869,600 | | | (1,073,139 | ) |
Citibank NA | | 2/17/2010 | | USD | | 50,883,544 | | EUR | | 34,279,325 | | | 1,745,540 | |
Citibank NA | | 2/17/2010 | | USD | | 21,749,733 | | GBP | | 13,171,199 | | | 481,601 | |
Deutsche Bank AG London | | 2/17/2010 | | USD | | 60,443,967 | | GBP | | 36,646,033 | | | 1,269,957 | |
Deutsche Bank AG London | | 2/17/2010 | | USD | | 40,029,800 | | JPY | | 3,600,000,000 | | | 1,367,136 | |
Goldman Sachs International | | 2/17/2010 | | USD | | 70,082,450 | | EUR | | 47,500,000 | | | 1,993,150 | |
Goldman Sachs International | | 2/17/2010 | | USD | | 40,000,000 | | JPY | | 3,505,320,000 | | | 2,354,164 | |
JPMorgan Chase Bank | | 2/17/2010 | | USD | | 92,159,080 | | EUR | | 62,215,000 | | | 2,976,431 | |
JPMorgan Chase Bank | | 2/17/2010 | | USD | | 81,700,000 | | JPY | | 7,129,387,100 | | | 5,133,028 | |
UBS AG London | | 2/17/2010 | | USD | | 13,944,806 | | EUR | | 9,400,000 | | | 470,292 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | $ | 15,757,115 | |
| | | | | | | | | | | | | | |
| A | | Definitions of currency abbreviations: |
CAD—Canadian Dollar
EUR—Euro
GBP—British Pound
JPY—Japanese Yen
USD—United States Dollar
At December 31, 2009, the Funds had the following open swap contracts:
As of December 31, 2009, the one and three month London Interbank offered Rate (“LIBOR”) were 0.2309% and 0.2506%, respectively.
Core
| | | | | | | | | | | | | | | |
Interest Rate Swaps: | | | | | | | | | | | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic
Payments Made
by the Fund‡ | | Periodic Payments
Received by the
Fund‡ | | Contract
Notional
Amount | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
Banc of America Securities LLC | | March 1, 2013 | | 5.104%
Semi-Annually | | 3-month LIBOR | | $ | 4,700,000 | | — | | $ | (427,534 | ) |
| | | | | | |
Banc of America Securities LLC | | December 16, 2013 | | 5.381%
Semi-Annually | | 3-month LIBOR | | | 2,740,000 | | — | | | (295,108 | ) |
| | | | | | |
Banc of America Securities LLC | | November 10, 2015 | | 4.864%
Semi-Annually | | 3-month LIBOR | | | 4,400,000 | | — | | | (386,933 | ) |
| | | | | | |
Banc of America Securities LLC | | January 15, 2016 | | 5.45084%
Semi-Annually | | 3-month LIBOR | | | 2,750,000 | | — | | | (330,746 | ) |
| | | | | | |
Banc of America Securities LLC | | October 3, 2016 | | 5.425%
Semi-Annually | | 3-month LIBOR | | | 4,120,000 | | — | | | (494,988 | ) |
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Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | | | |
Core—Continued | | | | | | | | | | | | |
| | | | |
Interest Rate Swaps—Continued | | | | | | | | | | | | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic
Payments Made
by the Fund‡ | | Periodic Payments
Received by the
Fund‡ | | Contract
Notional
Amount | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
| | | | | | |
Banc of America Securities LLC | | February 15, 2025 | | 4.29456%
Semi-Annually | | 3-month LIBOR | | $ | 91,600,000 | | | — | | $ | 729,842 | |
| | | | | | |
Barclays Capital Inc. | | November 1, 2011 | | 5.439%
Semi-Annually | | 3-month LIBOR | | | 5,600,000 | | | — | | | (421,237 | ) |
| | | | | | |
Barclays Capital Inc. | | June 25, 2012 | | 5.06%
Semi-Annually | | 3-month LIBOR | | | 3,550,000 | | | — | | | (287,387 | ) |
| | | | | | |
Barclays Capital Inc. | | September 15, 2012 | | 5.189%
Semi-Annually | | 3-month LIBOR | | | 3,520,000 | | | — | | | (308,344 | ) |
| | | | | | |
Barclays Capital Inc. | | November 20, 2019 | | 3.9%
Semi-Annually | | 3-month LIBOR | | | 16,960,000 | | | — | | | 76,583 | |
Bear Stearns, Inc. | | September 15, 2014 | | 5%
Semi-Annually | | 3-month LIBOR | | | 4,270,000 | | | — | | | (406,867 | ) |
Citigroup Global Markets | | September 15, 2011 | | 3.34%
Semi-Annually | | 3-month LIBOR | | | 5,500,000 | | | — | | | (199,287 | ) |
| | | | | | |
Credit Suisse First Boston USA | | September 15, 2010 | | 5.0025%
Semi-Annually | | 3-month LIBOR | | | 3,070,000 | | | — | | | (98,453 | ) |
| | | | | | |
Credit Suisse First Boston USA | | August 15, 2013 | | 5.023%
Semi-Annually | | 3-month LIBOR | | | 3,020,000 | | | — | | | (278,181 | ) |
| | | | | | |
Credit Suisse First Boston USA | | February 28, 2014 | | 2.75013%
Semi-Annually | | 3-month LIBOR | | | 203,340,000 | | | — | | | (879,161 | ) |
| | | | | | |
Credit Suisse First Boston USA | | March 15, 2014 | | 5.131%
Semi-Annually | | 3-month LIBOR | | | 3,290,000 | | | — | | | (328,028 | ) |
| | | | | | |
Credit Suisse First Boston USA | | September 15, 2015 | | 5.16%
Semi-Annually | | 3-month LIBOR | | | 3,050,000 | | | — | | | (317,004 | ) |
| | | | | | |
Credit Suisse First Boston USA | | March 1, 2017 | | 5.335%
Semi-Annually | | 3-month LIBOR | | | 2,420,000 | | | — | | | (278,501 | ) |
| | | | | | |
Deutsche Bank AG | | June 15, 2016 | | 5.1825%
Semi-Annually | | 3-month LIBOR | | | 5,620,000 | | | — | | | (592,172 | ) |
| | | | | | |
Deutsche Bank AG | | April 1, 2017 | | 5.435%
Semi-Annually | | 3-month LIBOR | | | 4,120,000 | | | — | | | (501,135 | ) |
| | | | | | |
JP Morgan Chase & Co. | | March 17, 2020 | | 3.6%
Semi-Annually | | 3-month LIBOR | | | 24,000,000 | | $ | 36,188 | | | 935,457 | |
Merrill Lynch & Co., Inc. | | November 2, 2010 | | USD-CMS 10Yr | | USD-CMM | | | 79,300,000 | | | — | | | (164,861 | )* |
| | | | | | |
Morgan Stanley & Co., Inc. | | March 15, 2012 | | 4.7625%
Semi-Annually | | 3-month LIBOR | | | 2,750,000 | | | — | | | (191,766 | ) |
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Annual Report to Shareholders
| | | | | | | | | | | | | | | | | |
Core—Continued | | | | | | | | | | | | | |
| | | | |
Interest Rate Swaps—Continued | | | | | | | | | | | | | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic
Payments Made
by the Fund‡ | | Periodic Payments
Received by the
Fund‡ | | Contract
Notional
Amount | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
| | | | | | |
Morgan Stanley & Co., Inc. | | April 30, 2016 | | 5.189%
Semi-Annually | | 3-month LIBOR | | $ | 3,400,000 | | | — | | | $ | (360,704 | ) |
| | | | | | |
Morgan Stanley & Co., Inc. | | September 16, 2019 | | 3.25%
Semi-Annually | | 3-month LIBOR | | | 28,710,000 | | $ | (377,410 | ) | | | 1,997,997 | |
| | | | | | |
RBS Greenwich | | March 1, 2016 | | 5.12%
Semi-Annually | | 3-month LIBOR | | | 4,250,000 | | | — | | | | (433,012 | ) |
| | | | | | |
RBS Greenwich | | July 16, 2019 | | 3.64%
Semi-Annually | | 3-month LIBOR | | | 50,600,000 | | | — | | | | 1,122,693 | |
| | | | | | |
RBS Greenwich | | July 16, 2039 | | 3-month LIBOR | | 4.095%
Semi-Annually | | | 25,300,000 | | | — | | | | (1,780,988 | ) |
| | | | | | |
The Goldman Sachs Group, Inc. | | November 2, 2010 | | USD-CMS 10Yr | | USD-CMM | | | 43,100,000 | | | — | | | | 39,948 | * |
| | | | | | |
The Goldman Sachs Group, Inc. | | November 8, 2010 | | USD-CMS 10Yr | | USD-CMM | | | 27,500,000 | | | — | | | | 38,978 | * |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 666,550,000 | | $ | (341,222 | ) | | $ | (4,820,899 | ) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Credit Default Swap on Corporate Issues—Sell Protection1 | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Implied Credit
Spread At
December 31,
20092 | | Periodic
Payments
Received by
the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
Bear Stearns, Inc. (Ford Motor Credit Company,
7%, due 10/1/13 ) | | June 20, 2010 | | 2.23% | | 4.83% Quarterly | | $ | 12,500,000 | | $ | 153,401 | | | — | | $ | 153,401 | |
| | | | | | | |
Credit Suisse First Boston USA (Eastman Kodak Company,
7.25%, due 11/15/13) | | March 20, 2010 | | 3.60% | | 1.4% Quarterly | | | 6,500,000 | | | (31,962 | ) | | — | | | (31,962 | ) |
| | | | | | | |
Deutsche Bank AG (Eastman Kodak Company,
7.25%, due 11/15/13) | | March 20, 2010 | | 3.60% | | 1.25% Quarterly | | | 1,100,000 | | | (5,778 | ) | | — | | | (5,778 | ) |
Deutsche Bank AG (Eastman Kodak Company,
7.25%, due 11/15/13) | | March 20, 2015 | | 10.14% | | 1.67% Quarterly | | | 1,300,000 | | | (396,844 | ) | | — | | | (396,844 | ) |
| | | | | | | |
Deutsche Bank AG (Ford Motor
Credit Co.,
7.45%, due 7/16/31) | | March 20, 2015 | | 6.90% | | 2.93% Quarterly | | | 1,700,000 | | | (282,726 | ) | | — | | | (282,726 | ) |
105
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | | | | | | | | |
Core—Continued | |
|
Credit Default Swap on Corporate Issues—Sell Protection1—Continued | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Implied Credit
Spread At
December 31,
20092 | | Periodic
Payments
Received by
the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
| | | | | | | |
RBS Greenwich (Countrywide Home Loans, Inc.,
4%, due 3/22/11) | | June 20, 2012 | | 0.81% | | 0.72% Quarterly | | $ | 25,000,000 | | $ | (55,603 | ) | | | — | | | $ | (55,603 | ) |
| | | | | | | |
RBS Greenwich (Countrywide Home Loans, Inc.,
4%, due 3/22/11) | | September 20, 2012 | | 0.83% | | 6% Quarterly | | | 9,100,000 | | | 1,251,872 | | | | — | | | | 1,251,872 | |
| | | | | | | |
RBS Greenwich (Countrywide Home Loans, Inc.,
4%, due 3/22/11) | | September 20, 2012 | | 0.83% | | 6.1% Quarterly | | | 9,100,000 | | | 1,276,106 | | | | — | | | | 1,276,106 | |
| | | | | | | |
RBS Greenwich (Countrywide Home Loans, Inc.,
4%, due 3/22/11) | | September 20, 2012 | | 0.83% | | 2.75% Quarterly | | | 10,000,000 | | | 510,191 | | | | — | | | | 510,191 | |
| | | | | | | |
RBS Greenwich (Countrywide Home Loans, Inc.,
4%, due 3/22/11) | | December 20, 2012 | | 0.85% | | 5% Quarterly | | | 10,000,000 | | | 1,199,304 | | | $ | (736,692 | ) | | | 1,935,996 | |
RBS Greenwich
(Ford Motor Credit Company,
7%, due 10/1/13) | | December 20, 2010 | | 2.47% | | 4.26% Quarterly | | | 25,000,000 | | | 428,983 | | | | — | | | | 428,983 | |
| | | | | | | |
RBS Greenwich (General Motors Acceptance Corporation,
6.875%, due 8/12/12) | | June 20, 2010 | | 2.22% | | 4.53% Quarterly | | | 15,000,000 | | | 163,925 | | | | — | | | | 163,925 | |
RBS Greenwich (General Motors Acceptance Corporation,
6.875%, due 8/28/12) | | June 20, 2010 | | 2.22% | | 4.68% Quarterly | | | 25,000,000 | | | 290,958 | | | | — | | | | 290,958 | |
| | | | | | | |
RBS Greenwich (General Motors Acceptance Corporation,
6.875%, due 8/28/12) | | September 20, 2010 | | 2.75% | | 5.75% Quarterly | | | 7,500,000 | | | 161,399 | | | | — | | | | 161,399 | |
106
Annual Report to Shareholders
| | | | | | | | | | | | | | | | | | | | | |
Core—Continued | |
|
Credit Default Swap on Corporate Issues—Sell Protection1—Continued | |
Swap Counterparty (Reference Entity) | | Termination Date | | Implied Credit
Spread At
December 31,
20092 | | Periodic
Payments
Received by
the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
RBS Greenwich (Residential Capital Corp.,
6.5%, due 4/17/13) | | September 20, 2012 | | 13.05% | | 2.32% Quarterly | | $ | 20,000,000 | | $ | (3,999,206 | ) | | | — | | | $ | (3,999,206 | ) |
| | | | | | | |
RBS Greenwich (Ryland Group Inc.,
5.375%, due 1/15/15) | | December 20, 2012 | | 1.47% | | 2.4% Quarterly | | | 9,800,000 | | | 259,754 | | | | — | | | | 259,754 | |
| | | | | | | |
RBS Greenwich
(SLM Corp.,
5.125%, due 8/27/12) | | June 20, 2012 | | 5.06% | | 1.78% Quarterly | | | 25,000,000 | | | (1,810,675 | ) | | | — | | | | (1,810,675 | ) |
| | | | | | | |
RBS Greenwich
(SLM Corp.,
5.125%, due 8/27/12) | | September 20, 2012 | | 5.10% | | 2.67 % Quarterly | | | 10,000,000 | | | (584,428 | ) | | | — | | | | (584,428 | ) |
| | | | | | | |
RBS Greenwich
(Time Warner Inc.
6.875%, due 5/1/12) | | September 20, 2010 | | 0.21% | | 0.47% Quarterly | | | 5,000,000 | | | 9,404 | | | | — | | | | 9,404 | |
| | | | | | | |
RBS Greenwich
(Time Warner Inc.,
6.875%, due 5/1/12) | | December 20, 2010 | | 0.21% | | 0.5% Quarterly | | | 12,500,000 | | | 35,255 | | | | — | | | | 35,255 | |
| | | | | | | |
The Goldman Sachs Group, Inc. (Countrywide Financial,
0.0%, due 2/8/31) | | September 20, 2012 | | 0.83% | | 6% Quarterly | | | 4,700,000 | | | 646,571 | | | | — | | | | 646,571 | |
The Goldman Sachs Group, Inc. (Eastman Kodak Company,
7.25%, due 11/15/13) | | March 20, 2015 | | 10.14% | | 1.67% Quarterly | | | 1,400,000 | | | (427,370 | ) | | | — | | | | (427,370 | ) |
| | | | | | | |
The Goldman Sachs Group, Inc. (Ford Motor Credit Co.,
7%, due 10/1/13) | | June 20, 2010 | | 2.23% | | 4.75% Quarterly | | | 1,900,000 | | | 22,598 | | | | — | | | | 22,598 | |
| | | | | | | |
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation,
6.875%, due 8/28/12) | | June 20, 2010 | | 2.22% | | 6% Quarterly | | | 5,000,000 | | | 89,428 | | | | — | | | | 89,428 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Total | | $ | 254,100,000 | | $ | (1,095,443 | ) | | $ | (736,692 | ) | | $ | (358,751 | ) |
| | | | | | | | | | | | | | | | | | | | | |
107
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | | | |
Core—Continued | | | | | | | | | | | | | | | | |
|
Credit Default Swaps on Corporate Issues—Buy Protection4 | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic Payments
Made by the
Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
Banc of America Securities LLC (Home Depot Inc.,
3.75%, due 9/15/09) | | December 20, 2013 | | 0.635%
Quarterly | | $2,740,000 | | $ | (16,533 | ) | | — | | $ | (16,533 | ) |
| | | | | | |
Banc of America Securities LLC (Marriot International Inc.,
4.625%, due 6/15/12 ) | | December 20, 2015 | | 0.73%
Monthly | | 4,400,000 | | | 35,404 | | | — | | | 35,404 | |
| | | | | | |
Banc of America Securities LLC
(Masco Corp.,
5.875%, due 7/15/12) | | December 20, 2016 | | 1.04%
Quarterly | | 4,120,000 | | | 287,504 | | | — | | | 287,504 | |
| | | | | | |
Banc of America Securities LLC (PHH Corporate Note,
7.125%, due 3/1/13 ) | | March 20, 2013 | | 1.05%
Monthly | | 3,410,000 | | | 505,793 | | | — | | | 505,793 | |
| | | | | | |
Banc of America Securities LLC
(Viacom Inc.,
4.625%, due 5/15/18) | | December 20, 2015 | | 1.13%
Quarterly | | 2,750,000 | | | 26,680 | | | — | | | 26,680 | |
| | | | | | |
Barclays Capital Inc. (Amerisourcebergen Corp.,
5.625%, due 9/15/12) | | September 20, 2012 | | 0.5%
Quarterly | | 3,520,000 | | | (23,623 | ) | | — | | | (23,623 | ) |
| | | | | | |
Barclays Capital Inc. (Health Care Property Investments Inc.,
6.45%, due 6/25/12) | | June 20, 2012 | | 0.63%
Quarterly | | 3,550,000 | | | 57,763 | | | — | | | 57,763 | |
| | | | | | |
Barclays Capital Inc. (Motorola Inc.,
6.5%, due 9/1/25) | | December 20, 2011 | | 0.32%
Quarterly | | 5,600,000 | | | 54,741 | | | — | | | 54,741 | |
| | | | | | |
Bear Stearns, Inc.
(Bell South Corp.,
6%, due 10/15/11) | | September 20, 2014 | | 0.28%
Quarterly | | 4,270,000 | | | 13,764 | | | — | | | 13,764 | |
| | | | | | |
Credit Suisse First Boston USA (AAMES Mortgage Investment Trust
2005-1 M8, 1-Month
LIBOR + 160 bp, due 6/25/35) | | June 25, 2035 | | 1.28%
Monthly | | 784,000 | | | 749,980 | | | — | | | 749,980 | |
108
Annual Report to Shareholders
| | | | | | | | | | | | | | | | |
Core—Continued | |
|
Credit Default Swaps on Corporate Issues—Buy Protection4—Continued | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic Payments
Made by the
Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
Credit Suisse First Boston USA (AAMES Mortgage Investment Trust
2005-1 M9, 1-Month LIBOR + 250 bp, due 6/25/35) | | June 25, 2035 | | 2.05%
Monthly | | $784,000 | | $ | 764,740 | | | — | | $ | 764,740 | |
| | | | | | |
Credit Suisse First Boston USA (ACE Securities Corp. 2005-HE1 M8, 1-Month LIBOR + 138 bp, due 2/25/35) | | February 25, 2035 | | 1.31%
Monthly | | 304,796 | | | 302,719 | | | — | | | 302,719 | |
| | | | | | |
Credit Suisse First Boston USA (Aegis Asset Backed Securities Trust 2004-4 B2, 1-Month LIBOR + 190bp, due 10/25/34) | | October 25, 2034 | | 1.37%
Monthly | | 442,801 | | | 388,981 | | | — | | | 388,981 | |
| | | | | | |
Credit Suisse First Boston USA (Aegis Asset Backed Securities Trust 2005 B2, 1-Month LIBOR + 130 bp, due 3/25/35) | | March 25, 2035 | | 1.31%
Monthly | | 784,000 | | | 783,257 | | | — | | | 783,257 | |
| | | | | | |
Credit Suisse First Boston USA (Aegis Asset Backed Securities Trust 2005 B3, 1-Month LIBOR + 200 bp, due 3/25/35) | | March 25, 2035 | | 2.18%
Monthly | | 784,000 | | | 783,347 | | | — | | | 783,347 | |
| | | | | | |
Credit Suisse First Boston USA (Amerisource Bergen Corp.,
8.125%, due 9/1/08) | | September 20, 2015 | | 0.9%
Quarterly | | 3,050,000 | | | (67,744 | ) | | — | | | (67,744 | ) |
| | | | | | |
Credit Suisse First Boston USA (Argent Securities Inc. 2004-W11 M10, 1-Month LIBOR + 350bp, due 11/25/34) | | November 25, 2034 | | 2.15%
Monthly | | 256,252 | | | 251,696 | | | — | | | 251,696 | |
| | | | | | |
Credit Suisse First Boston USA (Argent Securities Inc. 2004-W11 M9, 1-Month LIBOR + 225bp, due 11/25/34) | | November 25, 2034 | | 1.33%
Monthly | | 298,717 | | | 291,249 | | | — | | | 291,249 | |
109
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | |
Core—Continued |
|
Credit Default Swaps on Corporate Issues—Buy Protection4—Continued |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic Payments
Made by the
Fund‡ | | Contract
Notional
Amount3 | | Market Value | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) |
Credit Suisse First Boston USA (Argent Securities Inc. 2004-W4 M3, 1-Month LIBOR + 300 bp, due 3/25/34) | | March 25, 2034 | | 2.2%
Monthly | | $371,871 | | $ | 289,777 | | — | | $ | 289,777 |
| | | | | | |
Credit Suisse First Boston USA (Finance America Mortgage Loan Trust 2004-3 M8, 1-Month LIBOR + 180bp, due 11/25/34) | | November 25, 2034 | | 1.31%
Monthly | | 285,027 | | | 283,481 | | — | | | 283,481 |
| | | | | | |
Credit Suisse First Boston USA (Finance America Mortgage Loan Trust 2004-3 M9, 1-Month LIBOR + 315bp, due 11/25/34) | | November 25, 2034 | | 2.18%
Monthly | | 21,881 | | | 21,876 | | — | | | 21,876 |
| | | | | | |
Credit Suisse First Boston USA (Fremont Home Loan Trust 2005-A M8, 1-Month LIBOR +
135bp, due 1/25/35) | | January 25, 2035 | | 1.31%
Monthly | | 310,788 | | | 303,204 | | — | | | 303,204 |
| | | | | | |
Credit Suisse First Boston USA (Fremont Home Loan Trust 2005-A, 1-Month LIBOR + 100bp, due 1/25/35) | | January 25, 2035 | | 2.08%
Monthly | | 3,940 | | | 3,928 | | — | | | 3,928 |
| | | | | | |
Credit Suisse First Boston USA (IndyMac Home Equity Loan Asset-Backed, Trust 2004-C M8, 1-Month LIBOR + 190bp, due 3/25/35) | | March 25, 2035 | | 1.28%
Monthly | | 409,241 | | | 380,101 | | — | | | 380,101 |
| | | | | | |
Credit Suisse First Boston USA (IndyMac Home Equity Loan Asset-Backed, Trust 2004-C M9, 1-Month LIBOR + 325bp, due 3/25/35) | | March 25, 2035 | | 2.05%
Monthly | | 326,584 | | | 305,746 | | — | | | 305,746 |
| | | | | | |
Credit Suisse First Boston USA (Long Beach Mortgage Loan Trust 2004-1 M9, 1-Month LIBOR + 350bp, due 2/25/34) | | February 25, 2034 | | 2.15%
Monthly | | 165,409 | | | 129,669 | | — | | | 129,669 |
110
Annual Report to Shareholders
| | | | | | | | | | | | | | | | |
Core—Continued | |
|
Credit Default Swaps on Corporate Issues—Buy Protection4—Continued | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic Payments
Made by the
Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
Credit Suisse First Boston USA (Long Beach Mortgage Loan Trust 2005-1 M8, 1-Month LIBOR + 170bp, due 2/25/35) | | February 25, 2035 | | 1.31%
Monthly | | $344,389 | | $ | 342,970 | | | — | | $ | 342,970 | |
| | | | | | |
Credit Suisse First Boston USA (Marsh & Mclennan Company, Inc.,
5.375%, due 7/15/14) | | September 20, 2010 | | 0.46%
Quarterly | | 3,070,000 | | | (3,024 | ) | | — | | | (3,024 | ) |
| | | | | | |
Credit Suisse First Boston USA (Masco Corp.,
5.875%, due 7/15/12) | | September 20, 2013 | | 0.75%
Quarterly | | 3,320,000 | | | 114,663 | | | — | | | 114,663 | |
| | | | | | |
Credit Suisse First Boston USA (MASTR Asset Backed Securities Trust 2005-NC1 M8, 1-Month LIBOR + 153bp, due 12/25/34) | | December 25, 2034 | | 1.31%
Monthly | | 461,351 | | | 430,772 | | | — | | | 430,772 | |
| | | | | | |
Credit Suisse First Boston USA (MASTR Asset Backed Securities Trust 2005-NC1 M9, 1-Month LIBOR + 240bp, due 12/25/34) | | December 25, 2034 | | 2.08%
Monthly | | 414,556 | | | 399,203 | | | — | | | 399,203 | |
| | | | | | |
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2004-WMC1 B3, 1-Month LIBOR + 225bp, due 9/25/35) | | September 25, 2035 | | 2.05%
Monthly | | 206,563 | | | 195,627 | | | — | | | 195,627 | |
| | | | | | |
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2004-WMC4 B3, 1-Month LIBOR + 375bp, due 4/25/35) | | April 25, 2035 | | 2.15%
Monthly | | 185,449 | | | 181,560 | | | — | | | 181,560 | |
| | | | | | |
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-NC1 B2, 1-Month LIBOR + 130bp, due 10/25/35) | | October 25, 2035 | | 1.28%
Monthly | | 280,552 | | | 265,465 | | | — | | | 265,465 | |
111
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | |
Core—Continued |
|
Credit Default Swaps on Corporate Issues—Buy Protection4—Continued |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic Payments
Made by the
Fund‡ | | Contract
Notional
Amount3 | | Market Value | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) |
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-NC1 B3, 1-Month LIBOR + 205bp, due 10/25/35) | | October 25, 2035 | | 2.05%
Monthly | | $281,898 | | $ | 268,113 | | — | | $ | 268,113 |
| | | | | | |
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-WMC1 B2, 1-Month LIBOR + 135bp, due 9/25/35) | | September 25, 2035 | | 1.28%
Monthly | | 266,082 | | | 251,548 | | — | | | 251,548 |
| | | | | | |
Credit Suisse First Boston USA (Morgan Stanley ABS Capital I 2005-WMC1 B2, 1-Month LIBOR + 130bp, due 1/25/35) | | January 25, 2035 | | 1.31%
Monthly | | 248,671 | | | 243,253 | | — | | | 243,253 |
| | | | | | |
Credit Suisse First Boston USA (Morgan Stanley ABS Capital I 2005-WMC1 B3, 1-Month LIBOR + 215bp, due 1/25/35) | | January 25, 2035 | | 2.18%
Monthly | | 36,619 | | | 36,529 | | — | | | 36,529 |
| | | | | | |
Credit Suisse First Boston USA (New Century Home Equity Loan Trust 2004-2 M9, 1-Month LIBOR + 325bp, due 8/25/34) | | August 25, 2034 | | 2.15%
Monthly | | 296,162 | | | 173,278 | | — | | | 173,278 |
| | | | | | |
Credit Suisse First Boston USA (New Century Home Equity Loan Trust 2005-1 M8, 1-Month LIBOR + 140bp, due 3/25/35) | | March 25, 2035 | | 1.31%
Monthly | | 384,430 | | | 366,777 | | — | | | 366,777 |
| | | | | | |
Credit Suisse First Boston USA (New Century Home Equity Loan Trust 2005-1 M9, 1-Month LIBOR + 205bp, due 3/25/35) | | March 25, 2035 | | 2.18%
Monthly | | 335,297 | | | 322,341 | | — | | | 322,341 |
112
Annual Report to Shareholders
| | | | | | | | | | | | | | |
Core—Continued |
|
Credit Default Swaps on Corporate Issues—Buy Protection4—Continued |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic Payments
Made by the
Fund‡ | | Contract
Notional
Amount3 | | Market Value | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) |
Credit Suisse First Boston USA (Novastar Home Equity Loan 2005-1 B2, 1-Month LIBOR + 135bp, due 6/25/35) | | June 25, 2035 | | 1.28%
Monthly | | $784,000 | | $ | 748,569 | | — | | $ | 748,569 |
| | | | | | |
Credit Suisse First Boston
USA (Novastar Home
Equity Loan 2005-4 B3,
1-Month LIBOR + 195bp, due 6/25/35) | | June 25, 2035 | | 2.05%
Monthly | | 784,000 | | | 760,080 | | — | | | 760,080 |
| | | | | | |
Credit Suisse First Boston USA (Park Place Securities, Inc. 2005-WCH1 M8, 1-Month LIBOR + 155bp, due 1/25/36) | | January 25, 2036 | | 1.36%
Monthly | | 784,000 | | | 766,998 | | — | | | 766,998 |
| | | | | | |
Credit Suisse First Boston USA (Park Place Securities, Inc. 2005-WCH1 M9, 1-Month LIBOR + 250bp, due 1/25/36) | | January 25, 2036 | | 2.18%
Monthly | | 384,411 | | | 382,474 | | — | | | 382,474 |
| | | | | | |
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2004-1 M6, 1-Month LIBOR + 230bp, due 6/25/34) | | June 25, 2034 | | 1.37%
Quarterly | | 247,840 | | | 246,509 | | — | | | 246,509 |
| | | | | | |
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2005-1 B3, 1-Month LIBOR + 260bp, due 1/25/35) | | January 25, 2035 | | 2.05%
Monthly | | 614,700 | | | 614,195 | | — | | | 614,195 |
| | | | | | |
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2005-1, 1-Month LIBOR + 165bp, due 1/25/35) | | January 25, 2035 | | 1.28%
Monthly | | 784,000 | | | 783,230 | | — | | | 783,230 |
| | | | | | |
Credit Suisse First Boston USA (Southwest Airlines Co.,
5.25%, due 10/1/14) | | March 20, 2017 | | 0.69%
Quarterly | | 2,420,000 | | | 100,986 | | — | | | 100,986 |
| | | | | | |
Credit Suisse First Boston USA (Waste Management Inc.,
7.375%, due 8/1/10) | | March 20, 2014 | | 0.49%
Quarterly | | 3,290,000 | | | 7,291 | | — | | | 7,291 |
113
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | | | |
Core—Continued | |
|
Credit Default Swaps on Corporate Issues—Buy Protection4—Continued | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic Payments
Made by the
Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
Deutsche Bank AG (Autozone Inc.,
6.95%, due 6/15/16) | | June 20, 2016 | | 0.58%
Quarterly | | $5,620,000 | | $ | 11,340 | | | — | | $ | 11,340 | |
| | | | | | |
Deutsche Bank AG (Centurytel Inc., 7.875%, due 8/15/12) | | March 20, 2017 | | 0.89%
Quarterly | | 4,120,000 | | | 48,074 | | | — | | | 48,074 | |
| | | | | | |
Morgan Stanley & Co., Inc. (Sara Lee Corp. 6.125% due 11/01/32) | | September 20, 2011 | | 0.62%
Quarterly | | 5,500,000 | | | (29,965 | ) | | — | | | (29,965 | ) |
| | | | | | |
Morgan Stanley & Co., Inc. (Viacom Inc., 6.25%, due 4/30/16) | | March 20, 2012 | | 0.36%
Quarterly | | 5,460,000 | | | (1,760 | ) | | — | | | (1,760 | ) |
| | | | | | |
Morgan Stanley & Co., Inc. (Weyerhaeuser Co. Note, 7.125%, due 7/15/23) | | March 20, 2012 | | 0.74%
Quarterly | | 2,750,000 | | | 24,996 | | | — | | | 24,996 | |
| | | | | | |
RBS Greenwich (Home Depot Inc., 5.4%, due 3/1/16) | | March 20, 2016 | | 0.48%
Monthly | | 4,250,000 | | | 30,841 | | | — | | | 30,841 | |
| | | | | | |
RBS Greenwich (Washington Mutual 2005-AR11, 1-Month LIBOR + 120bp, due 8/25/45) | | August 25, 2045 | | 2.55%
Monthly | | 462,182 | | | 456,578 | | | — | | | 456,578 | * |
| | | | | | | | | | | | | | | | |
| Total | | $92,130,459 | | $ | 15,447,011 | | | — | | $ | 15,447,011 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Credit Default Swap on Credit Indices—Sell Protection1 | | | | | | | | | | | | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic Payments
Received by the
Fund‡ | | Contract
Notional
Amount3 | | Market Value5 | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
Barclays Capital Inc.
(CDX IG 10) | | June 20, 2013 | | 1.55%
Quarterly | | $ 55,176,000 | | $ | 837,627 | | | $ | (37,482 | ) | | $ | 875,109 | |
| | | | | | |
Barclays Capital Inc.
(CDX IG 9) | | December 20, 2017 | | 0.8%
Quarterly | | 6,098,400 | | | (185,564 | ) | | | (235,557 | ) | | | 49,993 | |
| | | | | | |
Barclays Capital Inc.
(CDX IG 9) | | December 20, 2017 | | 0.8%
Quarterly | | 24,945,360 | | | (759,045 | ) | | | (844,564 | ) | | | 85,519 | |
| | | | | | |
Barclays Capital Inc.
(CDX IG HVOL 9) | | December 20, 2012 | | 1.4%
Quarterly | | 19,413,264 | | | (801,061 | ) | | | (375,675 | ) | | | (425,386 | ) |
| | | | | | |
Barclays Capital Inc.
(CDX IG HVOL 9) | | December 20, 2012 | | 1.4%
Quarterly | | 2,613,324 | | | (107,835 | ) | | | (18,276 | ) | | | (89,559 | ) |
114
Annual Report to Shareholders
| | | | | | | | | | | | | | | | | | |
Core—Continued | |
|
Credit Default Swap on Credit Indices—Sell Protection1—Continued | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic Payments
Received by the
Fund‡ | | Contract
Notional
Amount3 | | Market Value5 | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
Barclays Capital Inc.
(CDX IG 10) | | June 20, 2013 | | 1.55%
Quarterly | | $ 13,261,600 | | $ | 201,324 | | | $ | (27,397 | ) | | $ | 228,721 | |
| | | | | | |
Bear Stearns, Inc. (ABX-HE-A 06-2) | | May 25, 2046 | | 0.44%
Quarterly | | 13,950,091 | | | (13,252,586 | ) | | | (74,245 | ) | | | (13,178,341 | ) |
| | | | | | |
Credit Suisse First Boston USA (ABX.HE-AAA 06-1) | | July 25, 2045 | | 0.18%
Monthly | | 47,840,964 | | | (8,730,976 | ) | | | (3,982,507 | ) | | | (4,748,469 | ) |
| | | | | | |
Credit Suisse First Boston USA (ABX.HE-AAA 06-1) | | July 25, 2045 | | 0.18%
Monthly | | 13,855,580 | | | (2,528,644 | ) | | | (1,219,134 | ) | | | (1,309,510 | ) |
| | | | | | |
Credit Suisse First Boston
USA (ABX.HE-AAA 06-1) | | July 25, 2045 | | 0.18%
Monthly | | 63,439,384 | | | (11,577,687 | ) | | | (6,220,615 | ) | | | (5,357,072 | ) |
| | | | | | |
Credit Suisse First Boston USA (CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | 18,199,935 | | | 354,775 | | | | 181,870 | | | | 172,905 | |
| | | | | | |
Credit Suisse First Boston USA (CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | 18,106,602 | | | 352,956 | | | | (287,225 | ) | | | 640,181 | |
| | | | | | |
Deutsche Bank AG (ABX.HE-AAA 06-1) | | July 25, 2045 | | 0.18%
Monthly | | 18,822,674 | | | (3,435,138 | ) | | | (1,578,080 | ) | | | (1,857,058 | ) |
| | | | | | |
Deutsche Bank AG (ABX.HE-AAA 06-1) | | July 25, 2045 | | 0.18%
Monthly | | 9,585,621 | | | (1,749,376 | ) | | | (843,426 | ) | | | (905,950 | ) |
| | | | | | |
Deutsche Bank AG (ABX.HE-AAA 06-1) | | July 25, 2045 | | 0.18%
Monthly | | 4,531,385 | | | (826,978 | ) | | | (492,147 | ) | | | (334,831 | ) |
| | | | | | |
Deutsche Bank AG
(iBoxx IG Hi-Vol2) | | September 20, 2014 | | 1.3%
Quarterly | | 8,042,667 | | | (197,386 | ) | | | 21,468 | | | | (218,854 | ) |
| | | | | | |
JP Morgan Chase & Co.
(CDX IG 8) | | June 20, 2012 | | 0.35%
Quarterly | | 35,254,560 | | | (613,789 | ) | | | (157,428 | ) | | | (456,361 | ) |
| | | | | | |
JP Morgan Chase & Co. (CMBX 3 2007-1 AAA) | | August 17, 2050 | | 0.08%
Monthly | | 38,430,000 | | | (5,941,278 | ) | | | (12,500,565 | ) | | | 6,559,287 | * |
| | | | | | |
Merrill Lynch & Co., Inc. (CDX HY 9) | | December 20, 2012 | | 2%
Quarterly | | 4,650,000 | | | (313,982 | ) | | | — | | | | (313,982 | ) |
| | | | | | |
Merrill Lynch & Co., Inc. (CDX HY 9) | | December 20, 2012 | | 2.3%
Quarterly | | 4,580,000 | | | (270,153 | ) | | | — | | | | (270,153 | ) |
| | | | | | |
Morgan Stanley & Co., Inc. (CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | 9,333,300 | | | 181,936 | | | | 39,239 | | | | 142,697 | |
| | | | | | |
Morgan Stanley & Co., Inc. (Dow Jones CDX IG HVOL 12) | | June 20, 2014 | | 5%
Quarterly | | 10,826,592 | | | 1,606,039 | | | | 305,512 | | | | 1,300,527 | |
| | | | | | |
RBS Greenwich
(CDX IG 8) | | June 20, 2012 | | 0.35%
Quarterly | | 44,431,200 | | | (773,556 | ) | | | (150,587 | ) | | | (622,969 | ) |
115
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | | | | | |
Core—Continued | |
|
Credit Default Swap on Credit Indices—Sell Protection1—Continued | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic Payments
Received by the
Fund‡ | | Contract
Notional
Amount3 | | Market Value5 | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
RBS Greenwich
(CDX IG 8) | | June 20, 2012 | | 0.35%
Quarterly | | $7,163,200 | | $ | (124,712 | ) | | $ | (77,892 | ) | | $ | (46,820 | ) |
| | | | | | |
RBS Greenwich
(CDX IG 8) | | June 20, 2012 | | 0.35%
Quarterly | | 4,549,600 | | | (79,209 | ) | | | (45,921 | ) | | | (33,288 | ) |
| | | | | | |
RBS Greenwich
(CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | 29,586,561 | | | 576,737 | | | | 544,196 | | | | 32,541 | |
| | | | | | |
The Goldman Sachs Group, Inc. (CDX HY 9) | | December 20, 2012 | | 1.8%
Quarterly | | 17,580,000 | | | (1,287,116 | ) | | | — | | | | (1,287,116 | ) |
| | | | | | |
The Goldman Sachs Group, Inc. (CDX HY 9) | | December 20, 2012 | | 2%
Quarterly | | 4,360,000 | | | (294,400 | ) | | | — | | | | (294,400 | ) |
| | | | | | |
The Goldman Sachs Group Inc. (CDX HY 9) | | December 20, 2012 | | 5.44%
Quarterly | | 10,000,000 | | | 303,763 | | | | — | | | | 303,763 | |
| | | | | | |
The Goldman Sachs Group, Inc. (CDX IG 9) | | December 20, 2017 | | 0.8%
Quarterly | | 17,424,000 | | | (530,183 | ) | | | (534,003 | ) | | | 3,820 | |
| | | | | | |
The Goldman Sachs Group, Inc. (CDX IG HVOL 3) | | March 20, 2010 | | 1.05%
Quarterly | | 48,333,000 | | | 64,418 | | | | 481 | | | | 63,937 | |
| | | | | | |
The Goldman Sachs Group, Inc. (CDX IG HVOL 3) | | March 20, 2010 | | 1.05%
Quarterly | | 16,433,220 | | | 21,902 | | | | (760 | ) | | | 22,662 | |
| | | | | | |
The Goldman Sachs Group, Inc. (CDX IG HVOL 3) | | March 20, 2010 | | 1.05%
Quarterly | | 32,093,112 | | | 42,774 | | | | (107,877 | ) | | | 150,651 | |
| | | | | | | | | | | | | | | | | | |
| | | | Total | | $672,911,196 | | $ | (49,836,403 | ) | | $ | (28,718,597 | ) | | $ | (21,117,806 | ) |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Credit Default Swap on Credit Indices—Buy Protection4 | | | | | | | | | | | | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic Payments
Made by
the Fund‡ | | Contract
Notional
Amount3 | | Market Value5 | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
Barclays Capital Inc.
(CDX IG 10 6/13) | | June 20, 2013 | | 1.55%
Quarterly | | $ 9,196,000 | | $ | (139,604 | ) | | $ | 130,486 | | | $ | (270,090 | ) |
| | | | | | |
Barclays Capital Inc.
(CDX IG 10) | | June 20, 2013 | | 1.55%
Quarterly | | 36,880,800 | | | (559,887 | ) | | | 206,606 | | | | (766,493 | ) |
| | | | | | |
Barclays Capital Inc.
(CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | 9,333,300 | | | (181,936 | ) | | | (286,604 | ) | | | 104,668 | |
| | | | | | |
Credit Suisse First Boston USA (CDX IG 11) | | December 20, 2013 | | 1.5%
Quarterly | | 37,497,600 | | | (710,321 | ) | | | 1,032,331 | | | | (1,742,652 | ) |
| | | | | | |
Credit Suisse First Boston USA (CMBX 1 2006-1 AAA) | | March 22, 2045 | | 0.1%
Monthly | | 7,300,000 | | | 547,500 | | | | 1,679,258 | | | | (1,131,758 | )* |
| | | | | | |
Credit Suisse First Boston USA (CMBX 2 2006-2 AAA) | | March 15, 2049 | | 0.07%
Monthly | | 4,200,000 | | | 466,620 | | | | 909,777 | | | | (443,157 | )* |
116
Annual Report to Shareholders
| | | | | | | | | | | | | | | | | | |
Core—Continued | |
| | | |
Credit Default Swap on Credit Indices—Buy Protection4—Continued | | | | | | | | | | | | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic Payments
Made by
the Fund‡ | | Contract
Notional
Amount3 | | Market Value5 | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
Credit Suisse First Boston USA (CMBX 3 2007-1 AAA) | | August 17, 2050 | | 0.08%
Monthly | | $18,625,000 | | $ | 2,879,425 | | | $ | 6,089,784 | | | $ | (3,210,359 | )* |
| | | | | | |
Credit Suisse First Boston USA (CMBX 4 2007-2 AAA) | | August 17, 2050 | | 0.35%
Monthly | | 29,200,000 | | | 4,975,680 | | | | 9,674,457 | | | | (4,698,777 | )* |
| | | | | | |
Credit Suisse First Boston USA (CMBX 4 2007-2 AJ) | | February 17, 2051 | | 0.96%
Monthly | | 9,900,000 | | | 4,828,230 | | | | 2,084,395 | | | | 2,743,835 | * |
| | | | | | |
JP Morgan Chase & Co.
(CDX IG 10 6/13) | | June 20, 2013 | | 1.55%
Quarterly | | 18,682,400 | | | (283,618 | ) | | | 380,504 | | | | (664,122 | ) |
| | | | | | |
JP Morgan Chase & Co.
(CDX IG 10 6/13) | | June 20, 2013 | | 1.55%
Quarterly | | 4,646,400 | | | (70,537 | ) | | | 49,320 | | | | (119,857 | ) |
| | | | | | |
JP Morgan Chase & Co.
(CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | 20,066,595 | | | (391,162 | ) | | | (646,384 | ) | | | 255,222 | |
| | | | | | |
JP Morgan Chase & Co.
(CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | 20,906,592 | | | (407,536 | ) | | | (791,501 | ) | | | 383,965 | |
| | | | | | |
JP Morgan Chase & Co.
(CMBX 3 2007-1 AAA) | | August 17, 2050 | | 0.08%
Monthly | | 19,805,000 | | | 3,061,853 | | | | 6,475,606 | | | | (3,413,753 | )* |
| | | | | | |
JP Morgan Chase & Co. (CMBX 4 2007-2 AAA) | | March 22, 2047 | | 0.35%
Monthly | | 38,430,000 | | | 6,548,472 | | | | 12,707,367 | | | | (6,158,895 | )* |
| | | | | | |
JP Morgan Chase & Co. (CMBX 4 2007-2 AAA) | | April 17, 2050 | | 0.35%
Monthly | | 38,630,000 | | | 6,582,552 | | | | 13,551,483 | | | | (6,968,931 | )* |
| | | | | | |
Merrill Lynch & Co., Inc. (CMBX 4 2007-2 AJ) | | February 17, 2051 | | 0.96%
Monthly | | 9,900,000 | | | 4,828,230 | | | | 2,084,395 | | | | 2,743,835 | * |
| | | | | | |
RBS Greenwich
(iBoxx IG Hi-Vol3) | | March 20, 2010 | | 1.05%
Quarterly | | 17,303,214 | | | 23,062 | | | | (3,178 | ) | | | 26,240 | |
| | | | | | |
The Goldman Sachs Group, Inc. (CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | 18,199,935 | | | (354,775 | ) | | | 152,209 | | | | (506,984 | ) |
| | | | | | |
The Goldman Sachs Group, Inc. (CMBX 4 2007-2 AJ) | | February 17, 2051 | | 0.96%
Monthly | | 10,000,000 | | | 4,877,000 | | | | 2,105,450 | | | | 2,771,550 | * |
| | | | | | | | | | | | | | | | | | |
| | | | Total | | $378,702,836 | | $ | 36,519,248 | | | $ | 57,585,761 | | | $ | (21,066,513 | ) |
| | | | | | | | | | | | | | | | | | |
Core Plus
| | | | | | | | | | | | | | | |
Interest Rate Swaps: | | | | | | | | | | | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic
Payments Made
by the Fund‡ | | Periodic Payments
Received by the
Fund‡ | | Contract
Notional
Amount | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
Banc of America Securities LLC | | March 1, 2013 | | 5.104%
Semi-Annually | | 3-month LIBOR | | $ | 8,100,000 | | — | | $ | (736,814 | ) |
117
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | | |
Core Plus—Continued | |
| | | | |
Interest Rate Swaps—Continued | | | | | | | | | | | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic
Payments Made
by the Fund‡ | | Periodic Payments
Received by the
Fund‡ | | Contract
Notional
Amount | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
Banc of America Securities LLC | | November 10, 2015 | | 4.864%
Semi-Annually | | 3-month LIBOR | | $ | 7,950,000 | | — | | $ | (699,117 | ) |
| | | | | | |
Banc of America Securities LLC | | January 15, 2016 | | 5.45084%
Semi-Annually | | 3-month LIBOR | | | 5,500,000 | | — | | | (661,492 | ) |
| | | | | | |
Banc of America Securities LLC | | December 16, 2013 | | 5.381%
Semi-Annually | | 3-month LIBOR | | | 5,510,000 | | — | | | (593,447 | ) |
| | | | | | |
Banc of America Securities LLC | | October 3, 2016 | | 5.425%
Semi-Annually | | 3-month LIBOR | | | 8,270,000 | | — | | | (993,579 | ) |
| | | | | | |
Banc of America Securities LLC | | February 15, 2025 | | 4.29456%
Semi-Annually | | 3-month LIBOR | | | 212,490,000 | | — | | | 1,693,056 | |
| | | | | | |
Barclays Capital Inc. | | June 25, 2012 | | 5.06%
Semi-Annually | | 3-month LIBOR | | | 6,240,000 | | — | | | (505,155 | ) |
| | | | | | |
Barclays Capital Inc. | | September 15, 2012 | | 5.189%
Semi-Annually | | 3-month LIBOR | | | 6,330,000 | | — | | | (554,493 | ) |
| | | | | | |
Barclays Capital Inc. | | November 1, 2011 | | 5.439%
Semi-Annually | | 3-month LIBOR | | | 10,850,000 | | — | | | (816,147 | ) |
| | | | | | |
Barclays Capital Inc. | | November 20, 2019 | | 3.9%
Semi-Annually | | 3-month LIBOR | | | 66,810,000 | | — | | | 301,680 | |
| | | | | | |
Bear Stearns, Inc. | | September 15, 2014 | | 5%
Semi-Annually | | 3-month LIBOR | | | 8,250,000 | | — | | | (786,102 | ) |
| | | | | | |
Citigroup Global Markets | | September 15, 2011 | | 3.34%
Semi-Annually | | 3-month LIBOR | | | 9,750,000 | | — | | | (353,280 | ) |
| | | | | | |
Credit Suisse First Boston USA | | September 15, 2015 | | 5.16%
Semi-Annually | | 3-month LIBOR | | | 5,350,000 | | — | | | (556,056 | ) |
| | | | | | |
Credit Suisse First Boston USA | | August 15, 2013 | | 5.023%
Semi-Annually | | 3-month LIBOR | | | 5,300,000 | | — | | | (488,198 | ) |
| | | | | | |
Credit Suisse First Boston USA | | September 15, 2010 | | 5.0025%
Semi-Annually | | 3-month LIBOR | | | 5,990,000 | | — | | | (192,096 | ) |
| | | | | | |
Credit Suisse First Boston USA | | March 15, 2014 | | 5.131%
Semi-Annually | | 3-month LIBOR | | | 6,630,000 | | — | | | (661,041 | ) |
| | | | | | |
Credit Suisse First Boston USA | | March 1, 2017 | | 5.335%
Semi-Annually | | 3-month LIBOR | | | 4,880,000 | | — | | | (561,604 | ) |
| | | | | | |
Credit Suisse First Boston USA | | February 28, 2014 | | 2.75013%
Semi-Annually | | 3-month LIBOR | | | 471,380,000 | | — | | | (2,038,058 | ) |
| | | | | | |
Deutsche Bank AG | | June 15, 2016 | | 5.1825%
Semi-Annually | | 3-month LIBOR | | | 10,890,000 | | — | | | (1,147,465 | ) |
118
Annual Report to Shareholders
| | | | | | | | | | | | | | | | |
Core Plus—Continued | |
| | | | |
Interest Rate Swaps—Continued | | | | | | | | | | | | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic
Payments Made
by the Fund‡ | | Periodic Payments
Received by the
Fund‡ | | Contract
Notional
Amount | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
Deutsche Bank AG | | April 1, 2017 | | 5.435%
Semi-Annually | | 3-month LIBOR | | $ | 8,270,000 | | | — | | $ | (1,005,920 | ) |
| | | | | | |
JP Morgan Chase & Co. | | March 17, 2020 | | 3.6%
Semi-Annually | | 3-month LIBOR | | | 59,100,000 | | $ | 88,094 | | | 2,304,581 | |
| | | | | | |
Merrill Lynch & Co., Inc. | | November 2, 2010 | | USD-CMS 10Yr | | USD-CMM | | | 192,700,000 | | | — | | | (400,614 | )* |
| | | | | | |
Morgan Stanley & Co., Inc. | | April 30, 2016 | | 5.189%
Semi-Annually | | 3-month LIBOR | | | 6,600,000 | | | — | | | (700,190 | ) |
| | | | | | |
Morgan Stanley & Co., Inc. | | March 15, 2012 | | 4.7625%
Semi-Annually | | 3-month LIBOR | | | 5,540,000 | | | — | | | (386,321 | ) |
| | | | | | |
RBS Greenwich | | April 1, 2012 | | 5.011%
Semi-Annually | | 3-month LIBOR | | | 4,560,000 | | | — | | | (346,292 | ) |
| | | | | | |
RBS Greenwich | | March 1, 2016 | | 5.12%
Semi-Annually | | 3-month LIBOR | | | 8,230,000 | | | — | | | (838,515 | ) |
| | | | | | |
RBS Greenwich | | July 16, 2019 | | 3.64%
Semi-Annually | | 3-month LIBOR | | | 117,700,000 | | | — | | | 2,611,480 | |
RBS Greenwich | | July 16, 2039 | | 3-month LIBOR | | 4.095%
Semi-Annually | | | 58,850,000 | | | — | | | (4,142,734 | ) |
| | | | | | |
The Goldman Sachs Group, Inc. | | November 2, 2010 | | USD-CMS 10Yr | | USD-CMM | | | 104,700,000 | | | — | | | 97,042 | * |
| | | | | | |
The Goldman Sachs Group, Inc. | | November 8, 2010 | | USD-CMS 10Yr | | USD-CMM | | | 66,800,000 | | | — | | | 94,680 | * |
| | | | | | | | | | | | | | | | |
| Total | | $ | 1,499,520,000 | | $ | 88,094 | | $ | (13,062,211 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Credit Default Swap on Corporate Issues—Sell Protection1 | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Implied Credit
Spread At
December 31,
20092 | | Periodic
Payments
Received by
the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
RBS Greenwich (Ford Motor Credit Company,
7.45%, due 7/16/31) | | June 20, 2012 | | 4.98% | | 5.1% Quarterly | | $ | 2,500,000 | | $ | 7,139 | | | | — | | | $ | 7,139 | |
| | | | | | | |
RBS Greenwich (Residential Capital, LLC,
7.5%, due 4/17/13) | | December 20, 2012 | | 12.52% | | 5% Quarterly | | | 8,400,000 | | | (1,259,956 | ) | | $ | (773,600 | ) | | | (486,356 | ) |
119
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | | | | | | | | |
Core Plus—Continued | |
|
Credit Default Swap on Corporate Issues—Sell Protection1—Continued | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Implied Credit
Spread At
December 31,
20092 | | Periodic
Payments
Received by
the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
Citigroup Global Markets (General Motors Acceptance Corporation, 7.75%, due 1/19/10) | | March 20, 2010 | | 1.75% | | 3.65% Quarterly | | $ | 4,400,000 | | $ | 18,734 | | | $ | (114,173 | ) | | $ | 132,908 | |
| | | | | | | |
Credit Suisse First Boston USA (Eastman Kodak Company, 7.25%, due 11/15/13) | | September 20, 2010 | | 3.60% | | 2.32% Quarterly | | | 2,400,000 | | | (21,957 | ) | | | — | | | | (21,958 | ) |
| | | | | | | |
Credit Suisse First Boston USA (Eastman Kodak Company, 7.25%, due 11/15/13) | | March 20, 2010 | | 3.60% | | 1.4% Quarterly | | | 9,000,000 | | | (44,255 | ) | | | — | | | | (44,255 | ) |
| | | | | | | |
Deutsche Bank AG (AES Corp.,
7.75%, due 3/1/14) | | December 20, 2016 | | 4.35% | | 2.21% Quarterly | | | 1,700,000 | | | (189,910 | ) | | | — | | | | (189,910 | ) |
| | | | | | | |
Deutsche Bank AG (AES Corp.,
7.75%, due 3/1/14) | | December 20, 2016 | | 4.35% | | 2.2% Quarterly | | | 2,500,000 | | | (280,587 | ) | | | — | | | | (280,587 | ) |
| | | | | | | |
Deutsche Bank AG (Eastman Kodak Company,
7.25%, due 11/15/13) | | March 20, 2010 | | 3.60% | | 1.25% Quarterly | | | 1,600,000 | | | (8,404 | ) | | | — | | | | (8,404 | ) |
| | | | | | | |
Deutsche Bank AG (Eastman Kodak Company,
7.25%, due 11/15/13) | | March 20, 2015 | | 10.14% | | 1.67% Quarterly | | | 1,900,000 | | | (580,002 | ) | | | — | | | | (580,002 | ) |
| | | | | | | |
Deutsche Bank AG (Eastman Kodak Company,
7.25%, due 11/15/13) | | September 20, 2010 | | 3.60% | | 2.3% Quarterly | | | 3,020,000 | | | (28,061 | ) | | | — | | | | (28,061 | ) |
| | | | | | | |
Deutsche Bank AG (Eastman Kodak Company,
7.25%, due 11/15/13) | | September 20, 2010 | | 3.60% | | 2.3% Quarterly | | | 5,430,000 | | | (50,454 | ) | | | — | | | | (50,454 | ) |
| | | | | | | |
Deutsche Bank AG (Eastman Kodak Company,
7.25%, due 11/15/13) | | September 20, 2010 | | 3.60% | | 2.32% Quarterly | | | 3,200,000 | | | (29,276 | ) | | | — | | | | (29,276 | ) |
120
Annual Report to Shareholders
| | | | | | | | | | | | | | | | | | | |
Core Plus—Continued | |
|
Credit Default Swap on Corporate Issues—Sell Protection1—Continued | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Implied Credit
Spread At
December 31,
20092 | | Periodic
Payments
Received by
the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
| | | | | | | |
Deutsche Bank AG (Ford Motor Credit Co.,
7.25%, due 10/25/11) | | September 20, 2017 | | 4.66% | | 3.65% Quarterly | | $ | 4,450,000 | | $ | (240,828 | ) | | — | | $ | (240,828 | ) |
| | | | | | | |
Deutsche Bank AG (Ford Motor Credit Co.,
7.25%, due 10/25/11) | | September 20, 2017 | | 4.66% | | 3.65% Quarterly | | | 3,500,000 | | | (189,415 | ) | | — | | | (189,415 | ) |
| | | | | | | |
Deutsche Bank AG (Ford Motor Credit Co., 7.45%, due 7/16/31) | | March 20, 2015 | | 6.90% | | 2.93% Quarterly | | | 2,600,000 | | | (432,404 | ) | | — | | | (432,404 | ) |
| | | | | | | |
Merrill Lynch & Co., Inc. (AES Corp., 7.75%, due 3/1/14) | | March 20, 2017 | | 4.36% | | 2.8% Quarterly | | | 5,600,000 | | | (465,978 | ) | | — | | | (465,978 | ) |
| | | | | | | |
Merrill Lynch & Co., Inc. (AES Corp., 7.75%, due 3/1/14) | | March 20, 2017 | | 4.36% | | 2.6% Quarterly | | | 3,600,000 | | | (338,010 | ) | | — | | | (338,010 | ) |
Merrill Lynch & Co., Inc. (Eastman Kodak Company, 7.25%, due 11/15/13) | | September 20, 2010 | | 3.60% | | 2.3% Quarterly | | | 1,610,000 | | | (14,960 | ) | | — | | | (14,960 | ) |
| | | | | | | |
RBS Greenwich (Countrywide Home Loans, Inc., 4%, due 3/22/11) | | March 20, 2012 | | 0.78% | | 0.6% Quarterly | | | 7,400,000 | | | (29,798 | ) | | — | | | (29,798 | ) |
| | | | | | | |
RBS Greenwich (Countrywide Home Loans, Inc., 4%, due 3/22/11) | | June 20, 2012 | | 0.81% | | 0.66% Quarterly | | | 9,900,000 | | | (36,445 | ) | | — | | | (36,445 | ) |
| | | | | | | |
RBS Greenwich (Eastman Kodak Company, 7.25%, due 11/15/13) | | December 20, 2010 | | 4.05% | | 3.2% Quarterly | | | 19,300,000 | | | (156,345 | ) | | — | | | (156,345 | ) |
| | | | | | | |
RBS Greenwich (Eastman Kodak Company, 7.25%, due 11/15/13) | | September 20, 2012 | | 8.23% | | 2.25% Quarterly | | | 3,260,000 | | | (463,015 | ) | | — | | | (463,015 | ) |
121
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | | | | | | | | |
Core Plus—Continued | |
|
Credit Default Swap on Corporate Issues—Sell Protection1—Continued | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Implied Credit
Spread At
December 31,
20092 | | Periodic
Payments
Received by
the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
RBS Greenwich (Ford Motor Credit Company, 7%, due 10/1/13) | | September 20, 2011 | | 3.12% | | 3.75% Quarterly | | $ | 8,900,000 | | $ | 100,158 | | | $ | (37,017 | ) | | $ | 137,175 | |
| | | | | | | |
RBS Greenwich (Ford Motor Credit Company, 7%, due 10/1/13) | | March 20, 2012 | | 4.57% | | 5.38% Quarterly | | | 8,200,000 | | | 140,063 | | | | — | | | | 140,063 | |
| | | | | | | |
RBS Greenwich (Ford Motor Credit Company, 7.45%, due 7/16/31) | | September 20, 2011 | | 3.98% | | 6.75% Quarterly | | | 18,400,000 | | | 853,309 | | | | — | | | | 853,309 | |
| | | | | | | |
RBS Greenwich (Ford Motor Credit Company, 7.45%, due 7/16/31) | | June 20, 2012 | | 4.98% | | 5.85% Quarterly | | | 7,400,000 | | | 150,549 | | | | — | | | | 150,549 | |
| | | | | | | |
RBS Greenwich (Ford Motor Credit Company, 7.45%, due 7/16/31) | | June 20, 2012 | | 4.98% | | 5.15% Quarterly | | | 6,900,000 | | | 27,749 | | | | — | | | | 27,749 | |
| | | | | | | |
RBS Greenwich (General Motors Acceptance Corporation, 6%, due 4/1/11) | | December 20, 2011 | | 3.29% | | 1.34% Quarterly | | | 780,000 | | | (28,548 | ) | | | — | | | | (28,548 | ) |
| | | | | | | |
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12) | | September 20, 2010 | | 2.75% | | 5.75% Quarterly | | | 1,250,000 | | | 26,900 | | | | — | | | | 26,900 | |
| | | | | | | |
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12) | | December 20, 2011 | | 3.29% | | 1.2% Quarterly | | | 680,000 | | | (26,670 | ) | | | — | | | | (26,670 | ) |
| | | | | | | |
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12) | | December 20, 2016 | | 4.35% | | 1.55% Quarterly | | | 4,200,000 | | | (597,759 | ) | | | — | | | | (597,759 | ) |
| | | | | | | |
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12) | | March 20, 2012 | | 3.39% | | 1.17% Quarterly | | | 8,500,000 | | | (393,312 | ) | | | — | | | | (393,312 | ) |
122
Annual Report to Shareholders
| | | | | | | | | | | | | | | | | | | |
Core Plus—Continued | |
|
Credit Default Swap on Corporate Issues—Sell Protection1—Continued | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Implied Credit
Spread At
December 31,
20092 | | Periodic
Payments
Received by
the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12) | | March 2, 2012 | | 3.39% | | 1.4% Quarterly | | $ | 9,400,000 | | $ | (389,827 | ) | | — | | $ | (389,827 | ) |
| | | | | | | |
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12) | | March 20, 2012 | | 3.39% | | 2% Quarterly | | | 9,300,000 | | | (269,206 | ) | | — | | | (269,206 | ) |
| | | | | | | |
RBS Greenwich (General Motors Acceptance Corporation, 6.875%, due 8/28/12) | | September 20, 2012 | | 3.54% | | 5.95% Quarterly | | | 3,800,000 | | | 229,515 | | | — | | | 229,515 | |
| | | | | | | |
RBS Greenwich (SLM Corp., 5.125%, due 8/27/12) | | June 20, 2012 | | 5.06% | | 1.76% Quarterly | | | 24,300,000 | | | (1,770,722 | ) | | — | | | (1,770,722 | ) |
| | | | | | | |
RBS Greenwich (SLM Corp., 5.125%, due 8/27/12) | | September 20, 2012 | | 5.10% | | 2.35% Quarterly | | | 3,600,000 | | | (238,060 | ) | | — | | | (238,060 | ) |
| | | | | | | |
RBS Greenwich (SLM Corp.,
5.125%, due 8/27/12) | | September 20, 2012 | | 5.10% | | 2.4% Quarterly | | | 3,600,000 | | | (233,737 | ) | | — | | | (233,737 | ) |
| | | | | | | |
RBS Greenwich (Time Warner Inc.
6.875%, due 5/1/12) | | September 20, 2010 | | 0.21% | | 0.47% Quarterly | | | 5,000,000 | | | 9,404 | | | — | | | 9,404 | |
| | | | | | | |
RBS Greenwich (Time Warner Inc.,
6.875%, due 5/1/12) | | December 20, 2010 | | 0.21% | | 0.5% Quarterly | | | 12,500,000 | | | 35,255 | | | — | | | 35,255 | |
| | | | | | | |
The Goldman Sachs Group, Inc. (Eastman Kodak Company,
7.25%, due 11/15/13) | | March 20, 2015 | | 10.14% | | 1.67% Quarterly | | | 1,900,000 | | | (580,002 | ) | | — | | | (580,002 | ) |
| | | | | | | |
The Goldman Sachs Group, Inc. (Ford Motor Credit Co.,
7%, due 10/1/13) | | June 20, 2010 | | 2.23% | | 4.75% Quarterly | | | 2,500,000 | | | 29,734 | | | — | | | 29,734 | |
| | | | | | | |
The Goldman Sachs Group, Inc. (Ford Motor Credit Co.,
7%, due 10/1/13) | | September 20, 2011 | | 3.12% | | 3.8% Quarterly | | | 9,200,000 | | | 103,534 | | | — | | | 103,534 | |
123
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | | | | | | | | |
Core Plus—Continued | |
|
Credit Default Swap on Corporate Issues—Sell Protection1—Continued | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Implied Credit
Spread At
December 31,
20092 | | Periodic
Payments
Received by
the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
The Goldman Sachs Group, Inc. (Ford Motor Credit Co.,
7%, due 10/1/13) | | September 20, 2017 | | 4.66% | | 3.77% Quarterly | | $ | 6,400,000 | | $ | (305,369 | ) | | | — | | | $ | (305,369 | ) |
| | | | | | | |
The Goldman Sachs Group, Inc. (Ford Motor Credit Co.,
7.45%, due 7/16/31) | | September 20, 2011 | | 3.98% | | 6.8% Quarterly | | | 10,000,000 | | | 472,123 | | | | — | | | | 472,123 | |
| | | | | | | |
The Goldman Sachs Group, Inc. (Ford Motor Credit Co.,
7.45%, due 7/16/31) | | September 20, 2011 | | 3.98% | | 6.8% Quarterly | | | 8,400,000 | | | 396,583 | | | | — | | | | 396,583 | |
| | | | | | | |
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation,
6.875%, due 8/28/12) | | June 20, 2010 | | 2.22% | | 5.75% Quarterly | | | 2,000,000 | | | 33,405 | | | | — | | | | 33,405 | |
| | | | | | | |
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation,
6.875%, due 8/28/12) | | June 20, 2010 | | 2.22% | | 5.95% Quarterly | | | 80,000 | | | 1,412 | | | | — | | | | 1,412 | |
| | | | | | | |
The Goldman Sachs Group, Inc. (General Motors Acceptance Corporation,
6.875%, due 8/28/12) | | June 20, 2010 | | 2.22% | | 6% Quarterly | | | 1,000,000 | | | 17,885 | | | | — | | | | 17,885 | |
| | | | | | | |
The Goldman Sachs Group, Inc. (TXU Corp.,
5.55%, due 11/15/14) | | September 20, 2012 | | 9.90% | | 3.24% Quarterly | | | 2,700,000 | | | (420,623 | ) | | | — | | | | (420,623 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Total | | $ | 288,160,000 | | $ | (7,460,444 | ) | | $ | (924,790 | ) | | $ | (6,535,654 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Credit Default Swaps on Corporate Issues—Buy Protection4 | | | | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic
Payments Made
by the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
Banc of America Securities LLC (Home Depot Inc.,
3.75%, due 9/15/09) | | December 20, 2013 | | 0.635%
Quarterly | | $ 5,510,000 | | $ | (33,248 | ) | | — | | $ | (33,248 | ) |
124
Annual Report to Shareholders
| | | | | | | | | | | | | | | | |
Core Plus—Continued | | | | |
| |
Credit Default Swaps on Corporate Issues—Buy Protection4—Continued | | | | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic
Payments Made
by the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
Banc of America Securities LLC (Marriot International Inc., 4.625%, due 6/15/12) | | December 20, 2015 | | 0.73%
Monthly | | $7,950,000 | | $ | 63,969 | | | — | | $ | 63,969 | |
| | | | | | |
Banc of America Securities LLC (Masco Corp.,
5.875%, due 7/15/12) | | December 20, 2016 | | 1.04%
Quarterly | | 8,270,000 | | | 577,102 | | | — | | | 577,102 | |
| | | | | | |
Banc of America Securities LLC (PHH Corporate Note, 7.125%, due 3/1/13) | | March 20, 2013 | | 1.05%
Monthly | | 5,940,000 | | | 881,059 | | | — | | | 881,059 | |
| | | | | | |
Banc of America Securities LLC (Viacom Inc.,
4.625%, due 5/15/18) | | December 20, 2015 | | 1.13%
Quarterly | | 5,500,000 | | | 53,361 | | | — | | | 53,361 | |
| | | | | | |
Barclays Capital Inc. (Amerisourcebergen Corp., 5.625%, due 9/15/12) | | September 20, 2012 | | 0.5%
Quarterly | | 6,330,000 | | | (42,481 | ) | | — | | | (42,481 | ) |
| | | | | | |
Barclays Capital Inc.
(Health Care Property Investments Inc.,
6.45%, due 6/25/12) | | June 20, 2012 | | 0.63%
Quarterly | | 6,240,000 | | | 101,532 | | | — | | | 101,532 | |
| | | | | | |
Barclays Capital Inc. (Motorola Inc.,
6.5%, due 9/1/25) | | December 20, 2011 | | 0.32%
Quarterly | | 10,850,000 | | | 106,061 | | | — | | | 106,061 | |
| | | | | | |
Bear Stearns, Inc.
(Bell South Corp.,
6%, due 10/15/11) | | September 20, 2014 | | 0.28%
Quarterly | | 8,250,000 | | | 26,594 | | | — | | | 26,594 | |
| | | | | | |
Bear Stearns, Inc.
(Ford Motor Credit Company,
7%, due 10/1/13) | | June 20, 2010 | | 5.75%
Quarterly | | 12,500,000 | | | (281,700 | ) | | — | | | (281,700 | ) |
| | | | | | |
Credit Suisse First Boston USA (AAMES Mortgage Investment Trust 2005-1 M8, 1-Month LIBOR +
160bp, due 6/25/35) | | June 25, 2035 | | 1.28%
Monthly | | 1,122,000 | | | 1,073,313 | | | — | | | 1,073,313 | |
| | | | | | |
Credit Suisse First Boston USA (AAMES Mortgage Investment Trust 2005-1 M9, 1-Month LIBOR +
250bp, due 6/25/35) | | June 25, 2035 | | 2.05%
Monthly | | 1,122,000 | | | 1,094,437 | | | — | | | 1,094,437 | |
125
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | | | | |
Core Plus—Continued | | | | |
| |
Credit Default Swaps on Corporate Issues—Buy Protection4—Continued | | | | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic
Payments Made
by the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
Credit Suisse First Boston USA (ACE Securities Corp. 2005-HE1 M8, 1-Month LIBOR + 138bp, due 2/25/35) | | February 25, 2035 | | 1.31%
Monthly | | $ | 436,201 | | $ | 433,229 | | | — | | $ | 433,229 | |
| | | | | | |
Credit Suisse First Boston USA (Aegis Asset Backed Securities Trust 2004-4 B2, 1-Month LIBOR + 190bp, due 10/25/34) | | October 25, 2034 | | 1.37%
Monthly | | | 632,452 | | | 555,582 | | | — | | | 555,582 | |
| | | | | | |
Credit Suisse First Boston USA (Aegis Asset Backed Securities Trust 2005 B2, 1-Month LIBOR + 130bp, due 3/25/35) | | March 25, 2035 | | 1.31%
Monthly | | | 1,122,000 | | | 1,120,936 | | | — | | | 1,120,936 | |
| | | | | | |
Credit Suisse First Boston USA (Aegis Asset Backed Securities Trust 2005 B3, 1-Month LIBOR + 200bp, due 3/25/35) | | March 25, 2035 | | 2.18%
Monthly | | | 1,122,000 | | | 1,121,066 | | | — | | | 1,121,066 | |
| | | | | | |
Credit Suisse First Boston USA (Amerisource Bergen Corp., 8.125%, due 9/1/08) | | September 20, 2015 | | 0.9%
Quarterly | | | 5,350,000 | | | (118,829 | ) | | — | | | (118,829 | ) |
| | | | | | |
Credit Suisse First Boston USA (Argent Securities Inc. 2004- W11 M10, 1-Month LIBOR + 350bp, due 11/25/34) | | November 25, 2034 | | 2.15%
Monthly | | | 366,728 | | | 360,208 | | | — | | | 360,208 | |
| | | | | | |
Credit Suisse First Boston USA (Argent Securities Inc. 2004-W11 M9, 1-Month LIBOR + 225bp, due 11/25/34) | | November 25, 2034 | | 1.33%
Monthly | | | 427,500 | | | 416,812 | | | - | | | 416,812 | |
| | | | | | |
Credit Suisse First Boston USA (Argent Securities Inc. 2004-W4 M3, 1-Month LIBOR + 300bp,
due 3/25/34) | | March 25, 2034 | | 2.2%
Monthly | | | 531,142 | | | 413,887 | | | — | | | 413,887 | |
| | | | | | |
Credit Suisse First Boston USA (Finance America Mortgage Loan Trust 2004-3 M8, 1-Month LIBOR + 180bp, due 11/25/34) | | November 25, 2034 | | 1.31%
Monthly | | | 407,909 | | | 405,696 | | | — | | | 405,696 | |
126
Annual Report to Shareholders
| | | | | | | | | | | | | | | | | |
Core Plus—Continued | | | | |
| |
Credit Default Swaps on Corporate Issues—Buy Protection4—Continued | | | | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic
Payments Made
by the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
Credit Suisse First Boston USA (Finance America Mortgage Loan Trust 2004-3 M9, 1-Month LIBOR + 315bp, due 11/25/34) | | November 25, 2034 | | 2.18%
Monthly | | $ | 31,315 | | $ | 31,307 | | | — | | $ | 31,307 | |
| | | | | | |
Credit Suisse First Boston USA (Fremont Home Loan Trust 2005-A M8, 1-Month LIBOR + 135bp,
due 1/25/35) | | January 25, 2035 | | 1.31%
Monthly | | | 444,776 | | | 433,922 | | | — | | | 433,922 | |
| | | | | | |
Credit Suisse First Boston USA (Fremont Home Loan Trust 2005-A, 1-Month LIBOR + 100bp, due 1/25/35) | | January 25, 2035 | | 2.08%
Monthly | | | 5,639 | | | 5,622 | | | — | | | 5,622 | |
| | | | | | |
Credit Suisse First Boston USA (IndyMac Home Equity Loan Asset-Backed, Trust 2004-C M8, 1-Month LIBOR + 190bp, due 3/25/35) | | March 25, 2035 | | 1.28%
Monthly | | | 585,674 | | | 543,972 | | | — | | | 543,972 | |
| | | | | | |
Credit Suisse First Boston USA (IndyMac Home Equity Loan Asset-Backed, Trust 2004-C M9, 1-Month LIBOR + 325bp, due 3/25/35) | | March 25, 2035 | | 2.05%
Monthly | | | 467,382 | | | 437,561 | | | — | | | 437,561 | |
| | | | | | |
Credit Suisse First Boston USA (Long Beach Mortgage Loan Trust 2004-1 M9, 1-Month LIBOR + 350bp, due 2/25/34) | | February 25, 2034 | | 2.15%
Monthly | | | 236,253 | | | 185,206 | | | — | | | 185,206 | |
| | | | | | |
Credit Suisse First Boston USA (Long Beach Mortgage Loan Trust 2005-1 M8, 1-Month LIBOR + 170 bp, due 2/25/35) | | February 25, 2035 | | 1.31%
Monthly | | | 492,863 | | | 490,832 | | | — | | | 490,832 | |
| | | | | | |
Credit Suisse First Boston USA (Marsh & Mclennan Company, Inc.,
5.375%, due 7/15/14) | | September 20, 2010 | | 0.46%
Quarterly | | | 5,990,000 | | | (5,901 | ) | | — | | | (5,901 | ) |
| | | | | | |
Credit Suisse First Boston USA (Masco Corp.,
5.875%, due 7/15/12) | | September 20, 2013 | | 0.75%
Quarterly | | | 5,830,000 | | | 201,351 | | | — | | | 201,351 | |
127
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | | |
Core Plus—Continued | | | |
| |
Credit Default Swaps on Corporate Issues—Buy Protection4—Continued | | | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic
Payments Made
by the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) |
Credit Suisse First Boston USA (MASTR Asset Backed Securities Trust 2005-NC1 M8, 1-Month LIBOR + 153bp, due 12/25/34) | | December 25, 2034 | | 1.31%
Monthly | | $ | 660,250 | | $ | 616,488 | | — | | $ | 616,488 |
| | | | | | |
Credit Suisse First Boston USA (MASTR Asset Backed Securities Trust 2005-NC1 M9, 1-Month LIBOR + 240bp, due 12/25/34) | | December 25, 2034 | | 2.08%
Monthly | | | 593,281 | | | 571,309 | | — | | | 571,309 |
| | | | | | |
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2004-WMC1 B3, 1-Month LIBOR + 225bp, due 9/25/35) | | September 25, 2035 | | 2.05%
Monthly | | | 295,616 | | | 279,965 | | — | | | 279,965 |
| | | | | | |
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2004-WMC4 B3, 1-Month LIBOR + 375bp, due 4/25/35) | | April 25, 2035 | | 2.15%
Monthly | | | 264,877 | | | 259,322 | | — | | | 259,322 |
| | | | | | |
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-NC1 B2, 1-Month LIBOR + 130bp, due 10/25/35) | | October 25, 2035 | | 1.28%
Monthly | | | 401,504 | | | 379,913 | | — | | | 379,913 |
| | | | | | |
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-NC1 B3, 1-Month LIBOR + 205bp, due 10/25/35) | | October 25, 2035 | | 2.05%
Monthly | | | 403,431 | | | 383,703 | | — | | | 383,703 |
| | | | | | |
Credit Suisse First Boston USA (Merrill Lynch Mortgage Investors, Inc. 2005-WMC1 B2, 1-Month LIBOR + 135bp, due 9/25/35) | | September 25, 2035 | | 1.28%
Monthly | | | 380,796 | | | 359,996 | | — | | | 359,996 |
| | | | | | |
Credit Suisse First Boston USA (Morgan Stanley ABS Capital I 2005-WMC1 B2, 1-Month LIBOR + 130bp, due 1/25/35) | | January 25, 2035 | | 1.31%
Monthly | | | 355,878 | | | 348,125 | | — | | | 348,125 |
128
Annual Report to Shareholders
| | | | | | | | | | | | | | | |
Core Plus—Continued | | | |
| |
Credit Default Swaps on Corporate Issues—Buy Protection4—Continued | | | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic
Payments Made
by the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) |
Credit Suisse First Boston USA
(Morgan Stanley ABS Capital I 2005-WMC1 B3, 1-Month LIBOR + 215bp, due 1/25/35) | | January 25, 2035 | | 2.18%
Monthly | | $ | 52,406 | | $ | 52,277 | | — | | $ | 52,277 |
| | | | | | |
Credit Suisse First Boston USA
(New Century Home Equity Loan Trust 2004-2 M9, 1-Month LIBOR + 325bp, due 8/25/34) | | August 25, 2034 | | 2.15%
Monthly | | | 423,008 | | | 247,494 | | — | | | 247,494 |
| | | | | | |
Credit Suisse First Boston USA
(New Century Home Equity Loan Trust 2005-1 M8, 1-Month LIBOR + 140bp, due 3/25/35) | | March 25, 2035 | | 1.31%
Monthly | | | 550,167 | | | 524,904 | | — | | | 524,904 |
| | | | | | |
Credit Suisse First Boston USA
(New Century Home Equity Loan Trust 2005-1 M9, 1-Month LIBOR + 205bp, due 3/25/35) | | March 25, 2035 | | 2.18%
Monthly | | | 479,851 | | | 461,310 | | — | | | 461,310 |
| | | | | | |
Credit Suisse First Boston USA
(Novastar Home Equity Loan 2005-1 B2, 1-Month LIBOR + 135bp, due 6/25/35) | | June 25, 2035 | | 1.28%
Monthly | | | 1,122,000 | | | 1,071,293 | | — | | | 1,071,293 |
| | | | | | |
Credit Suisse First Boston USA
(Novastar Home Equity Loan 2005-4 B3, 1-Month LIBOR + 195bp, due 6/25/35) | | June 25, 2035 | | 2.05%
Monthly | | | 1,122,000 | | | 1,087,767 | | — | | | 1,087,767 |
| | | | | | |
Credit Suisse First Boston USA
(Park Place Securities, Inc. 2005-WCH1 M8, 1-Month LIBOR + 155bp, due 1/25/36) | | January 25, 2036 | | 1.36%
Monthly | | | 1,122,000 | | | 1,097,669 | | — | | | 1,097,669 |
| | | | | | |
Credit Suisse First Boston USA
(Park Place Securities, Inc. 2005-WCH1 M9, 1-Month LIBOR + 250bp, due 1/25/36) | | January 25, 2036 | | 2.18%
Monthly | | | 550,139 | | | 547,366 | | — | | | 547,366 |
| | | | | | |
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2004-1 M6, 1-Month LIBOR + 230bp, due 6/25/34) | | June 25, 2034 | | 1.37%
Quarterly | | | 353,990 | | | 352,089 | | — | | | 352,089 |
129
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | | | | |
Core Plus—Continued | | | | |
| |
Credit Default Swaps on Corporate Issues—Buy Protection4—Continued | | | | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic
Payments Made
by the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2005-1 B3, 1-Month LIBOR + 260bp, due 1/25/35) | | January 25, 2035 | | 2.05%
Monthly | | $ | 879,711 | | $ | 878,988 | | | — | | $ | 878,988 | |
| | | | | | |
Credit Suisse First Boston USA (People’s Choice Home Loan Securities Trust 2005-1, 1-Month LIBOR + 165bp, due 1/25/35) | | January 25, 2035 | | 1.28%
Monthly | | | 1,122,000 | | | 1,120,898 | | | — | | | 1,120,898 | |
| | | | | | |
Credit Suisse First Boston USA (Southwest Airlines Co., 5.25%, due 10/1/14) | | March 20, 2017 | | 0.69%
Quarterly | | | 4,880,000 | | | 203,641 | | | — | | | 203,641 | |
| | | | | | |
Credit Suisse First Boston USA (Waste Management Inc.,
7.375%, due 8/1/10) | | March 20, 2014 | | 0.49%
Quarterly | | | 6,630,000 | | | 14,692 | | | — | | | 14,692 | |
| | | | | | |
Deutsche Bank AG
(Autozone Inc.,
6.95%, due 6/15/16) | | June 20, 2016 | | 0.58%
Quarterly | | | 10,890,000 | | | 21,974 | | | — | | | 21,974 | |
| | | | | | |
Deutsche Bank AG
(Centurytel Inc.,
7.875%, due 8/15/12) | | March 20, 2017 | | 0.89%
Quarterly | | | 8,270,000 | | | 96,498 | | | — | | | 96,498 | |
| | | | | | |
Morgan Stanley & Co., Inc.
(Gannett Co.,
6.375%, due 4/01/12) | | March 20, 2012 | | 0.46%
Quarterly | | | 4,560,000 | | | 166,243 | | | — | | | 166,243 | |
| | | | | | |
Morgan Stanley & Co., Inc.
(Sara Lee Corp.
6.125% due 11/01/32) | | September 20, 2011 | | 0.62%
Quarterly | | | 9,750,000 | | | (53,119 | ) | | — | | | (53,119 | ) |
| | | | | | |
Morgan Stanley & Co., Inc.
(Viacom Inc.,
6.25%, due 4/30/16) | | March 20, 2012 | | 0.36%
Quarterly | | | 10,540,000 | | | (3,398 | ) | | — | | | (3,398 | ) |
| | | | | | |
Morgan Stanley & Co., Inc.
(Weyerhaeuser Co. Note,
7.125%, due 7/15/23) | | March 20, 2012 | | 0.74%
Quarterly | | | 5,540,000 | | | 50,356 | | | — | | | 50,356 | |
| | | | | | |
RBS Greenwich
(Home Depot Inc.,
5.4%, due 3/1/16) | | March 20, 2016 | | 0.48%
Monthly | | | 8,230,000 | | | 59,722 | | | — | | | 59,722 | |
| | | | | | |
RBS Greenwich
(Washington Mutual 2005-AR11, 1-Month LIBOR + 120bp, due 8/25/45) | | August 25, 2045 | | 2.55%
Monthly | | | 673,001 | | | 664,841 | | | — | | | 664,841 | * |
130
Annual Report to Shareholders
| | | | | | | | | | | | | | | | |
Core Plus—Continued | | | | |
|
Credit Default Swaps on Corporate Issues—Buy Protection4—Continued | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic
Payments Made
by the Fund‡ | | Contract
Notional
Amount3 | | Market Value | | Upfront
Premiums
Paid/(Received) | | Unrealized
Appreciation/
(Depreciation) | |
| | | | | | |
The Goldman Sachs Group, Inc. (JPM Chase Commercial Mortgage,
5.7966%, due 5/15/47) | | May 15, 2047 | | 0.75%
Monthly | | $ | 5,000,000 | | $ | 4,528,808 | | — | | $ | 4,528,808 | * |
| | | | | | | | | | | | | | | | |
| Total | | $ | 190,159,740 | | $ | 27,043,592 | | — | | $ | 27,043,592 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Core Plus—Continued | | | | | |
|
Credit Default Swap on Credit Indices—Sell Protection1 | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic Payments
Received by
the Fund‡ | | Contract
Notional
Amount3 | | Market
Value5 | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
JPMorgan Chase & Co. (CDX IG 10) | | June 20, 2013 | | 1.55%
Quarterly | | $ 91,379,200 | | $ | 1,387,228 | | | $ | (420,424 | ) | | $ | 1,807,652 | |
| | | | | | |
Barclays Capital Inc. (CDX IG 9) | | December 20, 2017 | | 0.8%
Quarterly | | 3,523,520 | | | (107,215 | ) | | | (136,102 | ) | | | 28,887 | |
| | | | | | |
Barclays Capital Inc. (CDX IG HVOL 9) | | December 20, 2012 | | 1.4%
Quarterly | | 126,092,883 | | | (5,203,046 | ) | | | (3,544,566 | ) | | | (1,658,480 | ) |
| | | | | | |
JPMorgan Chase & Co. (CDX IG HVOL 9) | | December 20, 2012 | | 1.4%
Quarterly | | 11,199,960 | | | (462,151 | ) | | | (312,675 | ) | | | (149,476 | ) |
| | | | | | |
Barclays Capital Inc. (CDX IG HVOL 9) | | December 20, 2012 | | 1.4%
Quarterly | | 29,399,895 | | | (1,213,146 | ) | | | (833,955 | ) | | | (379,191 | ) |
| | | | | | |
Barclays Capital Inc. (CDX IG HVOL 9) | | December 20, 2012 | | 1.4%
Quarterly | | 33,599,880 | | | (1,386,452 | ) | | | (946,660 | ) | | | (439,792 | ) |
| | | | | | |
The Goldman Sachs Group Inc. (CDX IG HVOL 9) | | December 20, 2012 | | 1.4%
Quarterly | | 106,679,619 | | | (4,401,985 | ) | | | (8,727,616 | ) | | | 4,325,631 | |
| | | | | | |
The Goldman Sachs Group Inc. (CDX IG HVOL 9) | | December 20, 2012 | | 1.4%
Quarterly | | 28,279,899 | | | (1,166,930 | ) | | | (618,812 | ) | | | (548,118 | ) |
| | | | | | |
Barclays Capital Inc. (CDX IG HVOL 9) | | December 20, 2012 | | 1.4%
Quarterly | | 30,613,224 | | | (1,263,212 | ) | | | (1,536,744 | ) | | | 273,532 | |
| | | | | | |
Bear Stearns, Inc. (CDX HY 6B) | | June 20, 2011 | | 3%
Quarterly | | 21,354,000 | | | 537,171 | | | | 94,125 | | | | 443,046 | |
| | | | | | |
Bear Stearns, Inc. (CDX HY 8) | | June 20, 2012 | | 0.91%
Quarterly | | 31,750,000 | | | (1,526,756 | ) | | | — | | | | (1,526,756 | ) |
| | | | | | |
Bear Stearns, Inc. (CDX HY 8) | | June 20, 2012 | | 1.01%
Quarterly | | 11,800,000 | | | (538,926 | ) | | | — | | | | (538,926 | ) |
| | | | | | |
Bear Stearns, Inc. (CDX HY 8) | | June 20, 2012 | | 1.05%
Quarterly | | 12,700,000 | | | (567,761 | ) | | | — | | | | (567,761 | ) |
131
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | | | | | |
Core Plus—Continued | | | | | |
|
Credit Default Swap on Credit Indices—Sell Protection1—Continued | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic Payments
Received by
the Fund‡ | | Contract
Notional
Amount3 | | Market
Value5 | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
Credit Suisse First Boston USA (ABX.HE-AAA 06-1) | | July 25, 2045 | | 0.18%
Monthly | | $150,494,251 | | $ | (27,465,201 | ) | | $ | (12,527,867 | ) | | $ | (14,937,334 | ) |
| | | | | | |
Credit Suisse First Boston USA (ABX.HE-AAA 06-1) | | July 25, 2045 | | 0.18%
Monthly | | 21,611,218 | | | (3,944,047 | ) | | | (1,901,547 | ) | | | (2,042,500 | ) |
| | | | | | |
Credit Suisse First Boston USA (CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | 38,919,861 | | | 758,673 | | | | 388,923 | | | | 369,750 | |
| | | | | | |
Credit Suisse First Boston USA (CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | 39,479,859 | | | 769,589 | | | | (446,631 | ) | | | 1,216,220 | |
| | | | | | |
Deutsche Bank AG (ABX.HE-AAA 06-1) | | July 25, 2045 | | 0.18%
Monthly | | 29,541,142 | | | (5,391,258 | ) | | | (2,476,715 | ) | | | (2,914,543 | ) |
| | | | | | |
Deutsche Bank AG (ABX.HE-AAA 06-1) | | July 25, 2045 | | 0.18%
Monthly | | 14,901,284 | | | (2,719,485 | ) | | | (1,311,144 | ) | | | (1,408,341 | ) |
| | | | | | |
Deutsche Bank AG (ABX.HE-AAA 06-1) | | July 25, 2045 | | 0.18%
Monthly | | 7,145,645 | | | (1,304,080 | ) | | | (776,104 | ) | | | (527,976 | ) |
| | | | | | |
Deutsche Bank AG (iBoxx IG Hi-Vol2) | | September 20, 2014 | | 1.3%
Quarterly | | 11,174,667 | | | (274,252 | ) | | | 29,830 | | | | (304,082 | ) |
| | | | | | |
JP Morgan Chase & Co.
(ABX. HE-AAA 06-1) | | July 25, 2045 | | 0.18%
Monthly | | 20,914,082 | | | (3,816,820 | ) | | | (489,605 | ) | | | (3,327,215 | ) |
| | | | | | |
JP Morgan Chase & Co. (CDX HY 9) | | December 20, 2012 | | 2.25%
Quarterly | | 8,900,000 | | | (537,633 | ) | | | — | | | | (537,633 | ) |
| | | | | | |
The Goldman Sachs Group Inc. (CDX HY 9) | | December 20, 2012 | | 6.356%
Quarterly | | 50,000,000 | | | 2,822,240 | | | | — | | | | 2,822,240 | |
| | | | | | |
JP Morgan Chase & Co. (CDX HY 9) | | December 20, 2012 | | 6.2%
Quarterly | | 13,000,000 | | | 676,068 | | | | — | | | | 676,068 | |
| | | | | | |
Merrill Lynch & Co., Inc.
(CDX HY 9) | | December 20, 2012 | | 6.2%
Quarterly | | 3,000,000 | | | 156,016 | | | | — | | | | 156,016 | |
| | | | | | |
JP Morgan Chase & Co. (CDX IG 10) | | June 20, 2013 | | 1.55%
Quarterly | | 152,944,000 | | | 2,321,843 | | | | 66,335 | | | | 2,255,508 | |
| | | | | | |
JP Morgan Chase & Co. (CDX IG 8) | | June 20, 2012 | | 0.35%
Quarterly | | 82,764,000 | | | (1,440,938 | ) | | | (369,580 | ) | | | (1,071,358 | ) |
| | | | | | |
The Goldman Sachs Group Inc. (CDX IG HVOL 9) | | December 20, 2012 | | 1.4%
Quarterly | | 933,330 | | | (38,513 | ) | | | (21,784 | ) | | | (16,729 | ) |
| | | | | | |
Merrill Lynch & Co., Inc.
(ABX.HE-AAA 06-1) | | July 25, 2045 | | 0.18%
Monthly | | 21,785,503 | | | (3,975,854 | ) | | | (1,187,398 | ) | | | (2,788,456 | ) |
132
Annual Report to Shareholders
| | | | | | | | | | | | | | | | | | |
Core Plus—Continued | | | | | |
|
Credit Default Swap on Credit Indices—Sell Protection1—Continued | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic Payments
Received by
the Fund‡ | | Contract
Notional
Amount3 | | Market
Value5 | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
Merrill Lynch & Co., Inc. (CDX HY 8) | | June 20, 2012 | | 0.82%
Quarterly | | $30,600,000 | | $ | (1,537,968 | ) | | | — | | | $ | (1,537,968 | ) |
| | | | | | |
Merrill Lynch & Co., Inc. (CDX HY 8) | | June 20, 2012 | | 0.92%
Quarterly | | 31,750,000 | | | (1,519,088 | ) | | | — | | | | (1,519,088 | ) |
| | | | | | |
Merrill Lynch & Co., Inc. (CDX HY 8) | | June 20, 2012 | | 1.125%
Quarterly | | 18,800,000 | | | (806,413 | ) | | | — | | | | (806,413 | ) |
| | | | | | |
Merrill Lynch & Co., Inc. (CDX HY 9) | | December 20, 2012 | | 2%
Quarterly | | 9,340,000 | | | (630,665 | ) | | | — | | | | (630,665 | ) |
| | | | | | |
Merrill Lynch & Co., Inc. (CDX HY 9) | | December 20, 2012 | | 2.3%
Quarterly | | 9,220,000 | | | (543,844 | ) | | | — | | | | (543,844 | ) |
| | | | | | |
Merrill Lynch & Co., Inc. (CDX HY 9) | | December 20, 2012 | | 6.43%
Quarterly | | 2,000,000 | | | 117,102 | | | | — | | | | 117,102 | |
| | | | | | |
Merrill Lynch & Co., Inc. (Dow Jones CDX IG HVOL 12) | | June 20, 2014 | | 5%
Quarterly | | 24,553,164 | | | 3,642,268 | | | $ | 747,964 | | | | 2,894,304 | |
| | | | | | |
Barclays Capital Inc.
(CDX IG HVOL 9) | | December 20, 2012 | | 1.4%
Quarterly | | 104,532,960 | | | (4,313,406 | ) | | | (4,024,670 | ) | | | (288,736 | ) |
| | | | | | |
RBS Greenwich (CDX HY 10) | | June 20, 2013 | | 5%
Quarterly | | 10,614,000 | | | 318,907 | | | | (996,145 | ) | | | 1,315,052 | |
| | | | | | |
RBS Greenwich
(CDX IG 8) | | June 20, 2012 | | 0.35%
Quarterly | | 13,455,200 | | | (234,258 | ) | | | (146,309 | ) | | | (87,949 | ) |
| | | | | | |
Barclays Capital Inc.
(CDX IG 9) | | December 20, 2017 | | 0.8%
Quarterly | | 7,763,360 | | | (236,226 | ) | | | (262,842 | ) | | | 26,616 | |
| | | | | | |
RBS Greenwich
(LCDX HY 9) | | December 20, 2012 | | 2.25%
Quarterly | | 12,800,000 | | | (11,707 | ) | | | (634,507 | ) | | | 622,800 | |
| | | | | | |
Merrill Lynch & Co., Inc. (ABX.HE-AAA 06-1) | | July 25, 2045 | | 0.18%
Monthly | | 21,567,647 | | | (3,936,095 | ) | | | (1,430,971 | ) | | | (2,505,124 | ) |
| | | | | | |
The Goldman Sachs Group, Inc. (CDX HY 8) | | June 20, 2012 | | 0.9%
Quarterly | | 32,000,000 | | | (1,546,506 | ) | | | — | | | | (1,546,506 | ) |
| | | | | | |
The Goldman Sachs Group, Inc. (CDX HY 9) | | December 12, 2012 | | 1.8%
Quarterly | | 35,500,000 | | | (2,599,125 | ) | | | — | | | | (2,599,125 | ) |
| | | | | | |
The Goldman Sachs Group, Inc. (CDX HY 9) | | December 20, 2012 | | 2%
Quarterly | | 8,780,000 | | | (592,852 | ) | | | — | | | | (592,852 | ) |
| | | | | | |
JP Morgan Chase & Co. (CDX IG 8) | | June 20, 2012 | | 0.35%
Quarterly | | 9,776,800 | | | (170,216 | ) | | | (50,783 | ) | | | (119,433 | ) |
| | | | | | |
The Goldman Sachs Group, Inc. (CDX IG 9) | | December 20, 2017 | | 0.8%
Quarterly | | 35,138,400 | | | (1,069,202 | ) | | | (1,076,907 | ) | | | 7,705 | |
133
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | | | | | | |
Core Plus—Continued | | | | | |
|
Credit Default Swap on Credit Indices—Sell Protection1—Continued | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic Payments
Received by
the Fund‡ | | Contract
Notional
Amount3 | | Market
Value5 | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
The Goldman Sachs Group, Inc. (CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | | $234,359,163 | | $ | 4,568,410 | | | $ | 2,871,563 | | | $ | 1,696,847 | |
| | | | | | |
The Goldman Sachs Group, Inc.
(CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | | 31,546,554 | | | 614,943 | | | | 843,927 | | | | (228,984 | ) |
| | | | | | |
The Goldman Sachs Group, Inc.
(CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | | 31,639,887 | | | 616,763 | | | | 417,210 | | | | 199,553 | |
| | | | | | |
The Goldman Sachs Group, Inc.
(CDX IG HVOL 3) | | March 20, 2010 | | 1.05%
Quarterly | | | 21,846,516 | | | 29,117 | | | | (8,877 | ) | | | 37,994 | |
| | | | | | |
The Goldman Sachs Group, Inc.
(CDX IG HVOL 3) | | March 20, 2010 | | 1.05%
Quarterly | | | 42,823,038 | | | 57,075 | | | | (70,663 | ) | | | 127,738 | |
| | | | | | |
The Goldman Sachs Group, Inc.
(CDX IG HVOL 9) | | December 20, 2012 | | 1.4%
Quarterly | | | 46,666,500 | | | (1,925,628 | ) | | | (667,477 | ) | | | (1,258,151 | ) |
| | | | | | |
The Goldman Sachs Group, Inc. (CDX IG HVOL 9) | | December 20, 2012 | | 1.4%
Quarterly | | | 28,279,899 | | | (1,166,930 | ) | | | (632,583 | ) | | | (534,347 | ) |
| | | | | | |
The Goldman Sachs Group, Inc. (CDX IG HVOL 9) | | December 20, 2012 | | 1.4%
Quarterly | | | 27,439,902 | | | (1,132,269 | ) | | | (933,202 | ) | | | (199,067 | ) |
| | | | | | |
The Goldman Sachs Group, Inc. (CDX IG HVOL 9) | | December 20, 2012 | | 1.4%
Quarterly | | | 27,439,902 | | | (1,132,269 | ) | | | (816,417 | ) | | | (315,852 | ) |
| | | | | | |
The Goldman Sachs Group, Inc. (iBoxx HY 4) | | June 20, 2010 | | 3.4%
Quarterly | | | 1,980,000 | | | 21,331 | | | | (8,216 | ) | | | 29,547 | |
| | | | | | |
The Goldman Sachs Group, Inc. (iBoxx HY 6B) | | June 20, 2011 | | 3%
Quarterly | | | 9,737,424 | | | 244,950 | | | | 35,344 | | | | 209,606 | |
| | | | | | |
The Goldman Sachs Group, Inc. (iBoxx HY 6B) | | June 20, 2011 | | 3%
Quarterly | | | 12,812,400 | | | 322,302 | | | | 56,472 | | | | 265,830 | |
| | | | | | |
The Goldman Sachs Group, Inc. (LCDX 9) | | December 20, 2012 | | 2.25%
Quarterly | | | 13,600,000 | | | (12,439 | ) | | | 38,997 | | | | (51,436 | ) |
| | | | | | | | | | | | | | | | | | | |
| Total | | $ | 2,154,243,638 | | $ | (73,880,771 | ) | | $ | (44,755,808 | ) | | $ | (29,124,963 | ) |
| | | | | | | | | | | | | | | | | | | |
134
Annual Report to Shareholders
| | | | | | | | | | | | | | | | | | |
Core Plus—Continued | | | | | |
|
Credit Default Swap on Credit Indices—Buy Protection4 | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic
Payments Made
by the Fund‡ | | Contract
Notional
Amount3 | | Market
Value5 | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
Banc of America Securities LLC (CDX IG 10) | | June 20, 2013 | | 1.55%
Quarterly | | $ 774,400 | | $ | (11,756 | ) | | $ | 916 | | | $ | (12,672 | ) |
| | | | | | |
Barclays Capital Inc. (CDX IG 10 6/13) | | June 20, 2013 | | 1.55%
Quarterly | | 19,456,800 | | | (295,374 | ) | | | 276,081 | | | | (571,455 | ) |
| | | | | | |
Barclays Capital Inc.
(CDX IG 10) | | June 20, 2013 | | 1.55%
Quarterly | | 80,440,800 | | | (1,221,172 | ) | | | 285,849 | | | | (1,507,021 | ) |
| | | | | | |
Bear Stearns, Inc.
(CDX HY 6B) | | June 20, 2011 | | 3%
Quarterly | | 9,908,256 | | | 249,247 | | | | 15,413 | | | | 233,834 | |
| | | | | | |
Citigroup Global Markets (CMBX 1 2006-1 AAA) | | October 12, 2052 | | 0.1%
Monthly | | 9,530,000 | | | 714,750 | | | | 936,763 | | | | (222,013 | )* |
| | | | | | |
Credit Suisse First Boston USA (CDX HY 12) | | June 20, 2014 | | 5%
Quarterly | | 11,750,000 | | | (93,403 | ) | | | 486,846 | | | | (580,249 | ) |
| | | | | | |
Credit Suisse First Boston USA (CDX IG 11) | | March 20, 2013 | | 1.5%
Quarterly | | 89,379,200 | | | (1,693,119 | ) | | | 2,460,661 | | | | (4,153,780 | ) |
| | | | | | |
Credit Suisse First Boston USA (CMBX 1 2006-1 AAA) | | March 22, 2045 | | 0.1%
Monthly | | 9,520,000 | | | 714,000 | | | | 2,189,938 | | | | (1,475,938 | )* |
| | | | | | |
Credit Suisse First Boston USA (CMBX 2 2006-2 AAA) | | March 15, 2049 | | 0.07%
Monthly | | 16,420,000 | | | 1,824,262 | | | | 3,556,796 | | | | (1,732,534 | )* |
| | | | | | |
Credit Suisse First Boston USA (CMBX 4 2007-2 AAA) | | March 22, 2047 | | 0.35%
Monthly | | 34,700,000 | | | 5,912,880 | | | | 8,871,904 | | | | (2,959,024 | )* |
| | | | | | |
Credit Suisse First Boston USA (MARKIT CDX HY 13) | | December 20, 2014 | | 5%
Quarterly | | 28,116,000 | | | 176,903 | | | | 1,883,237 | | | | (1,706,334 | ) |
| | | | | | |
JP Morgan Chase & Co.
(CDX IG 10 6/13) | | June 20, 2013 | | 1.55%
Quarterly | | 39,494,400 | | | (599,564 | ) | | | 804,382 | | | | (1,403,946 | ) |
| | | | | | |
JP Morgan Chase & Co.
(CDX IG 10 6/13) | | June 20, 2013 | | 1.55%
Quarterly | | 9,776,800 | | | (148,422 | ) | | | 103,778 | | | | (252,200 | ) |
| | | | | | |
JP Morgan Chase & Co.
(CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | 27,719,901 | | | (540,350 | ) | | | (838,496 | ) | | | 298,146 | |
| | | | | | |
JP Morgan Chase & Co.
(CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | 25,199,910 | | | (491,227 | ) | | | (909,147 | ) | | | 417,920 | |
| | | | | | |
JP Morgan Chase & Co.
(CMBX 1 2006-1 AAA) | | October 12, 2052 | | 0.1%
Monthly | | 9,530,000 | | | 714,750 | | | | 942,617 | | | | (227,867 | )* |
| | | | | | |
JP Morgan Chase & Co.
(CMBX 4 2007-2 AAA) | | March 22, 2047 | | 0.35%
Quarterly | | 34,700,000 | | | 5,912,880 | | | | 8,871,904 | | | | (2,959,024 | )* |
| | | | | | |
Morgan Stanley & Co., Inc.
(CDX HY 12) | | June 20, 2014 | | 5%
Quarterly | | 23,500,000 | | | (186,806 | ) | | | 1,101,906 | | | | (1,288,712 | ) |
135
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | | | | | | | |
Core Plus—Continued | | | | | |
|
Credit Default Swap on Credit Indices—Buy Protection4—Continued | |
Swap Counterparty
(Reference Entity) | | Termination Date | | Periodic
Payments Made
by the Fund‡ | | Contract
Notional
Amount3 | | Market
Value5 | | | Upfront
Premiums
Paid/(Received) | | | Unrealized
Appreciation/
(Depreciation) | |
| | | | | | |
Morgan Stanley & Co., Inc. (MARKIT CDX HY 13) | | December 20, 2014 | | 5%
Quarterly | | | $28,116,000 | | $ | 176,903 | | | $ | 1,883,237 | | | $ | (1,706,334 | ) |
| | | | | | |
Credit Suisse First Boston USA
(CDX HY 10) | | June 20, 2013 | | 5%
Quarterly | | | 10,614,000 | | | (318,907 | ) | | | 1,475,260 | | | | (1,794,167 | ) |
| | | | | | |
Credit Suisse First Boston USA (CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | | 10,826,628 | | | (211,046 | ) | | | (390,597 | ) | | | 179,551 | |
| | | | | | |
The Goldman Sachs Group, Inc. (CDX IG HVOL 10) | | June 20, 2013 | | 3.5%
Quarterly | | | 38,919,861 | | | (758,673 | ) | | | 325,493 | | | | (1,084,166 | ) |
| | | | | | | | | | | | | | | | | | | |
| Total | | $ | 568,392,956 | | $ | 9,826,756 | | | $ | 34,334,741 | | | $ | (24,507,985 | ) |
| | | | | | | | | | | | | | | | | | | |
| 1 | | If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index. |
| 2 | | Implied credit spreads, utilized in determining the market value of credit default swap agreements on corporate issues or sovereign issues of an emerging country as of period end serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement. A credit spread identified as “Defaulted” indicates a credit event has occurred for the referenced entity or obligation. |
| 3 | | The maximum potential amount the Fund could be required to make as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement. |
| 4 | | If the Fund is a buyer of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) receive from the seller of protection an amount equal to the notional amount of the swap and deliver the underlying securities comprising the referenced index or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the underlying securities comprising the referenced index. |
| 5 | | The quoted market prices and resulting values for credit default swap agreements on asset-backed securities and credit indices serve as an indicator of the current status of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement been closed/sold as of the period end. Decreasing market values when compared to the notional amount of the swap, represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement. |
| ‡ | | Percentage shown is an annual percentage rate. |
| * | | Security is valued in good faith at fair value by or under the direction of the Board of Directors. |
4. Derivative Instruments and Hedging Activities
Financial Accounting Standards Board Codification Topic 815 (formerly, Statement of Financial Accounting Standards No. 161) (“ASC Topic 815”) requires enhanced disclosure about an entity’s derivative and hedging activities.
Below is a table, grouped by derivative type that provides information about the fair value and the location of derivatives within the Statement of Assets and Liabilities at December 31, 2009.
Core
| | | | | | | | | | | |
| | | Asset Derivatives1 |
| | | Interest Rate
Contracts Risk | | Credit
Contracts Risk | | Other
Contracts Risk | | Total |
Options Purchased | | $ | 4,925,893 | | | — | | — | | $ | 4,925,893 |
Futures Contracts2 | | | 16,745,070 | | | — | | — | | | 16,745,070 |
Swap Contracts3 | | | 4,977,686 | | $ | 102,893,323 | | — | | | 107,871,009 |
Total | | $ | 26,648,649 | | $ | 102,893,323 | | — | | $ | 129,541,972 |
| | | | | | | | | | | | |
136
Annual Report to Shareholders
| | | | | | | | | | | |
| | | Liability Derivatives1 |
| | | Interest Rate
Contracts Risk | | Credit
Contracts Risk | | Other
Contracts Risk | | Total |
Written Options | | $ | 21,472,212 | | | — | | — | | $ | 21,472,212 |
Futures Contracts2 | | | 18,124,776 | | | — | | — | | | 18,124,776 |
Swap Contracts3 | | | 10,139,807 | | $ | 101,858,910 | | — | | | 111,998,717 |
Total | | $ | 49,736,795 | | $ | 101,858,910 | | — | | $ | 151,595,705 |
| | | | | | | | | | | | |
| 1 | | Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation(depreciation) and for liability derivatives is payables/net unrealized appreciation(depreciation). |
| 2 | | Includes cumulative appreciation/depreciation of futures contracts as reported in the Portfolio of Investments. Only current day's variation margin is reported within the receivables and/or payables of the Statement of Assets and Liabilities. |
| 3 | | Values include premiums paid/(received) on swap contracts which are shown separately in the Statement of Assets and liabilities. |
Core Plus
| | | | | | | | | | | | | | |
| | | Asset Derivative1 |
| | | Interest Rate
Contracts Risk | | Foreign Exchange
Contracts Risk | | Credit
Contracts Risk | | Other
Contracts Risk | | Total |
Options Purchased | | $ | 11,458,300 | | | — | | | — | | — | | $ | 11,458,300 |
Futures Contracts2 | | | 27,266,071 | | | — | | | — | | — | | | 27,266,071 |
Swap Contracts3 | | | 7,190,613 | | | — | | $ | 95,505,276 | | — | | | 102,695,889 |
Forward Foreign Currency Contracts | | | — | | $ | 18,924,774 | | | — | | — | | | 18,924,774 |
Total | | $ | 45,914,984 | | $ | 18,924,774 | | $ | 95,505,276 | | — | | $ | 160,345,034 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | Liability Derivatives1 |
| | | Interest Rate
Contracts Risk | | Foreign Exchange
Contracts Risk | | Credit
Contracts Risk | | Other
Contracts Risk | | Total |
Written Options | | $ | 51,739,630 | | | — | | | — | | — | | $ | 51,739,630 |
Futures Contracts2 | | | 34,569,594 | | | — | | | — | | — | | | 34,569,594 |
Swap Contracts3 | | | 20,164,730 | | | — | | $ | 139,976,143 | | — | | | 160,140,873 |
Forward Foreign Currency Contracts | | | — | | $ | 3,167,659 | | | — | | — | | | 3,167,659 |
Total | | $ | 106,473,954 | | $ | 3,167,659 | | $ | 139,976,143 | | — | | $ | 249,617,756 |
| | | | | | | | | | | | | | | |
| 1 | | Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation (depreciation) and for liability derivatives is payables/net unrealized appreciation (depreciation). |
| 2 | | Includes cumulative appreciation/depreciation of futures contracts as reported in the Portfolio of Investments. Only current day's variation margin is reported within the receivables and/or payables of the Statement of Assets and Liabilities. |
| 3 | | Values include premiums paid/(received) on swap contracts which are shown separately in the Statement of Assets and liabilities. |
The following tables provide information about the effect of derivatives and hedging activities on each Fund’s Statement of Operations for the year ended December 31, 2009. The first table provides additional detail about the amounts and sources of gains/(losses) realized on derivatives during the period. The second table provides additional information about the changes in unrealized appreciation/(depreciation) resulting from each Fund’s derivatives and hedging activities during the period.
Core
| | | | | | | | | | | | | | |
| | | Amount of Realized Gain or (Loss) on Derivatives Recognized | |
| | | Interest Rate
Contracts Risk | | | Credit
Contracts Risk | | | Other
Contracts Risk | | Total | |
Written Options | | $ | 36,760,869 | | | | — | | | — | | $ | 36,760,869 | |
Options Purchased | | | (7,833,267 | ) | | | — | | | — | | | (7,833,267 | ) |
Futures Contracts | | | (998,297 | ) | | | — | | | — | | | (998,297 | ) |
Swap Contracts | | | 20,041,551 | | | $ | (215,071,242 | ) | | — | | | (195,029,691 | ) |
Total | | $ | 47,970,856 | | | $ | (215,071,242 | ) | | — | | $ | (167,100,386 | ) |
| | | | | | | | | | | | | | | |
137
Annual Report to Shareholders
Notes to Financial Statements—Continued
| | | | | | | | | | | | | |
| | | Change in Unrealized Appreciation/Depreciation on
Derivatives Recognized | |
| | | Interest Rate
Contracts Risk | | | Credit
Contracts Risk | | Other
Contracts Risk | | Total | |
Written Options | | $ | 6,386,958 | | | | — | | — | | $ | 6,386,958 | |
Purchased Options | | | 1,319,790 | | | | — | | — | | | 1,319,790 | |
Futures Contracts | | | (58,355,147 | ) | | | — | | — | | | (58,355,147 | ) |
Swap Contracts | | | 54,837,720 | | | $ | 244,876,383 | | — | | | 299,714,103 | |
Total | | $ | 4,189,321 | | | $ | 244,876,383 | | — | | $ | 249,065,704 | |
| | | | | | | | | | | | | | |
Core Plus
| | | | | | | | | | | | | | | | | |
| | | Amount of Realized Gain or (Loss) on Derivatives Recognized | |
| | | Interest Rate
Contracts Risk | | | Foreign Exchange
Contracts Risk | | Credit
Contracts Risk | | | Other
Contracts Risk | | Total | |
Written Options | | $ | 85,322,429 | | | | — | | | — | | | — | | $ | 85,322,429 | |
Purchased Options | | | (17,518,936 | ) | | | — | | | — | | | — | | | (17,518,936 | ) |
Futures Contracts | | | 25,847,481 | | | | — | | | — | | | — | | | 25,847,481 | |
Swap Contracts | | | 17,451,990 | | | | — | | $ | (384,722,776 | ) | | — | | | (367,270,786 | ) |
Forward Foreign Currency Contracts | | | | | | $ | 5,746,802 | | | | | | | | | 5,746,802 | |
Total | | $ | 111,102,964 | | | $ | 5,746,802 | | $ | (384,722,776 | ) | | — | | $ | (267,873,010 | ) |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | Change in Unrealized Appreciation (Depreciation) on Derivatives Recognized | |
| | | Interest Rate
Contracts
Risk | | | Foreign Exchange
Contracts Risk | | Credit
Contracts Risk | | Other
Contracts Risk | | Total | |
Written Options | | $ | 11,676,577 | | | | — | | | — | | — | | $ | 11,676,577 | |
Purchased Options | | | 2,654,942 | | | | — | | | — | | — | | | 2,654,942 | |
Futures Contracts | | | (179,345,203 | ) | | | — | | | — | | — | | | (179,345,203 | ) |
Swap Contracts | | | 169,127,112 | | | | — | | $ | 692,688,464 | | — | | | 861,815,576 | |
Forward Foreign Currency Contracts | | | — | | | $ | 11,569,808 | | | — | | — | | | 11,569,808 | |
Total | | $ | 4,113,428 | | | $ | 11,569,808 | | $ | 692,688,464 | | — | | $ | 708,371,700 | |
| | | | | | | | | | | | | | | | | |
The Funds had average market values in written options, purchased options, forward foreign currency contracts (to buy), forward foreign currency contracts (to sell), futures contracts (to buy) and futures contracts (to sell), of:
| | | | | | | | | |
| | | Written
Options | | Purchased
Options | | Forward Foreign
Currency Contracts
(to Buy) |
Core | | $ | 26,304,745 | | $ | 4,170,476 | | | — |
Core Plus | | | 58,448,466 | | | 9,705,761 | | $ | 231,281,061 |
| | | | | | | | | |
| | | Forward Foreign
Currency Contracts
(to Sell) | | Futures
Contracts
(to Buy) | | Futures
Contracts
(to Sell) |
Core | | | — | | $ | 2,241,992,807 | | $ | 375,276,616 |
Core Plus | | $ | 303,088,929 | | | 4,887,934,697 | | | 468,856,636 |
138
Annual Report to Shareholders
The Funds had average notional balances in interest rate swap contracts, credit default swap contracts (to buy protection) and credit default swap contracts (to sell protection), of:
| | | | | | | | | |
| | | Interest Rate
Swap Contracts | | Credit Default
Swap Contracts
(to buy) | | Credit Default
Swap Contracts
(to Sell) |
Core | | $ | 860,680,692 | | $ | 488,578,363 | | $ | 1,705,867,750 |
Core Plus | | | 1,866,715,000 | | | 745,379,805 | | | 3,884,342,938 |
The Funds have several credit related contingent features that if triggered would allow their derivatives counterparties to close out and demand payment or additional collateral to cover their exposure from the Funds. Credit related contingent features are established between the Fund ands their derivatives counterparties to reduce the risk that the Funds will not fulfill their payment obligations to its counterparties. These triggering features include, but are not limited to, a percentage decrease in the Funds’ net assets and or percentage decrease in the Funds’ Net Asset Value or NAV. The contingent features are established within the Funds’ International Swap and Derivatives Association, Inc. master agreements which govern positions in swaps, over-the-counter options, and forward currency exchange contracts for each individual counterparty.
5. Subscription in-Kind
The Fund under certain conditions may accept portfolio securities rather than cash as payment for the purchase of fund shares. The cost basis of contributed securities is equal to the market value of securities on the date of contribution. There are no gains or losses recognized by the Fund and there are no tax consequences on subscription in-kind transactions. During the year ended December 31, 2009, Core Plus accepted $5,961,875 of subscription in-kind.
6. Class Specific Expenses, waivers and/or reimbursements
The Funds have adopted a Rule 12b-1 distribution plan and under that plan the Funds pay a distribution fee with respect to their Financial Intermediary Class shares calculated at the annual rate of 0.25% of the average daily net assets of the class. Distribution fees are accrued and paid monthly.
For the year ended December 31, 2009, class specific expenses were as follows:
Core
| | | | | | | | | |
| | | Distribution Fees | | Transfer Agent and
Shareholder Servicing
Expense | | Reports to
Shareholders |
Institutional Class | | | — | | $ | 977,935 | | $ | 286,086 |
Institutional Select Class | | | — | | | 7,466 | | | 513 |
Financial Intermediary Class | | $ | 2,800,092 | | | 1,004,216 | | | 133,596 |
| | | | | | | | | |
Total | | $ | 2,800,092 | | $ | 1,989,617 | | $ | 420,195 |
| | | | | | | | | |
Core Plus
| | | | | | | | | |
| | | Distribution Fees | | Transfer Agent and
Shareholder Servicing
Expense | | Reports to
Shareholders |
Institutional Class | | | — | | $ | 1,396,153 | | $ | 261,899 |
Institutional Select Class | | | — | | | 27,658 | | | 47,790 |
Financial Intermediary Class | | $ | 1,707,060 | | | 1,049,266 | | | 200,217 |
| | | | | | | | | |
Total | | $ | 1,707,060 | | $ | 2,473,077 | | $ | 509,906 |
| | | | | | | | | |
139
Annual Report to Shareholders
Notes to Financial Statements—Continued
For year ended December 31, 2009, waivers and/or reimbursements by class were as follows:
Core
| | | |
| | | Fees Waived |
Institutional Class | | | — |
Institutional Select Class | | | — |
Financial Intermediary Class | | $ | 381,799 |
| | | |
Total | | $ | 381,799 |
| | | |
Core Plus
| | | |
| | | Fees Waived |
Institutional Class | | | — |
Institutional Select Class | | $ | 3,982 |
Financial Intermediary Class | | | 1,102,926 |
| | | |
Total | | $ | 1,106,908 |
| | | |
7. Capital Shares
At December 31, 2009, the Funds had 21.05 billion shares of capital stock authorized with a par value of $0.001 per share. Transactions in shares of the Funds were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008A | | | March 31, 2008 | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | |
Core | | | | | | | | | | | | | | | | | | | | | |
Institutional Class | | | | | | | | | | | | | | | | | | | | | |
Shares sold | | 41,315,602 | | | $ | 383,430,599 | | | 45,809,011 | | | $ | 462,764,704 | | | 145,194,635 | | | $ | 1,603,386,410 | |
Shares issued on reinvestment | | 11,707,840 | | | | 113,453,329 | | | 19,465,391 | | | | 189,411,274 | | | 24,570,553 | | | | 270,401,252 | |
Shares repurchased | | (130,449,505 | ) | | | (1,181,617,166 | ) | | (271,357,244 | ) | | | (2,560,566,907 | ) | | (119,670,207 | ) | | | (1,306,567,803 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Net Increase (Decrease) | | (77,426,063 | ) | | $ | (684,733,238 | ) | | (206,082,842 | ) | | $ | (1,908,390,929 | ) | | 50,094,981 | | | $ | 567,219,859 | |
| | | | | | | | | | | | | | | | | | | | | |
Institutional Select Class | | | | | | | | | | | | | | | | | | | | | |
Shares sold | | 5,684,243 | | | $ | 54,085,912 | | | 26,523,024 | | | $ | 231,066,783 | | | — | | | | — | |
Shares issued on reinvestment | | 1,381,067 | | | | 13,529,293 | | | 506,958 | | | | 4,593,497 | | | — | | | | — | |
Shares repurchased | | (10,304,729 | ) | | | (101,242,066 | ) | | (546,226 | ) | | | (4,786,801 | ) | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Net Increase (Decrease) | | (3,239,419 | ) | | $ | (33,626,861 | ) | | 26,483,756 | | | $ | 230,873,479 | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Financial Intermediary Class | | | | | | | | | | | | | | | | | | | | | |
Shares sold | | 24,695,986 | | | $ | 236,183,280 | | | 32,207,905 | | | $ | 319,217,126 | | | 61,374,893 | | | $ | 675,386,074 | |
Shares issued on reinvestment | | 6,018,661 | | | | 58,707,825 | | | 7,514,997 | | | | 72,497,732 | | | 7,607,185 | | | | 83,678,848 | |
Shares repurchased | | (46,551,286 | ) | | | (434,617,720 | ) | | (65,446,508 | ) | | | (633,361,948 | ) | | (37,942,574 | ) | | | (415,583,975 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Net Increase (Decrease) | | (15,836,639 | ) | | $ | (139,726,615 | ) | | (25,723,606 | ) | | $ | (241,647,090 | ) | | 31,039,504 | | | $ | 343,480,947 | |
| | | | | | | | | | | | | | | | | | | | | |
140
Annual Report to Shareholders
| | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008A | | | March 31, 2008 | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | |
| Core Plus | | | | | | | | | | | | | | | | | | | | | |
Institutional Class | | | | | | | | | | | | | | | | | | | | | |
Shares sold | | 83,122,713 | | | $ | 785,109,184 | | | 147,333,326 | | | $ | 1,395,839,016 | | | 431,074,565 | | | $ | 4,418,392,877 | |
Shares issued on reinvestment | | 41,608,644 | | | | 387,836,215 | | | 46,231,902 | | | | 426,186,161 | | | 60,102,475 | | | | 614,857,736 | |
Shares repurchased | | (348,715,515 | ) | | | (3,185,312,307 | ) | | (741,151,845 | ) | | | (6,662,401,360 | ) | | (269,816,777 | ) | | | (2,748,602,623 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Net Increase (Decrease) | | (223,984,158 | ) | | $ | (2,012,366,908 | ) | | (547,586,617 | ) | | $ | (4,840,376,183 | ) | | 221,360,263 | | | $ | 2,284,647,990 | |
| | | | | | | | | | | | | | | | | | | | | |
Institutional Select Class | | | | | | | | | | | | | | | | | | | | | |
Shares sold | | 63,248,090 | | | $ | 601,541,786 | | | 206,086,935 | | | $ | 1,850,661,361 | | | — | | | | — | |
Shares issued on reinvestment | | 11,566,955 | | | | 108,468,213 | | | 3,637,450 | | | | 31,448,482 | | | — | | | | — | |
Shares repurchased | | (73,803,380 | ) | | | (677,088,372 | ) | | (29,527,138 | ) | | | (256,518,602 | ) | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Net Increase | | 1,011,665 | | | $ | 32,921,627 | | | 180,197,247 | | | $ | 1,625,591,241 | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Financial Intermediary Class | | | | | | | | | | | | | | | | | | | | | |
Shares sold | | 27,353,342 | | | $ | 257,187,247 | | | 57,558,798 | | | $ | 523,353,929 | | | 92,870,337 | | | $ | 950,307,000 | |
Shares issued on reinvestment | | 4,981,465 | | | | 46,584,905 | | | 5,007,719 | | | | 46,006,164 | | | 5,521,041 | | | | 56,470,452 | |
Shares repurchased | | (54,702,172 | ) | | | (474,063,985 | ) | | (88,631,269 | ) | | | (811,527,610 | ) | | (48,005,422 | ) | | | (489,249,437 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Net Increase (Decrease) | | (22,367,365 | ) | | $ | (170,291,833 | ) | | (26,064,752 | ) | | $ | (242,167,517 | ) | | 50,385,956 | | | $ | 517,528,015 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| A | | For the period April 1, 2008 to December 31, 2008. |
8. Income Tax Information and Distributions to Shareholders
Subsequent to the fiscal year end, the Funds have made the following distributions:
| | | | | | | | | |
| | | Core |
Record Date
Payable Date | | Institutional
Class | | Financial
Intermediary
Class | | Institutional Select
Class |
Daily 1/29/2010 | | $ | 0.039249 | | $ | 0.037337 | | $ | 0.039881 |
| |
| | | Core Plus |
Record Date
Payable Date | | Institutional
Class | | Financial
Intermediary
Class | | Institutional Select
Class |
Daily 1/29/2010 | | $ | 0.039205 | | $ | 0.037169 | | $ | 0.039260 |
The tax character of distributions paid during the fiscal year ended December 31, 2009 were as follows:
| | | | | | |
| Distributions paid from: | | Core | | Core Plus |
Ordinary Income | | $ | 195,641,251 | | $ | 602,184,829 |
| | | | | | |
The tax character of distributions paid during the fiscal year ended December 31, 2008 were as follows:
| | | | | | |
| Distributions paid from: | | Core | | Core Plus |
Ordinary Income | | $ | 291,170,384 | | $ | 556,207,181 |
| | | | | | |
141
Annual Report to Shareholders
Notes to Financial Statements—Continued
As of December 31, 2009, the components of accumulated earnings on a tax basis were as follows:
| | | | | | | | |
| | | Core | | | Core Plus | |
Undistributed ordinary income—net | | $ | 23,486,918 | | | $ | 124,082,280 | |
Capital loss carryforward* | | | (369,226,813 | ) | | | (625,371,745 | ) |
Other book/tax temporary differences | | | (8,742,432 | )(a) | | | (40,927,414 | )(a) |
Unrealized appreciation/(depreciation) | | | (501,923,611 | )(b) | | | (708,188,716 | )(b) |
| | | | | | | | |
Total accumulated earnings/(losses)—net | | $ | (856,405,938 | ) | | $ | (1,250,405,595 | ) |
| | | | | | | | |
* As of December 31, 2009, the Funds had the following net capital loss carryforwards remaining:
| | | | | | | | |
Year of Expiration | | Core | | | Core Plus | |
12/31/2015 | | $ | (84,734,017 | ) | | | — | |
12/31/2016 | | | (33,885,094 | ) | | | — | |
12/31/2017 | | | (250,607,702 | ) | | $ | (625,371,745 | ) |
| | | | | | | | |
| | $ | (369,226,813 | ) | | $ | (625,371,745 | ) |
| | | | | | | | |
These amounts will be available to offset any future taxable capital gains.
| (a) | | Other book/tax temporary differences are attributable primarily to the tax deferral of losses on straddles, the realization for tax purposes of unrealized gains/losses on certain futures and foreign currency contracts, the deferral of post-October capital losses for tax purposes, differences between book/tax accrual of interest income on securities in default and book/tax differences in the timing of the deductibility of various expenses. |
| (b) | | The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable primarily to the tax deferral of losses on wash sales and other book/tax basis adjustments on certain securities. |
142
Annual Report to Shareholders
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Western Asset Funds, Inc. and to the Shareholders of Western Asset Core Bond Portfolio and Western Asset Core Plus Bond Portfolio:
In our opinion, the accompanying statements of assets and liabilities, including the portfolios of investments, 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 Western Asset Core Bond Portfolio and Western Asset Core Plus Bond Portfolio (two of the Portfolios comprising Western Asset Funds, Inc., the “Funds”) at December 31, 2009, the results of each of their operations, the changes in each of their net assets, and financial highlights for each of the 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, 2009 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 23, 2010
143
Annual Report to Shareholders
Board Consideration of the Investment Advisory and Subadvisory Agreements (Unaudited)
The Executive and Contracts Committee of the Board of Directors considered the Investment Management Agreements between the Corporation and LMPFA and the Investment Advisory Agreements between LMPFA and Western Asset Management Company (“Western Asset”) with respect to Core and Core Plus, and solely with respect to Core Plus, the Investment Advisory Agreements between the Corporation and Western Asset Management Limited (“WAML”), Western Asset Management Company Pte. Ltd. in Singapore (“Western Singapore”) and Western Asset Management Company Ltd in Japan (“Western Japan,” and together with Western Singapore and WAML the “Non-U.S. Advisers” and together with Western Asset, the “Advisers”) (collectively, the “Agreements”) at meetings held on September 15, October 23 and November 3, 2009. At a meeting held on November 17, 2009, the Executive and Contracts Committee reported to the full Board of Directors their considerations and recommendation with respect to the Agreements, and the Board of Directors, including a majority of the Independent Directors, considered and approved renewal of the Agreements.
The Directors noted that although Western Asset’s business is operated through separate legal entities, such as the Non-U.S. Advisers, its business is highly integrated and senior investment personnel at Western Asset have supervisory oversight responsibility over the investment decisions made by the Non-U.S. Advisers. Therefore, in connection with their deliberations noted below, the Directors primarily focused on the information provided by Western Asset when considering the approval of the Investment Advisory Agreements between the Corporation and the Non-U.S. Advisers with respect to Core Plus. The Directors also noted that neither Fund pays any management fees directly to Western Asset and Core Plus does not pay any management fees directly to any of the Non-U.S. Advisers because LMPFA pays the Adviser(s) for services provided to the Fund(s) they advise out of the management fees LMPFA receives from such Funds.
In arriving at their decision to renew the Agreements, the Directors met with representatives of Western Asset, including relevant investment advisory personnel as well as representatives of LMPFA; reviewed a variety of information prepared by LMPFA and Western Asset and materials provided by Lipper Inc. (“Lipper”) and counsel to the Independent Directors; and reviewed performance and expense information for the Funds’ respective peer groups of comparable funds selected and prepared by Lipper and for certain other comparable products available from Western Asset, including separate accounts managed by Western Asset. These reviews were in addition to information obtained by the Directors at their regular quarterly meetings with respect to the Funds’ performance and other relevant matters, and related discussions with Western Asset’s personnel.
As part of their review, the Directors examined LMPFA’s ability to provide high quality oversight and administrative and shareholder support services to the Funds, and the Advisers’ ability to provide high quality investment management services to the applicable Funds. The Directors considered the experience of LMPFA’s personnel in providing the types of services that LMPFA is responsible for providing to the Funds; the ability of LMPFA to attract and retain capable personnel; the capability and integrity of LMPFA’s senior management and staff; and the level of skill required to provide such services to the Funds. The Directors considered the investment philosophy and research and decision-making processes of the Advisers; the experience of their key advisory personnel responsible for management of the Funds; the ability of the Advisers to attract and retain capable research and advisory personnel; the capability and integrity of the Advisers’ senior management and staff; and the level of skill required to manage each Fund. In addition, the Directors reviewed the quality of LMPFA’s and the Advisers’ services with respect to regulatory compliance and compliance with the investment policies of the Funds and conditions that might affect LMPFA’s or an Adviser’s ability to provide high quality services to the Funds in the future under the Agreements, including its business reputation, financial condition and operational stability. Based on the foregoing, the Directors concluded that the Advisers’ investment process, research capabilities and philosophy were well suited to the Funds given their respective investment objectives and policies, and that LMPFA and each of the Advisers would be able to meet any reasonably foreseeable obligations under the Agreements.
In reviewing the quality of the services provided to the Funds, the Directors also reviewed comparisons of the performance of the Funds to the performance of certain comparable funds in their respective peer groups and to their respective investment benchmarks over one-, three-, five- and ten-year periods ended August 31, 2009. In that connection, the Directors noted that the performance of Core Plus exceeded its peer average performance for each period and that the performance of Core exceeded its peer average for the one-, five- and ten-year periods, but was slightly lower than its peer average for the three-year period. With respect to each Fund, the Directors considered the factors involved in its performance relative to the performance of its investment benchmark and peer group.
The Directors also considered the management fees payable by the Funds to LMPFA, the total expenses payable by the Funds and the fact that LMPFA pays to the Advisers the entire management fee it receives from each Fund. They reviewed information
144
Annual Report to Shareholders
Board Consideration of the Investment Advisory and Subadvisory Agreements (Unaudited)—Continued
concerning management fees paid to investment advisers of similarly-managed funds, as well as fees paid by the Advisers’ other clients, including separate accounts managed by the Advisers. The Directors observed that the management fees paid by Core and Core Plus to LMPFA were slightly lower and slightly higher than the fees paid by their peer groups, respectively. The Directors also observed that total expenses for each Fund were lower than the average of the funds in its respective peer group. The Directors noted that the management fees paid by the Funds were generally higher than the fees paid by other clients of the Advisers for accounts with similar investment strategies, but that the administrative and operational responsibilities for the Advisers with respect to the Funds were also relatively higher. In light of this difference, the Directors concluded that the difference in the management fees paid by the Funds from those paid by the Advisers’ other clients was reasonable.
The Directors further evaluated the benefits of the advisory relationship to LMPFA and the Advisers, including, among others, the profitability of the relationship to LMPFA and the Advisers; the direct and indirect benefits that LMPFA and each Adviser may receive from its relationship with the Funds, including any “fallout benefits”, such as reputational value derived from serving as investment manager or adviser; and the affiliations between LMPFA, the Advisers and certain service providers for the Funds. In that connection, the Directors concluded that LMPFA and each Adviser’s profitability was consistent with levels of profitability that had been determined by courts not to be excessive. The Directors noted that Western Asset does not have soft dollar arrangements.
Finally, the Directors considered, in light of the profitability information provided by LMPFA and Western Asset, the extent to which economies of scale would be realized by the Advisers as the assets of the Funds grow. They further concluded that, where a Fund’s assets were currently at a level at which the Advisers potentially may realize economies of scale from any future growth in the Fund, fee breakpoints had been implemented to capture a portion of any economies of scale for the benefit of the Fund’s shareholders.
In their deliberations with respect to these matters, the Independent Directors were advised by their independent counsel, who is independent of LMPFA and the Advisers within the meaning of Securities and Exchange Commission rules regarding the independence of counsel. The Independent Directors weighed the foregoing matters in light of the advice given to them by their independent counsel as to the law applicable to the review of investment advisory contracts. In arriving at a decision, the Directors, including the Independent Directors, did not identify any single matter as all-important or controlling, and the foregoing summary does not detail all the matters considered. The Directors judged the terms and conditions of the Agreements, including the investment advisory fees, in light of all of the surrounding circumstances.
Based upon their review, the Directors, including all of the Independent Directors, determined, in the exercise of their business judgment, that they were generally satisfied with the quality of investment advisory services being provided by the Advisers, but would continue to closely monitor the Advisers’ performance; that the fees to be paid to the Advisers and LMPFA under the relevant Agreements were fair and reasonable, given the scope and quality of the services rendered by the Advisers and LMPFA; and that approval of the Agreements was in the best interest of the Corporation and its shareholders.
145
Annual Report to Shareholders
Directors and Officers
The Directors and officers of the Fund, their age (as of December 31, 2009) and a description of their principal occupations during the past five years are listed below. Except as shown, each Director’s and officer’s principal occupation and business experience for the last five years has been with the employer(s) indicated, although in some cases the Director or officer may have held different positions with such employer(s). Unless otherwise indicated, the business address of the persons listed below is c/o Western Asset Management Company, 385 East Colorado Blvd., Pasadena, California 91101.
| | | | | | | | | | |
| Name and Year of Birth | | Position(s)
Held With
Fund | | Term of Office
and Length of
Time ServedA | | Principal Occupations
During the Past 5 Years | | Number of
Portfolios in
Fund Complex
OverseenB | | Other
Directorships Held |
| Independent Directors | | | | | | | | | | |
Ronald J. Arnault
1943 | | Director | | Served
since 1997 | | Retired. | | 13 | | None |
Anita L. DeFrantz
1953 | | Director | | Served
since 1998 | | President (1987-present) and Director (1990-present) of LA84 (formerly Amateur Athletic Foundation of Los Angeles); President and Director of Kids in Sports (1994-present); Vice President, International Rowing Federation (1986-present); Member of the International Olympic Committee (1986-present). | | 13 | | OBN Holdings, Inc. (film, television and media company) |
Avedick B. Poladian
1952 | | Director | | Served
since 2007 | | Executive Vice President and Chief Operating Officer of Lowe Enterprises, Inc. (real estate and hospitality firm) (2002-present); Partner, Arthur Andersen, LLP (1974-2002). | | 13 | | Occidental Petroleum Corporation |
William E. B. Siart
1946 | | Director and Chairman | | Served
since 1997 | | Vice Chairman of The Getty Trust (2005-present); Chairman of Walt Disney Concert Hall, Inc. (1998-2006); Chairman of Excellent Education Development (2000-present). | | 13 | | None |
Jaynie Miller Studenmund
1954 | | Director | | Served
since 2004 | | Chief Operating Officer of Overture Services, Inc. (online marketing firm) (2001-2004); President and Chief Operating Officer of Paymybills.com (2000-2001). | | 13 | | Orbitz Worldwide (global on-line travel company) |
| Interested Directors | | | | | | | | | | |
R. Jay GerkenC
1951 | | Director and President | | Served as a Director
since 2006 and as President
since 2007 | | Managing Director of Legg Mason & Co., LLC, Chairman, President and Chief Executive Officer of certain mutual funds associated with Legg Mason & Co., LLC or its affiliates (2005-present); President of Legg Mason Partners Fund Advisor, LLC (“LMPFA”) (2006-present); Chairman of Smith Barney Fund Management LLC and Citi Fund Management Inc. (2002-2005); Chairman, President and Chief Executive Officer of Travelers Investment Adviser, Inc. (2002-2005). | | 147 | | N/A |
Ronald L. OlsonD
1941 | | Director | | Served
since 2005 | | Senior Partner of Munger, Tolles & Olson LLP (a law partnership) (1968-present). | | 13 | | Edison International, City National Corporation (financial services company), The Washington Post Company, and Berkshire Hathaway, Inc. |
146
Annual Report to Shareholders
Directors and Officers—Continued
| | | | | | | | | | |
| Name and Year of Birth | | Position(s)
Held With
Fund | | Term of Office
and Length of
Time ServedA | | Principal Occupations
During the Past 5 Years | | Number of
Portfolios in
Fund Complex
OverseenB | | Other
Directorships Held |
| OfficersE | | | | | | | | | | |
Gavin L. James
1961 | | Vice President | | Served
since 2001 | | Director of Global Client Services and Marketing of Western Asset (1998-present). | | N/A | | N/A |
S. Kenneth Leech
1954 | | Vice President | | Served
since 1990 | | Chief Investment Officer Emeritus of Western Asset (1998-present); Vice President of Western Asset Income Fund (1998-present) and Western Asset Premier Bond Fund (2001-present). | | N/A | | N/A |
Stephen A. Walsh
1959 | | Vice President | | Served
since 1994 | | Chief Investment Officer of Western Asset (2000-present); Vice President of Western Asset Income Fund (1999-present) and Western Asset Premier Bond Fund (2001-present). | | N/A | | N/A |
Susanne D. Wilson
1962
100 International Drive Baltimore, MD 21202 | | Vice President | | Served since 1998 | | Vice President of Legg Mason & Co., LLC (2005-present); Vice President of Legg Mason Wood Walker, Incorporated (1998-2005). | | N/A | | N/A |
Frances M. Guggino
1957
55 Water Street
New York, NY 10041 | | Principal Financial and Accounting Officer | | Served since 2009 | | Director of Legg Mason & Co. (since 2005); Director at Citigroup Asset Management (“CAM”) (1992 to 2005); Treasurer and/or Controller of certain funds associated with Legg Mason & Co. (since 2005); Treasurer and/or Controller of certain funds associated with CAM (1992 to 2005) | | N/A | | N/A |
Erin K. Morris
1966
100 International Drive Baltimore, MD 21202 | | Treasurer | | Served since 2006 | | Vice President and Manager, Global Funds Administration, Legg Mason & Co., LLC (2005-present); Assistant Vice President of Legg Mason Wood Walker, Incorporated (2002-2005); Treasurer of Legg Mason Income Trust, Inc., Legg Mason Tax-Free Income Fund, Western Asset Income Fund and Western Asset Premier Bond Fund (2006-present); Assistant Treasurer, Legg Mason Partners Fund complex (2007-present), Western Asset/Claymore Inflation-Linked Securities & Income Fund (2003- present), Western Asset/Claymore Inflation-Linked Opportunities & Income Fund (2004-present); Assistant Treasurer, the Corporation, Western Asset Income Fund, Western Asset Premier Bond Fund, Legg Mason Income Trust, Inc. and Legg Mason Tax-Free Income Fund (2001-2006); Manager, Funds Accounting, Legg Mason Wood Walker, Incorporated (2000-2005). | | N/A | | N/A |
147
Annual Report to Shareholders
| | | | | | | | | | |
| Name and Year of Birth | | Position(s)
Held With
Fund | | Term of Office
and Length of
Time ServedA | | Principal Occupations
During the Past 5 Years | | Number of
Portfolios in
Fund Complex
OverseenB | | Other
Directorships Held |
Todd F. Kuehl
1968
100 International Drive Baltimore, MD 21202 | | Chief Compliance Officer | | Served since 2007 | | Director, Legg Mason & Co., LLC (2006-present); Chief Compliance Officer of Legg Mason Private Portfolio Group (2009-present); Chief Compliance Officer of Western Asset/Claymore Inflation-Linked Securities & Income Fund, Western Asset/Claymore Inflation-Linked Opportunities & Income Fund, Western Asset Income Fund, Western Asset Premier Bond Fund and Western Asset Funds, Inc. (2007-present) and Barrett Growth Fund and Barrett Opportunity Fund (2006-2008); Branch Chief, Division of Investment Management, U.S. Securities and Exchange Commission (2002-2006). | | N/A | | N/A |
Robert I. Frenkel
1954
100 First Stamford Place Stamford, CT 06902 | | Secretary and Chief Legal Officer | | Served since 2009 | | Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (2005- present); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. (2003-present); formerly, Managing Director and General Counsel of Global Mutual Funds for CAM (2000 to 2005); formerly, Secretary of CFM (2001 to 2004). | | N/A | | N/A |
| A | | Each Officer holds office until his or her respective successor is chosen and qualified, or in each case until he or she sooner dies, resigns, is removed with or without cause or becomes disqualified. Each of the Directors of the Corporation holds office until his or her successor shall have been duly elected and shall qualify, subject to prior death, resignation, retirement, disqualification or removed from office and applicable law and the rules of the New York Stock Exchange. |
| B | | In addition to overseeing the nine portfolios of the Fund each Director also serves as a Trustee of Western Asset Premier Bond Fund and as a Director of Western Asset Income Fund (closed-end investment companies), which are considered part of the same Fund Complex as the Corporation. In addition, Mr. Gerken serves as Director/Trustee to 147 other portfolios associated with Legg Mason & Co., LLC or its affiliates. Legg Mason & Co., LLC is an affiliate of Western Asset Management Co. (“WAM”). |
| C | | Mr. Gerken is an “Interested person” (as defined in section 2(a)(19) of the Investment Company Act of 1940, as amended (the “1940 Act”)) of each Fund because of his positions with subsidiaries of, and ownership of shares of common stock of, Legg Mason, Inc., the parent company of WAM. |
| D | | Mr. Olson is an “Interested person” (as defined above) of each Fund because his law firm has provided legal services to WAM. |
| E | | Each officer of the Corporation is an “Interested person” (as defined above) of the Corporation. |
ADDITIONAL INFORMATION ABOUT THE CORPORATION’S
DIRECTORS AND OFFICERS IS CONTAINED IN THE STATEMENT OF
ADDITIONAL INFORMATION, AVAILABLE WITHOUT CHARGE UPON
REQUEST BY CALLING FUNDS INVESTOR SERVICES AT 1-800-822-5544 OR
INSTITUTIONAL SHAREHOLDER SERVICES AT 1-888-425-6432 OR ON THE
SECURITIES AND EXCHANGE COMMISSION WEBSITE (http://www.sec.gov).
148
Annual Report to Shareholders
Important Tax Information (Unaudited)
The following information is provided with respect to the distributions paid during the taxable year ended December 31, 2009:
| | | | | | | | | |
| | | Core | |
Record Date: | | Daily | | | Daily | | | Daily | |
Payable Date: | | January 30, 2009 | | | February 27, 2009 | | | March 2009–
December 2009 |
|
| | | | | | | | | |
Ordinary Income: | | | | | | | | | |
Qualified Dividend Income for Individuals | | 0.08 | % | | 0.07 | % | | 0.03 | % |
| | | | | | | | | |
Dividends Qualifying for the Dividends | | | | | | | | | |
Received Deduction for Corporations | | 0.08 | % | | 0.07 | % | | 0.02 | % |
| | | | | | | | | |
Interest from Federal Obligations | | 3.19 | % | | 3.19 | % | | 3.19 | % |
| | | | | | | | | |
| | | | | | | | | | | | |
| | | Core Plus | |
Record Date: | | Daily | | | Daily | | | Daily | | | June 10, 2009 | |
Payable Date: | | January 30, 2009 | | | February 27, 2009 | | | March 2009–
December 2009 |
| | June 11, 2009 | |
| | | | | | | | | | | | |
Ordinary Income: | | | | | | | | | | | | |
Qualified Dividend Income for Individuals | | 0.80 | %�� | | 0.66 | % | | 0.41 | % | | 0.80 | % |
| | | | | | | | | | | | |
Dividends Qualifying for the Dividends | | | | | | | | | | | | |
Received Deduction for Corporations | | 0.80 | % | | 0.66 | % | | 0.41 | % | | 0.80 | % |
| | | | | | | | | | | | |
Interest from Federal Obligations | | 3.11 | % | | 3.11 | % | | 3.11 | % | | 3.11 | % |
| | | | | | | | | | | | |
The law varies in each state as to whether and what percentage of dividend income attributable to Federal obligations is exempt from state income tax. We recommend that you consult with your tax adviser to determine if any portion of the dividends you received is exempt from state income taxes.
Please retain this information for your records.
149
Privacy policy
We are committed to keeping nonpublic personal information about you secure and confidential. This notice is intended to help you understand how we fulfill this commitment. From time to time, we may collect a variety of personal information about you, including:
| | • | | Information we receive from you on applications and forms, via the telephone, and through our websites; |
| | • | | Information about your transactions with us, our affiliates, or others (such as your purchases, sales, or account balances); and |
| | • | | Information we receive from consumer reporting agencies. |
We do not disclose nonpublic personal information about our customers or former customers, except to our affiliates (such as broker-dealers or investment advisers within the Legg Mason family of companies) or as is otherwise permitted by applicable law or regulation. For example, we may share this information with others in order to process your transactions or service an account. We may also provide this information to companies that perform marketing services on our behalf, such as printing and mailing, or to other financial institutions with whom we have joint marketing agreements. When we enter into such agreements, we will require these companies to protect the confidentiality of this information and to use it only to perform the services for which we hired them.
With respect to our internal security procedures, we maintain physical, electronic, and procedural safeguards to protect your nonpublic personal information, and we restrict access to this information.
If you decide at some point either to close your account(s) or become an inactive customer, we will continue to adhere to our privacy policies and practices with respect to your nonpublic personal information.
NOT PART OF THE ANNUAL REPORT
Western Asset Funds, Inc.
The Board of Directors
William E. B. Siart, Chairman
Ronald J. Arnault
Anita L. DeFrantz
R. Jay Gerken
Ronald L. Olson
Avedick B. Poladian
Jaynie Miller Studenmund
Officers
R. Jay Gerken, President
Gavin L. James, Vice President
S. Kenneth Leech, Vice President
Stephen A. Walsh, Vice President
Frances M. Guggino, Principal Financial and Accounting Officer
Erin K. Morris, Treasurer
Todd F. Kuehl, Chief Compliance Officer
Robert I. Frenkel, Secretary and Chief Legal Officer
Investment Manager
Legg Mason Partners Fund Advisor, LLC
55 Water Street
New York, NY 10041
Investment Advisers
Western Asset Management Company
385 East Colorado Boulevard
Pasadena, California 91101
Western Asset Management Company Limited
10 Exchange Square
London, England EC2A2EN
Western Asset Management Company Ltd
36F Shin-Marunouchi Building
5-1 Marunouchi 1-Chronu Chiyoda
Tokyo 100-6536
Western Asset Management Company Pte. Ltd.
1 George Street #23-01
Singapore 049145
Transfer and Shareholder Servicing Agent
Boston Financial Data Services
2000 Crown Colony Drive
Quincy, Massachusetts 02169
Custodian
State Street Bank and Trust Company
1 Lincoln Street
Boston, Massachusetts 02111
Counsel
Ropes & Gray LLP
1211 Avenue of the Americas
New York, New York 10036
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
100 East Pratt Street
Baltimore, Maryland 21201
Information about the policies and procedures that each Fund uses to determine how to vote proxies relating to each Fund’s portfolio securities is contained in the Statement of Additional Information, available upon request without charge by calling 1-888-425-6432 or on the Securities and Exchange Commission’s (“SEC”) website (http://www.sec.gov). Information regarding how the Funds 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 without charge through www.westernassetfunds.com.
Each Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Each Fund’s Form N-Q is available on the Securities and Exchange Commission’s (“SEC”) website (http://www.sec.gov) and may be viewed 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. Quarterly portfolio holdings are also available upon request by calling 1-888-425-6432 or at www.lminstitutionalfunds.com/fund_information/fund_literature/gbl_literature/proxy_report.asp.
This report must be preceded or accompanied by a free prospectus. Investors should consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the Fund. Please read the prospectus carefully before investing.
Western Asset Management Company
Legg Mason Investor Services, LLC, Distributor
Legg Mason, Inc. Subsidiaries
| | |
| WAF-A(2/10) SR10-1032 | | WASX011415 |
| (a) | Western Asset Funds, Inc. (the “Registrant”) has adopted a Code of Ethics, as defined in Item 2 of Form N-CSR, that applies to the Registrant’s Principal Executive, Financial and Accounting Officers a copy of which is attached as an exhibit to this Form N-CSR. |
(b) Omitted.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f) Omitted.
| Item 3. | Audit Committee Financial Expert. |
The Audit Committee of the Registrant’s Board of Directors is comprised solely of Directors who are “independent” (as such term has been defined by the Securities and Exchange Commission (“SEC”) in regulations implementing Section 407 of the Sarbanes-Oxley Act of 2002 (the “Regulations”)). In addition, the Board of Directors of the Registrant has determined that Mr. Ronald J. Arnault qualifies as an “audit committee financial expert” (as such term has been defined by the Regulations) based on its review of his pertinent experience, knowledge and education. The SEC has stated that the designation or identification of a person as an audit committee financial expert pursuant to this Item 3 of Form N-CSR does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Audit Committee and the Board of Directors in absence of such designation or identification.
| Item 4. | Principal Accountant Fees and Services. |
(a) Audit Fees
Fiscal Year Ended December 31, 2008 - $360,150
Fiscal Year Ended December 31, 2009 - $396,200
(b) Audit-Related Fees
Fiscal Year Ended December 31, 2008 - $39,500
Fiscal Year Ended December 31, 2009 - $48,500
Services include interim audit security pricing.
PricewaterhouseCoopers LLP billed fees in the amount of $230,000 and $230,000 for non-audit services that required pre-approval by the Audit Committee pursuant to paragraph
(C)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s fiscal years ended December 31, 2008 and December 31, 2009, repectively.
PricewaterhouseCoopers LLP conducted a SAS 70 audit to review and test operating effectiveness of controls placed in operation for Western Asset Management Company and reviewed the Australian Superannuation Circular.
Fiscal Year Ended December 31, 2008 - $47,500
Fiscal Year Ended December 31, 2009 - $47,500
Services include preparation of federal and state income tax returns and preparation of excise tax returns.
PricewaterhouseCoopers LLP did not bill fees for tax services that required pre-approval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years.
There were no fees billed to the Registrant during each of the last two fiscal years by PricewaterhouseCoopers LLP that were not disclosed in Items 4(a), (b) or (c) above.
PricewaterhouseCoopers LLP did not bill fees for services not included in Items 4(a), (b) or (c) above that required pre-approval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years.
| | | | | | |
| | (e) | | (1) | | The Audit Committee has determined that all work performed for the Registrant by PricewaterhouseCoopers LLP will be pre-approved by the full Audit Committee and, therefore, has not adopted pre-approval procedures. |
| | | |
| | | | (2) | | None |
PricewaterhouseCoopers LLP did not bill fees for services where pre-approval by the Audit Committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X was waived pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X during the Registrant’s last two fiscal years.
Fiscal Year Ended December 31, 2008 - $1,371,045
Fiscal Year Ended December 31, 2009 - $1,785,000
| | (h) | The Audit Committee of the Registrant has considered whether the non-audit services that were rendered by the Registrant’s principal accountant to the Registrant’s investment adviser (not including any subadviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser) and any entity controlling, controlled by, or under common control with the investment adviser and that were not pre-approved by the Audit Committee are compatible with maintaining the principal accountant’s independence. |
| Item 5. | Audit Committee of Listed Registrants. |
Not applicable.
| Item 6. | Schedule of Investments |
The schedule of investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this Form.
| Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. |
Not applicable.
| Item 8. | Portfolio Managers of Closed-End Management Investment Companies. |
Not applicable.
| Item 9. | Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers. |
Not applicable.
| Item 10. | Submission of Matters to a Vote of Security Holders. |
There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrant’s Board of Directors that have been implemented since the Registrant last provided disclosure in response to the requirements of this Item 10.
| Item 11. | Controls and Procedures. |
(a) The Registrant’s principal executive and principal financial officers have concluded, based on their evaluation of the Registrant’s disclosure controls and procedures 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 required time periods in the SEC’s rules 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 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) Code of Ethics subject to disclosure required by Item 2 – filed as an exhibit hereto. |
| | |
| | | | (2) Certifications pursuant to Rule 30a-2(a) under the Investment Company Act of 1940 – filed as an exhibit hereto. |
| | |
| | | | (3) Not applicable. |
| | | | |
| | (b) | | Certifications pursuant to Rule 30a-2(b) under the Investment Company Act of 1940 – filed as an exhibit hereto. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | |
| Western Asset Funds, Inc. |
| |
| By: | | /s/ R. Jay Gerken |
| | R. Jay Gerken |
| | President |
| | Western Asset Funds, Inc. |
| |
| Date: | | March 2, 2010 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | |
| By: | | /s/ R. Jay Gerken |
| | R. Jay Gerken |
| | President |
| | Western Asset Funds, Inc. |
| |
| Date: | | March 2, 2010 |
| |
| By: | | /s/ Frances M. Guggino |
| | Frances M. Guggino |
| | Principal Financial and Accounting Officer |
| | Western Asset Funds, Inc. |
| |
| Date: | | March 2, 2010 |
