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.
(Exact name of registrant as specified in charter)
620 Eighth Avenue,
49th Floor, New York, NY 10018
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Legg Mason & Co., LLC
100 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant’s telephone number, including area code: 1-877-721-1926
Date of fiscal year end: December 31
Date of reporting period: December 31, 2012
| ITEM 1. | REPORT TO STOCKHOLDERS. |
The Annual Report to Stockholders is filed herewith.
December 31, 2012
Annual
Repor t
Western Asset
Intermediate Bond
Fund
INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
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| II | | Western Asset Intermediate Bond Fund |
Fund objective
The Fund seeks to maximize total return, consistent with prudent investment management and liquidity needs, by investing to obtain an average duration which is expected to range within 20% of the duration of its benchmark.
Fund name change
Prior to May 1, 2012, the Fund was known as Western Asset Intermediate Bond Portfolio. There was no change in the Fund’s investment objective or investment policies as a result of the name change.
Letter from the president
Dear Shareholder,
We are pleased to provide the annual report of Western Asset Intermediate Bond Fund for the twelve-month reporting period ended December 31, 2012. Please read on for a detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund performance.
Special shareholder notice
Effective September 1, 2012, the individuals responsible for day-to-day portfolio management, development of investment strategy, oversight and coordination of the Fund are Stephen A. Walsh, Julien A. Scholnick, and Carl L. Eichstaedt. Mr. Walsh has been responsible for the day-to-day management of the Fund since its inception in 1994. Messrs. Scholnick and Eichstaedt have been responsible for the day-to-day management of the Fund since 2009 and September 2012, respectively. Messrs. Walsh, Scholnick and Eichstaedt have been employed by Western Asset Management Company (“Western Asset”) as investment professionals for at least the past five years. These individuals work together with the broader Western Asset investment management team on portfolio structure, duration weighting and term structure decisions.
As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our website, www.leggmason.com/individualinvestors. Here you can gain immediate access to market and investment information, including:
| Ÿ | | Fund prices and performance, |
| Ÿ | | Market insights and commentaries from our portfolio managers, and |
| Ÿ | | A host of educational resources. |
We look forward to helping you meet your financial goals.
Sincerely,
R. Jay Gerken, CFA
President
January 31, 2013
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| Western Asset Intermediate Bond Fund | | | III | |
Investment commentary
Economic review
The U.S. economy continued to grow over the twelve months ended December 31, 2012, but it did so at an uneven pace. U.S. gross domestic product (“GDP”)i growth, as reported by the U.S. Department of Commerce, was 2.0% in the first quarter of 2012. The economy then slowed in the second quarter, as GDP growth was a tepid 1.3%. Economic growth accelerated to 3.1% in the third quarter, partially due to increased private inventory investment, higher federal government spending and moderating imports. However, this was a temporary uptick, as the Commerce Department’s initial estimate showed that fourth quarter GDP contracted 0.1%. This was the first negative reading since the second quarter of 2009, and was driven by a reversal of the above factors, as private inventory investment and federal government spending weakened.
While there was some improvement in the U.S. job market, unemployment remained elevated throughout the reporting period. When the period began, unemployment, as reported by the U.S. Department of Labor, was 8.3%. Unemployment then generally declined and was 7.8% in September 2012, the lowest rate since January 2009, but still high by historical standards. The unemployment rate then rose to 7.9% in October, before falling to 7.8% in November, where it remained in December. The number of longer-term unemployed continued to be a headwind for the economy, as roughly 39% of the 12.2 million people without a job have been out of work for more than six months.
Meanwhile, the housing market brightened, as sales generally improved and home prices continued to rebound. According to the National Association of Realtors (“NAR”), while existing-home sales dipped 1.0% on a seasonally adjusted basis in December 2012 versus the previous month, they were still 12.8% higher than in December 2011. In addition, the NAR reported that the median existing-home price for all housing types was $180,800 in December 2012, up 11.5% from December 2011. This marked the tenth consecutive month that home prices rose compared to the same period a year earlier. Furthermore, the inventory of homes available for sale fell 8.5% in December, which represents a 4.4 month supply at the current sales pace. This represents the lowest inventory since May 2005.
The manufacturing sector expanded during much of the reporting period, although it experienced several soft patches. Based on the Institute for Supply Management’s PMI (“PMI”)ii, after expanding 34 consecutive months, the PMI fell to 49.7 in June 2012, which represented the first contraction in the manufacturing sector since July 2009 (a reading below 50 indicates a contraction, whereas a reading above 50 indicates an expansion). Manufacturing continued to contract in July and August before ticking up to 51.5 in September and 51.7 in October. The PMI fell back to contraction territory with a reading of 49.5 in November, its lowest level since July 2009. However, manufacturing again expanded in December, with the PMI increasing to 50.7.
The Federal Reserve Board (“Fed”)iii took a number of actions as it sought to meet its dual mandate of fostering maximum employment and price stability. As has been the case since December 2008, the Fed kept the federal funds rateiv at a historically low range between zero and 0.25%. In January 2012, the Fed extended the period it expects to keep rates on hold until at least through late 2014. At its June 2012 meeting, the Fed announced that it would continue its program of purchasing longer-term Treasury securities and selling an equal amount of shorter-term Treasury securities (often referred to as “Operation Twist”) until the end of 2012. In September, the Fed announced a third round of quantitative easing (“QE3”), which involves purchasing
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| IV | | Western Asset Intermediate Bond Fund |
Investment commentary (cont’d)
$40 billion each month of agency mortgage-backed securities on an open-end basis. In addition, the Fed further extended the duration that it expects to keep the federal funds rate on hold, until at least mid-2015. Finally, at its meeting in December, the Fed announced that it would continue purchasing $40 billion per month of agency mortgage-backed securities, as well as initially purchasing $45 billion a month of longer-term Treasuries. The Fed also said that it would keep the federal funds rate on hold “…as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2.0% longer-run goal, and longer-term inflation expectations continue to be well anchored.”
As always, thank you for your confidence in our stewardship of your assets.
Sincerely,
R. Jay Gerken, CFA
President
January 31, 2013
All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results.
| i | Gross domestic product (“GDP”) is the market value of all final goods and services produced within a country in a given period of time. |
| ii | The Institute for Supply Management’s PMI is based on a survey of purchasing executives who buy the raw materials for manufacturing at more than 350 companies. It offers an early reading on the health of the manufacturing sector. |
| iii | The Federal Reserve Board (“Fed”) is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments. |
| iv | 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. |
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| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 1 | |
Fund overview
Q. What is the Fund’s investment strategy?
A. The Fund seeks to maximize total return, consistent with prudent investment management and liquidity needs, by investing to obtain the average durationi specified below. The Fund invests in a portfolio of fixed-income securities of various maturities and, under normal market conditions, will invest at least 80% of its net assets in debt and fixed-income securities. Although the Fund may invest in debt and fixed-income securities of any maturity, under normal market conditions, the target dollar-weighted average effective durationii for the Fund is expected to range within 20% of the duration of its benchmark, the Barclays Intermediate U.S. Government/ Credit Indexiii (generally, this range is two to five years).
The Fund presently intends to limit its investments to U.S. dollar-denominated securities and currently anticipates that it will only purchase debt securities that are rated Baa or BBB or above at the time of purchase by one or more nationally recognized statistical rating organizations or unrated securities that we determine to be of comparable quality at the time of purchase (that is, “investment grade securities”). The Fund may invest up to 25% of its total assets in the securities of non-U.S. issuers.
The Fund may also enter into various derivative transactions for both hedging and non-hedging purposes, including for purposes of enhancing returns. These derivative transactions include, but are not limited to, futures, options, swaps and forwards.
In particular, the Fund may use interest rate swaps, credit default swaps (on individual securities and/or baskets of securities), futures contracts and/or mortgage-backed securities to a significant extent, although the amounts invested in these instruments may change from time to time. Other instruments may also be used to a significant extent from time to time.
At Western Asset Management Company (“Western Asset”), the Fund’s subadviser, we utilize a fixed-income team approach, with decisions derived from interaction among various investment management sector specialists. The sector teams are comprised of Western Asset’s senior portfolio management personnel, research analysts and an in-house economist. Under this team approach, management of client fixed-income portfolios will reflect a consensus of interdisciplinary views within the Western Asset organization.
Q. What were the overall market conditions during the Fund’s reporting period?
A. The spread sectors (non-Treasuries) overcame several periods of heightened risk aversion and outperformed equal-duration Treasuries over the twelve months ended December 31, 2012. To a great extent, demand for the spread sectors was robust during the first two months of the reporting period. This was due to several factors, including signs that the U.S. economy was gathering momentum and some progress in the European sovereign debt crisis. However, fears that the economy may be experiencing a soft patch and contagion fears from Europe led to flights to quality during portions of March, April and May 2012. The spread sectors then generally rallied over the last seven months of the period as investor sentiment was largely positive.
Short-term U.S. Treasury yields fluctuated in 2012, but ended the year where they began. In contrast, 10-year Treasury yields fell from 1.89% to 1.78% during the twelve months ended December 31, 2012. When the period began, two-year Treasury yields were 0.25%. They moved as low as 0.21% on January 17, 2012 and as high as 0.41% on March 20, 2012. Ten-year Treasury yields were 1.89% at the beginning of the
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| 2 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Fund overview (cont’d)
period and peaked at 2.39% on March 19, 2012. On July 25, 2012, ten-year Treasuries closed at an all-time low of 1.43%. Yields then moved higher due to some positive developments in Europe and additional Federal Reserve Board (“Fed”)iv actions to stimulate the economy. When the reporting period ended on December 31, 2012, two-year Treasury yields were 0.25% and ten-year Treasury yields were 1.78%. All told, the Barclays U.S. Aggregate Indexv returned 4.22% for the twelve months ended December 31, 2012.
Q. How did we respond to these changing market conditions?
A. A number of adjustments were made to the Fund during the reporting period. We increased the Fund’s allocation to U.S. Treasuries and reduced its exposure to government agencies during the period. We also trimmed Investment Grade credit and Non Agency Mortgage Backed securities in the portfolio.
We used U.S. Treasury futures, as well as options on both Eurodollar futures and Treasury futures to manage the Fund’s duration and yield curvevi exposure. While the U.S. Treasury futures contributed to performance, the options on Eurodollar futures and Treasury futures detracted from results. Credit default swaps, which were used to manage the Fund’s investment-grade bond exposure, were a drag on results during the reporting period.
Performance review
For the twelve months ended December 31, 2012, Class I shares of Western Asset Intermediate Bond Fund returned 7.10%. The Fund’s unmanaged benchmark, the Barclays Intermediate U.S. Government/Credit Index, returned 3.89% for the same period. The Lipper Intermediate Investment Grade Debt Funds Category Average1 returned 6.81% over the same time frame.
| | | | | | | | |
Performance Snapshot as of December 31, 2012
(unaudited) | |
| (excluding sales charges) | | 6 months | | | 12 months | |
| Western Asset Intermediate Bond Fund: | | | | | | | | |
Class A | | | 2.94 | % | | | N/A | |
Class C | | | 2.57 | % | | | N/A | |
Class R | | | 2.81 | % | | | N/A | |
Class I | | | 3.18 | % | | | 7.10 | % |
Class IS | | | 3.17 | % | | | 7.11 | % |
| Barclays Intermediate U.S. Government/Credit Index | | | 1.76 | % | | | 3.89 | % |
| Lipper Intermediate Investment Grade Debt Funds Category Average1 | | | 3.20 | % | | | 6.81 | % |
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 at net asset value and the deduction of all Fund expenses. Returns have not been adjusted to include sales charges that may apply or the deduction of taxes that a shareholder would pay on Fund distributions. If sales charges were reflected, the performance quoted would be lower. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.
| 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, 2012, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 624 funds for the six-month period and among the 596 funds for the twelve-month period in the Fund’s Lipper category, and excluding sales charges. |
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| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 3 | |
Fund performance figures reflect fee waivers and/or expense reimbursements, without which the performance would have been lower.
The 30-Day SEC Yields for the period ended December 31, 2012 for Class A, Class C, Class R, Class I and Class IS shares were 0.76%, 0.06%, 0.55%, 1.37% and 1.27%, respectively. Absent fee waivers and/or expense reimbursements, the 30-Day SEC Yields for Class A, Class C, Class R, Class I and Class IS shares would have been 0.65%, -1.19%, 0.39%, 1.28% and 1.18%, respectively. The 30-Day SEC Yield is subject to change and is based on the yield to maturity of the Fund’s investments over a 30-day period and not on the dividends paid by the Fund, which may differ.
Performance of Class A, Class C and Class R shares for the twelve-month period are not shown because these share classes commenced operations on April 30, 2012.
| | | | |
| Total Annual Operating Expenses (unaudited) |
As of the Fund’s current prospectus dated May 1, 2012, as supplemented on May 31, 2012, the gross total annual operating expense ratios for Class A, Class C, Class R, Class I and Class IS shares were 0.86%, 1.61%, 1.16%, 0.49% 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 expense limitation arrangements, the ratio of expenses, other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses, to average net assets is not expected to exceed 0.90% for Class A shares, 1.65% for Class C shares, 1.15% for Class R shares and 0.45% for Class IS shares. These expense limitation arrangements cannot be terminated prior to December 31, 2014 without the Board of Directors’ consent.
The manager is permitted to recapture amounts waived and/or reimbursed to a class within two years after the fiscal year in which the manager earned the fee or incurred the expense if the class’ total annual operating expenses have fallen to a level below the expense limitation (“expense cap”) in effect at the time the fees were earned or the expenses incurred. In no case will the manager recapture any amount that would result, on any particular business day of the Fund, in the class’ total annual operating expenses exceeding the expense cap or any other lower limit then in effect.
Q. What were the leading contributors to performance?
A. The largest contributor to the Fund’s relative performance during the reporting period was its overweight to investment grade corporate bonds. Their spreads narrowed given generally strong demand from investors as they looked to generate incremental yield in the low interest rate environment. In particular, overweight positions in Goldman Sachs, Bank of America and Morgan Stanley were beneficial for results.
The Fund’s overweight position in the non-agency mortgage-backed security sector was also rewarded. The sector was supported by continued signs of improvement in the housing market and positive supply/demand technicals. Elsewhere, an overweight to asset-backed securities, namely student loans, was additive to results.
Q. What were the leading detractors from performance?
A. The Fund significantly outperformed its benchmark during the reporting period. Modestly detracting from the Fund’s relative performance was its yield curve positioning.
A number of investment grade corporate bonds holdings, including overweights in Chilean wood pulp, engineered wood and forestry company Celulosa Arauco y Constitucion SA were negative for performance. An overweight in asset-backed security AFC Home Equity Loan Trust was also a drag on results.
Thank you for your investment in Western Asset Intermediate Bond Fund. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.
Sincerely,
Western Asset Management Company
January 22, 2013
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| 4 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Fund overview (cont’d)
RISKS: Fixed-income securities involve interest rate, credit, inflation and reinvestment risks. As interest rates rise, the value of fixed-income securities falls. Derivatives, such as options, futures and swaps, can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. International investments are subject to special risks including social, economic and political uncertainties, which could increase volatility. Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks. Please see the Fund’s prospectus for a more complete discussion of these and other risks, and the Fund’s investment strategies.
Portfolio holdings and breakdowns are as of December 31, 2012 and are subject to change and may not be representative of the portfolio managers’ current or future investments. Please refer to pages 11 through 25 for a list and percentage breakdown of the Fund’s holdings.
The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. 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, 2012 were: U.S. Government & Agency Obligations (28.1%), Financials (23.4%), Asset-Backed Securities (9.6%), Collateralized Mortgage Obligations (7.7%) and Energy (5.8%). The Fund’s portfolio composition is subject to change at any time.
All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.
| 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 | Effective duration measures the expected sensitivity of market price to changes in interest rates, taking into account the effects of structural complexities. (For example, some bonds can be prepaid by the issuer.) |
| iii | The Barclays Intermediate U.S. Government/Credit Index is a market value weighted performance benchmark for government and corporate fixed-rate debt issues (rated Baa/BBB or higher) with maturities between one and ten years. |
| iv | 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. |
| v | The Barclays U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage- and asset-backed issues, rated investment grade or higher, and having at least one year to maturity. |
| vi | The yield curve is the graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities. |
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| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 5 | |
Fund at a glance† (unaudited)
Investment breakdown (%) as a percent of total investments
| † | The bar graph above represents the composition of the Fund’s investments as of December 31, 2012 and December 31, 2011 and does not include derivatives such as futures contracts, written options and swap contracts. The Fund is actively managed. As a result, the composition of the Fund’s investments is subject to change at any time. |
| ‡ | Represents less than 0.1% |
| | |
| 6 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Fund expenses (unaudited)
Example
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including front-end and back-end sales charges (loads) on purchase payments; and (2) ongoing costs, including management fees; service and/or distribution (12b-1) fees; and other Fund expenses. This example is 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.
This example is based on an investment of $1,000 invested on July 1, 2012 and held for the six months ended December 31, 2012.
Actual expenses
The table below titled “Based on Actual Total Return” provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled “Expenses Paid During the Period”.
Hypothetical example for comparison purposes
The table below titled “Based on Hypothetical Total Return” provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information provided in this table to compare the ongoing costs of investing in the Fund and other funds. To do so, compare the 5.00% hypothetical example relating to the Fund with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table below are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front-end or back-end sales charges (loads). Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
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| Based on actual total return1 | | | | | Based on hypothetical total return1 | |
| | | Actual
Total Return
Without
Sales
Charge2 | | | Beginning
Account
Value | | | Ending
Account
Value | | | Annualized
Expense
Ratio | | | Expenses
Paid
During
the
Period3 | | | | | | | Hypothetical
Annualized
Total Return | | | Beginning
Account
Value | | | Ending
Account
Value | | | Annualized
Expense
Ratio | | | Expenses
Paid
During
the
Period3 | |
Class A | | | 2.94 | % | | $ | 1,000.00 | | | $ | 1,029.40 | | | | 0.88 | % | | $ | 4.49 | | | | | Class A | | | 5.00 | % | | $ | 1,000.00 | | | $ | 1,020.71 | | | | 0.88 | % | | $ | 4.47 | |
Class C | | | 2.57 | | | | 1,000.00 | | | | 1,025.70 | | | | 1.60 | | | | 8.15 | | | | | Class C | | | 5.00 | | | | 1,000.00 | | | | 1,017.09 | | | | 1.60 | | | | 8.11 | |
Class R | | | 2.81 | | | | 1,000.00 | | | | 1,028.10 | | | | 1.15 | | | | 5.86 | | | | | Class R | | | 5.00 | | | | 1,000.00 | | | | 1,019.36 | | | | 1.15 | | | | 5.84 | |
Class I | | | 3.18 | | | | 1,000.00 | | | | 1,031.80 | | | | 0.42 | | | | 2.15 | | | | | Class I | | | 5.00 | | | | 1,000.00 | | | | 1,023.03 | | | | 0.42 | | | | 2.14 | |
Class IS | | | 3.17 | | | | 1,000.00 | | | | 1,031.70 | | | | 0.44 | | | | 2.25 | | | | | Class IS | | | 5.00 | | | | 1,000.00 | | | | 1,022.92 | | | | 0.44 | | | | 2.24 | |
| 1 | For the six months ended December 31, 2012. |
| 2 | Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value and does not reflect the deduction of the applicable sales charge with respect to Class A shares or the applicable contingent deferred sales charge (“CDSC”) with respect to Class C shares. Total return is not annualized, as it may not be representative of the total return for the year. Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. |
| 3 | Expenses (net of compensating balance arrangements, fee waivers and/or expense reimbursements) are equal to each class’ respective annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year (184), then divided by 366. |
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 7 | |
Fund performance (unaudited)
| | | | | | | | | | | | | | | | | | | | |
| Average annual total returns | |
| Without sales charges1 | | Class A† | | | Class C† | | | Class R† | | | Class I | | | Class IS | |
| Twelve Months Ended 12/31/12 | | | N/A | | | | N/A | | | | N/A | | | | 7.10 | % | | | 7.11 | % |
| Five Years Ended 12/31/12 | | | N/A | | | | N/A | | | | N/A | | | | 6.54 | | | | N/A | |
| Ten Years Ended 12/31/12 | | | N/A | | | | N/A | | | | N/A | | | | 5.72 | | | | N/A | |
| Inception* through 12/31/12 | | | 3.81 | % | | | 3.31 | % | | | 3.64 | % | | | 6.57 | | | | 8.89 | |
| | | | | |
| With sales charges2 | | Class A† | | | Class C† | | | Class R† | | | Class I | | | Class IS | |
| Twelve Months Ended 12/31/12 | | | N/A | | | | N/A | | | | N/A | | | | 7.10 | % | | | 7.11 | % |
| Five Years Ended 12/31/12 | | | N/A | | | | N/A | | | | N/A | | | | 6.54 | | | | N/A | |
| Ten Years Ended 12/31/12 | | | N/A | | | | N/A | | | | N/A | | | | 5.72 | | | | N/A | |
| Inception* through 12/31/12 | | | -0.63 | % | | | 2.31 | % | | | 3.64 | % | | | 6.57 | | | | 8.89 | |
| | | | |
| Cumulative total returns | |
| Without sales charges1 | | | |
| Class A (Inception date of 4/30/12 through 12/31/12) | | | 3.81 | % |
| Class C (Inception date of 4/30/12 through 12/31/12) | | | 3.31 | |
| Class R (Inception date of 4/30/12 through 12/31/12) | | | 3.64 | |
| Class I (12/31/02 through 12/31/12) | | | 74.34 | |
| Class IS (Inception date of 10/3/08 through 12/31/12) | | | 43.58 | |
All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower.
| 1 | Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value and does not reflect the deduction of the applicable sales charge with respect to Class A shares or the applicable contingent deferred sales charges (“CDSC”) with respect to Class C shares. |
| 2 | Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value. In addition, Class A shares reflect the deduction of the maximum initial sales charge of 4.25%. Class C shares reflect the deduction of a 1.00% CDSC, which applies if shares are redeemed within one year from purchase payment. |
| * | Inception dates for Class A, C, R, I and IS shares are April 30, 2012, April 30, 2012, April 30, 2012, July 1, 1994 and October 3, 2008, respectively. |
| | |
| 8 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Fund performance (unaudited) (cont’d)
Historical performance
Value of $1,000,000 invested in
Class IS Shares of Western Asset Intermediate Bond Fund vs. Barclays Intermediate U.S. Government/Credit Index† — October 3, 2008 - December 2012
Value of $1,000,000 invested in
Class I Shares of Western Asset Intermediate Bond Fund vs. Barclays Intermediate U.S. Government/Credit Index† —
December 2002 - December 2012
All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower.
| † | Hypothetical illustration of $1,000,000 invested in Class IS and I shares of Western Asset Intermediate Bond Fund on October 3, 2008 (commencement of operations) and December 31, 2002, respectively, assuming the reinvestment of all distributions, including returns of capital, if any, at net asset value through December 31, 2012. The hypothetical illustration also assumes a $1,000,000 investment in the Barclays Intermediate U.S. Government/Credit Index. The Barclays Intermediate U.S. Government/Credit Index is a market value weighted performance benchmark for government and corporate fixed-rate debt issues (rated Baa/BBB or higher) with maturities between one and ten years. The Index is unmanaged and not subject to the same management and trading expenses as a mutual fund. Please note that an investor cannot invest directly in an index. The performance of the Fund’s other classes may be greater or less than the performance of Class IS and Class I shares performance indicated on the charts, depending on whether higher or lower sales charges and fees were incurred by shareholders investing in the other classes. |
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| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 9 | |
Spread duration (unaudited)
Economic exposure — December 31, 2012
Spread duration measures the sensitivity to changes in spreads. The spread over Treasuries is the annual risk-premium demanded by investors to hold non-Treasury securities. Spread duration is quantified as the % change in price resulting from a 100 basis points change in spreads. For a security with positive spread duration, an increase in spreads would result in a price decline and a decline in spreads would result in a price increase. This chart highlights the market sector exposure of the Fund’s sectors relative to the selected benchmark sectors as of the end of the reporting period.
| | |
| ABS | | — Asset-Backed Securities |
| Benchmark | | — Barclays Intermediate U.S. Government/Credit Index |
| EM | | — Emerging Markets |
| HY | | — High Yield |
| IG Credit | | — Investment Grade Credit |
| MBS | | — Mortgage-Backed Securities |
| WAIBF | | — Western Asset Intermediate Bond Fund |
| | |
| 10 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Effective duration (unaudited)
Interest rate exposure — December 31, 2012
Effective duration measures the sensitivity to changes in relevant interest rates. Effective duration is quantified as the % change in price resulting from a 100 basis points change in interest rates. For a security with positive effective duration, an increase in interest rates would result in a price decline and a decline in interest rates would result in a price increase. This chart highlights the interest rate exposure of the Fund’s sectors relative to the selected benchmark sectors as of the end of the reporting period.
| | |
| ABS | | — Asset-Backed Securities |
| Benchmark | | — Barclays Intermediate U.S. Government/Credit Index |
| EM | | — Emerging Markets |
| HY | | — High Yield |
| IG Credit | | — Investment Grade Credit |
| MBS | | — Mortgage-Backed Securities |
| WAIBF | | — Western Asset Intermediate Bond Fund |
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| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 11 | |
Schedule of investments
December 31, 2012
Western Asset Intermediate Bond Fund
| | | | | | | | | | | | | | |
| Security | | Rate | | | Maturity
Date | | Face
Amount | | | Value | |
| Corporate Bonds & Notes — 43.7% | | | | | | | | | | | | | | |
| Consumer Discretionary — 2.7% | | | | | | | | | | | | | | |
Automobiles — 0.8% | | | | | | | | | | | | | | |
Daimler Finance NA LLC, Senior Notes | | | 2.950 | % | | 1/11/17 | | $ | 1,060,000 | | | $ | 1,110,626 | (a) |
Ford Motor Credit Co., LLC, Senior Notes | | | 8.125 | % | | 1/15/20 | | | 240,000 | | | | 307,530 | |
Ford Motor Credit Co., LLC, Senior Notes | | | 5.875 | % | | 8/2/21 | | | 750,000 | | | | 873,404 | |
Ford Motor Credit Co., LLC, Senior Notes | | | 4.250 | % | | 9/20/22 | | | 780,000 | | | | 824,760 | |
Hyundai Capital America, Senior Notes | | | 1.625 | % | | 10/2/15 | | | 380,000 | | | | 382,283 | (a) |
Total Automobiles | | | | | | | | | | | | | 3,498,603 | |
Media — 1.5% | | | | | | | | | | | | | | |
Comcast Corp., Senior Notes | | | 6.500 | % | | 1/15/17 | | | 1,190,000 | | | | 1,435,191 | |
Comcast Corp., Senior Notes | | | 5.150 | % | | 3/1/20 | | | 500,000 | | | | 592,632 | |
Time Warner Cable Inc., Senior Notes | | | 6.200 | % | | 7/1/13 | | | 40,000 | | | | 41,098 | |
Time Warner Cable Inc., Senior Notes | | | 8.250 | % | | 2/14/14 | | | 2,140,000 | | | | 2,318,153 | |
Time Warner Cable Inc., Senior Notes | | | 8.250 | % | | 4/1/19 | | | 40,000 | | | | 53,229 | |
Virgin Media Secured Finance PLC, Senior Secured Notes | | | 6.500 | % | | 1/15/18 | | | 530,000 | | | | 570,412 | |
WPP Finance UK, Senior Notes | | | 8.000 | % | | 9/15/14 | | | 890,000 | | | | 984,198 | |
Total Media | | | | | | | | | | | | | 5,994,913 | |
Multiline Retail — 0.4% | | | | | | | | | | | | | | |
Macy’s Retail Holdings Inc., Notes | | | 5.750 | % | | 7/15/14 | | | 1,470,000 | | | | 1,576,424 | |
Total Consumer Discretionary | | | | | | | | | | | | | 11,069,940 | |
| Consumer Staples — 3.4% | | | | | | | | | | | | | | |
Beverages — 1.6% | | | | | | | | | | | | | | |
Anheuser-Busch InBev Worldwide Inc., Senior Notes | | | 5.375 | % | | 1/15/20 | | | 1,100,000 | | | | 1,338,737 | |
Anheuser-Busch InBev Worldwide Inc., Senior Notes | | | 5.000 | % | | 4/15/20 | | | 130,000 | | | | 155,567 | |
Anheuser-Busch InBev Worldwide Inc., Senior Notes | | | 2.500 | % | | 7/15/22 | | | 230,000 | | | | 231,440 | |
Bottling Group LLC | | | 6.950 | % | | 3/15/14 | | | 1,310,000 | | | | 1,408,622 | |
Diageo Capital PLC, Senior Bonds | | | 4.828 | % | | 7/15/20 | | | 1,050,000 | | | | 1,236,126 | |
Diageo Capital PLC, Senior Notes | | | 1.500 | % | | 5/11/17 | | | 140,000 | | | | 141,980 | |
Heineken NV, Senior Notes | | | 1.400 | % | | 10/1/17 | | | 190,000 | | | | 189,426 | (a) |
PepsiCo Inc., Senior Notes | | | 0.700 | % | | 8/13/15 | | | 640,000 | | | | 640,817 | |
Pernod-Ricard SA, Senior Notes | | | 2.950 | % | | 1/15/17 | | | 220,000 | | | | 231,380 | (a) |
Pernod-Ricard SA, Senior Notes | | | 4.450 | % | | 1/15/22 | | | 680,000 | | | | 752,064 | (a) |
Total Beverages | | | | | | | | | | | | | 6,326,159 | |
Food & Staples Retailing — 0.5% | | | | | | | | | | | | | | |
Kroger Co., Notes | | | 3.900 | % | | 10/1/15 | | | 865,000 | | | | 933,440 | |
See Notes to Financial Statements.
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| 12 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Schedule of investments (cont’d)
December 31, 2012
Western Asset Intermediate Bond Fund
| | | | | | | | | | | | | | |
| Security | | Rate | | | Maturity
Date | | Face
Amount | | | Value | |
Food & Staples Retailing — continued | | | | | | | | | | | | | | |
Safeway Inc., Senior Notes | | | 3.950 | % | | 8/15/20 | | $ | 70,000 | | | $ | 70,016 | |
Wal-Mart Stores Inc. | | | 4.250 | % | | 4/15/13 | | | 930,000 | | | | 940,389 | |
Total Food & Staples Retailing | | | | | | | | | | | | | 1,943,845 | |
Food Products — 0.5% | | | | | | | | | | | | | | |
Kraft Foods Group Inc., Senior Notes | | | 5.375 | % | | 2/10/20 | | | 602,000 | | | | 722,827 | (a) |
Kraft Foods Group Inc., Senior Notes | | | 3.500 | % | | 6/6/22 | | | 490,000 | | | | 523,010 | (a) |
Mondelez International Inc., Senior Notes | | | 5.375 | % | | 2/10/20 | | | 548,000 | | | | 661,579 | |
Total Food Products | | | | | | | | | | | | | 1,907,416 | |
Tobacco — 0.8% | | | | | | | | | | | | | | |
Altria Group Inc., Senior Notes | | | 8.500 | % | | 11/10/13 | | | 400,000 | | | | 426,185 | |
Altria Group Inc., Senior Notes | | | 9.250 | % | | 8/6/19 | | | 660,000 | | | | 918,154 | |
Altria Group Inc., Senior Notes | | | 2.850 | % | | 8/9/22 | | | 450,000 | | | | 445,288 | |
Philip Morris International Inc. | | | 5.650 | % | | 5/16/18 | | | 1,130,000 | | | | 1,369,996 | |
Philip Morris International Inc., Senior Notes | | | 2.500 | % | | 8/22/22 | | | 110,000 | | | | 110,506 | |
Reynolds American Inc., Senior Notes | | | 3.250 | % | | 11/1/22 | | | 200,000 | | | | 200,899 | |
Total Tobacco | | | | | | | | | | | | | 3,471,028 | |
Total Consumer Staples | | | | | | | | | | | | | 13,648,448 | |
| Energy — 5.8% | | | | | | | | | | | | | | |
Energy Equipment & Services — 0.6% | | | | | | | | | | | | | | |
Baker Hughes Inc., Senior Notes | | | 7.500 | % | | 11/15/18 | | | 720,000 | | | | 953,821 | |
Transocean Inc., Senior Notes | | | 5.250 | % | | 3/15/13 | | | 1,530,000 | | | | 1,543,435 | |
Total Energy Equipment & Services | | | | | | | | | | | | | 2,497,256 | |
Oil, Gas & Consumable Fuels — 5.2% | | | | | | | | | | | | | | |
Anadarko Petroleum Corp., Senior Notes | | | 5.950 | % | | 9/15/16 | | | 70,000 | | | | 80,579 | |
Anadarko Petroleum Corp., Senior Notes | | | 6.375 | % | | 9/15/17 | | | 1,610,000 | | | | 1,923,137 | |
Apache Corp., Senior Notes | | | 3.250 | % | | 4/15/22 | | | 750,000 | | | | 794,854 | |
BP Capital Markets PLC, Senior Notes | | | 5.250 | % | | 11/7/13 | | | 940,000 | | | | 978,171 | |
BP Capital Markets PLC, Senior Notes | | | 3.125 | % | | 10/1/15 | | | 180,000 | | | | 191,079 | |
BP Capital Markets PLC, Senior Notes | | | 3.561 | % | | 11/1/21 | | | 50,000 | | | | 54,030 | |
BP Capital Markets PLC, Senior Notes | | | 3.245 | % | | 5/6/22 | | | 460,000 | | | | 484,613 | |
ConocoPhillips | | | 5.200 | % | | 5/15/18 | | | 1,310,000 | | | | 1,550,395 | |
Devon Energy Corp. | | | 6.300 | % | | 1/15/19 | | | 1,170,000 | | | | 1,451,886 | |
Enbridge Energy Partners LP | | | 9.875 | % | | 3/1/19 | | | 590,000 | | | | 798,890 | |
Enterprise Products Operating LLC, Senior Bonds | | | 6.300 | % | | 9/15/17 | | | 1,500,000 | | | | 1,814,446 | |
Enterprise Products Operating LLC, Senior Notes | | | 5.250 | % | | 1/31/20 | | | 260,000 | | | | 308,953 | |
Gazprom, Loan Participation Notes | | | 6.212 | % | | 11/22/16 | | | 120,000 | | | | 134,400 | (a) |
Kinder Morgan Energy Partners LP, Senior Notes | | | 6.000 | % | | 2/1/17 | | | 1,710,000 | | | | 1,997,294 | |
Noble Energy Inc., Senior Notes | | | 8.250 | % | | 3/1/19 | | | 340,000 | | | | 445,613 | |
See Notes to Financial Statements.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 13 | |
Western Asset Intermediate Bond Fund
| | | | | | | | | | | | | | |
| Security | | Rate | | | Maturity
Date | | Face
Amount | | | Value | |
Oil, Gas & Consumable Fuels — continued | | | | | | | | | | | |
Noble Energy Inc., Senior Notes | | | 4.150 | % | | 12/15/21 | | $ | 270,000 | | | $ | 298,064 | |
Occidental Petroleum Corp., Senior Notes | | | 3.125 | % | | 2/15/22 | | | 450,000 | | | | 478,659 | |
Occidental Petroleum Corp., Senior Notes | | | 2.700 | % | | 2/15/23 | | | 730,000 | | | | 744,872 | |
Pemex Project Funding Master Trust | | | 5.750 | % | | 3/1/18 | | | 190,000 | | | | 221,825 | |
Petrobras International Finance Co., Senior Notes | | | 3.875 | % | | 1/27/16 | | | 600,000 | | | | 633,002 | |
Petrobras International Finance Co., Senior Notes | | | 5.750 | % | | 1/20/20 | | | 1,233,000 | | | | 1,403,593 | |
Petrobras International Finance Co., Senior Notes | | | 5.375 | % | | 1/27/21 | | | 520,000 | | | | 585,426 | |
Petroleos Mexicanos, Notes | | | 8.000 | % | | 5/3/19 | | | 840,000 | | | | 1,098,300 | |
Phillips 66, Senior Notes | | | 2.950 | % | | 5/1/17 | | | 270,000 | | | | 286,156 | (a) |
Shell International Finance BV, Senior Notes | | | 4.375 | % | | 3/25/20 | | | 1,140,000 | | | | 1,322,343 | |
Sinopec Group Overseas Development 2012 Ltd., Senior Notes | | | 2.750 | % | | 5/17/17 | | | 270,000 | | | | 279,973 | (a) |
Williams Cos. Inc., Notes | | | 7.875 | % | | 9/1/21 | | | 330,000 | | | | 425,155 | |
Total Oil, Gas & Consumable Fuels | | | | | | | | | | | | | 20,785,708 | |
Total Energy | | | | | | | | | | | | | 23,282,964 | |
| Financials — 23.4% | | | | | | | | | | | | | | |
Capital Markets — 3.4% | | | | | | | | | | | | | | |
Bear Stearns Cos. LLC, Senior Notes | | | 6.400 | % | | 10/2/17 | | | 710,000 | | | | 852,709 | |
Credit Suisse AG/Guernsey, Secured Bonds | | | 2.600 | % | | 5/27/16 | | | 1,110,000 | | | | 1,171,281 | (a) |
Goldman Sachs Capital II, Junior Subordinated Bonds | | | 4.000 | % | | 6/1/43 | | | 2,020,000 | | | | 1,577,782 | (b) |
Goldman Sachs Group Inc., Senior Notes | | | 5.250 | % | | 10/15/13 | | | 210,000 | | | | 217,352 | |
Goldman Sachs Group Inc., Senior Notes | | | 6.000 | % | | 5/1/14 | | | 70,000 | | | | 74,497 | |
Goldman Sachs Group Inc., Senior Notes | | | 5.750 | % | | 1/24/22 | | | 1,720,000 | | | | 2,033,405 | |
Lehman Brothers Holdings Capital Trust VII | | | 5.857 | % | | 2/14/13 | | | 6,200,000 | | | | 0 | (b)(c)(d)(e)(f)(g) |
Lehman Brothers Holdings E-Capital Trust I, Junior Subordinated Notes | | | 3.850 | % | | 8/19/65 | | | 360,000 | | | | 0 | (b)(c)(d)(e)(f) |
Lehman Brothers Holdings Inc., Subordinated Notes | | | 6.500 | % | | 7/19/17 | | | 30,000 | | | | 0 | (c)(d)(e)(f) |
Merrill Lynch & Co. Inc., Subordinated Notes | | | 5.700 | % | | 5/2/17 | | | 1,500,000 | | | | 1,646,250 | |
Morgan Stanley | | | 7.300 | % | | 5/13/19 | | | 2,100,000 | | | | 2,551,962 | |
Morgan Stanley, Medium-Term Notes | | | 5.550 | % | | 4/27/17 | | | 1,180,000 | | | | 1,308,189 | |
State Street Corp., Junior Subordinated Notes | | | 4.956 | % | | 3/15/18 | | | 690,000 | | | | 781,557 | |
See Notes to Financial Statements.
| | |
| 14 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Schedule of investments (cont’d)
December 31, 2012
Western Asset Intermediate Bond Fund
| | | | | | | | | | | | | | |
| Security | | Rate | | | Maturity
Date | | Face
Amount | | | Value | |
Capital Markets — continued | | | | | | | | | | | | | | |
Temasek Financial I Ltd., Senior Notes | | | 2.375 | % | | 1/23/23 | | $ | 370,000 | | | $ | 364,415 | (a) |
UBS AG Stamford CT, Senior Notes | | | 3.875 | % | | 1/15/15 | | | 840,000 | | | | 887,596 | |
Vesey Street Investment Trust I, Senior Notes | | | 4.404 | % | | 9/1/16 | | | 200,000 | | | | 215,814 | |
Total Capital Markets | | | | | | | | | | | | | 13,682,809 | |
Commercial Banks — 11.3% | | | | | | | | | | | | | | |
Abbey National Treasury Services PLC, Senior Notes | | | 4.000 | % | | 4/27/16 | | | 680,000 | | | | 719,016 | |
ANZ National International Ltd., Senior Notes | | | 1.850 | % | | 10/15/15 | | | 250,000 | | | | 254,730 | (a) |
Bank of Tokyo-Mitsubishi UFJ Ltd., Senior Notes | | | 2.600 | % | | 1/22/13 | | | 380,000 | | | | 380,344 | (a) |
Barclays Bank PLC, Subordinated Notes | | | 10.179 | % | | 6/12/21 | | | 720,000 | | | | 980,222 | (a) |
BBVA US Senior SAU, Senior Notes | | | 3.250 | % | | 5/16/14 | | | 670,000 | | | | 670,598 | |
BBVA US Senior SAU, Senior Notes | | | 4.664 | % | | 10/9/15 | | | 890,000 | | | | 912,532 | |
BNP Paribas SA, Senior Notes | | | 1.205 | % | | 1/10/14 | | | 690,000 | | | | 692,097 | (b) |
BNP Paribas SA, Senior Notes | | | 2.375 | % | | 9/14/17 | | | 420,000 | | | | 426,026 | |
BPCE SA, Senior Subordinated Bonds | | | 2.375 | % | | 10/4/13 | | | 870,000 | | | | 877,992 | (a) |
Commonwealth Bank of Australia, Senior Notes | | | 2.900 | % | | 9/17/14 | | | 4,630,000 | | | | 4,822,191 | (a) |
Commonwealth Bank of Australia, Senior Notes | | | 3.750 | % | | 10/15/14 | | | 650,000 | | | | 683,345 | (a) |
Commonwealth Bank of Australia, Senior Notes | | | 1.250 | % | | 9/18/15 | | | 680,000 | | | | 687,430 | |
Compagnie de Financement Foncier, Secured Bonds | | | 2.250 | % | | 3/7/14 | | | 700,000 | | | | 711,008 | (a) |
Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, Senior Notes | | | 3.375 | % | | 1/19/17 | | | 10,000 | | | | 10,743 | |
Credit Agricole Home Loan SFH, Secured Bonds | | | 1.069 | % | | 7/21/14 | | | 400,000 | | | | 400,670 | (a)(b) |
Credit Agricole SA, Subordinated Notes | | | 8.375 | % | | 10/13/19 | | | 1,230,000 | | | | 1,303,800 | (a)(b)(g) |
Danske Bank A/S, Senior Notes | | | 3.875 | % | | 4/14/16 | | | 930,000 | | | | 985,075 | (a) |
Dexia Credit Local NY, Senior Notes | | | 2.000 | % | | 3/5/13 | | | 2,910,000 | | | | 2,912,404 | (a) |
HSBC Bank PLC, Bonds | | | 1.625 | % | | 7/7/14 | | | 1,530,000 | | | | 1,558,723 | (a) |
ING Bank NV, Senior Secured Notes | | | 2.625 | % | | 12/5/22 | | | 1,000,000 | | | | 990,597 | (a) |
Intesa Sanpaolo SpA, Senior Notes | | | 3.625 | % | | 8/12/15 | | | 370,000 | | | | 370,218 | (a) |
Landwirtschaftliche Rentenbank, Senior Notes | | | 2.500 | % | | 2/15/16 | | | 3,980,000 | | | | 4,213,626 | |
Landwirtschaftliche Rentenbank, Senior Notes | | | 1.375 | % | | 10/23/19 | | | 480,000 | | | | 478,944 | |
National Bank of Canada, Secured Bonds | | | 2.200 | % | | 10/19/16 | | | 1,100,000 | | | | 1,157,640 | (a) |
Nordea Bank AB, Senior Notes | | | 3.700 | % | | 11/13/14 | | | 620,000 | | | | 650,845 | (a) |
See Notes to Financial Statements.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 15 | |
Western Asset Intermediate Bond Fund
| | | | | | | | | | | | | | |
| Security | | Rate | | | Maturity
Date | | Face
Amount | | | Value | |
Commercial Banks — continued | | | | | | | | | | | | | | |
Nordea Eiendomskreditt AS, Mortgage Secured Bonds | | | 1.875 | % | | 4/7/14 | | $ | 1,860,000 | | | $ | 1,893,294 | (a) |
Rabobank Nederland NV, Junior Subordinated Notes | | | 11.000 | % | | 6/30/19 | | | 745,000 | | | | 1,007,613 | (a)(b)(g) |
Royal Bank of Canada, Senior Secured Bonds | | | 0.625 | % | | 12/4/15 | | | 3,000,000 | | | | 2,992,320 | |
Royal Bank of Scotland Group PLC, Senior Notes | | | 2.550 | % | | 9/18/15 | | | 210,000 | | | | 214,916 | |
Royal Bank of Scotland Group PLC, Subordinated Notes | | | 5.000 | % | | 10/1/14 | | | 180,000 | | | | 184,952 | |
Sparebank 1 Boligkreditt AS, Secured Bonds | | | 2.625 | % | | 5/27/16 | | | 1,310,000 | | | | 1,381,978 | (a) |
Sumitomo Mitsui Banking Corp., Senior Notes | | | 3.150 | % | | 7/22/15 | | | 620,000 | | | | 653,014 | (a) |
Swedbank AB | | | 2.375 | % | | 4/5/17 | | | 1,900,000 | | | | 1,990,060 | (a) |
U.S. Bancorp | | | 4.200 | % | | 5/15/14 | | | 1,050,000 | | | | 1,102,384 | |
Wachovia Capital Trust III, Junior Subordinated Bonds | | | 5.570 | % | | 2/14/13 | | | 3,458,000 | | | | 3,440,710 | (b)(g) |
Wells Fargo & Co., Senior Notes | | | 3.750 | % | | 10/1/14 | | | 1,220,000 | | | | 1,286,341 | |
Wells Fargo & Co., Senior Notes | | | 2.100 | % | | 5/8/17 | | | 170,000 | | | | 175,758 | |
Wells Fargo & Co., Senior Notes | | | 1.500 | % | | 1/16/18 | | | 210,000 | | | | 210,344 | |
Westpac Banking Corp., Senior Notes | | | 2.900 | % | | 9/10/14 | | | 1,010,000 | | | | 1,051,440 | (a) |
Total Commercial Banks | | | | | | | | | | | | | 45,435,940 | |
Consumer Finance — 1.7% | | | | | | | | | | | | | | |
American Express Co., Subordinated Debentures | | | 6.800 | % | | 9/1/66 | | | 820,000 | | | | 880,475 | (b) |
American Express Credit Corp., Senior Notes | | | 5.125 | % | | 8/25/14 | | | 1,860,000 | | | | 1,992,698 | |
American Honda Finance Corp., Senior Notes | | | 3.500 | % | | 3/16/15 | | | 1,020,000 | | | | 1,079,061 | (a) |
HSBC Finance Corp., Senior Notes | | | 6.676 | % | | 1/15/21 | | | 980,000 | | | | 1,162,644 | |
SLM Corp., Medium-Term Notes, Senior Notes | | | 8.450 | % | | 6/15/18 | | | 530,000 | | | | 620,100 | |
SLM Corp., Senior Notes | | | 3.875 | % | | 9/10/15 | | | 300,000 | | | | 308,389 | |
Toyota Motor Credit Corp., Senior Notes | | | 1.250 | % | | 10/5/17 | | | 940,000 | | | | 946,686 | |
Total Consumer Finance | | | | | | | | | | | | | 6,990,053 | |
Diversified Financial Services — 5.7% | | | | | | | | | | | | | | |
Bank of America Corp., Senior Notes | | | 6.500 | % | | 8/1/16 | | | 2,985,000 | | | | 3,446,956 | |
CDP Financial Inc. | | | 4.400 | % | | 11/25/19 | | | 1,270,000 | | | | 1,461,304 | (a) |
Citigroup Inc., Senior Notes | | | 6.375 | % | | 8/12/14 | | | 440,000 | | | | 475,486 | |
Citigroup Inc., Senior Notes | | | 5.500 | % | | 10/15/14 | | | 470,000 | | | | 504,235 | |
Citigroup Inc., Senior Notes | | | 6.000 | % | | 8/15/17 | | | 1,060,000 | | | | 1,248,835 | |
Citigroup Inc., Senior Notes | | | 8.500 | % | | 5/22/19 | | | 1,100,000 | | | | 1,479,101 | |
Citigroup Inc., Senior Notes | | | 5.375 | % | | 8/9/20 | | | 590,000 | | | | 695,284 | |
Citigroup Inc., Subordinated Notes | | | 5.000 | % | | 9/15/14 | | | 910,000 | | | | 957,400 | |
See Notes to Financial Statements.
| | |
| 16 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Schedule of investments (cont’d)
December 31, 2012
Western Asset Intermediate Bond Fund
| | | | | | | | | | | | | | |
| Security | | Rate | | | Maturity
Date | | Face
Amount | | | Value | |
Diversified Financial Services — continued | | | | | | | | | | | | | | |
FDIC Structured Sale Guaranteed Notes | | | 0.000 | % | | 10/25/13 | | $ | 1,400,000 | | | $ | 1,397,354 | (a) |
General Electric Capital Corp., Senior Notes | | | 1.625 | % | | 7/2/15 | | | 220,000 | | | | 223,651 | |
General Electric Capital Corp., Senior Notes | | | 5.625 | % | | 5/1/18 | | | 1,020,000 | | | | 1,211,285 | |
General Electric Capital Corp., Senior Notes | | | 6.000 | % | | 8/7/19 | | | 220,000 | | | | 267,644 | |
General Electric Capital Corp., Senior Notes | | | 4.650 | % | | 10/17/21 | | | 1,480,000 | | | | 1,688,733 | |
General Electric Capital Corp., Subordinated Debentures | | | 6.375 | % | | 11/15/67 | | | 1,705,000 | | | | 1,798,775 | (b) |
International Lease Finance Corp., Senior Secured Notes | | | 6.500 | % | | 9/1/14 | | | 280,000 | | | | 298,900 | (a) |
International Lease Finance Corp., Senior Secured Notes | | | 6.750 | % | | 9/1/16 | | | 1,350,000 | | | | 1,515,375 | (a) |
JPMorgan Chase & Co. | | | 4.400 | % | | 7/22/20 | | | 490,000 | | | | 553,133 | |
JPMorgan Chase & Co., Senior Notes | | | 1.100 | % | | 10/15/15 | | | 970,000 | | | | 969,970 | |
JPMorgan Chase & Co., Senior Notes | | | 4.250 | % | | 10/15/20 | | | 130,000 | | | | 144,576 | |
Private Export Funding Corp., Secured Notes | | | 2.125 | % | | 7/15/16 | | | 1,130,000 | | | | 1,193,038 | |
SSIF Nevada LP, Senior Notes | | | 1.005 | % | | 4/14/14 | | | 1,390,000 | | | | 1,397,783 | (a)(b) |
Total Diversified Financial Services | | | | | | | | | | | | | 22,928,818 | |
Insurance — 1.1% | | | | | | | | | | | | | | |
American International Group Inc., Medium-Term Notes, Senior Notes | | | 5.850 | % | | 1/16/18 | | | 250,000 | | | | 295,549 | |
American International Group Inc., Senior Notes | | | 3.750 | % | | 11/30/13 | | | 200,000 | | | | 205,164 | (a) |
American International Group Inc., Senior Notes | | | 8.250 | % | | 8/15/18 | | | 500,000 | | | | 656,943 | |
MetLife Capital Trust IV, Junior Subordinated Notes | | | 7.875 | % | | 12/15/37 | | | 620,000 | | | | 759,500 | (a) |
Prudential Financial Inc., Senior Notes | | | 2.750 | % | | 1/14/13 | | | 1,820,000 | | | | 1,821,716 | |
Teachers Insurance & Annuity Association of America — College Retirement Equity Fund, Notes | | | 6.850 | % | | 12/16/39 | | | 330,000 | | | | 447,571 | (a) |
Total Insurance | | | | | | | | | | | | | 4,186,443 | |
Thrifts & Mortgage Finance — 0.2% | | | | | | | | | | | | | | |
Countrywide Financial Corp., Subordinated Notes | | | 6.250 | % | | 5/15/16 | | | 810,000 | | | | 889,143 | |
Santander Holdings USA Inc., Senior Notes | | | 4.625 | % | | 4/19/16 | | | 50,000 | | | | 52,274 | |
Total Thrifts & Mortgage Finance | | | | | | | | | | | | | 941,417 | |
Total Financials | | | | | | | | | | | | | 94,165,480 | |
| Health Care — 1.8% | | | | | | | | | | | | | | |
Health Care Equipment & Supplies — 0.3% | | | | | | | | | | | | | | |
Baxter International Inc., Senior Notes | | | 5.900 | % | | 9/1/16 | | | 500,000 | | | | 589,513 | |
See Notes to Financial Statements.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 17 | |
Western Asset Intermediate Bond Fund
| | | | | | | | | | | | | | |
| Security | | Rate | | | Maturity
Date | | Face
Amount | | | Value | |
Health Care Equipment & Supplies — continued | | | | | | | | | | | | | | |
Medtronic Inc., Senior Notes | | | 4.450 | % | | 3/15/20 | | $ | 390,000 | | | $ | 453,028 | |
Medtronic Inc., Senior Notes | | | 3.125 | % | | 3/15/22 | | | 140,000 | | | | 148,641 | |
Total Health Care Equipment & Supplies | | | | | | | | | | | | | 1,191,182 | |
Health Care Providers & Services — 0.4% | | | | | | | | | | | | | | |
Humana Inc., Senior Notes | | | 3.150 | % | | 12/1/22 | | | 160,000 | | | | 159,109 | |
UnitedHealth Group Inc., Senior Notes | | | 3.875 | % | | 10/15/20 | | | 380,000 | | | | 421,104 | |
WellPoint Inc., Notes | | | 5.875 | % | | 6/15/17 | | | 100,000 | | | | 118,689 | |
WellPoint Inc., Senior Notes | | | 1.250 | % | | 9/10/15 | | | 130,000 | | | | 131,028 | |
WellPoint Inc., Senior Notes | | | 4.350 | % | | 8/15/20 | | | 540,000 | | | | 596,026 | |
WellPoint Inc., Senior Notes | | | 3.700 | % | | 8/15/21 | | | 70,000 | | | | 73,623 | |
WellPoint Inc., Senior Notes | | | 3.125 | % | | 5/15/22 | | | 330,000 | | | | 333,447 | |
Total Health Care Providers & Services | | | | | | | | | | | | | 1,833,026 | |
Life Sciences Tools & Services — 0.3% | | | | | | | | | | | | | | |
Agilent Technologies Inc., Senior Notes | | | 6.500 | % | | 11/1/17 | | | 780,000 | | | | 942,897 | |
Thermo Fisher Scientific Inc., Senior Notes | | | 3.600 | % | | 8/15/21 | | | 280,000 | | | | 297,788 | |
Total Life Sciences Tools & Services | | | | | | | | | | | | | 1,240,685 | |
Pharmaceuticals — 0.8% | | | | | | | | | | | | | | |
AbbVie Inc., Senior Notes | | | 1.750 | % | | 11/6/17 | | | 690,000 | | | | 697,505 | (a) |
AbbVie Inc., Senior Notes | | | 2.900 | % | | 11/6/22 | | | 480,000 | | | | 488,822 | (a) |
Aristotle Holding Inc., Senior Notes | | | 3.500 | % | | 11/15/16 | | | 1,260,000 | | | | 1,347,148 | (a) |
Teva Pharmaceutical Finance IV BV, Senior Notes | | | 3.650 | % | | 11/10/21 | | | 370,000 | | | | 395,986 | |
Watson Pharmaceuticals Inc., Senior Notes | | | 1.875 | % | | 10/1/17 | | | 180,000 | | | | 182,367 | |
Total Pharmaceuticals | | | | | | | | | �� | | | | 3,111,828 | |
Total Health Care | | | | | | | | | | | | | 7,376,721 | |
| Industrials — 2.0% | | | | | | | | | | | | | | |
Aerospace & Defense — 0.6% | | | | | | | | | | | | | | |
Boeing Co., Senior Notes | | | 6.000 | % | | 3/15/19 | | | 1,250,000 | | | | 1,556,984 | |
United Technologies Corp., Senior Notes | | | 3.100 | % | | 6/1/22 | | | 840,000 | | | | 889,550 | |
Total Aerospace & Defense | | | | | | | | | | | | | 2,446,534 | |
Airlines — 0.3% | | | | | | | | | | | | | | |
Continental Airlines Inc., Pass-Through Certificates | | | 6.545 | % | | 2/2/19 | | | 153,654 | | | | 167,483 | |
US Airways Pass-Through Trust, Pass-Through Certificates | | | 6.850 | % | | 1/30/18 | | | 812,989 | | | | 849,573 | |
Total Airlines | | | | | | | | | | | | | 1,017,056 | |
Electrical Equipment — 0.3% | | | | | | | | | | | | | | |
Eaton Corp., Senior Notes | | | 1.500 | % | | 11/2/17 | | | 280,000 | | | | 280,572 | (a) |
Eaton Corp., Senior Notes | | | 2.750 | % | | 11/2/22 | | | 740,000 | | | | 737,717 | (a) |
Total Electrical Equipment | | | | | | | | | | | | | 1,018,289 | |
See Notes to Financial Statements.
| | |
| 18 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Schedule of investments (cont’d)
December 31, 2012
Western Asset Intermediate Bond Fund
| | | | | | | | | | | | | | |
| Security | | Rate | | | Maturity
Date | | Face
Amount | | | Value | |
Industrial Conglomerates — 0.1% | | | | | | | | | | | | | | |
General Electric Co., Senior Notes | | | 0.850 | % | | 10/9/15 | | $ | 270,000 | | | $ | 270,952 | |
United Technologies Corp., Senior Notes | | | 4.500 | % | | 4/15/20 | | | 250,000 | | | | 293,713 | |
Total Industrial Conglomerates | | | | | | | | | | | | | 564,665 | |
Machinery — 0.1% | | | | | | | | | | | | | | |
John Deere Capital Corp., Notes | | | 2.250 | % | | 4/17/19 | | | 480,000 | | | | 494,025 | |
Road & Rail — 0.6% | | | | | | | | | | | | | | |
Canadian National Railway Co. Financing Pass-Through Trusts, Secured Bonds | | | 7.195 | % | | 1/2/16 | | | 2,133,615 | | | | 2,437,388 | |
Total Industrials | | | | | | | | | | | | | 7,977,957 | |
| Information Technology — 0.2% | | | | | | | | | | | | | | |
Software — 0.2% | | | | | | | | | | | | | | |
Oracle Corp., Senior Notes | | | 1.200 | % | | 10/15/17 | | | 760,000 | | | | 762,256 | |
| Materials — 2.2% | | | | | | | | | | | | | | |
Chemicals — 0.2% | | | | | | | | | | | | | | |
Ecolab Inc., Senior Notes | | | 4.350 | % | | 12/8/21 | | | 190,000 | | | | 212,074 | |
Potash Corp. of Saskatchewan Inc., Senior Notes | | | 6.500 | % | | 5/15/19 | | | 320,000 | | | | 400,542 | |
Potash Corp. of Saskatchewan Inc., Senior Notes | | | 4.875 | % | | 3/30/20 | | | 180,000 | | | | 206,916 | |
Total Chemicals | | | | | | | | | | | | | 819,532 | |
Metals & Mining — 1.9% | | | | | | | | | | | | | | |
BHP Billiton Finance USA Ltd., Senior Notes | | | 6.500 | % | | 4/1/19 | | | 680,000 | | | | 867,204 | |
BHP Billiton Finance USA Ltd., Senior Notes | | | 3.250 | % | | 11/21/21 | | | 300,000 | | | | 322,876 | |
Cliffs Natural Resources Inc., Senior Notes | | | 3.950 | % | | 1/15/18 | | | 500,000 | | | | 503,241 | |
Cliffs Natural Resources Inc., Senior Notes | | | 4.800 | % | | 10/1/20 | | | 150,000 | | | | 149,070 | |
Freeport-McMoRan Copper & Gold Inc., Senior Notes | | | 3.550 | % | | 3/1/22 | | | 620,000 | | | | 614,901 | |
Rio Tinto Finance USA Ltd. | | | 8.950 | % | | 5/1/14 | | | 90,000 | | | | 99,515 | |
Rio Tinto Finance USA Ltd., Senior Notes | | | 2.500 | % | | 5/20/16 | | | 1,100,000 | | | | 1,148,324 | |
Rio Tinto Finance USA Ltd., Senior Notes | | | 4.125 | % | | 5/20/21 | | | 590,000 | | | | 651,920 | |
Southern Copper Corp., Senior Notes | | | 3.500 | % | | 11/8/22 | | | 350,000 | | | | 357,432 | |
Vale Overseas Ltd., Notes | | | 6.250 | % | | 1/23/17 | | | 650,000 | | | | 747,885 | |
Vale Overseas Ltd., Senior Notes | | | 4.375 | % | | 1/11/22 | | | 1,226,000 | | | | 1,308,764 | |
Xstrata Finance Canada Ltd., Senior Notes | | | 1.800 | % | | 10/23/15 | | | 530,000 | | | | 532,878 | (a) |
Xstrata Finance Canada Ltd., Senior Notes | | | 2.450 | % | | 10/25/17 | | | 470,000 | | | | 474,556 | (a) |
Total Metals & Mining | | | | | | | | | | | | | 7,778,566 | |
Paper & Forest Products — 0.1% | | | | | | | | | | | | | | |
Celulosa Arauco y Constitucion SA, Senior Notes | | | 4.750 | % | | 1/11/22 | | | 330,000 | | | | 346,139 | |
Total Materials | | | | | | | | | | | | | 8,944,237 | |
See Notes to Financial Statements.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 19 | |
Western Asset Intermediate Bond Fund
| | | | | | | | | | | | | | |
| Security | | Rate | | | Maturity
Date | | Face
Amount | | | Value | |
| Telecommunication Services — 1.4% | | | | | | | | | | | | | | |
Diversified Telecommunication Services — 0.9% | | | | | | | | | | | |
AT&T Inc., Global Notes | | | 5.500 | % | | 2/1/18 | | $ | 1,030,000 | | | $ | 1,227,030 | |
AT&T Inc., Global Notes | | | 5.600 | % | | 5/15/18 | | | 800,000 | | | | 965,020 | |
AT&T Inc., Senior Notes | | | 1.400 | % | | 12/1/17 | | | 400,000 | | | | 400,075 | |
Deutsche Telekom International Finance BV, Senior Notes | | | 5.750 | % | | 3/23/16 | | | 470,000 | | | | 535,525 | |
Verizon Communications Inc., Senior Notes | | | 2.450 | % | | 11/1/22 | | | 720,000 | | | | 720,240 | |
Total Diversified Telecommunication Services | | | | | | | | | | 3,847,890 | |
Wireless Telecommunication Services — 0.5% | | | | | | | | | | | |
America Movil SAB de CV, Notes | | | 2.375 | % | | 9/8/16 | | | 910,000 | | | | 945,839 | |
Cellco Partnership/Verizon Wireless Capital LLC | | | 5.550 | % | | 2/1/14 | | | 1,000,000 | | | | 1,049,744 | |
Total Wireless Telecommunication Services | | | | | | | | | | 1,995,583 | |
Total Telecommunication Services | | | | | | | | | | | | | 5,843,473 | |
| Utilities — 0.8% | | | | | | | | | | | | | | |
Electric Utilities — 0.4% | | | | | | | | | | | | | | |
Duke Energy Corp., Senior Notes | | | 6.300 | % | | 2/1/14 | | | 750,000 | | | | 794,584 | |
Exelon Corp., Notes | | | 4.900 | % | | 6/15/15 | | | 530,000 | | | | 576,920 | |
FirstEnergy Corp., Notes | | | 7.375 | % | | 11/15/31 | | | 140,000 | | | | 180,822 | |
Total Electric Utilities | | | | | | | | | | | | | 1,552,326 | |
Multi-Utilities — 0.4% | | | | | | | | | | | | | | |
Dominion Resources Inc., Senior Notes | | | 8.875 | % | | 1/15/19 | | | 1,160,000 | | | | 1,587,671 | |
Total Utilities | | | | | | | | | | | | | 3,139,997 | |
Total Corporate Bonds & Notes (Cost — $168,804,058) | | | | | | | 176,211,473 | |
| Asset-Backed Securities — 9.6% | | | | | | | | | | | | | | |
Access Group Inc., 2005-B A2 | | | 0.545 | % | | 7/25/22 | | | 939,732 | | | | 914,619 | (b) |
AESOP Funding II LLC, 2011-3A A | | | 3.410 | % | | 11/20/17 | | | 1,200,000 | | | | 1,287,217 | (a) |
Ally Auto Receivables Trust, 2012-4 A3 | | | 0.590 | % | | 1/17/17 | | | 1,110,000 | | | | 1,109,141 | |
American Express Credit Account Master Trust, 2012-3 A | | | 0.359 | % | | 3/15/18 | | | 1,700,000 | | | | 1,703,072 | (b) |
American Express Credit Account Master Trust, 2012-5 A | | | 0.590 | % | | 5/15/18 | | | 400,000 | | | | 400,087 | |
Avis Budget Rental Car Funding AESOP II LLC, 2012-2A A | | | 2.802 | % | | 5/20/18 | | | 250,000 | | | | 263,629 | (a) |
Bank of America Credit Card Trust, 2010-A1 A1 | | | 0.506 | % | | 9/15/15 | | | 2,440,000 | | | | 2,441,645 | (b) |
BMW Floorplan Master Owner Trust, 2012-1A A | | | 0.609 | % | | 9/15/17 | | | 1,420,000 | | | | 1,422,458 | (a)(b) |
Countrywide Asset-Backed Certificates, 2002-BC1 | | | 0.870 | % | | 4/25/32 | | | 225,503 | | | | 132,884 | (b) |
See Notes to Financial Statements.
| | |
| 20 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Schedule of investments (cont’d)
December 31, 2012
Western Asset Intermediate Bond Fund
| | | | | | | | | | | | | | |
| Security | | Rate | | | Maturity
Date | | Face
Amount | | | Value | |
| Asset-Backed Securities — continued | | | | | | | | | | | | | | |
Countrywide Home Equity Loan Trust, 2006-HW 2A1B | | | 0.356 | % | | 11/15/36 | | $ | 1,995,847 | | | $ | 1,699,989 | (b) |
Credit-Based Asset Servicing and Securitization LLC, 2005-CB3 M1 | | | 0.650 | % | | 5/25/35 | | | 588,903 | | | | 560,440 | (b) |
Credit-Based Asset Servicing and Securitization LLC, 2005-RP1 M1 | | | 0.830 | % | | 1/25/35 | | | 1,280,541 | | | | 1,226,890 | (a)(b) |
CS First Boston Mortgage Securities Corp., 2002-MH3 A | | | 6.700 | % | | 12/25/31 | | | 678,038 | | | | 772,670 | |
Educational Funding of the South Inc., 2011-1 A2 | | | 0.965 | % | | 4/25/35 | | | 3,100,000 | | | | 3,119,298 | (b) |
EFS Volunteer No. 3 LLC, 2012-1 A3 | | | 1.208 | % | | 4/25/33 | | | 1,520,000 | | | | 1,548,731 | (a)(b) |
Ford Credit Floorplan Master Owner Trust, 2012-4 A2 | | | 0.559 | % | | 9/15/16 | | | 820,000 | | | | 820,282 | (b) |
Greenpoint Manufactured Housing, 2001-2 IA2 | | | 3.712 | % | | 2/20/32 | | | 325,000 | | | | 276,858 | (b) |
Greenpoint Manufactured Housing, 2001-2 IIA2 | | | 3.709 | % | | 3/13/32 | | | 450,000 | | | | 377,188 | (b) |
GRMT Mortgage Loan Trust, 2001-1A A5 | | | 6.650 | % | | 7/20/31 | | | 232,377 | | | | 230,110 | (a) |
Hertz Vehicle Financing LLC, 2009-2A A1 | | | 4.260 | % | | 3/25/14 | | | 990,000 | | | | 995,507 | (a) |
Hertz Vehicle Financing LLC, 2009-2A A2 | | | 5.290 | % | | 3/25/16 | | | 430,000 | | | | 467,697 | (a) |
Honda Auto Receivables Owner Trust, 2011-1 A3 | | | 1.130 | % | | 10/15/14 | | | 257,758 | | | | 258,560 | |
Indymac Home Equity Loan Asset-Backed Trust, 2001-A | | | 0.470 | % | | 3/25/31 | | | 136,301 | | | | 101,750 | (b) |
Mercedes-Benz Auto Receivables Trust, 2012-1 A2 | | | 0.370 | % | | 3/16/15 | | | 380,000 | | | | 380,145 | |
Mercedes-Benz Auto Receivables Trust, 2012-1 A3 | | | 0.470 | % | | 10/17/16 | | | 700,000 | | | | 699,731 | |
NCUA Guaranteed Notes, 2010-A1 A | | | 0.558 | % | | 12/7/20 | | | 2,737,907 | | | | 2,746,121 | (b) |
Nissan Auto Receivables Owner Trust, 2012-A A3 | | | 0.730 | % | | 5/16/16 | | | 650,000 | | | | 653,275 | |
Penarth Master Issuer, 2011-1A A1 | | | 0.859 | % | | 5/18/15 | | | 520,000 | | | | 520,662 | (a)(b) |
Quest Trust, 2005-X1 M1 | | | 0.710 | % | | 3/25/35 | | | 138,738 | | | | 136,072 | (a)(b) |
Residential Asset Mortgage Products Inc., 2003-RZ4 A7 | | | 4.790 | % | | 6/25/33 | | | 289,522 | | | | 299,479 | |
SLM Student Loan Trust, 2003-04 A5A | | | 1.058 | % | | 3/15/33 | | | 652,153 | | | | 644,409 | (a)(b) |
SLM Student Loan Trust, 2003-04 A5E | | | 1.058 | % | | 3/15/33 | | | 2,353,130 | | | | 2,323,878 | (a)(b) |
SLM Student Loan Trust, 2003-11 A6 | | | 0.598 | % | | 12/15/25 | | | 1,400,000 | | | | 1,367,577 | (a)(b) |
SLM Student Loan Trust, 2005-4 A3 | | | 0.435 | % | | 1/25/27 | | | 1,600,000 | | | | 1,564,141 | (b) |
SLM Student Loan Trust, 2005-7 A4 | | | 0.465 | % | | 10/25/29 | | | 1,000,000 | | | | 926,672 | (b) |
SLM Student Loan Trust, 2011-B A1 | | | 1.056 | % | | 12/16/24 | | | 901,929 | | | | 903,895 | (a)(b) |
SLM Student Loan Trust, 2012-6 A3 | | | 0.960 | % | | 5/26/26 | | | 1,500,000 | | | | 1,515,372 | (b) |
SLM Student Loan Trust, 2012-7 A1 | | | 0.369 | % | | 2/27/17 | | | 97,621 | | | | 97,582 | (b) |
Soundview Home Equity Loan Trust, 2005-3 M2 | | | 0.990 | % | | 6/25/35 | | | 324,635 | | | | 320,616 | (b) |
See Notes to Financial Statements.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 21 | |
Western Asset Intermediate Bond Fund
��
| | | | | | | | | | | | | | |
| Security | | Rate | | | Maturity
Date | | Face
Amount | | | Value | |
| Asset-Backed Securities — continued | | | | | | | | | | | | | | |
UCFC Home Equity Loan, 1998-D MF1 | | | 6.905 | % | | 4/15/30 | | $ | 618,201 | | | $ | 623,366 | |
USAA Auto Owner Trust, 2012-1 A2 | | | 0.380 | % | | 6/15/15 | | | 340,000 | | | | 340,132 | |
Volkswagen Auto Loan Enhanced Trust, 2012-1 A3 | | | 0.850 | % | | 8/22/16 | | | 350,000 | | | | 352,051 | |
Total Asset-Backed Securities (Cost — $37,505,306) | | | | | | | 38,545,898 | |
| Collateralized Mortgage Obligations — 7.7% | | | | | | | | | | | |
ARM Trust, 2004-5 4A1 | | | 5.159 | % | | 4/25/35 | | | 351,923 | | | | 350,068 | (b) |
Bear Stearns Alt-A Trust, 2005-2 2A4 | | | 2.915 | % | | 4/25/35 | | | 922,222 | | | | 765,867 | (b) |
Bear Stearns Commercial Mortgage Securities, 2007-PW17 A4 | | | 5.694 | % | | 6/11/50 | | | 40,000 | | | | 47,269 | (b) |
Citigroup Mortgage Loan Trust Inc., 2005-8, 1A1A | | | 2.930 | % | | 10/25/35 | | | 1,102,884 | | | | 910,977 | (b) |
Citigroup Mortgage Loan Trust Inc., 2010-3 4A1 | | | 2.430 | % | | 2/25/36 | | | 761,438 | | | | 757,130 | (a)(b) |
Countrywide Home Loans, 2004-20 2A1 | | | 2.794 | % | | 9/25/34 | | | 258,774 | | | | 201,848 | (b) |
Countrywide Home Loans, 2004-R1 1AF | | | 0.610 | % | | 11/25/34 | | | 297,680 | | | | 250,622 | (a)(b) |
CS First Boston Mortgage Securities Corp., 2005-9 3A1 | | | 6.000 | % | | 10/25/35 | | | 1,283,051 | | | | 817,176 | |
Deutsche Mortgage Securities Inc., 2004-4 3AR1 | | | 3.118 | % | | 6/25/34 | | | 403,019 | | | | 369,374 | (b) |
FDIC Structured Sale Guaranteed Notes, 2010-S1 1A | | | 0.759 | % | | 2/25/48 | | | 772,951 | | | | 774,498 | (a)(b) |
FDIC Structured Sale Guaranteed Notes, 2010-S2 | | | 0.910 | % | | 12/29/45 | | | 1,586,725 | | | | 1,586,725 | (a)(b)(d) |
Federal Home Loan Mortgage Corp. (FHLMC) | | | 9.300 | % | | 4/15/19 | | | 14,000 | | | | 15,422 | |
Federal Home Loan Mortgage Corp. (FHLMC), 170 B, IO | | | 10.000 | % | | 3/1/21 | | | 1,501 | | | | 255 | |
Federal National Mortgage Association (FNMA), PO, PAC | | | 0.000 | % | | 5/25/22 | | | 1,628 | | | | 1,551 | |
GE Capital Commercial Mortgage Corp., 2007-C1 A4 | | | 5.543 | % | | 12/10/49 | | | 60,000 | | | | 68,495 | |
Government National Mortgage Association (GNMA), 2010-H26 LF | | | 0.560 | % | | 8/20/58 | | | 1,009,599 | | | | 1,009,781 | (b) |
Government National Mortgage Association (GNMA), 2011-H01 AF | | | 0.660 | % | | 11/20/60 | | | 2,815,823 | | | | 2,830,170 | (b) |
Government National Mortgage Association (GNMA), 2011-H07 FA | | | 0.710 | % | | 2/20/61 | | | 877,586 | | | | 883,941 | (b) |
Government National Mortgage Association (GNMA), 2011-H09 AF | | | 0.710 | % | | 3/20/61 | | | 472,646 | | | | 476,222 | (b) |
Government National Mortgage Association (GNMA), 2011-H19 FA | | | 0.680 | % | | 8/20/61 | | | 3,258,377 | | | | 3,278,374 | (b) |
See Notes to Financial Statements.
| | |
| 22 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Schedule of investments (cont’d)
December 31, 2012
Western Asset Intermediate Bond Fund
| | | | | | | | | | | | | | |
| Security | | Rate | | | Maturity
Date | | Face
Amount | | | Value | |
| Collateralized Mortgage Obligations — continued | | | | | | | | | | | |
Government National Mortgage Association (GNMA), 2012-H30 GA | | | 0.560 | % | | 12/20/62 | | $ | 800,000 | | | $ | 801,500 | (b)(d) |
GS Mortgage Securities Corp. II, 2007-EOP A2 | | | 1.260 | % | | 3/6/20 | | | 1,130,000 | | | | 1,131,522 | (a)(b) |
GSMPS Mortgage Loan Trust, 2005-RP1 1AF | | | 0.560 | % | | 1/25/35 | | | 294,906 | | | | 242,740 | (a)(b) |
Harborview Mortgage Loan Trust, 2004-10 4A | | | 2.913 | % | | 1/19/35 | | | 689,518 | | | | 694,374 | (b) |
JPMorgan Chase Commercial Mortgage Securities Corp., 2006-LDP9 A3 | | | 5.336 | % | | 5/15/47 | | | 50,000 | | | | 57,199 | |
LB-UBS Commercial Mortgage Trust, 2007-C1 A4 | | | 5.424 | % | | 2/15/40 | | | 133,000 | | | | 154,398 | |
MASTR Adjustable Rate Mortgages Trust, 2004-13 3A7 | | | 2.630 | % | | 11/21/34 | | | 6,815,190 | | | | 7,053,367 | (b) |
MASTR ARM Trust, 2004-11 M1 | | | 0.850 | % | | 11/25/34 | | | 617,243 | | | | 591,168 | (b) |
Merrill Lynch Mortgage Investors Trust, 2004-A1 2A1 | | | 2.731 | % | | 2/25/34 | | | 793,921 | | | | 796,933 | (b) |
MLCC Mortgage Investors Inc., 2005-1, 2A1 | | | 2.480 | % | | 4/25/35 | | | 245,887 | | | | 242,674 | (b) |
Morgan Stanley Bank of America Merrill Lynch Trust, 2012-C5 XA, IO | | | 1.937 | % | | 8/15/45 | | | 1,164,285 | | | | 130,336 | (a)(b) |
Morgan Stanley Dean Witter Capital I, 2002-IQ3 A4 | | | 5.080 | % | | 9/15/37 | | | 146,859 | | | | 146,818 | |
Residential Asset Securitization Trust, 2003-A14 A1 | | | 4.750 | % | | 2/25/19 | | | 570,954 | | | | 587,889 | |
SACO I Trust, 2007-VA1 A | | | 9.023 | % | | 6/25/21 | | | 1,014,357 | | | | 1,096,727 | (a)(b) |
Sequoia Mortgage Trust, 2003-3 A1 | | | 0.871 | % | | 7/20/33 | | | 764,639 | | | | 718,373 | (b) |
Structured Asset Mortgage Investments Inc., 2004-AR8 A1 | | | 0.890 | % | | 5/19/35 | | | 1,185,517 | | | | 1,121,167 | (b) |
Wachovia Bank Commercial Mortgage Trust, 2006-C29 A4 | | | 5.308 | % | | 11/15/48 | | | 128,000 | | | | 147,192 | |
Total Collateralized Mortgage Obligations (Cost — $30,861,078) | | | | | | | 31,110,142 | |
| Mortgage-Backed Securities — 3.2% | | | | | | | | | | | | | | |
FHLMC — 0.4% | | | | | | | | | | | | | | |
Federal Home Loan Mortgage Corp. (FHLMC) | | | 2.877 | % | | 1/1/19 | | | 3,114 | | | | 3,118 | (b) |
Federal Home Loan Mortgage Corp. (FHLMC) | | | 2.745 | % | | 12/1/34 | | | 465,382 | | | | 494,149 | (b) |
Federal Home Loan Mortgage Corp. (FHLMC) | | | 2.768 | % | | 7/1/35 | | | 1,252,698 | | | | 1,332,171 | (b) |
Total FHLMC | | | | | | | | | | | | | 1,829,438 | |
FNMA — 2.1% | | | | | | | | | | | | | | |
Federal National Mortgage Association (FNMA) | | | 8.000 | % | | 9/1/15 | | | 6,502 | | | | 6,899 | |
Federal National Mortgage Association (FNMA) | | | 2.457 | % | | 3/1/18 | | | 6,422 | | | | 6,760 | (b) |
Federal National Mortgage Association (FNMA) | | | 9.500 | % | | 4/15/21 | | | 13,147 | | | | 15,632 | |
See Notes to Financial Statements.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 23 | |
Western Asset Intermediate Bond Fund
| | | | | | | | | | | | | | |
| Security | | Rate | | | Maturity
Date | | Face
Amount | | | Value | |
FNMA — continued | | | | | | | | | | | | | | |
Federal National Mortgage Association (FNMA) | | | 2.630 | % | | 12/1/34 | | $ | 176,550 | | | $ | 188,235 | (b) |
Federal National Mortgage Association (FNMA) | | | 2.173 | % | | 1/1/35 | | | 1,582,907 | | | | 1,680,661 | (b) |
Federal National Mortgage Association (FNMA) | | | 3.500 | % | | 8/1/42-9/1/42 | | | 1,975,078 | | | | 2,132,566 | |
Federal National Mortgage Association (FNMA) | | | 2.500 | % | | 1/14/43 | | | 900,000 | | | | 917,156 | (h) |
Federal National Mortgage Association (FNMA) | | | 3.000 | % | | 1/14/43 | | | 900,000 | | | | 943,031 | (h) |
Federal National Mortgage Association (FNMA) | | | 4.000 | % | | 1/14/43 | | | 2,300,000 | | | | 2,465,313 | (h) |
Total FNMA | | | | | | | | | | | | | 8,356,253 | |
GNMA — 0.7% | | | | | | | | | | | | | | |
Government National Mortgage Association (GNMA) | | | 2.041 | % | | 6/20/60 | | | 2,568,120 | | | | 2,748,402 | (b) |
Total Mortgage-Backed Securities (Cost — $12,666,363) | | | | 12,934,093 | |
| Municipal Bonds — 1.0% | | | | | | | | | | | | | | |
Pennsylvania — 0.6% | | | | | | | | | | | | | | |
Pennsylvania State Higher Education Assistance Agency, Student Loan Revenue | | | 2.112 | % | | 5/1/46 | | | 2,450,000 | | | | 2,328,691 | (b) |
Virginia — 0.4% | | | | | | | | | | | | | | |
Virginia State Housing Development Authority | | | 6.000 | % | | 6/25/34 | | | 1,701,686 | | | | 1,847,027 | |
Total Municipal Bonds (Cost — $3,864,266) | | | | | | | | | | 4,175,718 | |
| Sovereign Bonds — 2.1% | | | | | | | | | | | | | | |
Canada — 0.7% | | | | | | | | | | | | | | |
Province of Ontario, Senior Bonds | | | 1.100 | % | | 10/25/17 | | | 1,400,000 | | | | 1,401,540 | |
Province of Ontario, Senior Bonds | | | 4.400 | % | | 4/14/20 | | | 1,440,000 | | | | 1,695,815 | |
Total Canada | | | | | | | | | | | | | 3,097,355 | |
Germany — 0.1% | | | | | | | | | | | | | | |
FMS Wertmanagement, Senior Bonds | | | 1.000 | % | | 11/21/17 | | | 370,000 | | | | 369,519 | |
Japan — 0.7% | | | | | | | | | | | | | | |
Japan Finance Corp., Senior Bonds | | | 2.875 | % | | 2/2/15 | | | 2,690,000 | | | | 2,825,549 | |
Norway — 0.5% | | | | | | | | | | | | | | |
Kommunalbanken AS, Senior Notes | | | 2.375 | % | | 1/19/16 | | | 1,800,000 | | | | 1,892,538 | (a) |
Russia — 0.1% | | | | | | | | | | | | | | |
RSHB Capital, Loan Participation Notes, Senior Secured Bonds | | | 6.299 | % | | 5/15/17 | | | 270,000 | | | | 299,025 | (a) |
Total Sovereign Bonds (Cost — $8,005,404) | | | | | | | | | | 8,483,986 | |
See Notes to Financial Statements.
| | |
| 24 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Schedule of investments (cont’d)
December 31, 2012
Western Asset Intermediate Bond Fund
| | | | | | | | | | | | | | |
| Security | | Rate | | | Maturity
Date | | Face
Amount | | | Value | |
| U.S. Government & Agency Obligations — 28.1% | | | | | | | | | | | |
U.S. Government Agencies — 5.3% | | | | | | | | | | | | | | |
Farmer Mac | | | 3.000 | % | | 9/22/14 | | $ | 120,000 | | | $ | 125,705 | |
Farmer Mac, Guaranteed Trust | | | 5.125 | % | | 4/19/17 | | | 3,350,000 | | | | 3,935,593 | (a) |
Federal Home Loan Bank (FHLB), Bonds | | | 1.000 | % | | 11/15/17 | | | 2,010,000 | | | | 2,013,688 | |
Federal Home Loan Bank (FHLB), Bonds | | | 5.625 | % | | 6/11/21 | | | 1,910,000 | | | | 2,495,293 | |
Federal National Mortgage Association (FNMA), Debentures | | | 0.000 | % | | 10/9/19 | | | 4,320,000 | | | | 3,784,566 | |
Federal National Mortgage Association (FNMA), Subordinated Notes | | | 4.625 | % | | 5/1/13 | | | 1,590,000 | | | | 1,613,532 | |
Resolution Funding Corp. Strip Principal, Bonds | | | 0.000 | % | | 10/15/19 | | | 2,050,000 | | | | 1,857,813 | |
Tennessee Valley Authority, Bonds | | | 5.980 | % | | 4/1/36 | | | 70,000 | | | | 98,374 | |
Tennessee Valley Authority, Notes | | | 5.250 | % | | 9/15/39 | | | 1,090,000 | | | | 1,434,131 | |
Tennessee Valley Authority, Senior Bonds | | | 3.875 | % | | 2/15/21 | | | 3,600,000 | | | | 4,177,627 | |
Total U.S. Government Agencies | | | | | | | | | | | | | 21,536,322 | |
U.S. Government Obligations — 22.8% | | | | | | | | | | | | | | |
U.S. Treasury Notes | | | 0.250 | % | | 7/15/15 | | | 10,600,000 | | | | 10,582,605 | |
U.S. Treasury Notes | | | 0.250 | % | | 10/15/15 | | | 210,000 | | | | 209,524 | |
U.S. Treasury Notes | | | 0.375 | % | | 11/15/15 | | | 90,000 | | | | 90,084 | |
U.S. Treasury Notes | | | 1.000 | % | | 9/30/16 | | | 6,660,000 | | | | 6,786,953 | |
U.S. Treasury Notes | | | 0.625 | % | | 8/31/17 | | | 11,430,000 | | | | 11,419,279 | |
U.S. Treasury Notes | | | 1.250 | % | | 10/31/19 | | | 11,000,000 | | | | 11,091,091 | |
U.S. Treasury Notes | | | 1.125 | % | | 12/31/19 | | | 31,220,000 | | | | 31,132,209 | |
U.S. Treasury Notes | | | 1.625 | % | | 8/15/22 | | | 5,580,000 | | | | 5,543,384 | |
U.S. Treasury Notes | | | 1.625 | % | | 11/15/22 | | | 15,120,000 | | | | 14,954,618 | |
Total U.S. Government Obligations | | | | | | | | | | | | | 91,809,747 | |
Total U.S. Government & Agency Obligations (Cost — $110,399,256) | | | | 113,346,069 | |
| U.S. Treasury Inflation Protected Securities — 0.6% | | | | | | | | | | | |
U.S. Treasury Notes, Inflation Indexed
(Cost — $2,166,328) | | | 1.250 | % | | 4/15/14 | | | 2,098,598 | | | | 2,163,525 | |
| | | | |
| | | | | | Expiration
Date | | Contracts | | | | |
| Purchased Options — 0.0% | | | | | | | | | | | | | | |
U.S. Treasury 10-Year Notes, Call @ $133.50 | | | | | | 1/25/13 | | | 152 | | | | 45,125 | |
U.S. Treasury 10-Year Notes, Put @ $131.00 | | | | | | 1/25/13 | | | 114 | | | | 16,031 | |
Total Purchased Options (Cost — $64,396) | | | | | | | | | | | | | 61,156 | |
Total Investments before Short-Term Investments (Cost — $374,336,455) | | | | 387,032,060 | |
See Notes to Financial Statements.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 25 | |
Western Asset Intermediate Bond Fund
| | | | | | | | | | | | | | |
| Security | | Rate | | | Maturity
Date | | Face
Amount | | | Value | |
| Short-Term Investments — 4.6% | | | | | | | | | | | | | | |
U.S. Treasury Bills — 1.2% | | | | | | | | | | | | | | |
U.S. Treasury Bills (Cost — $4,697,669) | | | 0.133 | % | | 5/16/13 | | $ | 4,700,000 | | | $ | 4,698,383 | (i) |
Repurchase Agreements — 3.4% | | | | | | | | | | | | | | |
Barclays Capital Inc. repurchase agreement dated 12/31/12; Proceeds at maturity — $13,800,123; (Fully collateralized by U.S. government obligations, 0.250% due 9/15/15; Market value — $14,075,902) (Cost — $13,800,000) | | | 0.160 | % | | 1/2/13 | | | 13,800,000 | | | | 13,800,000 | |
Total Short-Term Investments (Cost — $18,497,669) | | | | 18,498,383 | |
Total Investments — 100.6 % (Cost — $392,834,124#) | | | | 405,530,443 | |
Liabilities in Excess of Other Assets — (0.6)% | | | | | | | | | | (2,239,665 | ) |
Total Net Assets — 100.0% | | | | | | | | | | | | $ | 403,290,778 | |
| (a) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Directors, unless otherwise noted. |
| (b) | Variable rate security. Interest rate disclosed is as of the most recent information available. |
| (c) | The coupon payment on these securities is currently in default as of December 31, 2012. |
| (d) | Security is valued in good faith in accordance with procedures approved by the Board of Directors (See Note 1). |
| (e) | Value is less than $1. |
| (f) | Illiquid security (unaudited). |
| (g) | Security has no maturity date. The date shown represents the next call date. |
| (h) | This security is traded on a to-be-announced (“TBA”) basis (See Note 1). |
| (i) | Rate shown represents yield-to-maturity. |
| # | Aggregate cost for federal income tax purposes is $392,848,113. |
| | |
Abbreviations used in this schedule: |
| ARM | | — Adjustable Rate Mortgage |
| IO | | — Interest Only |
| PAC | | — Planned Amortization Class |
| PO | | — Principal Only |
| | | | | | | | | | | | | | |
| Schedule of Written Options | |
| Security | | Expiration
Date | | | Strike
Price | | Contracts | | | Value | |
U.S. Treasury 10-Year Notes, Call
(Premiums received — $2,845) | | | 1/25/13 | | | $134.50 | | | 38 | | | $ | 2,969 | |
See Notes to Financial Statements.
| | |
| 26 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Statement of assets and liabilities
December 31, 2012
| | | | |
| |
| Assets: | | | | |
Investments, at value (Cost — $392,834,124) | | $ | 405,530,443 | |
Cash | | | 41,847 | |
Interest receivable | | | 2,574,826 | |
Receivable for securities sold | | | 1,405,800 | |
Deposits with brokers for open futures contracts | | | 145,502 | |
Receivable for Fund shares sold | | | 94,149 | |
Principal paydown receivable | | | 49,646 | |
Receivable from broker — variation margin on open futures contracts | | | 26,141 | |
Receivable for open swap contracts | | | 287 | |
Prepaid expenses | | | 50,352 | |
Other receivables | | | 107,999 | |
Total Assets | | | 410,026,992 | |
| |
| Liabilities: | | | | |
Payable for securities purchased | | | 4,329,457 | |
Payable for Fund shares repurchased | | | 1,880,469 | |
Distributions payable | | | 299,562 | |
Investment management fee payable | | | 104,052 | |
Swaps, at value (net premiums received — $26,172) | | | 38,929 | |
Written options, at value (premiums received — $2,845) | | | 2,969 | |
Payable for open swap contracts | | | 1,183 | |
Service and/or distribution fees payable | | | 63 | |
Accrued expenses | | | 79,530 | |
Total Liabilities | | | 6,736,214 | |
| Total Net Assets | | $ | 403,290,778 | |
| |
| Net Assets: | | | | |
Par value (Note 7) | | $ | 35,919 | |
Paid-in capital in excess of par value | | | 397,957,800 | |
Undistributed net investment income | | | 64,911 | |
Accumulated net realized loss on investments, futures contracts, written options and swap contracts | | | (7,513,017) | |
Net unrealized appreciation on investments, futures contracts, written options and swap contracts | | | 12,745,165 | |
| Total Net Assets | | $ | 403,290,778 | |
See Notes to Financial Statements.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 27 | |
| | | | |
| |
| Shares Outstanding: | | | | |
Class A | | | 9,446 | |
Class C | | | 3,974 | |
Class R | | | 923 | |
Class I | | | 21,867,693 | |
Class IS | | | 14,036,715 | |
| |
| Net Asset Value: | | | | |
Class A (and redemption price) | | | $11.23 | |
Class C* | | | $11.23 | |
Class R (and redemption price) | | | $11.23 | |
Class I (and redemption price) | | | $11.23 | |
Class IS (and redemption price) | | | $11.23 | |
| Maximum Public Offering Price Per Share: | | | | |
Class A (based on maximum initial sales charge of 4.25%) | | | $11.73 | |
| * | Redemption price per share is NAV of Class C shares reduced by a 1.00% CDSC, if shares are redeemed within one year from purchase payment (See Note 2). |
See Notes to Financial Statements.
| | |
| 28 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Statement of operations
For the Year Ended December 31, 2012
| | | | |
| |
| Investment Income: | | | | |
Interest | | $ | 11,581,158 | |
Less: Foreign taxes withheld | | | (247) | |
Total Investment Income | | | 11,580,911 | |
| |
| Expenses: | | | | |
Investment management fee (Note 2) | | | 1,537,002 | |
Registration fees | | | 64,509 | |
Audit and tax | | | 60,349 | |
Legal fees | | | 50,009 | |
Fund accounting fees | | | 44,812 | |
Shareholder reports (Note 5) | | | 35,625 | |
Transfer agent fees (Note 5) | | | 29,869 | |
Directors’ fees | | | 20,372 | |
Custody fees | | | 9,795 | |
Insurance | | | 8,960 | |
Service and/or distribution fees (Notes 2 and 5) | | | 302 | |
Miscellaneous expenses | | | 200 | |
Total Expenses | | | 1,861,804 | |
Less: Fee waivers and/or expense reimbursements (Notes 2 and 5) | | | (130,665) | |
Net Expenses | | | 1,731,139 | |
| Net Investment Income | | | 9,849,772 | |
| |
Realized and Unrealized Gain (Loss) on Investments, Futures Contracts,
Written Options and Swap Contracts (Notes 1, 3 and 4): | | | | |
Net Realized Gain (Loss) From: | | | | |
Investment transactions | | | (2,858,668) | |
Futures contracts | | | 1,008,563 | |
Written options | | | 176,469 | |
Swap contracts | | | (658,709) | |
Net Realized Loss | | | (2,332,345) | |
Change in Net Unrealized Appreciation (Depreciation) From: | | | | |
Investments | | | 18,348,769 | |
Futures contracts | | | (8,988) | |
Written options | | | (5,862) | |
Swap contracts | | | 165,703 | |
Change in Net Unrealized Appreciation (Depreciation) | | | 18,499,622 | |
| Net Gain on Investments, Futures Contracts, Written Options and Swap Contracts | | | 16,167,277 | |
| Increase in Net Assets from Operations | | $ | 26,017,049 | |
See Notes to Financial Statements.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 29 | |
Statements of changes in net assets
| | | | | | | | |
| For the Years Ended December 31, | | 2012 | | | 2011 | |
| | |
| Operations: | | | | | | | | |
Net investment income | | $ | 9,849,772 | | | $ | 11,679,829 | |
Net realized gain (loss) | | | (2,332,345) | | | | 672,705 | |
Change in net unrealized appreciation (depreciation) | | | 18,499,622 | | | | 6,936,688 | |
Increase in Net Assets From Operations | | | 26,017,049 | | | | 19,289,222 | |
| | |
| Distributions to Shareholders From (Notes 1 and 6): | | | | | | | | |
Net investment income | | | (9,778,340) | | | | (11,904,040) | |
Net realized gains | | | (183,701) | | | | (4,075,354) | |
Decrease in Net Assets From Distributions to Shareholders | | | (9,962,041) | | | | (15,979,394) | |
| | |
| Fund Share Transactions (Note 7): | | | | | | | | |
Net proceeds from sale of shares | | | 129,265,980 | | | | 74,775,495 | |
Reinvestment of distributions | | | 6,457,867 | | | | 10,412,677 | |
Cost of shares repurchased | | | (102,144,837) | | | | (135,334,690) | |
Increase (Decrease) in Net Assets From Fund Share Transactions | | | 33,579,010 | | | | (50,146,518) | |
Increase (Decrease) in Net Assets | | | 49,634,018 | | | | (46,836,690) | |
| | |
| Net Assets: | | | | | | | | |
Beginning of year | | | 353,656,760 | | | | 400,493,450 | |
End of year* | | $ | 403,290,778 | | | $ | 353,656,760 | |
* Includes undistributed (overdistributed) net investment income, respectively of: | | | $64,911 | | | | $(21,352) | |
See Notes to Financial Statements.
| | |
| 30 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Financial highlights
| | | | |
For a share of each class of capital stock outstanding throughout each year ended December 31,
unless otherwise noted: | |
| Class A Shares1 | | 20122 | |
| |
| Net asset value, beginning of period | | | $10.97 | |
| |
| Income from operations: | | | | |
Net investment income | | | 0.14 | |
Net realized and unrealized gain | | | 0.28 | |
Total income from operations | | | 0.42 | |
| |
| Less distributions from: | | | | |
Net investment income | | | (0.15) | |
Net realized gains | | | (0.01) | |
Total distributions | | | (0.16) | |
| |
| Net asset value, end of period | | | $11.23 | |
Total return3 | | | 3.81 | % |
| |
| Net assets, end of period (000s) | | | $106 | |
| |
| Ratios to average net assets: | | | | |
Gross expenses4 | | | 0.96 | % |
Net expenses4,5,6,7 | | | 0.87 | |
Net investment income4 | | | 1.92 | |
| |
| Portfolio turnover rate8 | | | 101 | % |
| 1 | Per share amounts have been calculated using the average shares method. |
| 2 | For the period April 30, 2012 (commencement of operations) to December 31, 2012. |
| 3 | Performance figures, exclusive of sales charges, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| 5 | As a result of an expense limitation arrangement, the ratio of expenses, other than interest, brokerage commissions, taxes, extraordinary expenses, and deferred organizational expenses, to average net assets of Class A shares did not exceed 0.90%. This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Directors’ consent. |
| 6 | The impact of compensating balance arrangements, if any, was less than 0.01%. |
| 7 | Reflects fee waivers and/or expense reimbursements. |
| 8 | Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 118% for period ended December 31, 2012. |
See Notes to Financial Statements.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 31 | |
| | | | |
For a share of each class of capital stock outstanding throughout each year ended December 31,
unless otherwise noted: | |
| Class C Shares1 | | 20122 | |
| |
| Net asset value, beginning of period | | | $10.97 | |
| |
| Income from operations: | | | | |
Net investment income | | | 0.09 | |
Net realized and unrealized gain | | | 0.28 | |
Total income from operations | | | 0.37 | |
| |
| Less distributions from: | | | | |
Net investment income | | | (0.10) | |
Net realized gains | | | (0.01) | |
Total distributions | | | (0.11) | |
| |
| Net asset value, end of period | | | $11.23 | |
Total return3 | | | 3.31 | % |
| |
| Net assets, end of period (000s) | | | $45 | |
| |
| Ratios to average net assets: | | | | |
Gross expenses4 | | | 1.87 | % |
Net expenses4,5,6,7 | | | 1.60 | |
Net investment income4 | | | 1.23 | |
| |
| Portfolio turnover rate8 | | | 101 | % |
| 1 | Per share amounts have been calculated using the average shares method. |
| 2 | For the period April 30, 2012 (commencement of operations) to December 31, 2012. |
| 3 | Performance figures, exclusive of CDSC, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| 5 | As a result of an expense limitation arrangement, the ratio of expenses, other than interest, brokerage commissions, taxes, extraordinary expenses, and deferred organizational expenses, to average net assets of Class C shares did not exceed 1.65%. This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Directors’ consent. |
| 6 | The impact of compensating balance arrangements, if any, was less than 0.01%. |
| 7 | Reflects fee waivers and/or expense reimbursements. |
| 8 | Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 118% for period ended December 31, 2012. |
See Notes to Financial Statements.
| | |
| 32 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Financial highlights (cont’d)
| | | | |
For a share of each class of capital stock outstanding throughout each year ended December 31,
unless otherwise noted: | |
| Class R Shares1 | | 20122 | |
| |
| Net asset value, beginning of period | | | $10.97 | |
| |
| Income from operations: | | | | |
Net investment income | | | 0.13 | |
Net realized and unrealized gain | | | 0.27 | |
Total income from operations | | | 0.40 | |
| |
| Less distributions from: | | | | |
Net investment income | | | (0.13) | |
Net realized gains | | | (0.01) | |
Total distributions | | | (0.14) | |
| |
| Net asset value, end of period | | | $11.23 | |
Total return3 | | | 3.64 | % |
| |
| Net assets, end of period (000s) | | | $10 | |
| |
| Ratios to average net assets: | | | | |
Gross expenses4 | | | 1.21 | % |
Net expenses4,5,6,7 | | | 1.14 | |
Net investment income4 | | | 1.72 | |
| |
| Portfolio turnover rate8 | | | 101 | % |
| 1 | Per share amounts have been calculated using the average shares method. |
| 2 | For the period April 30, 2012 (commencement of operations) to December 31, 2012. |
| 3 | Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| 5 | As a result of an expense limitation arrangement, the ratio of expenses, other than interest, brokerage commissions, taxes, extraordinary expenses, and deferred organizational expenses, to average net assets of Class R shares did not exceed 1.15%. This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Directors’ consent. |
| 6 | The impact of compensating balance arrangements, if any, was less than 0.01%. |
| 7 | Reflects fee waivers and/or expense reimbursements. |
| 8 | Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 118% for period ended December 31, 2012. |
See Notes to Financial Statements.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 33 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
For a share of each class of capital stock outstanding throughout each year ended December 31,
unless otherwise noted: | |
| Class I Shares1,2 | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 20083 | | | 20084 | |
| | | | | | |
| Net asset value, beginning of year | | | $ 10.76 | | | | $ 10.67 | | | | $ 10.31 | | | | $ 9.32 | | | | $ 10.30 | | | | $ 10.43 | |
| | | | | | |
| Income (loss) from operations: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | 0.28 | | | | 0.34 | | | | 0.39 | | | | 0.42 | | | | 0.34 | | | | 0.52 | |
Net realized and unrealized gain (loss) | | | 0.48 | | | | 0.23 | | | | 0.50 | | | | 1.14 | | | | (0.82) | | | | (0.14) | |
Total income (loss) from operations | | | 0.76 | | | | 0.57 | | | | 0.89 | | | | 1.56 | | | | (0.48) | | | | 0.38 | |
| | | | | | |
| Less distributions from: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | (0.28) | | | | (0.35) | | | | (0.40) | | | | (0.42) | | | | (0.37) | | | | (0.51) | |
Net realized gains | | | (0.01) | | | | (0.13) | | | | (0.13) | | | | (0.15) | | | | (0.13) | | | | — | |
Total distributions | | | (0.29) | | | | (0.48) | | | | (0.53) | | | | (0.57) | | | | (0.50) | | | | (0.51) | |
| | | | | | |
| Net asset value, end of year | | | $11.23 | | | | $10.76 | | | | $10.67 | | | | $10.31 | | | | $9.32 | | | | $10.30 | |
Total return5 | | | 7.10 | % | | | 5.35 | % | | | 8.76 | % | | | 17.24 | % | | | (4.72) | % | | | 3.77 | % |
| | | | | | |
| Net assets, end of year (000s) | | | $245,534 | | | | $271,537 | | | | $341,090 | | | | $422,610 | | | | $475,695 | | | | $706,873 | |
| | | | | | |
| Ratios to average net assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Gross expenses | | | 0.49 | % | | | 0.49 | % | | | 0.48 | % | | | 0.47 | % | | | 0.46 | %6 | | | 0.45 | % |
Net expenses7 | | | 0.45 | 8 | | | 0.48 | 8 | | | 0.48 | 8 | | | 0.47 | | | | 0.46 | 6 | | | 0.45 | |
Net investment income | | | 2.57 | | | | 3.15 | | | | 3.63 | | | | 4.20 | | | | 4.60 | 6 | | | 5.00 | |
| | | | | | |
| Portfolio turnover rate | | | 101 | %9 | | | 69 | %9 | | | 99 | % | | | 175 | % | | | 165 | %10 | | | 239 | % |
| 1 | Per share amounts have been calculated using the average shares method. |
| 2 | In April 2010, Institutional Class shares were renamed Class I shares. |
| 3 | For the period April 1, 2008 through December 31, 2008. |
| 4 | For the year ended March 31. |
| 5 | Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| 7 | The impact of compensating balance arrangements, if any, was less than 0.01%. |
| 8 | Reflects fee waivers and/or expense reimbursements. |
| 9 | Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 118% and 75% for the years ended December 31, 2012 and 2011, respectively. |
See Notes to Financial Statements.
| | |
| 34 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Financial highlights (cont’d)
| | | | | | | | | | | | | | | | | | | | |
For a share of each class of capital stock outstanding throughout each year ended December 31,
unless otherwise noted: | |
| Class IS Shares1,2 | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 20083 | |
| | | | | |
| Net asset value, beginning of year | | | $ 10.76 | | | | $ 10.67 | | | | $ 10.31 | | | | $ 9.31 | | | | $ 9.49 | |
| | | | | |
| Income (loss) from operations: | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | 0.28 | | | | 0.34 | | | | 0.39 | | | | 0.42 | | | | 0.09 | |
Net realized and unrealized gain (loss) | | | 0.48 | | | | 0.23 | | | | 0.50 | | | | 1.15 | | | | (0.13) | |
Total income (loss) from operations | | | 0.76 | | | | 0.57 | | | | 0.89 | | | | 1.57 | | | | (0.04) | |
| | | | | |
| Less distributions from: | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | (0.28) | | | | (0.35) | | | | (0.40) | | | | (0.42) | | | | (0.14) | |
Net realized gains | | | (0.01) | | | | (0.13) | | | | (0.13) | | | | (0.15) | | | | — | |
Total distributions | | | (0.29) | | | | (0.48) | | | | (0.53) | | | | (0.57) | | | | (0.14) | |
| | | | | |
| Net asset value, end of year | | | $11.23 | | | | $10.76 | | | | $10.67 | | | | $10.31 | | | | $9.31 | |
Total return4 | | | 7.11 | % | | | 5.39 | % | | | 8.79 | % | | | 17.39 | % | | | (0.41) | % |
| | | | | |
| Net assets, end of year (000s) | | | $157,596 | | | | $82,120 | | | | $59,403 | | | | $60,112 | | | | $50,196 | |
| | | | | |
| Ratios to average net assets: | | | | | | | | | | | | | | | | | | | | |
Gross expenses | | | 0.48 | % | | | 0.48 | % | | | 0.47 | % | | | 0.46 | % | | | 0.46 | %5 |
Net expenses6,7 | | | 0.44 | 8 | | | 0.45 | | | | 0.45 | | | | 0.45 | | | | 0.45 | 5 |
Net investment income | | | 2.56 | | | | 3.17 | | | | 3.65 | | | | 4.20 | | | | 4.50 | 5 |
| | | | | |
| Portfolio turnover rate | | | 101 | %9 | | | 69 | %9 | | | 99 | % | | | 175 | % | | | 165 | %10 |
| 1 | Per share amounts have been calculated using the average shares method. |
| 2 | In April 2010, Institutional Select Class shares were renamed Class IS shares. |
| 3 | For the period October 3, 2008 (commencement of operations) to December 31, 2008. |
| 4 | Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| 6 | The impact of compensating balance arrangements, if any, was less than 0.01%. |
| 7 | Reflects fee waivers and/or expense reimbursements. |
| 8 | As a result of an expense limitation arrangement, the ratio of expenses, other than interest, brokerage commissions, taxes, extraordinary expenses, and deferred organizational expenses, to average net assets of Class IS shares did not exceed 0.45%. This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Directors’ consent. |
| 9 | Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 118% and 75% for the years ended December 31, 2012 and 2011, respectively. |
See Notes to Financial Statements.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 35 | |
Notes to financial statements
1. Organization and significant accounting policies
Western Asset Intermediate Bond Fund (formerly Western Asset Intermediate Bond Portfolio) (the “Fund”) is a separate diversified investment series of Western Asset Funds, Inc. (the “Corporation”). The Corporation, a Maryland corporation, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation. The valuations for fixed income securities (which may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Short-term fixed income securities that will mature in 60 days or less are valued at amortized cost, unless it is determined that using this method would not reflect an investment’s fair value. 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 the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Directors.
The Board of Directors is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North American Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Directors, is responsible for making
| | |
| 36 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Notes to financial statements (cont’d)
fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of Directors. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.
For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Directors quarterly.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.
GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:
| Ÿ | | Level 1 — quoted prices in active markets for identical investments |
| Ÿ | | Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) |
| Ÿ | | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 37 | |
The following is a summary of the inputs used in valuing the Fund’s assets and liabilities carried at fair value:
| | | | | | | | | | | | | | | | |
| ASSETS | |
| Description | | Quoted Prices
(Level 1) | | | Other Significant
Observable Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | | | Total | |
| Long-term investments†: | | | | | | | | | | | | | | | | |
Corporate bonds & notes | | | — | | | $ | 176,211,473 | | | $ | 0 | * | | $ | 176,211,473 | |
Asset-backed securities | | | — | | | | 38,545,898 | | | | — | | | | 38,545,898 | |
Collateralized mortgage obligations | | | — | | | | 31,110,142 | | | | — | | | | 31,110,142 | |
Mortgage-backed securities | | | — | | | | 12,934,093 | | | | — | | | | 12,934,093 | |
Municipal bonds | | | — | | | | 4,175,718 | | | | — | | | | 4,175,718 | |
Sovereign bonds | | | — | | | | 8,483,986 | | | | — | | | | 8,483,986 | |
U.S. government & agency obligations | | | — | | | | 113,346,069 | | | | — | | | | 113,346,069 | |
U.S. Treasury inflation protected securities | | | — | | | | 2,163,525 | | | | — | | | | 2,163,525 | |
Purchased options | | $ | 61,156 | | | | — | | | | — | | | | 61,156 | |
| Total long-term investments | | $ | 61,156 | | | $ | 386,970,904 | | | $ | 0 | * | | $ | 387,032,060 | |
| Short-term investments† | | | — | | | | 18,498,383 | | | | — | | | | 18,498,383 | |
| Total investments | | $ | 61,156 | | | $ | 405,469,287 | | | $ | 0 | * | | $ | 405,530,443 | |
| Other financial instruments: | | | | | | | | | | | | | | | | |
Futures contracts | | | 82,384 | | | | — | | | | — | | | | 82,384 | |
| Total | | $ | 143,540 | | | $ | 405,469,287 | | | $ | 0 | * | | $ | 405,612,827 | |
| | | | | | | | | | | | | | | | |
| LIABILITIES | |
| Description | | Quoted Prices
(Level 1) | | | Other Significant
Observable Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | | | Total | |
| Other financial instruments: | | | | | | | | | | | | | | | | |
Written options | | $ | 2,969 | | | | — | | | | — | | | $ | 2,969 | |
Futures contracts | | | 20,657 | | | | — | | | | — | | | | 20,657 | |
Credit default swaps on corporate issues — sell protection‡ | | | — | | | $ | 27,327 | | | | — | | | | 27,327 | |
Credit default swaps on corporate issues — buy protection‡ | | | — | | | | 11,602 | | | | — | | | | 11,602 | |
| Total | | $ | 23,626 | | | $ | 38,929 | | | | — | | | $ | 62,555 | |
| † | See Schedule of Investments for additional detailed categorizations. |
| ‡ | Values include any premiums paid or received with respect to swap contracts. |
(b) Repurchase agreements. The Fund may enter into repurchase agreements with institutions that its investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, the Fund acquires a debt security subject to an obligation of the seller to repurchase, and of the Fund to resell, the security at an agreed-upon price and time, thereby determining the yield during the Fund’s holding period. When entering into
| | |
| 38 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Notes to financial statements (cont’d)
repurchase agreements, it is the Fund’s policy that its custodian or a third party custodian, acting on the Fund’s behalf, take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that 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 in an effort to ensure the adequacy of the collateral. If the counterparty defaults, the Fund generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during the period in which the Fund seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.
(c) Inflation-indexed bonds. Inflation-indexed bonds are fixed-income securities whose principal value or interest rate is periodically adjusted according to the rate of inflation. As the index measuring inflation changes, the principal value or interest rate of inflation-indexed bonds will be adjusted accordingly. Inflation adjustments to the principal amount of inflation-indexed bonds are reflected as an increase or decrease to investment income on the Statement of Operations. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
(d) Written options. When the Fund writes an option, an amount equal to the premium received by the Fund is recorded as a liability, the value of which is marked-to-market daily to reflect the current market value of the option written. If the option expires, the premium received is recorded as a realized gain. When a written call option is exercised, the difference between the premium received plus the option exercise price and the Fund’s basis in the underlying security (in the case of a covered written call option), or the cost to purchase the underlying security (in the case of an uncovered written call option), including brokerage commission, is recognized as a realized gain or loss. When a written put option is exercised, the amount of the premium received is subtracted from the cost of the security purchased by the Fund 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 the Fund may forego the opportunity of profit if the market price of the underlying security increases and the option is exercised. The risk in writing a put option is that the Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. The risk in writing an uncovered call option is that the Fund is exposed to the risk of loss if the market price of the underlying security increases. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 39 | |
(e) Futures contracts. The Fund uses futures contracts generally to gain exposure to, or hedge against, changes in interest rates or gain exposure to, or hedge against, changes in certain asset classes. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
Upon entering into a futures contract, the Fund is required to deposit cash or cash equivalents with a broker in an amount equal to a certain percentage of the contract amount. This is known as the ‘‘initial margin’’ and subsequent payments (‘‘variation margin’’) are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. For certain futures, including foreign denominated futures, variation margin is not settled daily, but is recorded as a net variation margin payable or receivable. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. The daily changes in contract value are recorded as unrealized gains or losses in the Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.
Futures contracts involve, to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
(f) Swap agreements. The Fund invests 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 other 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. Collateral, in the form of restricted cash or securities, may be required to be held in segregated accounts with the Fund’s custodian in compliance with the terms of the swap contracts. Securities posted 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. Net periodic payments received or paid by the Fund are recognized as a realized gain or loss in the Statement of Operations.
The Fund’s maximum exposure in the event of a defined credit event on a credit default swap to sell protection is the notional amount. As of December 31, 2012, the total notional value of all credit default swaps to sell protection is $860,000. This
| | |
| 40 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Notes to financial statements (cont’d)
amount would be offset by the value of the swap’s reference entity, upfront premiums received on the swap and any amounts received from the settlement of a credit default swap where the Fund bought protection for the same referenced security/entity.
For average notional amounts of swaps held during the year ended December 31, 2012, see Note 4.
Credit default swaps
The Fund enters into credit default swap (“CDS”) contracts for investment purposes, to manage its 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 Fund may use a CDS to provide protection against defaults of the issuers (i.e., to reduce risk where the Fund has exposure to an 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 Fund generally receives an upfront payment or a stream of payments throughout the term of the swap provided that there is no credit event. If the Fund is 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 Fund 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 Fund effectively adds leverage to its portfolio because, in addition to its total net assets, the Fund is subject to investment exposure on the notional amount of the swap. As a buyer of protection, the Fund generally receives 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.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 41 | |
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
The Fund enters into interest rate swap contracts to manage its exposure to interest rate risk. Interest rate swaps are agreements between two parties to exchange cash flows based on a notional principal amount. The Fund 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. Interest rate swaps are marked-to-market daily based upon quotations from market 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 Fund records 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 Fund’s 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 that amount is positive. This risk is mitigated by the posting of collateral by the counterparty to the Fund to cover the Fund’s exposure to the counterparty.
Total return swaps
The Fund enters 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 Fund will receive a payment from the counterparty. To the extent it is less, the Fund will make a payment to the counterparty.
(g) Securities traded on a to-be-announced basis. The Fund may trade securities on a to-be-announced (“TBA”) basis. In a TBA transaction, the Fund commits to purchasing or selling securities which have not yet been issued by the issuer and for
| | |
| 42 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Notes to financial statements (cont’d)
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 the 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.
(h) Mortgage dollar rolls. The Fund may enter into mortgage dollar rolls in which the 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.
The Fund executes its mortgage dollar rolls entirely in the TBA market, whereby the 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. The 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 Fund is 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, the 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.
(i) Stripped securities. The Fund may invest in ‘‘Stripped Securities,’’ a term used collectively for components, or strips, of fixed income securities. Stripped securities can be principal only securities (“PO”), which are debt obligations that have been stripped of unmatured interest coupons, or interest only securities (“IO”), which are unmatured interest coupons that have been stripped from debt obligations. The market value of Stripped Securities will fluctuate in response to changes in economic conditions, rates of pre-payment, interest rates and the market’s perception of the securities. However, fluctuations in response to interest rates may be greater in Stripped Securities than for debt obligations of comparable maturities that pay interest currently. The amount of fluctuation may increase with a longer period of maturity.
The yield to maturity on IO’s is sensitive to the rate of principal repayments (including prepayments) on the related underlying debt obligation and principal payments may have a material effect on yield to maturity. If the underlying debt obligation experiences greater than anticipated prepayments of principal, the Fund may not fully recoup its initial investment in IO’s.
(j) Loan participations. The Fund may invest in loans arranged through private negotiation between one or more financial institutions. The Fund’s investment in any such loan may be in the form of a participation in or an assignment of the loan.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 43 | |
In connection with purchasing participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement related to the loan, or any rights of off-set against the borrower and the Fund may not benefit directly from any collateral supporting the loan in which it has purchased the participation.
The Fund assumes the credit risk of the borrower, the lender that is selling the participation and any other persons interpositioned between the Fund and the borrower. In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor of the lender and may not benefit from any off-set between the lender and the borrower.
(k) Credit and market risk. The Fund invests in high-yield and emerging market instruments that are subject to certain credit and market risks. The yields of high-yield and emerging market debt obligations reflect, among other things, perceived credit and market risks. The Fund’s investments in securities rated below investment grade typically involve risks not associated with higher rated securities including, among others, greater risk related to timely and ultimate payment of interest and principal, greater market price volatility and less liquid secondary market trading. The consequences of political, social, economic or diplomatic changes may have disruptive effects on the market prices of investments held by the Fund. The Fund’s investments in non-U.S. dollar denominated securities may also result in foreign currency losses caused by devaluations and exchange rate fluctuations.
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 the 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.
(l) Counterparty risk and credit-risk-related contingent features of derivative instruments. The Fund may invest in certain securities or engage in other transactions, where the Fund is exposed to counterparty credit risk in addition to broader market risks. The Fund may invest in securities of issuers, which may also be considered counterparties as trading partners in other transactions. This may increase the risk of loss in the event of default or bankruptcy by the counterparty or if the counterparty otherwise fails to meet its contractual obligations. The Fund’s investment manager attempts to mitigate counterparty risk by (i) periodically assessing the creditworthiness of its trading partners, (ii) monitoring and/or limiting the amount of its net exposure to each individual counterparty based on its assessment and (iii) requiring collateral from the counterparty for certain transactions. Market events and changes in overall economic conditions may impact the assessment of such counterparty risk by the investment manager. In addition, declines in the values of underlying collateral received may expose the Fund to increased risk of loss.
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| 44 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Notes to financial statements (cont’d)
The Fund has entered into master agreements with certain of its derivative counterparties that provide for general obligations, representations, agreements, collateral, events of default or termination and credit related contingent features. The credit related contingent features include, but are not limited to, a percentage decrease in the Fund��s net assets or NAV over a specified period of time. If these credit related contingent features were triggered, the derivatives counterparty could terminate the positions and demand payment or require additional collateral.
As of December 31, 2012, the Fund held written options and credit default swaps with credit related contingent features which had a liability position of $41,898. If a contingent feature in the master agreements would have been triggered, the Fund would have been required to pay this amount to its derivatives counterparties.
(m) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.
(n) Distributions to shareholders. Distributions from net investment income of the Fund 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 to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(o) Share class accounting. Investment income, common expenses and realized/unrealized gains (losses) on investments are allocated to the various classes of the Fund on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that share class.
(p) Compensating balance arrangements. The Fund has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash on deposit with the bank.
(q) Federal and other taxes. It is the 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 Fund intends 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 or state income tax provision is required in the Fund’s financial statements.
Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of December 31, 2012, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 45 | |
Under the applicable foreign tax laws, a withholding tax may be imposed on interest, dividends and capital gains at various rates.
(r) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. During the current year, the following reclassifications have been made:
| | | | | | | | |
| | | Undistributed Net
Investment Income | | | Accumulated Net
Realized Loss | |
| (a) | | $ | 14,831 | | | $ | (14,831) | |
| (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 distributions, and book/tax differences in the treatment of swaps. |
2. Investment management agreement and other transactions with affiliates
The Fund has an investment management agreement with Legg Mason Partners Fund Advisor, LLC (“LMPFA”). Western Asset Management Company (“Western Asset”) is the investment adviser. LMPFA and Western Asset are wholly owned subsidiaries of Legg Mason, Inc (“Legg Mason”).
LMPFA provides the Fund with management and administrative services for which the Fund pays a fee calculated daily and paid monthly, at an annual rate of 0.40% of the Fund’s average daily net assets.
The investment manager has agreed to waive fees and/or reimburse operating expenses (other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses) so that total operating expenses are not expected to exceed 0.90%, 1.65%, 1.15% and 0.45% for Class A, Class C, Class R and Class IS shares, respectively. Western Asset also agreed to waive their advisory fee (which is paid by LMPFA and not the Fund) under the Fee Cap. These arrangements cannot be terminated prior to December 31, 2014 without the Board’s consent.
During the year ended December 31, 2012, fees waived and/or expenses reimbursed amounted to $130,665.
Prior to July 1, 2012, the investment manager was permitted to recapture amounts waived or reimbursed to a class within three years after the day on which the investment manager earned the fee or incurred the expense if the class’s total annual operating expenses have fallen to a level below the lower of the limit described above or the limit then in effect.
Effective July 1, 2012, the investment manager is permitted to recapture amounts waived and/or reimbursed to a class within two years after the fiscal year in which the investment manager earned the fee or incurred the expense if the class’ total annual operating expenses have fallen to a level below the limits described above. In no case will the investment manager recapture any amount that would result, on any particular business day of the Fund, in the class’ total annual operating expenses exceeding this limit or any other lower limit then in effect.
| | |
| 46 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Notes to financial statements (cont’d)
Pursuant to the new arrangement, at December 31, 2012, the Fund had remaining fee waivers and/or expense reimbursements subject to recapture by LMPFA and respective dates of expiration as follows:
| | | | | | | | | | | | | | | | |
| | | Class A† | | | Class C† | | | Class R† | | | Class IS | |
| Expires December 31, 2013 | | | — | | | | — | | | | — | | | $ | 17,470 | |
| Expires December 31, 2014 | | $ | 16 | | | $ | 61 | | | $ | 5 | | | | 52,915 | |
| Total fee waivers/expense reimbursements subject to recapture | | $ | 16 | | | $ | 61 | | | $ | 5 | | | $ | 70,385 | |
| † | For the period April 30, 2012 (commencement of operations) to December 31, 2012. |
For the year ended December 31, 2012, LMPFA did not recapture any fees.
Legg Mason Investor Services, LLC (“LMIS”), a wholly-owned broker-dealer subsidiary of Legg Mason, serves as the Fund’s sole and exclusive distributor.
There is a maximum initial sales charge of 4.25% for Class A shares. There is a contingent deferred sales charge (“CDSC”) of 1.00% on Class C share, which applies if redemption occurs within 12 months from purchase payment. In certain cases, Class A shares have a 1.00% CDSC, which applies if redemption occurs within 18 months from purchase payment (or within 12 months for shares purchased prior to August 1, 2012). This CDSC only applies to those purchases of Class A shares, which, when combined with current holdings of other shares of funds sold by LMIS, equal or exceed $1,000,000 in the aggregate. These purchases do not incur an initial sales charge.
For the year ended December 31, 2012, LMIS and its affiliates did not received sales charges on sales of the Fund’s Class A shares. In addition, for the year ended December 31, 2012, CDSCs paid to LMIS and its affiliates $77 for Class C shares.
All officers and one Director of the Corporation are employees of Legg Mason or its affiliates and do not receive compensation from the Corporation.
3. Investments
During the year ended December 31, 2012, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) and U.S Government & Agency Obligations were as follows:
| | | | | | | | |
| | | Investments | | | U.S. Government &
Agency Obligations | |
| Purchases | | $ | 72,825,655 | | | $ | 385,343,775 | |
| Sales | | | 85,795,837 | | | | 343,382,595 | |
At December 31, 2012, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
| | | | |
| Gross unrealized appreciation | | $ | 20,343,724 | |
| Gross unrealized depreciation | | | (7,661,394) | |
| Net unrealized appreciation | | $ | 12,682,330 | |
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 47 | |
At December 31, 2012, the Fund had the following open futures contracts:
| | | | | | | | | | | | | | | | | | | | |
| | | Number of
Contracts | | | Expiration
Date | | | Basis
Value | | | Market
Value | | | Unrealized
Gain (Loss) | |
| Contracts to Buy: | | | | | | | | | | | | | | | | | | | | |
| 90-day eurodollar | | | 110 | | | | 6/14 | | | $ | 27,369,895 | | | $ | 27,376,250 | | | $ | 6,355 | |
| U.S. Treasury 5-year Notes | | | 79 | | | | 3/13 | | | | 9,833,804 | | | | 9,828,711 | | | | (5,093) | |
| | | | | | | | | | | | | | | | | | | $ | 1,262 | |
| Contracts to Sell: | | | | | | | | | | | | | | | | | | | | |
| 90-day eurodollar | | | 25 | | | | 9/13 | | | | 6,213,356 | | | | 6,228,437 | | | | (15,081) | |
| 90-day eurodollar | | | 110 | | | | 6/15 | | | | 27,309,992 | | | | 27,310,250 | | | | (258) | |
| U.S. Treasury 2-year Notes | | | 2 | | | | 3/13 | | | | 440,712 | | | | 440,937 | | | | (225) | |
| U.S. Treasury 10-year Notes | | | 30 | | | | 3/13 | | | | 4,018,028 | | | | 3,983,438 | | | | 34,590 | |
| U.S. Treasury 30-year Notes | | | 9 | | | | 3/13 | | | | 1,339,440 | | | | 1,327,500 | | | | 11,940 | |
| U.S. Treasury ultra long-term Bonds | | | 10 | | | | 3/13 | | | | 1,655,436 | | | | 1,625,937 | | | | 29,499 | |
| | | | | | | | | | | | | | | | | | | $ | 60,465 | |
| Net unrealized gain on open futures contracts | | | | | | | $ | 61,727 | |
At December 31, 2012, the Fund held TBA securities with a total cost of $4,329,456.
During the year ended December 31, 2012, written option transactions for the Fund were as follows:
| | | | | | | | |
| | | Number of
Contracts | | | Premiums | |
| Written options, outstanding as of December 31, 2011 | | | 92 | | | $ | 19,826 | |
| Options written | | | 14,414,848 | | | | 257,924 | |
| Options closed | | | (14,414,423) | | | | (150,993) | |
| Options exercised | | | (82) | | | | (33,046) | |
| Options expired | | | (397) | | | | (90,866) | |
| Written options, outstanding as of December 31, 2012 | | | 38 | | | $ | 2,845 | |
At December 31, 2012, the Fund held the following open swap contracts:
| | | | | | | | | | | | | | | | | | | | | | | | |
| CREDIT DEFAULT SWAPS ON CORPORATE ISSUES — SELL PROTECTION1 | |
Swap Counterparty
(Reference Entity) | | Notional
Amount2 | | | Termination
Date | | | Implied
Credit
Spread at
December 31, 20123 | | Periodic
Payments
Received By
The Fund† | | Market
Value | | | Upfront
Premiums
Paid
(Received) | | | Unrealized
Appreciation | |
| Deutsche Bank AG (MetLife Inc., 5.000%, due 6/15/15) | | $ | 860,000 | | | | 6/20/18 | | | 1.617% | | 1.000% quarterly | | $ | (27,327) | | | $ | (28,079) | | | $ | 752 | |
| | |
| 48 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Notes to financial statements (cont’d)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| CREDIT DEFAULT SWAPS ON CORPORATE ISSUES — BUY PROTECTION4 | |
Swap Counterparty
(Reference Entity) | | Notional
Amount2 | | | Termination
Date | | | Implied
Credit
Spread at
December 31, 20123 | | | Periodic
Payments
Made By
The Fund† | | Market
Value | | | Upfront
Premiums
Paid
(Received) | | | Unrealized
Depreciation | |
| Goldman Sachs Group Inc. (Assured Guaranty Municipal Corp., 0.480% due 11/15/13) | | $ | 330,000 | | | | 3/20/15 | | | | 3.950 | % | | 5.000% quarterly | | $ | (7,313) | | | $ | 1,427 | | | $ | (8,740) | |
| Goldman Sachs Group Inc. (Assured Guaranty Municipal Corp., 0.480% due 11/15/13) | | | 220,000 | | | | 3/20/13 | | | | 1.613 | % | | 5.000% quarterly | | | (1,629) | | | | (104) | | | | (1,525) | |
| Goldman Sachs Group Inc. (Assured Guaranty Municipal Corp., 0.480%, due 11/15/13) | | | 60,000 | | | | 3/20/13 | | | | 1.613 | % | | 5.000% quarterly | | | (444) | | | | (17) | | | | (427) | |
| Goldman Sachs Group Inc. (Assured Guaranty Municipal Corp., 0.480%, due 11/15/13) | | | 100,000 | | | | 3/20/15 | | | | 3.950 | % | | 5.000% quarterly | | | (2,216) | | | | 601 | | | | (2,817) | |
| Total | | $ | 710,000 | | | | | | | | | | | | | $ | (11,602) | | | $ | 1,907 | | | $ | (13,509) | |
| 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 | The maximum potential amount the Fund could be required to pay 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. |
| 3 | 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. |
| 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 referenced obligation or 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 referenced obligation or the underlying securities comprising the referenced index. |
| † | Percentage shown is an annual percentage rate. |
4. Derivative instruments and hedging activities
GAAP requires enhanced disclosure about an entity’s derivative and hedging activities.
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 49 | |
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, 2012.
| | | | |
| ASSET DERIVATIVES1 | |
| | | Interest Rate
Risk | |
| Purchased options2 | | $ | 61,156 | |
| Futures contracts3 | | | 82,384 | |
| Total | | $ | 143,540 | |
| | | | | | | | | | | | |
| LIABILITY DERIVATIVES1 | |
| | | Interest Rate
Risk | | | Credit Risk | | | Total | |
| Written options | | $ | 2,969 | | | | — | | | $ | 2,969 | |
| Futures contracts3 | | | 20,657 | | | | — | | | | 20,657 | |
| Swap contracts4 | | | — | | | $ | 38,929 | | | | 38,929 | |
| Total | | $ | 23,626 | | | $ | 38,929 | | | $ | 62,555 | |
| 1 | Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation (depreciation) and for liability derivatives is payables/net unrealized appreciation (depreciation). |
| 2 | Market value of purchased options is reported in Investments at value in the Statement of Assets and Liabilities. |
| 3 | Includes cumulative appreciation (depreciation) of futures contracts as reported in the footnotes. Only variation margin is reported within the receivables and/or payables of the Statement of Assets and Liabilities. |
| 4 | 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 the Fund’s Statement of Operations for the year ended December 31, 2012. The first table provides additional detail about the amounts and sources of gains (losses) realized on derivatives during the period. The second table provides additional information about the change in unrealized appreciation (depreciation) resulting from the Fund’s derivatives and hedging activities during the period.
| | | | | | | | | | | | |
| AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED | |
| | | Interest Rate Risk | | | Credit Risk | | | Total | |
| Purchased options1 | | $ | (295,878) | | | $ | 68,488 | | | $ | (227,390) | |
| Written options | | | 172,866 | | | | 3,603 | | | | 176,469 | |
| Futures contracts | | | 1,008,563 | | | | — | | | | 1,008,563 | |
| Swap contracts | | | (411,297) | | | | (247,412) | | | | (658,709) | |
| Total | | $ | 474,254 | | | $ | (175,321) | | | $ | 298,933 | |
| 1 | Net realized gain (loss) from purchased options is reported in net realized gain (loss) from investment transactions in the Statement of Operations. |
| | |
| 50 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Notes to financial statements (cont’d)
| | | | | | | | | | | | |
| CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED | |
| | | Interest Rate Risk | | | Credit Risk | | | Total | |
| Purchased options1 | | $ | 3,096 | | | | — | | | $ | 3,096 | |
| Written options | | | (5,862) | | | | — | | | | (5,862) | |
| Futures contracts | | | (8,988) | | | | — | | | | (8,988) | |
| Swap contracts | | | — | | | $ | 165,703 | | | | 165,703 | |
| Total | | $ | (11,754) | | | $ | 165,703 | | | $ | 153,949 | |
| 1 | The change in unrealized appreciation (depreciation) from purchased options is reported in the change in net unrealized appreciation (depreciation) from investments in the Statement of Operations. |
During the year ended December 31, 2012, the volume of derivative activity for the Fund was as follows:
| | | | |
| | | Average Market Value | |
| Purchased options | | $ | 64,747 | |
| Written options | | | 41,154 | |
| Futures contracts (to buy) | | | 39,656,934 | |
| Futures contracts (to sell) | | | 34,758,514 | |
| |
| | | Average Notional Balance | |
| Interest rate swap contracts† | | $ | 6,151,692 | |
| Credit default swap contracts (to buy protection) | | | 886,923 | |
| Credit default swap contracts (to sell protection) | | | 2,039,611 | |
| Total return swap contracts† | | | 74,615 | |
| † | At December 31, 2012, there were no open positions held in this derivative. |
5. Class specific expenses, waivers and/or expense reimbursements
The Fund has adopted a Rule 12b-1 distribution plan and under that plan the Fund pays a service and/or distribution fee with respect to its Class A, Class C and Class R shares calculated at the annual rate of 0.25%, 1.00% and 0.50% of the average daily net assets of each respective class. Service and distribution fees are accrued and paid monthly.
For the year ended December 31, 2012, class specific expenses were as follows:
| | | | | | | | | | | | |
| | | Service and/or
Distribution Fees | | | Shareholder
Report† | | | Transfer Agent
Fees | |
| Class A | | $ | 49 | ‡ | | $ | 0 | * | | $ | 41 | ‡ |
| Class C | | | 219 | ‡ | | | 0 | * | | | 87 | ‡ |
| Class R | | | 34 | ‡ | | | 0 | * | | | 18 | ‡ |
| Class I | | | — | | | | 8,682 | | | | 22,622 | |
| Class IS | | | — | | | | 2,059 | | | | 7,101 | |
| Total | | $ | 302 | | | $ | 10,741 | | | $ | 29,869 | |
| * | Amount represents less than $1. |
| † | For the period April 30, 2012 (commencement of operations) through May 31, 2012 for Class A, Class C and Class R shares and for the period January 1, 2012 through May 31, 2012, for Class I and Class IS shares. Subsequent to May 31, 2012, these expenses were accrued as common fund expenses. |
| ‡ | For the period April 30, 2012 (commencement of operations) to December 31, 2012. |
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 51 | |
For the year ended December 31, 2012, waivers and/or expense reimbursements by class were as follows:
| | | | |
| | | Waivers/Expense
Reimbursements | |
| Class A† | | $ | 16 | |
| Class C† | | | 61 | |
| Class R† | | | 5 | |
| Class I | | | 77,668 | |
| Class IS | | | 52,915 | |
| Total | | $ | 130,665 | |
| † | For the period April 30, 2012 (commencement of operations) to December 31, 2012. |
6. Distributions to shareholders by class
| | | | | | | | |
| | | Year Ended
December 31, 2012 | | | Year Ended
December 31, 2011 | |
| Net Investment Income: | | | | | | | | |
| Class A† | | $ | 423 | | | | — | |
| Class C† | | | 284 | | | | — | |
| Class R† | | | 121 | | | | — | |
| Class I | | | 6,385,496 | | | $ | 9,689,872 | |
| Class IS | | | 3,392,016 | | | | 2,214,168 | |
| Total | | $ | 9,778,340 | | | $ | 11,904,040 | |
| | |
| Net Realized Gains | | | | | | | | |
| Class A† | | $ | 5 | | | | — | |
| Class C† | | | 5 | | | | — | |
| Class R† | | | 5 | | | | — | |
| Class I | | | 120,231 | | | $ | 3,130,405 | |
| Class IS | | | 63,455 | | | | 944,949 | |
| Total | | $ | 183,701 | | | $ | 4,075,354 | |
| † | For the period April 30, 2012 (commencement of operations) to December 31, 2012. |
7. Capital shares
At December 31, 2012, the Corporation had 37.5 billion shares of capital stock authorized with a par value of $0.001 per share.
Transactions in shares of each class were as follows:
| | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, 2012 | | | Year Ended
December 31, 2011 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Class A† | | | | | | | | | | | | | | | | |
| Shares sold | | | 9,408 | | | $ | 105,545 | | | | — | | | | — | |
| Shares issued on reinvestment | | | 38 | | | | 428 | | | | — | | | | — | |
| Net increase | | | 9,446 | | | $ | 105,973 | | | | — | | | | — | |
| | | | |
| Class C† | | | | | | | | | | | | | | | | |
| Shares sold | | | 4,650 | | | $ | 51,436 | | | | — | | | | — | |
| Shares issued on reinvestment | | | 26 | | | | 289 | | | | — | | | | — | |
| Shares repurchased | | | (702) | | | | (7,886) | | | | — | | | | — | |
| Net increase | | | 3,974 | | | $ | 43,839 | | | | — | | | | — | |
| | |
| 52 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Notes to financial statements (cont’d)
| | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, 2012 | | | Year Ended
December 31, 2011 | |
| | | Shares | | | Amount | | | Shares | | | Amount | |
| Class R† | | | | | | | | | | | | | | | | |
| Shares sold | | | 912 | | | $ | 10,000 | | | | — | | | | — | |
| Shares issued on reinvestment | | | 11 | | | | 125 | | | | — | | | | — | |
| Net increase | | | 923 | | | $ | 10,125 | | | | — | | | | — | |
| | | | |
| Class I | | | | | | | | | | | | | | | | |
| Shares sold | | | 4,311,408 | | | $ | 47,438,284 | | | | 4,433,992 | | | $ | 48,236,252 | |
| Shares issued on reinvestment | | | 280,714 | | | | 3,108,532 | | | | 679,287 | | | | 7,342,179 | |
| Shares repurchased | | | (7,955,839) | | | | (87,291,951) | | | | (11,840,541) | | | | (128,176,990) | |
| Net decrease | | | (3,363,717) | | | $ | (36,745,135) | | | | (6,727,262) | | | $ | (72,598,559) | |
| | | | |
| Class IS | | | | | | | | | | | | | | | | |
| Shares sold | | | 7,440,966 | | | $ | 81,660,715 | | | | 2,432,305 | | | $ | 26,539,243 | |
| Shares issued on reinvestment | | | 302,071 | | | | 3,348,493 | | | | 284,152 | | | | 3,070,498 | |
| Shares repurchased | | | (1,337,415) | | | | (14,845,000) | | | | (651,689) | | | | (7,157,700) | |
| Net increase | | | 6,405,622 | | | $ | 70,164,208 | | | | 2,064,768 | | | $ | 22,452,041 | |
| † | For the period April 30, 2012 (commencement of operations) to December 31, 2012. |
8. Income tax information and distributions to shareholders
Subsequent to the fiscal year end, the Fund has made the following distributions per share:
| | | | | | | | | | | | | | | | | | | | |
Record Date
Payable Date | | Class A | | | Class C | | | Class R | | | Class I | | | Class IS | |
Daily
1/31/2013 | | $ | 0.016034 | | | $ | 0.008690 | | | $ | 0.012743 | | | $ | 0.018986 | | | $ | 0.019347 | |
The tax character of distributions paid during the fiscal years ended December 31, were as follows:
| | | | | | | | |
| | | 2012 | | | 2011 | |
| Distributions Paid From: | | | | | | | | |
| Ordinary income | | $ | 9,962,041 | | | $ | 13,640,445 | |
| Net long-term capital gains | | | — | | | | 2,338,949 | |
| Total taxable distributions | | $ | 9,962,041 | | | $ | 15,979,394 | |
As of December 31, 2012, the components of accumulated earnings on a tax basis were as follows:
| | | | |
| Undistributed ordinary income — net | | $ | 219,008 | |
| Capital loss carryforward* | | | (5,646,448) | |
| Other book/tax temporary differences(a) | | | (2,006,677) | |
| Unrealized appreciation (depreciation)(b) | | | 12,731,176 | |
| Total accumulated earnings (losses) — net | | $ | 5,297,059 | |
| * | As of December 31, 2012, the Fund had the following net capital loss carryforward remaining: |
| | | | |
| Western Asset Intermediate Bond Fund 2012 Annual Report | | | 53 | |
| | | | |
| Year of Expiration | | Amount | |
| No Expiration | | $ | (5,646,448 | )** |
This amount will be available to offset any future taxable capital gains.
| ** | Under the Regulated Investment Company Modernization Act of 2010, the Fund is permitted to carry forward these capital losses for an unlimited period. Additionally, these capital losses retain their character as either short-term or long-term capital losses rather than being considered all short-term as under previous law. |
| (a) | Other book/tax temporary differences are attributable primarily the realization for tax purposes of unrealized gains (losses) on certain futures and option contracts, the deferral of post-October capital losses for tax purposes, book/tax differences in the 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. |
| | |
| 54 | | Western Asset Intermediate Bond Fund 2012 Annual Report |
Report of independent registered public accounting firm
To the Board of Directors of Western Asset Funds, Inc. and to the Shareholders of Western Asset Intermediate Bond Fund:
In our opinion, the accompanying statement of assets and liabilities, including the schedule 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 Intermediate Bond Fund (one of the funds comprising Western Asset Funds, Inc., the “Fund”) at December 31, 2012, the results of its operations, the changes in its net assets, and the 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 Fund’s 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, 2012 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 21, 2013
| | | | |
| Western Asset Intermediate Bond Fund | | | 55 | |
Board approval of investment management
and advisory agreements (unaudited)
The Executive and Contracts Committee of the Board of Directors considered the Investment Management Agreement between the Corporation and LMPFA with respect to the Fund and the Investment Advisory Agreement between LMPFA and Western Asset Management Company (“Western Asset”) (collectively, the “Agreements”) with respect to the Fund at meetings held on September 10, October 18 and October 25, 2012. At a meeting held on November 13, 2012, the Executive and Contracts Committee reported to the full Board of Directors its 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.
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; reviewed performance and expense information for the Fund’s peer group 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; and requested and reviewed additional information as necessary. These reviews were in addition to information obtained by the Directors at their regular quarterly meetings with respect to the Fund’s 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 Fund, and Western Asset’s ability to provide high quality investment management services to the Fund. The Directors considered the experience of LMPFA’s personnel in providing the types of services that LMPFA is responsible for providing to the Fund; 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 Fund. The Directors considered the investment philosophy and research and decision-making processes of Western Asset; the experience of its key advisory personnel responsible for management of the Fund; the ability of Western Asset to attract and retain capable research and advisory personnel; the capability and integrity of Western Asset’s senior management and staff; and the level of skill required to manage the Fund. In addition, the Directors reviewed the quality of LMPFA’s and Western Asset’s services with respect to regulatory compliance and compliance with the investment policies of the Fund and conditions that might affect LMPFA’s or Western Asset’s ability to provide high quality services to the Fund in the future under the Agreements, including its business reputation, financial condition and operational stability. Based on the foregoing, the Directors concluded that Western Asset’s investment process, research capabilities and philosophy were well suited to the Fund given the Fund’s investment objectives and policies, and that LMPFA and Western Asset would be able to meet any reasonably foreseeable obligations under the Agreements.
| | |
| 56 | | Western Asset Intermediate Bond Fund |
Board approval of investment management
and advisory agreements (unaudited) (cont’d)
In reviewing the quality of the services provided to the Fund, the Directors also reviewed comparisons of the performance of the Fund to the performance of certain comparable funds in its peer group and to its investment benchmark over the one-, three-, five- and ten-year periods ended August 31, 2012. In that connection, the Directors noted that the performance of the Fund exceeded its peer average performance for the ten-year period and slightly exceeded its peer average performance for the five-year period, but was lower than its peer average for the one- and three- year periods. With respect to the 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 fee payable by the Fund to LMPFA, the total expenses payable by the Fund and the fact that LMPFA pays to Western Asset the entire management fee it receives from the Fund. They reviewed information concerning management fees paid to investment advisers of similarly-managed funds, as well as fees paid by Western Asset’s other clients, including separate accounts managed by Western Asset. The Directors observed that although the management fee paid by the Fund to LMPFA was slightly higher than the average of the fees paid by funds in its peer group, total expenses for the Fund were lower than the average of the funds in its peer group. The Directors noted that the management fee paid by the Fund was generally higher than the fees paid by other clients of Western Asset for accounts with similar investment strategies, but that the administrative and operational responsibilities for Western Asset with respect to the Fund were also relatively higher. In light of this difference, the Directors concluded that the management fee paid by the Fund relative to the fees paid by Western Asset’s other clients was reasonable.
The Directors further evaluated the benefits of the advisory relationship to LMPFA and Western Asset, including, among others, the profitability of the relationship to LMPFA and Western Asset; the direct and indirect benefits that LMPFA and Western Asset may receive from its relationship with the Fund, including any “fallout benefits,” such as reputational value derived from serving as investment manager or adviser to the Fund; and the affiliations between LMPFA, Western Asset and certain service providers for the Fund. In that connection, the Directors concluded that LMPFA and Western Asset’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 Western Asset as the assets of the Fund grow. The Directors determined that the lack of breakpoints was appropriate and that the management fee structure for the Fund is reasonable.
In their deliberations with respect to these matters, the Independent Directors were advised by their independent counsel, who is independent of LMPFA and Western Asset within the meaning of Securities and Exchange Commission rules regarding
| | | | |
| Western Asset Intermediate Bond Fund | | | 57 | |
the independence of counsel. The Independent Directors weighed each of 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 services being provided by LMPFA and Western Asset, but they would continue to closely monitor the performance of LMPFA and Western Asset; that the fees to be paid to Western Asset and LMPFA under the relevant Agreements were fair and reasonable, given the scope and quality of the services rendered by Western Asset and LMPFA; and that approval of the Agreements was in the best interest of the Fund and its shareholders.
| | |
| 58 | | Western Asset Intermediate Bond Fund |
Additional information (unaudited)
Information about Directors and Officers
The business and affairs of Western Asset Intermediate Bond Fund (the “Fund”) are conducted by management under the supervision and subject to the direction of its Board of Directors. The business address of each Director is 100 International Drive, Attn: Fund Secretary, Baltimore, Maryland 21202. Information pertaining to the Directors and officers of the Fund is set forth below.
The Statement of Additional Information includes additional information about Directors and is available, without charge, upon request by calling the Fund at 1-877-721-1926.
| | |
| Independent Directors† | | |
| Ronald J. Arnault | | |
| Year of birth | | 1943 |
| Position(s) held with Fund | | Director |
| Term of office and length of time served1 | | Served since 1997 |
| Principal occupations during the past five years | | Retired. |
| Number of portfolios in fund complex overseen2 | | 12 |
| Other directorships held | | None |
| Anita L. DeFrantz | | |
| Year of birth | | 1952 |
| Position(s) held with Fund | | Director |
| Term of office and length of time served1 | | Served since 1998 |
| Principal occupations during the past five years | | President (1987-present) and Director (1990-present) of LA84 (formerly Amateur Athletic Foundation of Los Angeles); Director of Kids in Sports (1994-present); Vice President, International Rowing Federation (1995-present); Member of the International Olympic Committee (1986-present). |
| Number of portfolios in fund complex overseen2 | | 12 |
| Other directorships held | | OBN Holdings, Inc. (film, television and media company) |
| Avedick B. Poladian | | |
| Year of birth | | 1951 |
| Position(s) held with Fund | | Director |
| Term of office and length of time served1 | | Served since 2007 |
| Principal occupations during the past five years | | Executive Vice President and Chief Operating Officer of Lowe Enterprises, Inc. (real estate and hospitality firm) (2002-present); Partner, Arthur Andersen, LLP (1974-2002). |
| Number of portfolios in fund complex overseen2 | | 12 |
| Other directorships held | | Occidental Petroleum Corporation and Public Storage |
| | | | |
| Western Asset Intermediate Bond Fund | | | 59 | |
| | |
| Independent Directors cont’d | | |
| William E. B. Siart | | |
| Year of birth | | 1946 |
| Position(s) held with Fund | | Director and Chairman |
| Term of office and length of time served1 | | Served since 1997 |
| Principal occupations during the past five years | | Trustee of The Getty Trust (2005-present); Chairman of Walt Disney Concert Hall, Inc. (1998-2006); Chairman of Excellent Education Development (2000-present). |
| Number of portfolios in fund complex overseen2 | | 12 |
| Other directorships held | | None |
| Jaynie Miller Studenmund | | |
| Year of birth | | 1954 |
| Position(s) held with Fund | | Director |
| Term of office and length of time served1 | | Served since 2004 |
| Principal occupations during the past five years | | Director of Orbitz Worldwide, Inc. (2007-present) (online travel company); Director of Pinnacle Entertainment, Inc. (2012-present) (gaming and hospitality company); Director of Core Logic, Inc. (2012-present) (information, analytics and business services). Formerly: Director of MarketTools, Inc. (2010-2012) (market research software provider); Director of eHarmony, Inc. (2005-2011) (online dating company). |
| Number of portfolios in fund complex overseen2 | | 12 |
| Other directorships held | | Orbitz Worldwide (global on-line travel company) |
| Interested Directors | | |
R. Jay Gerken3 Legg Mason 620 Eighth Avenue, New York NY 10018 | | |
| Year of birth | | 1951 |
| Position(s) with Fund | | Director and President |
| Term of office and length of time served2 | | Served as a Director since 2006 and as President since 2007 |
| Principal occupation(s) during past five years | | Managing Director of Legg Mason & Co. (since 2005); Officer and Trustee/Director of 161 funds associated with LMPFA or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); President and Chief Executive Officer of LMPFA (since 2006); President and Chief Executive Officer of Smith Barney Fund Management LLC (“SBFM”) (formerly a registered investment adviser) (since 2002) |
| Number of funds in fund complex overseen | | 161 |
| Other directorships held | | None |
| | |
| 60 | | Western Asset Intermediate Bond Fund |
Additional information (unaudited) (cont’d)
Information about Directors and Officers
| | |
| Interested Directors cont’d | | |
| Ronald L. Olson4 | | |
| Year of birth | | 1941 |
| Position(s) held with Fund | | Director |
| Term of office and length of time served1 | | Served since 2005 |
| Principal occupations during the past five years | | Senior Partner of Munger, Tolles & Olson LLP (a law partnership) (1968-present). |
| Number of portfolios in fund complex overseen2 | | 12 |
| Other directorships held | | Edison International, City National Corporation (financial services company), The Washington Post Company, and Berkshire Hathaway, Inc. |
| Officers5 | | |
Richard F. Sennett Legg Mason 100 International Drive, Baltimore, MD 21202 | | |
| Year of birth | | 1970 |
| Position(s) with Fund | | Principal Financial Officer |
| Term of office and length of time served2 | | Since 2011 |
| Principal occupation(s) during past five years | | Principal Financial Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); Managing Director of Legg Mason & Co. and Senior Manager of the Treasury Policy group for Legg Mason & Co.’s Global Fiduciary Platform (since 2011); formerly, Chief Accountant within the SEC’s Division of Investment Management (2007 to 2011); formerly, Assistant Chief Accountant within the SEC’s Division of Investment Management (2002 to 2007) |
Erin K. Morris 100 International Drive Baltimore, MD 21202 | | |
| Year of birth | | 1966 |
| Position(s) held with Fund | | Treasurer |
| Term of office and length of time served1 | | Served since 2006 |
| Principal occupations during the past five years | | Vice President Legg Mason & Co., LLC (since 2005); Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006); formerly, Assistant Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2009) |
| | | | |
| Western Asset Intermediate Bond Fund | | | 61 | |
| | |
| Officers5 cont’d | | |
Todd F. Kuehl 100 International Drive Baltimore, MD 21202 | | |
| Year of birth | | 1969 |
| Position(s) held with Fund | | Chief Compliance Officer |
| Term of office and length of time served1 | | Served since 2007 |
| Principal occupations during the past five years | | Managing Director of Legg Mason & Co. (since 2011); Chief Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006); formerly, Chief Compliance Officer of Legg Mason Private Portfolio Group (prior to 2010); Branch Chief, Division of Investment Management, U.S. Securities and Exchange Commission (2002 to 2006) |
Robert I. Frenkel 100 First Stamford Place Stamford, CT 06902 | | |
| Year of birth | | 1954 |
| Position(s) held with Fund | | Secretary and Chief Legal Officer |
| Term of office and length of time served1 | | Served since 2009 |
| Principal occupations during the past five years | | Vice President and Deputy General Counsel of Legg Mason, Inc. (since 2006); Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006). |
| † | Directors who are not “interested persons” of the Fund within the meaning of section 2(a)(19) of the Investment Company Act of 1940, as amended (the “1940 Act”). |
| 1 | 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 Fund 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. |
| 2 | In addition to overseeing the ten portfolios of the Corporation each Director also serves as a Trustee of Western Asset Premier Bond Fund and as a Director of Western Asset Income Fund, Inc. (closed-end investment companies), which are considered part of the same Fund Complex as the Fund. In addition, Mr. Gerken serves as Director/Trustee to 149 other portfolios associated with Legg Mason & Co., LLC or its affiliates. Legg Mason & Co., LLC is an affiliate of Western Asset Management Co. (“WAM”). |
| 3 | Mr. Gerken is an “interested person” (as defined in section 2(a)(19) of the 1940 Act of the Fund because of his positions with subsidiaries of, and ownership of shares of common stock of, Legg Mason, Inc., the parent company of WAM. |
| 4 | Mr. Olson is an “interested person” (as defined above) of the Fund because his law firm has provided legal services to WAM. |
| 5 | Each officer of the Fund is an “interested person” (as defined above) of the Fund. |
| | |
| 62 | | Western Asset Intermediate Bond Fund |
Important tax information (unaudited)
11.43% of the net investment income distributions paid monthly by the Fund during the taxable year ended December 31, 2012 were attributable to Federal obligations.
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.
The following information is applicable to non-U.S. resident shareholders:
70% of the ordinary income distributions paid monthly by the Fund represent Qualified Net Investment Income and the entire short term capital gain distribution of $ 0.00534 per share paid on June 19, 2012 to shareholders of record on June 18, 2012 represents Qualified Short-Term Capital Gains eligible for exemption from U.S. withholding tax for nonresident aliens and foreign corporations.
Please retain this information for your records.
Western Asset
Intermediate Bond Fund
Directors
William E. B. Siart, Chairman
R. Jay Gerken
President
Ronald J. Arnault
Anita L. DeFrantz
Ronald L. Olson
Avedick B. Poladian
Jaynie Miller Studenmund
Investment manager
Legg Mason Partners Fund Advisor, LLC
Investment adviser
Western Asset Management Company
Transfer agent
Boston Financial Data Services
2000 Crown Colony Drive
Quincy, MA 02169
Custodian
State Street Bank and Trust Company
Independent registered public accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
Legal counsel
Ropes & Gray LLP
1211 Avenue of the Americas
New York, NY 10036
Western Asset Intermediate Bond Fund
The Fund is a separate investment series of Western Asset Funds, Inc.
Western Asset Intermediate Bond Fund
Legg Mason Funds
620 Eighth Avenue
New York, NY 10018
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q, shareholders can call the Fund at 1-877-721-1926.
Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling the Fund at 1-877-721-1926, (2) on the Fund’s website at www.leggmason.com/individualinvestors and (3) on the SEC’s website at www.sec.gov.
This report is submitted for the general information of the shareholders of Western Asset Intermediate Bond Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by a current 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.
www.leggmason.com/individualinvestors
©2013 Legg Mason Investor Services, LLC
Member FINRA, SIPC
Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds
This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsored closed-end funds and certain closed-end funds managed or sub-advised by Legg Mason or its affiliates. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:
| Ÿ | | Personal information included on applications or other forms; |
| Ÿ | | Account balances, transactions, and mutual fund holdings and positions; |
| Ÿ | | Online account access user IDs, passwords, security challenge question responses; and |
| Ÿ | | Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt, payment history, etc.). |
How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have authorized or as permitted or required by law. The Funds may disclose information about you to:
| Ÿ | | Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business or comply with obligations to government regulators; |
| Ÿ | | Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform marketing services solely for the Funds; |
| Ÿ | | The Funds’ representatives such as legal counsel, accountants and auditors; and |
| Ÿ | | Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust. |
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| NOT PART OF THE ANNUAL REPORT |
Legg Mason Funds Privacy and Security Notice (cont’d)
Except as otherwise permitted by applicable law, companies acting on the Funds’ behalf are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to perform.
The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds’ practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.
Keeping You Informed of the Funds’ Privacy and Security Practices
The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.
The Funds’ Security Practices
The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.
In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is incomplete, not accurate or not current, or if you have questions about the Funds’ privacy practices, write the Funds using the contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at www.leggmason.com, or contact the Fund at 1-877-721-1926.
Revised April 2011
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| NOT PART OF THE ANNUAL REPORT |
Western Asset Management Company
Legg Mason, Inc. Subsidiaries
www.leggmason.com/individualinvestors
©2013 Legg Mason Investor Services, LLC Member FINRA, SIPC
WASX013143 2/13 SR13-1876
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
The Board of Directors of the registrant has determined that Mr. Ronald J. Arnault possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as “audit committee financial expert,” and have designated Mr. Arnault as the Audit Committee’s financial expert. Mr. Arnault is “independent” Directors pursuant to paragraph (a) (2) of Item 3 to Form N-CSR.
| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
a) Audit Fees. The aggregate fees billed in the last two fiscal years ending December 31, 2011 and December 31, 2012 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $468,601 in December 31, 2011 and $354,434 in December 31, 2012.
b) Audit-Related Fees. The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrant’s financial statements were $0 in December 31, 2011 and $0 in December 31, 2012.
In addition, there were no Audit-Related Fees billed in the Reporting Period for assurance and related services by the Auditor to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Western Asset Funds, Inc. (“service affiliates”), that were reasonably related to the performance of the annual audit of the service affiliates. Accordingly, there were no such fees that required pre-approval by the Audit Committee for the Reporting Periods.
(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $42,600 in December 31, 2011 and $57,000 in December 31, 2012. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.
There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee.
d) All Other Fees. The aggregate other fees billed in the Reporting Periods for products and services provided by the Auditor were $0 in December 31, 2011 and $13,130 in December 31, 2012, other than the services reported in paragraphs (a) through (c) for the Item for the Western Asset Funds, Inc.
All Other Fees. There were no other non-audit services rendered by the Auditor to Legg Mason Partners Fund Advisors, LLC (“LMPFA”), and any entity controlling, controlled by or under common control with LMPFA that provided ongoing services to Western Asset Funds, Inc. requiring pre-approval by the Audit Committee in the Reporting Period.
(e) Audit Committee’s pre–approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of
Regulation S-X.
(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by LMPFA or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s
independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee.
The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.
Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.
(2) For the Western Asset Funds, Inc., the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 100% for December 31, 2011 and December 31, 2012; Tax Fees were 100% and 100% for December 31, 2011 and December 31, 2012; and Other Fees were 100% and 100% for December 31, 2011 and December 31, 2012.
(f) N/A
(g) Non-audit fees billed by the Auditor for services rendered to Western Asset Funds, Inc., LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Western Asset Funds, Inc. during the reporting period were $0 in December 31, 2012.
(h) Yes. Western Asset Funds, Inc.’s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates, which were not pre-approved (not requiring pre-approval), is compatible with maintaining the Accountant’s independence. All services provided by the Auditor to the Western Asset Funds, Inc. or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.
| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
| | a) | The independent board members are acting as the registrant’s audit committee as specified in Section 3(a)(58)(B) of the Exchange Act. The Audit Committee consists of the following Board members: |
Ronald J. Arnault
Anita L. DeFrantz
Avedick B. Poladian
William E.B. Siart
Jaynie Miller Studenmund
| ITEM 6. | SCHEDULE OF INVESTMENTS. |
Included herein under Item 1.
| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable.
| ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable.
| ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
Not applicable.
| ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
Not applicable.
| ITEM 11. | CONTROLS AND PROCEDURES. |
| | (a) | The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934. |
| | (b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting. |
(a) (1) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(a) (2) Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.CERT
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.906CERT
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
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| Western Asset Funds, Inc. |
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By: | | /s/ R. Jay Gerken |
| | (R. Jay Gerken) President |
| | Western Asset Funds, Inc. |
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| Date: February 27, 2013 |
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. |
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| Date: February 27, 2013 |
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| By: | | /s/ Richard F. Sennett |
| | (Richard F. Sennett) |
| | Principal Financial Officer |
| | Western Asset Funds, Inc. |
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| Date: February 27, 2013 |
