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P R O S P E C T U S
A U G U S T 1, 2 0 0 0
This Prospectus describes the shares of certain of the institutional mutual
funds managed by LM Institutional Advisors, Inc.
LM INSTITUTIONAL FUND ADVISORS I
Western Asset Government Money Market Portfolio
Western Asset Money Market Portfolio
Western Asset Intermediate Portfolio
Western Asset Intermediate Plus Portfolio
Western Asset Core Portfolio
Western Asset Core Plus Portfolio
Western Asset Inflation Indexed Bond Portfolio
Western Asset High Yield Portfolio
Western Asset Non-U.S. Fixed Income Portfolio
Western Asset Global Strategic Income Portfolio
Western Asset Enhanced Equity Portfolio
LM INSTITUTIONAL FUND ADVISORS II
LM Value Institutional Portfolio
LM Special Investment Institutional Portfolio
LM Total Return Institutional Portfolio
LM Balanced Institutional Portfolio
Batterymarch U.S. MidCapitalization Equity Portfolio
Batterymarch U.S. Small Capitalization Equity Portfolio
Batterymarch International Equity Portfolio
Batterymarch Emerging Markets Portfolio
These securities have not been approved or disapproved by the Securities and
Exchange Commission nor has the Securities and Exchange Commission passed upon
the accuracy or adequacy of this prospectus. Any representation to the contrary
is a criminal offense.
LM | INSTITUTIONAL
----------------------------
Advisors Incorporated
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TABLE OF CONTENTS
PROSPECTUS SUMMARY........................................ 1
DESCRIPTION OF EACH PORTFOLIO, ITS INVESTMENT OBJECTIVE
AND PRINCIPAL INVESTMENT STRATEGIES................ 1
PRINCIPAL RISKS...........................................14
PERFORMANCE INFORMATION...................................19
FEES AND EXPENSES.........................................22
MANAGEMENT OF THE PORTFOLIOS..............................30
PURCHASE OF SHARES........................................33
DISTRIBUTION PLANS........................................35
REDEMPTION OF SHARES......................................35
EXCHANGE PRIVILEGE........................................36
NET ASSET VALUE...........................................37
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS...............37
TAX INFORMATION...........................................38
FINANCIAL HIGHLIGHTS......................................39
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PROSPECTUS SUMMARY
General
LM Institutional Fund Advisors I, Inc. ("LMIFA I") consists of the following
portfolios: Western Asset Government Money Market Portfolio, Western Asset Money
Market Portfolio, Western Asset Intermediate Portfolio, Western Asset
Intermediate Plus Portfolio, Western Asset Core Portfolio, Western Asset Core
Plus Portfolio, Western Asset Inflation Indexed Bond Portfolio, Western Asset
High Yield Portfolio, Western Asset Non-U.S. Fixed Income Portfolio, Western
Asset Global Strategic Income Portfolio and Western Asset Enhanced Equity
Portfolio. LM Institutional Fund Advisors II, Inc. ("LMIFA II") consists of the
following portfolios: LM Value Institutional Portfolio, LM Special Investment
Institutional Portfolio, LM Total Return Institutional Portfolio, LM Balanced
Institutional Portfolio, Batterymarch U.S. MidCapitalization Equity Portfolio,
Batterymarch U.S. Small Capitalization Equity Portfolio, Batterymarch
International Equity Portfolio and Batterymarch Emerging Markets Portfolio.
Manager and Advisers
LM Institutional Advisors, Inc. (the "Manager") serves as the investment manager
to each Portfolio. Legg Mason Funds Management Inc. ("LMFM"), Batterymarch
Financial Management, Inc. ("Batterymarch"), Western Asset Management Company
("Western Asset") and Western Asset Management Company Limited ("WAML") serve as
the investment advisers to the various Portfolios as noted below. LMFM,
Batterymarch, Western Asset and WAML are referred to as "Advisers."
DESCRIPTION OF EACH PORTFOLIO, ITS INVESTMENT OBJECTIVE AND
PRINCIPAL INVESTMENT STRATEGIES
The investment objective and policies for each Portfolio are stated below. There
is no assurance a Portfolio will meet its objectives.
Western Asset Government Money Market Portfolio
Adviser: Western Asset
Objective: High current income consistent with liquidity and conservation of
principal
The Portfolio is a money market fund that seeks to maintain a net asset value of
$1.00 per share by investing in government money market instruments. To achieve
its objective, the Portfolio generally adheres to the following practices:
. It invests only in obligations of the U.S. Government and its agencies and
instrumentalities, repurchase agreements secured by such instruments and in
U.S. dollar-denominated debt obligations of "supranational organizations."
"Supranational organizations" are non-governmental entities designated or
supported by a government or governmental agency to promote economic
development, such as the European Community, the International Monetary Fund,
the United Nations and the World Bank.
. It generally buys instruments maturing in 397 days or less. It can also buy
certain variable and floating rate securities.
. It maintains a dollar-weighted average portfolio maturity of 90 days or less.
. It may purchase or sell securities on a forward commitment basis.
. It may engage in reverse repurchase agreements and other borrowings as
permitted by applicable law.
Among the principal risks of investing in the Portfolio are Interest Rate Risk
and Credit Risk. Please see "Principal Risks" on pages 15 to 19 for a discussion
of these and other risks.
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Western Asset Money Market Portfolio
Adviser: Western Asset
Objective: High current income consistent with liquidity and conservation of
principal
The Portfolio is a money market fund that seeks to maintain a net asset value of
$1.00 per share. To achieve its objective, the Portfolio generally adheres to
the following practices:
. It generally invests in money market instruments, such as:
- U.S. government obligations
- municipal obligations
- instruments such as certificates of deposit, demand and time deposits,
savings shares and bankers' acceptances issued by domestic and foreign banks
and savings and loan institutions that have over $1 billion in total assets
or where the principal amount is insured by the Federal Deposit Insurance
Corporation
- repurchase agreements
- commercial paper and other short-term investments
. It invests only in "high quality" money market instruments. "High quality"
money market instruments are those that: (i) have received one of the two
highest ratings by two or more Nationally Recognized Statistical Rating
Organizations ("NRSRO"); (ii) receive one of the two highest ratings by one
NRSRO if only one has rated the security; or (iii) if unrated, are determined
by Western Asset to be of comparable quality.
. It may not invest more than 5% of its total assets in the "first tier"
securities of any one issuer (except for U.S. government obligations). "First
tier" securities are those that: (i) have been rated in the highest rating
category by two NRSROs; (ii) receive the highest rating by one NRSRO if only
one has rated the security; or (iii) if unrated, are determined by Western
Asset to be of comparable quality.
. It may not invest more than 1% of its total assets or $1 million (whichever is
greater) in the "second tier" securities of any one issuer. "Second tier"
securities are all "high quality" securities that are not "first tier"
securities.
. It may not invest more than 5% of its total assets in "second tier"
securities.
. It may invest only in U.S. dollar-denominated securities. These include
foreign investments denominated in U.S. dollars.
. It may engage in reverse repurchase agreements and make other borrowings.
. It generally buys money market securities maturing in 397 days or less. It can
also buy certain variable and floating rate securities.
. It may purchase or sell securities on a forward commitment basis.
. It maintains a dollar-weighted average portfolio maturity of 90 days or less.
Among the principal risks of investing in the Portfolio are Interest Rate Risk
and Credit Risk. Please see "Principal Risks" on pages 15 to 19 for a discussion
of these and other risks.
Western Asset Intermediate Portfolio, Western Asset Intermediate Plus Portfolio,
Western Asset Core Portfolio, Western Asset Core Plus Portfolio
Advisers: Western Asset and WAML (non-U.S. portions of Intermediate Plus and
Core Plus Portfolios)
Objective: Maximize total return, consistent with prudent investment management
and liquidity needs, by investing to obtain the average duration
specified for each Portfolio
Each of these Portfolios invests in a portfolio of fixed income securities of
various maturities. To achieve their objectives, the Portfolios invest primarily
in:
. U.S. Government obligations
. mortgage- and other asset-backed securities
. U.S. dollar-denominated obligations of foreign governments, international
agencies or supranational organizations
. U.S. dollar-denominated fixed income securities of non-governmental domestic
or foreign issuers
In addition to the foregoing principal investment strategies, the Portfolios are
also permitted to:
. purchase other securities and instruments, including:
- preferred stocks
- structured notes
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- municipal obligations
- convertible securities
- pay-in-kind securities and zero coupon bonds
- certificates of deposit, time deposits and bankers' acceptances issued by
domestic and foreign banks
- commercial paper and other short-term investments
. invest up to 25% of their total assets in the securities of foreign issuers
. buy or sell futures contracts and options for both hedging and non-hedging
purposes, including for purposes of enhancing returns buy or sell securities
on a forward commitment basis
. lend their portfolio securities
. engage in foreign currency exchange transactions
. engage in repurchase agreements and reverse repurchase agreements
. borrow money for temporary or emergency purposes
Each of the Portfolios may buy and sell investments relatively often, which
involves higher brokerage commissions and other expenses, and may increase taxes
payable by shareholders.
Each Portfolio in this group differs from the others in terms of its investment
policies regarding its target dollar weighted average duration, and the two
"Plus" Portfolios, the Intermediate Plus and Core Plus, differ from the other
Portfolios in terms of their policies with respect to U.S. dollar-denominated
securities and the credit quality of their investments. These differences are
summarized in the following table. "Duration" refers to the range within which
the dollar weighted average duration of a Portfolio is expected to fluctuate.
With respect to the Core and Core Plus Portfolios, the average duration is
expected to range within 20% of the duration of the domestic bond market as a
whole (normally four to six years, although this may vary) as measured by
Western Asset. "Foreign Currency Exposure" refers to whether a Portfolio
presently intends to limit its investments to U.S. dollar-denominated
securities. "Credit Quality" refers to the percentage of a Portfolio's net
assets that may be invested in debt securities that are rated, at the time of
purchase, below investment grade, but at least B or higher by an NRSRO or, if
unrated, determined by the Adviser to be of comparable quality. The continued
holding of securities downgraded below investment grade or, if unrated,
determined by the Adviser to be of comparable quality, will be evaluated by the
Adviser on a case by case basis.
<TABLE>
<CAPTION>
Portfolio Duration Foreign Currency Exposure Credit Quality
<S> <C> <C> <C>
Intermediate 2-4 Years U.S. Dollar-Denominated Only Currently Anticipates No Securities
Below Investment Grade
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Intermediate 2-4 Years The Portfolio may invest up to Up to 15% Below Investment Grade
Plus 20% of its total assets in non-U.S.
dollar denominated securities.
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Core Generally U.S. Dollar-Denominated Only Currently Anticipates No Securities
4-6 Years Below Investment Grade
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Core Plus Generally The Portfolio may invest up to Up to 15% Below Investment Grade
4-6 Years 20% of its total assets in non-U.S.
dollar-denominated securities.
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</TABLE>
Among the principal risks of investing in these Portfolios are Interest Rate
Risk, Credit Risk, Call Risk, Special Risks of Mortgage-Backed and Asset-Backed
Securities, Foreign Securities Risk, Borrowing Risk, Derivatives Risk and
Hedging Risk. In addition to those risks, Special Risks of High Yield
Securities, Liquidity Risk and Currency Risk are among the principal risks of
investing in the Intermediate Plus and Core Plus Portfolios. Please see
"Principal Risks" on pages 15 to 19 for a discussion of these and other risks.
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Western Asset Inflation Indexed Bond Portfolio
Adviser: Western Asset
Objective: Maximize total return, consistent with preservation of capital
Under normal market conditions, the Portfolio invests at least 65% of its total
assets in inflation-indexed fixed income securities issued in the United States.
Inflation-indexed bonds are fixed income securities that are structured to
provide protection against inflation. The principal or interest components of an
inflation-indexed bond are adjusted periodically according to the general
movements of inflation in the country of issue. The U.S. Treasury currently uses
the Consumer Price Index for Urban Consumers, non-seasonally adjusted, as its
inflation measure.
The Adviser uses fundamental investment techniques to select issues. The average
modified duration of the Portfolio is expected to range within 3 years of that
of its benchmark, the Lehman Brothers Treasury Inflation Notes Index. Although
the Portfolio is expected to maintain an average credit quality of AAA/Aaa, it
may invest up to 35% of its net assets in securities rated below AAA/Aaa but
above BBB/Baa at the time of purchase or unrated securities of comparable
quality at the time of purchase. Consistent with its investment objective, the
Portfolio may invest in fixed income securities of any maturity.
To achieve its objective, the Portfolio may also invest in other securities or
instruments, including:
. U.S. Government obligations
. corporate obligations ("Corporate obligations" include preferred stock,
. convertible securities, zero coupon securities and pay-in-kind securities)
. foreign inflation-indexed securities
. preferred stocks
. non-U.S. debt issued in U.S. dollars or foreign currencies
. mortgage- and other asset-backed securities
. municipal obligations
. variable and floating rate debt securities
. commercial paper and other short-term investments
. certificates of deposit, fixed time deposits and bankers' acceptances
. loan participations and assignments
. structured notes
. repurchase agreements
. pay-in-kind securities and zero coupon bonds
The Portfolio may also:
. engage in reverse repurchase agreements
. borrow money for temporary or emergency purposes
. buy or sell futures contracts and options for both hedging and non-hedging
. purposes, including for purposes of enhancing returns
. buy or sell foreign currencies, foreign currency options, or foreign currency
futures contracts and related options
. enter into foreign currency forward contracts for hedging and non-hedging
purposes, including for purposes of enhancing returns
. loan its portfolio securities
. buy or sell securities on a forward commitment basis
Among the principal risks of investing in the Portfolio are Interest Rate Risk,
Credit Risk, Market Risk, Derivatives Risk, Liquidity Risk, Foreign Securities
Risk, Currency Risk, Call Risk, Borrowing Risk, Special Risks of Mortgage-Backed
and Asset-Backed Securities and Hedging Risk. Please see "Principal Risks" on
pages 15 to 19 for a discussion of these and other risks.
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Western Asset High Yield Portfolio
Adviser: Western Asset
Objective: Maximize total return, consistent with prudent investment management
Under normal market conditions, the Portfolio will invest at least 75% of its
total assets in U.S. dollar-denominated debt or fixed income securities that are
rated below investment grade at the time of purchase by one or more NRSROs or
are of a comparable quality as determined by Western Asset. These securities are
commonly known as "junk bonds" or "high yield bonds."
Western Asset expects that, under normal market conditions, all or substantially
all of the Portfolio's assets will be invested in such securities. In deciding
among the securities in which the Portfolio may invest, the Adviser takes into
account the credit quality, country of issue, interest rate, liquidity, maturity
and yield of a security as well as other factors, including the Portfolio's
duration and prevailing and anticipated market conditions. To achieve its
objective, the Portfolio may also make other investments, including:
. mortgage- and other asset-backed securities
. municipal obligations
. variable and floating rate debt securities
. commercial paper and other short-term investments
. corporate obligations
. common stocks and warrants
. certificates of deposit, fixed time deposits and bankers' acceptances issued
by domestic banks
The Portfolio is also permitted to:
. invest up to 25% of its total assets in foreign currency-denominated foreign
securities
. buy or sell futures contracts and options for both hedging and non-hedging
purposes, including for purposes of enhancing returns
. engage in foreign currency exchange transactions
. lend its portfolio securities
. borrow money for temporary or emergency purposes
. buy or sell securities on a forward commitment basis
. engage in repurchase agreements and reverse repurchase agreements
The Portfolio may buy and sell investments relatively often, which involves
higher brokerage commissions and other expenses, and may increase taxes payable
by shareholders.
Among the principal risks of investing in the Portfolio are Interest Rate Risk,
Credit Risk, Call Risk, Special Risks of High Yield Securities, Special Risks of
Mortgage-Backed and Asset-Backed Securities, Market Risk, Foreign Securities
Risk, Liquidity Risk, Borrowing Risk, Emerging Markets Risk, Currency Risk,
Derivatives Risk and Hedging Risk. Please see "Principal Risks" on pages 15 to
19 for a discussion of these and other risks.
Western Asset Non-U.S. Fixed Income Portfolio
Adviser: WAML
Objective: Maximize total return, consistent with prudent investment management
Under normal market conditions, the Portfolio invests at least 75% of its total
assets in debt and fixed income securities denominated in major foreign
currencies. WAML anticipates that, under normal market conditions, all or
substantially all of the Portfolio's assets will be invested in securities of
foreign issuers and that these foreign issuers will represent at least three
foreign countries. Under current market conditions, the Portfolio expects that
substantially all of its currency risk will be hedged to U.S. dollars.
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To achieve its objective, the Portfolio may invest in a variety of securities,
including:
. U.S. dollar-denominated or foreign currency-denominated obligations of foreign
governments, international agencies or supranational entities
. foreign currency exchange-related securities, including foreign currency
warrants
. U.S. Government obligations
. mortgage- and other asset-backed securities
. variable and floating rate debt securities
. commercial paper and other short-term investments
. corporate obligations
. certificates of deposit, fixed time deposits and bankers' acceptances
. loan participations and assignments
. indexed securities and structured notes
. repurchase agreements
The Portfolio may also:
. engage in reverse repurchase agreements
. borrow money for temporary or emergency purposes
. buy or sell futures contracts and options for both hedging and non-hedging
purposes, including for purposes of enhancing returns
. buy or sell foreign currencies, foreign currency options, or foreign currency
futures contracts and related options
. enter into foreign currency forward contracts for hedging and non-hedging
purposes, including for purposes of enhancing returns
. loan its portfolio securities
The Portfolio does not currently intend to invest in securities that are rated
at the time of purchase below investment grade, although it may do so if market
conditions are favorable. The Portfolio is "non-diversified" within the meaning
of the Investment Company Act. As a result, the value of its shares will be more
susceptible to any single economic, political or regulatory event than shares of
a diversified fund. For more information, see "Principal Risks--Non-
Diversification." WAML anticipates that from time to time over 25% of the
Portfolio's assets may be invested in securities of issuers located in a single
country. Because the Portfolio may concentrate a significant portion of its
investments in a single country or currency, it will be more susceptible to
factors adversely affecting such currency or issuers within that country than
would a more diversified portfolio of securities. The Portfolio may buy and sell
investments relatively often, which involves higher brokerage commissions and
other expenses, and may increase taxes payable by shareholders.
Among the principal risks of investing in the Portfolio are Interest Rate Risk,
Credit Risk, Call Risk, Special Risks of High Yield Securities, Special Risks of
Mortgage-Backed and Asset-Backed Securities, Market Risk, Foreign Securities
Risk, Emerging Markets Risk, Currency Risk, Borrowing Risk, Derivatives Risk,
Liquidity Risk and Hedging Risk. Please see "Principal Risks" on pages 15 to 19
for a discussion of these and other risks.
Western Asset Global Strategic Income Portfolio
Advisers: WAML (non-U.S. portion) and Western Asset (U.S. portion)
Objective: Income and capital appreciation
To achieve its investment objective, the Portfolio invests primarily in various
types of U.S. dollar-denominated and foreign currency-denominated fixed income
securities, including:
. U.S. and foreign corporate fixed income securities
. Debt obligations of corporate and governmental issuers in emerging market
countries (These include "Brady Bonds"; bonds issued as a result of a debt
restructuring plan; Eurobonds; domestic and international bonds issued under
the laws of a developing country; and emerging market loans.)
. sovereign debt obligations of developed nations, including those of the United
States
. debt obligations of "supranational organizations"
. mortgage- and other asset-backed securities
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The Portfolio may invest in a variety of other securities, including:
. foreign currency exchange-related securities, including foreign currency
warrants
. variable and floating rate debt securities
. commercial paper and other short-term investments
. municipal obligations
. certificates of deposit, fixed time deposits and bankers' acceptances
. loan participations and assignments
. indexed securities and structured notes
. repurchase agreements
The Portfolio may invest up to 60% of its net assets in securities that are
rated at the time of purchase below investment grade or are of comparable
quality at the time of purchase as determined by WAML or Western Asset. These
securities are commonly known as "junk bonds" or "high yield bonds." The
Portfolio may buy and sell investments relatively often, which involves higher
brokerage commissions and other expenses, and may increase taxes payable by
shareholders.
The Portfolio may also:
. engage in reverse repurchase agreements
. borrow money for temporary or emergency purposes
. loan its portfolio securities
. buy or sell futures contracts and options for both hedging and non-hedging
purposes, including for purposes of enhancing returns
. buy or sell foreign currencies, foreign currency options, or foreign currency
futures contracts and related options
. enter into foreign currency forward contracts for hedging and non-hedging
purposes, including for purposes of enhancing returns
Under normal market conditions, the Portfolio will invest at least 80% of its
total assets in securities of issuers representing at least three countries (one
of which may be the U.S.) and at least 65% of its total assets in income
producing securities. Because the Portfolio may concentrate a significant
portion of its investments in a single country or currency, it will be more
susceptible to factors adversely affecting issuers within that country or
currency than would a more diversified portfolio of securities.
The Portfolio is "non-diversified" within the meaning of the Investment Company
Act. As a result, the value of its shares will be more susceptible to any single
economic, political or regulatory event than shares of a diversified fund. For
more information, see "Principal Risks--Non-Diversification."
Among the principal risks of investing in the Portfolio are Interest Rate Risk,
Credit Risk, Call Risk, Special Risks of High Yield Securities, Special Risks of
Mortgage-Backed and Asset-Backed Securities, Foreign Securities Risk, Emerging
Markets Risk, Currency Risk, Borrowing Risk, Derivatives Risk, Liquidity Risk
and Hedging Risk. Please see "Principal Risks" on pages 15 to 19 for a
discussion of these and other risks.
Western Asset Enhanced Equity Portfolio
Adviser: Western Asset
Objective: Long-term total return
The Portfolio's assets will be comprised of two components: an equity component
and a fixed income component.
. The equity component will generally maintain full exposure to the U.S. equity
market as represented by the S&P 500 Index (the "Index").
. The fixed income component will try to generate interest and gains in excess
of the Portfolio's expenses, including transaction costs related to its
investments.
The Portfolio expects that its performance will approximate that of the Index,
with the extent to which the Portfolio outperforms or underperforms the Index
depending largely, but not exclusively, on whether the fixed income component
has earned
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sufficient amounts to offset the Portfolio's expenses. Up to 10% of the
Portfolio's net assets may be invested in securities rated below investment
grade at the time of purchase or unrated securities of comparable quality at the
time of purchase (commonly known as "junk bonds" or "high yield bonds") and up
to 20% of its net assets may be invested in foreign securities. The Portfolio
may buy and sell investments relatively often, which involves higher brokerage
commissions and other expenses, and may increase taxes payable by shareholders.
The following information summarizes the investment practices of the Portfolio's
two components.
Equity Component
The Portfolio's equity component intends to invest primarily in stock index
futures, options on stock indexes, options on stock index futures and other
derivative instruments that are based on the Index ("S&P derivatives").
The equity component of the Portfolio adheres to the following practices:
. It may invest in any combination of (i) S&P derivatives and (ii) common stocks
that are registered in the Index ("S&P Stocks").
. It currently plans to invest predominantly, and likely exclusively, in S&P
derivatives.
. It will not be limited to purchasing S&P stocks in the same proportion as such
stocks are weighted in the Index.
. It will seek to remain invested in S&P stocks and S&P derivatives even when
the Index is declining.
The Index is composed of 500 selected common stocks, most of which are listed on
the New York Stock Exchange. Standard and Poor's ("S&P") chooses the stocks to
be included in the Index solely on a statistical basis. The weightings of stocks
in the Index are based on each stock's relative total market value, that is, its
market price per share times the number of shares out-standing. The Portfolio is
neither sponsored by nor affiliated with S&P.
Fixed Income Component
The fixed income component will invest primarily in the following types of fixed
income securities:
. U.S. Government obligations
. securities of non-governmental domestic or foreign issuers
. municipal securities
. mortgage- and other asset-backed securities
. preferred stocks
. obligations of foreign governments, international agencies or supranational
entities
The fixed income component may also take other actions, including:
. investing in certificates of deposit, time deposits and bankers'
. acceptances issued by domestic and foreign banks
. investing in commercial paper and other short-term investments
. engaging in repurchase agreements, reverse repurchase agreements and other
borrowings
. purchasing or selling futures contracts and options
. engaging in foreign currency exchange transactions
Among the principal risks of investing in the Portfolio are Market Risk,
Interest Rate Risk, Credit Risk, Call Risk, Special Risks of High Yield
Securities, Special Risks of Mortgage-Backed and Asset-Backed Securities,
Foreign Securities Risk, Emerging Markets Risk, Currency Risk, Borrowing Risk,
Derivatives Risk and Hedging Risk. Please see "Principal Risks" on pages 15 to
19 for a discussion of these and other risks.
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LM Value Institutional Portfolio
Adviser: LMFM
Objective: Long-term growth of capital
The Portfolio invests primarily in equity securities (including common and
preferred stocks), and securities convertible into equity securities, that, in
the Adviser's opinion, offer the potential for capital growth. The Adviser
follows a value discipline in selecting securities, and therefore seeks to
purchase securities at large discounts to the Adviser's assessment of their
intrinsic value. Intrinsic value, according to the Adviser, is the value of the
company measured, to different extents depending on the type of company, on
factors such as, but not limited to, the discounted value of its projected
future free cash flows, the company's ability to earn returns on capital in
excess of its cost of capital, private market values of similar companies, the
value of its assets, and the costs to replicate its business. Qualitative
factors, such as an assessment of the company's products, competitive
positioning, strategy, industry economics and dynamics, regulatory frameworks
and more, are also important. Securities may be undervalued due to uncertainty
arising from the availability of accurate information, economic growth and
change, changes in competitive conditions, technological change, changes in
government policy or geo-political dynamics, and more. The Adviser takes a long-
term approach to investing, generally characterized by long holding periods and
low portfolio turnover. The Portfolio generally invests in companies with market
capitalizations greater than $5 billion, but may invest in companies of any
size.
The Adviser typically sells a security when, in the Adviser's assessment, the
security no longer appears to offer a long-term above average risk-adjusted rate
of return, when a more compelling investment opportunity is found, or when the
investment basis no longer applies.
The Portfolio may also invest in debt securities of companies having one or more
of the above characteristics. The Portfolio may invest up to 25% of its net
assets in long-term debt securities. Up to 10% of its total assets may be
invested in convertible and/or debt securities rated below investment grade,
i.e., not rated at least BBB by Standard & Poor's or Baa by Moody's Investors
Service, Inc. or, if unrated by those entities, deemed by the Adviser to be of
comparable quality. These bonds are commonly referred to as junk bonds.
For temporary purposes, or when cash is temporarily available, the Portfolio may
invest without limit in investment grade, short-term debt instruments, including
government, corporate and money market securities. The Portfolio may not achieve
its investment objective when so invested.
Among the principal risks of investing in the Portfolio are Market Risk,
Interest Rate Risk, Credit Risk, Call Risk, Special Risks of High Yield
Securities, Foreign Securities Risk, Borrowing Risk and Hedging Risk. Please see
"Principal Risks" on pages 15 to 19 for a discussion of these and other risks.
LM Special Investment Institutional Portfolio
Adviser: LMFM
Objective: Capital appreciation
The Portfolio invests primarily in equity securities, and securities convertible
into equity securities, of companies whose market capitalizations are typically
classified as small to mid-sized. The Adviser defines small to mid-sized
companies as those below the top 500 U.S. companies in terms of market
capitalization. It also invests in "special situations" without regard to market
capitalization. Special situations are companies undergoing unusual or possibly
one-time developments that, in the opinion of the Adviser, make them attractive
for investment. Such developments may include actual or anticipated: sale or
termination of an unprofitable part of the company's business; change in the
company's management or in management's philosophy; change in the industry in
which the company operates; introduction of new products or technologies; or the
prospect or effect of acquisition or merger activities.
The Adviser follows a value discipline in selecting securities, and therefore
seeks to purchase securities at large discounts to the Adviser's assessment of
their intrinsic value. Intrinsic value, according to the Adviser, is the value
of the company measured, to different extents depending on the type of company,
on factors such as, but not limited to, the discounted value of its projected
future free cash flows, the company's ability to earn returns on capital in
excess of its cost of capital, private market values of
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similar companies, the value of its assets, and the costs to replicate its
business. Qualitative factors, such as an assessment of the company's products,
competitive positioning, strategy, industry economics and dynamics, regulatory
frameworks and more, are also important. Securities may be undervalued due to
uncertainty arising from the availability of accurate information, economic
growth and change, changes in competitive conditions, technological change,
changes in government policy or geo-political dynamics, and more.
The Portfolio also invests in debt securities of companies having one or more of
the above characteristics. The Portfolio may invest up to 35% of its net assets
in debt securities rated below investment grade, i.e., rated below BBB/Baa (or,
if unrated, determined by the Adviser to be of comparable quality). These bonds
are commonly referred to as junk bonds. The Portfolio may invest up to 20% of
its total assets in securities of companies involved in actual or anticipated
reorganizations or restructurings.
The Adviser typically sells a security when, in the Adviser's assessment, the
security no longer appears to offer a long-term above average risk-adjusted rate
of return, when a more compelling investment opportunity is found, or when the
investment basis no longer applies.
For temporary defensive purposes, or when cash is temporarily available, the
Portfolio may invest without limit in investment grade, short-term debt
instruments, including government, corporate and money market securities. The
Portfolio may not achieve its investment objective when so invested.
Among the principal risks of investing in the Portfolio are Market Risk,
Interest Rate Risk, Credit Risk, Call Risk, Special Risks of High Yield
Securities, Foreign Securities Risk, Borrowing Risk and Hedging Risk. Please see
"Principal Risks" on pages 15 to 19 for a discussion of these and other risks.
LM Total Return Institutional Portfolio
Adviser: LMFM
Objective: Capital appreciation and current income in order to achieve an
attractive total investment return consistent with reasonable risk
The Portfolio invests primarily in securities that, in the Adviser's opinion,
offer the potential for long-term capital growth and attractive current income.
The Portfolio invests primarily in common stocks, debt securities, and
securities convertible into common stocks, but is not limited to these types of
securities. The Portfolio may invest in securities that do not pay current
income but do, in the Adviser's opinion, offer prospects for capital
appreciation and/or future income. The Adviser follows a value discipline in
selecting securities, and therefore seeks to purchase securities at large
discounts to the Adviser's assessment of their intrinsic value. Intrinsic value,
according to the Adviser, is the value of the company measured, to different
extents depending on the type of company, on factors such as, but not limited
to, the discounted value of its projected future free cash flows, the company's
ability to earn returns on capital in excess of its costs of capital, private
market values of similar companies, the value of its assets, and the costs to
replicate its business. Qualitative factors, such as an assessment of the
company's products, competitive positioning, strategy, industry economics and
dynamics, regulatory frameworks and more, are also important. Securities may be
undervalued due to uncertainty arising from the availability of accurate
information, economic growth and change, changes in competitive conditions,
technological change, changes in government policy or geo-political dynamics,
and more. The Portfolio may invest in companies of any size.
The Adviser typically sells a security when, in the Adviser's assessment, the
security no longer appears to offer long-term attractive total returns at
reasonable risk, when a more compelling investment opportunity is found, or when
the investment basis no longer applies. The Portfolio may invest in money market
securities for temporary defensive purposes or when cash is temporarily
available. The Portfolio may not achieve its investment objective when so
invested. Consistent with the investment objective, the Portfolio may also
invest in debt securities when the Adviser believes the return on such
securities may equal or exceed the return on equity securities. The Portfolio
may invest in debt securities of any maturity of both foreign and domestic
issuers without regard to rating, and may invest its assets in debt securities
without regard to a percentage limit. The Adviser currently anticipates that
under normal market conditions the Portfolio will invest no more than 50% of its
total assets in intermediate-term and long-term debt securities and no more than
5% of its total assets in debt securities that are not investment grade quality
(commonly referred to as junk bonds).
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Among the principal risks of investing in the Portfolio are Market Risk,
Interest Rate Risk, Credit Risk, Call Risk, Special Risks of High Yield
Securities, Liquidity Risk, Borrowing Risk, Foreign Securities Risk, Currency
Risk and Hedging Risk. Please see "Principal Risks" on pages 15 to 19 for a
discussion of these and other risks.
LM Balanced Institutional Portfolio
Adviser: LMFM
Objective: Long-term capital appreciation and current income
The Portfolio is a "fund of funds" which is comprised of two separate investment
components: an equity component and a fixed income component. The equity
component will consist solely of Institutional Class shares of the LM Value
Institutional Portfolio ("Value Institutional Portfolio"), a series of LM
Institutional Fund Advisors II, Inc., while the fixed income component will
consist solely of Institutional Class shares of the Western Asset Core Portfolio
("Core Portfolio"), a series of LM Institutional Fund Advisors I, Inc. The
investment objectives, principal investment strategies and related risks of the
Core Portfolio and the Value Institutional Portfolio are described elsewhere in
this Prospectus.
LMFM, the Portfolio's Adviser, will be responsible for allocating assets between
the two components. LMFM currently anticipates that under normal market
conditions approximately 60% of the Portfolio's total assets will be allocated
to the equity component and approximately 40% will be allocated to the fixed
income component. However, LMFM reserves the right to vary these percentages, as
it deems appropriate and market opportunities arise, subject to the limitation
that, under normal market conditions, at least 25% of the Portfolio's total
assets will be allocated to the fixed income component. For temporary defensive
purposes, the Portfolio may also hold cash or other short-term investments and
may not achieve its investment objective when so invested.
Batterymarch U.S. MidCapitalization Equity Portfolio
Adviser: Batterymarch
Objective: Long-term capital appreciation
Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in equity securities of companies with medium market
capitalizations domiciled, or having their principal activities, in the United
States. The Adviser defines medium market capitalization companies as those with
market capitalizations similar, in its judgment, to the market capitalization of
companies in the Standard & Poor's MidCap 400 Index, determined at the time of
the Portfolio's investment. The S&P MidCap 400 Index is a market weighted
composite index of 400 stocks in the middle capitalization sector of the U.S.
equities market. A company that was a medium market capitalization company at
the time of the Portfolio's investment will continue to be treated as such for
purposes of the 65% test, even if its market capitalization is no longer similar
to that of companies in the S&P MidCap 400 Index.
Equity securities include common stock, preferred stock, securities convertible
into or exchangeable for common stock, rights and warrants to acquire such
securities and substantially similar forms of equity with comparable risk. The
Portfolio may also invest in securities of companies in the form of American
Depository Receipts, which are typically dollar-denominated instruments traded
on an exchange in the United States.
The Adviser uses a bottom-up, quantitative stock selection process. The
cornerstone of this process is a proprietary stock selection model that ranks
the stocks in the Portfolio's investable universe by relative attractiveness.
The quantitative factors within this model reflect a style neutral investment
philosophy and are intended to measure growth, value, fundamental expectations
and technical indicators.
In addition to its principal investment strategies, the Portfolio may engage in
other transactions. For example, although the Portfolio expects to remain
substantially fully invested in equity securities, the Portfolio may invest in
debt or fixed income securities, cash and money market instruments, including
repurchase agreements. Under normal market conditions, up to 5% of the
Portfolio's total assets may be invested in fixed income securities rated below
investment grade or, if unrated, determined by the Adviser to be of comparable
quality. The Portfolio may also engage in reverse repurchase agreement
transactions and other borrowings, purchase restricted and illiquid securities,
lend its portfolio securities, invest in securities of other investment
companies, engage in foreign currency exchange transactions and engage in
futures and options transactions.
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Among the principal risks of investing in the Portfolio are Market Risk,
Interest Rate Risk, Credit Risk, Borrowing Risk, Liquidity Risk, Derivatives
Risk, Foreign Securities Risk, Currency Risk, Special Risks of High Yield
Securities and Hedging Risk. Please see "Principal Risks" on pages 15 to 19 for
a discussion of these and other risks.
Batterymarch U.S. Small Capitalization Equity Portfolio
Adviser: Batterymarch
Objective: Long-term capital appreciation
Under normal market conditions, the Portfolio will invest at least 65% of its
total assets in equity securities of companies with small market capitalizations
domiciled, or having their principal activities, in the United States. The
Adviser defines small market capitalization companies as those whose market
capitalizations are similar, in its judgment, to the market capitalization of
companies in the Russell 2000 Index, determined at the time of the Portfolio's
investment. The Russell 2000 Index is a capitalization-weighted broad-based
index of 2000 small capitalization U.S. companies. A company that was a small
market capitalization company at the time of the Portfolio's investment will
continue to be treated as such for purposes of the 65% test, even if its market
capitalization is no longer similar to that of companies in the Russell 2000
Index.
Equity securities include common stock, preferred stock, securities convertible
into or exchangeable for common stock, rights and warrants to acquire such
securities and substantially similar forms of equity with comparable risk. The
Portfolio may also invest in securities of companies in the form of American
Depository Receipts, which are typically dollar-denominated instruments traded
on an exchange in the United States.
The Adviser uses a bottom-up, quantitative stock selection process. The
cornerstone of this process is a proprietary stock selection model that ranks
the stocks in the Portfolio's investable universe by relative attractiveness on
a daily basis. The quantitative factors within this model reflect a style
neutral investment philosophy and are intended to measure growth, value,
fundamental expectations and technical indicators.
In addition to its principal investment strategies, the Portfolio may engage in
other transactions. For example, although the Portfolio expects to remain
substantially fully invested in equity securities, the Portfolio may invest in
debt or fixed income securities, cash and money market instruments, including
repurchase agreements. Under normal market conditions, up to 5% of the
Portfolio's total assets may be invested in fixed income securities rated below
investment grade or, if unrated, determined by the Adviser to be of comparable
quality. The Portfolio may also engage in reverse repurchase agreement
transactions and other borrowings, purchase restricted and illiquid securities,
lend its portfolio securities, invest in securities of other investment
companies, engage in foreign currency exchange transactions and engage in
futures and options transactions.
Among the principal risks of investing in the Portfolio are Market Risk,
Interest Rate Risk, Credit Risk, Borrowing Risk, Liquidity Risk, Derivatives
Risk, Special Risks of High Yield Securities and Hedging Risk. Please see
"Principal Risks" on pages 15 to 19 for a discussion of these and other risks.
Batterymarch International Equity Portfolio
Adviser: Batterymarch
Objective: Long-term total return
Under normal market conditions, the Portfolio will invest substantially all of
its assets, but in any event at least 65% of its total assets, in non-U.S.
equity securities.
The primary focus of the Adviser is stock selection, with a secondary focus on
country allocation. The Adviser uses a bottom-up, quantitative stock selection
process for the developed markets portion of the Portfolio's investments. The
cornerstone of this process is a proprietary stock selection model that ranks
the 2,800 stocks in the Portfolio's investable universe by relative
attractiveness on a daily basis. The quantitative factors within this model are
intended to measure growth, value, fundamental expectations and technical
indicators (i.e., supply and demand).
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Country allocation for the developed markets portion of the Portfolio is based
on rankings generated by the Adviser's proprietary country model. The Adviser
examines securities from over 20 international stock markets, with emphasis on
several of the largest: Japan, United Kingdom, France, Canada and Germany.
The Portfolio may invest up to 35% of its total assets in emerging market equity
securities. The Adviser's investment strategy for the emerging markets portion
of the Portfolio represents a distinctive combination of quantitative
methodology and traditional fundamental analysis. The emerging markets
allocation focuses on what the Adviser believes are higher-quality, dominant
companies, which the Adviser believes to have strong growth prospects and
reasonable valuations. Country allocation for the emerging markets portion of
the Portfolio also combines quantitative and fundamental approaches.
The Portfolio will normally be invested across a broad range of industries and
across a number of countries, consistent with the objective of maximum total
return. However, more than 25% of the Portfolio's total assets may be invested
in securities of issuers located in a single country, which is currently
expected to be the case with respect to both Japan and the United Kingdom.
Because the Portfolio may concentrate a significant portion of its investments
in a single country or currency, it will be more susceptible to factors
adversely affecting such currency or issuers within that country than would a
more diversified portfolio of securities.
The Portfolio may invest without limit in cash and money market instruments,
including repurchase agreements, in circumstances when cash is temporarily
available, or for temporary defensive purposes when the Adviser believes such
action is warranted by abnormal market or economic situations. The Portfolio may
not achieve its investment objectives when so invested. Up to 5% of the
Portfolio's total assets may be invested in fixed income securities rated below
investment grade or, if unrated, determined by the Adviser to be below
investment grade. The Adviser may also seek to enhance portfolio returns through
active currency hedging strategies, although there can be no assurances that
such strategies will be pursued or, if pursued, will be successful.
Among the principal risks of investing in the Portfolio are Market Risk, Foreign
Securities Risk, Emerging Markets Risk, Currency Risk, Interest Rate Risk,
Credit Risk, Call Risk, Special Risks of High Yield Securities, Borrowing Risk,
Derivatives Risk and Hedging Risk. Please see "Principal Risks" on pages 15 to
19 for a discussion of these and other risks.
Batterymarch Emerging Markets Portfolio
Adviser: Batterymarch
Objective: Long-term capital appreciation
Under normal market conditions, the Portfolio will invest substantially all of
its assets, but in any event at least 65% of its total assets, in equity
securities and convertible securities of emerging market issuers. Emerging
market countries are those countries having less fully developed economic and
political systems and include any country: (i) having an "emerging stock market"
or considered a "frontier market" as defined by the International Finance
Corporation; (ii) with low- to middle-income economies according to the
International Bank for Reconstruction and Development ("World Bank"); (iii)
listed in World Bank publications as developing; or (iv) included in the Morgan
Stanley Capital International (MSCI) Emerging Markets published index. Emerging
market equity securities include common stock, preferred stock, securities
convertible into common stock, rights and warrants to acquire such securities
and substantially similar forms of equity with comparable risk characteristics
that are: (1) publicly traded on emerging market stock exchanges, or whose
principal trading market is over-the-counter (i.e., off-exchange) in an emerging
market country; (2) securities denominated in any currency if issued by
companies to finance operations in an emerging market country; (3) securities of
companies that derive a substantial portion (i.e., in excess of 50%) of their
total revenues from goods or services produced in, or sales made in, emerging
market countries; (4) securities of companies organized under the laws of an
emerging market country or region, which are publicly traded in securities
markets elsewhere; or (5) American depositary receipts ("ADRs") (or similar
instruments) with respect to the foregoing.
The Portfolio intends to invest in Asia, Latin America, the Indian Subcontinent,
Southern and Eastern Europe, the Middle East and Africa, although it may not
invest in all these markets at all times and may not invest in any particular
market when it deems investment in that country or region to be inadvisable.
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More than 25% of the Portfolio's total assets may be invested in securities of
issuers located in a single country. Because the Portfolio may concentrate a
significant portion of its investments in a single country or currency, it will
be more susceptible to factors adversely affecting such currency or issuers
within that country than would a more diversified portfolio of securities.
The Adviser focuses on what the Adviser believes are higher-quality, dominant
emerging markets companies which the Adviser believes to have strong growth
prospects and reasonable valuations, selected from an investable universe of
approximately 1,000 stocks. The Adviser's emerging markets investment strategy
represents a distinctive combination of quantitative methodology and traditional
fundamental analysis. Traditional "on-the-ground" fundamental research is
combined by the Adviser with quantitative valuation disciplines in those markets
where reliable data is available. In determining country allocation, the Adviser
also merges quantitative and fundamental approaches.
The Portfolio may invest without limit in cash and money market instruments,
including repurchase agreements, in circumstances when cash is temporarily
available, or for temporary defensive purposes when the Adviser believes such
action is warranted by abnormal market or economic situations. The Portfolio may
not achieve its investment objective when so invested. Up to 10% of the
Portfolio's total assets may be invested in fixed income securities rated below
investment grade or, if unrated, determined by the Adviser to be below
investment grade (i.e., rated below BBB/Baa and commonly referred to as junk
bonds).
Among the principal risks of investing in the Portfolio are Market Risk, Foreign
Securities Risk, Emerging Markets Risk, Currency Risk, Interest Rate Risk,
Credit Risk, Call Risk, Special Risks of High Yield Securities, Borrowing Risk,
Derivatives Risk and Hedging Risk. Please see "Principal Risks" on pages 15 to
19 for a discussion of those and other risks.
PRINCIPAL RISKS
In General
At any time, your investment in a mutual fund may be worth more or less than the
price you originally paid for it. You may lose money by investing in any of
these Portfolios because: (1) the value of the investments it owns changes,
sometimes rapidly and unpredictably; (2) the Portfolio is not successful in
reaching its goal because of its strategy or because it did not implement its
strategy properly; or (3) unforeseen occurrences in the securities markets
negatively affect the Portfolio.
An investment in the Western Asset Government Money Market and Western Asset
Money Market Portfolios is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although these Portfolios seek to preserve the value of your investment
at $1.00 per share, it is possible to lose money by investing in these
Portfolios.
The following risks apply to the Portfolios. You should read this section
carefully before you invest in order to learn more about the Portfolio in which
you will invest.
Market Risk
Certain of the Portfolios may invest, directly or indirectly, their assets in
equity securities. Prices of equity securities generally fluctuate more than
those of other securities. A Portfolio may experience a substantial or complete
loss on an individual stock. Market risk may affect a single issuer, industry or
section of the economy or may affect the market as a whole. The Batterymarch
International Equity Portfolio and the Batterymarch Emerging Markets Portfolio
invest primarily in foreign equity securities. Foreign securities have
additional risks, see "Foreign Securities Risk" and "Currency Risk" below.
Securities of "small cap" companies, such as those in which the Batterymarch
U.S. Small Capitalization Equity Portfolio may invest, entail special risks.
Such companies often have limited operating histories and may have more
restricted product lines or more limited financial resources than larger, more
established companies. For these and other reasons, they may be more severely
affected by economic downturns or other adverse developments than are larger,
more established companies. Securities of "small cap" companies may be traded
"over-the-counter" and often trade less frequently and in more limited volume,
may be subject to greater volatility and may be more difficult to value than
securities of larger, more established companies. "Small
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cap" companies are often involved in actual or anticipated reorganizations or
restructurings, which involve special risks, including difficulty in obtaining
information as to the financial condition of such companies. Market prices of
such companies' securities may be subject to sudden and erratic price
volatility. The securities of "mid-sized" companies, such as those in which the
Batterymarch U.S. MidCapitalization Equity Portfolio and the LM Special
Investment Institutional Portfolio may invest, share many of these same risks.
Foreign Securities Risk
Investments in foreign securities (including those denominated in U.S. dollars)
involve certain risks not typically associated with investments in domestic
issuers. The values of foreign securities are subject to economic and political
developments in the countries and regions where the companies operate or are
domiciled, or where the securities are traded, such as changes in economic or
monetary policies, and to changes in exchange rates. Values may also be affected
by restrictions on receiving the investment proceeds from a foreign country.
In general, less information is publicly available about foreign companies than
about U.S. companies. Foreign companies are generally not subject to the same
accounting, auditing and financial reporting standards as are U.S. companies.
Some securities issued by foreign governments or their subdivisions, agencies
and instrumentalities may not be backed by the full faith and credit of the
foreign government. Even where a security is backed by the full faith and credit
of a foreign government, it may be difficult for a Portfolio to pursue its
rights against a foreign government in that country's courts. Some foreign
governments have defaulted on principal and interest payments.
In addition, a Portfolio's investments in foreign securities may be subject to
the risk of nationalization or expropriation of assets, imposition of currency
exchange controls or restrictions on the repatriation of foreign currency,
confiscatory taxation, political or financial instability and adverse diplomatic
developments. Dividends or interest on, or proceeds from the sale of, foreign
securities may be subject to foreign withholding taxes, and special U.S. tax
considerations may apply.
Emerging Markets Risk
The risks of foreign investment are greater for investments in emerging markets.
Among others, these types of investments can include not only equity securities,
but also "Brady Bonds," bonds issued as a result of a debt restructuring plan,
Eurobonds, domestic and international bonds issued under the laws of a
developing country, emerging market loans and other debt instruments. Emerging
market countries typically have economic and political systems that are less
fully developed, and can be expected to be less stable than those of more
advanced countries. For example, the economies of such countries can be subject
to rapid and unpredictable rates of inflation or deflation. Low trading volumes
may result in a lack of liquidity and in price volatility. Emerging market
countries may have policies that restrict investment by foreigners, or that
prevent foreign investors from withdrawing their money at will.
Because some of the Portfolios may invest a significant amount of their total
assets in emerging market securities, investors should be able to tolerate
sudden and sometimes substantial fluctuations in the value of their investments.
An investment in any Portfolio that invests in emerging market securities, which
includes the Batterymarch Emerging Markets Portfolio, the Batterymarch
International Equity Portfolio, the Western Asset High Yield Portfolio, the
Western Asset Non-U.S. Fixed Income Portfolio and the Western Asset Global
Strategic Income Portfolio, should be considered speculative.
Currency Risk
Because certain Portfolios may invest in securities denominated in foreign
currencies, their value can be affected by changes in the rates of exchange
between those currencies and the U.S. dollar. Currency exchange rates can be
volatile and affected by, among other factors, the general economics of a
country, the actions of the U.S. and foreign governments or central banks, the
imposition of currency controls, and speculation. A security may be denominated
in a currency that is different from the currency where the issuer is domiciled.
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In addition to the policies described elsewhere in this Prospectus, the
Portfolios may from time to time attempt to hedge a portion of their currency
risk, using a variety of techniques, including currency futures, forwards, or
options. However, these instruments may not always work as intended, and in
certain cases a Portfolio may be worse off than if it had not used a hedging
instrument. For most emerging market currencies, there are not suitable hedging
instruments available. See "Hedging Risk" below for more information.
Interest Rate Risk
Each Portfolio may be subject to interest rate risk, which is the possibility
that the market prices of the Portfolio's fixed income investments may decline
due to an increase in market interest rates. Generally, the longer the maturity
of a fixed-income security, the greater is the effect on its value when rates
increase.
Certain securities pay interest at variable or floating rates. Variable rate
securities reset at specified intervals, while floating rate securities reset
whenever there is a change in a specified index rate. In most cases, these reset
provisions reduce the effect of market interest rates on the value of the
security. However, some securities do not track the underlying index directly,
but reset based on formulas that can produce an effect similar to leveraging;
others may also provide for interest payments that vary inversely with market
rates. The market prices of these securities may fluctuate significantly when
interest rates change.
Credit Risk
A Portfolio is also subject to credit risk, i.e., the risk that an issuer of
securities will be unable to pay principal and interest when due, or that the
value of the security will suffer because investors believe the issuer is less
able to pay. This is broadly gauged by the credit ratings of the securities in
which a Portfolio invests. However, ratings are only the opinions of the
agencies issuing them and are not absolute guarantees as to quality. Not all
securities are rated.
Moody's Investors Service considers debt securities rated Baa to have
speculative characteristics. Debt securities rated below investment grade (i.e.,
securities rated below Baa/BBB) are deemed by the rating agencies to be
speculative and may involve major risk of exposure to adverse conditions. These
ratings may indicate that the securities are highly speculative and may be in
default or in danger of default as to principal and interest. Unrated securities
of comparable quality share these risks.
Not all U.S. government securities are backed by the full faith and credit of
the United States. Some securities, such as securities issued by Freddie Mac,
are backed only by the credit of the issuing agency or instrumentality.
Accordingly, there is a risk of default on these securities.
Call Risk
Many fixed income securities, especially those issued at high interest rates,
provide that the issuer may repay them early. Issuers often exercise this right
when interest rates are low. Accordingly, holders of callable securities may not
benefit fully from the increase in value that other fixed income securities
experience when rates decline. Furthermore, a Portfolio reinvests the proceeds
of the payoff at current yields, which are lower than those paid by the security
that was paid off.
Special Risks of High Yield Securities
Securities rated below Baa/BBB, commonly known as junk bonds or high yield
securities, have speculative characteristics. Accordingly, there is a greater
possibility that the issuers of these securities may be unable to make timely
payments of interest and principal and thus default. If this happens, or is
perceived as likely to happen, the values of these investments will usually be
more volatile. These securities may be less liquid than higher-rated securities,
which means a Portfolio may have difficulty selling them at times, and may have
to apply a greater degree of judgment in establishing a price. When a Portfolio
buys lower rated debt, the achievement of its goals depends more on the
Advisers' ability than would be the case if a Portfolio were buying investment
grade debt. Unrated securities of comparable quality share these risks.
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Borrowing Risk
When a Portfolio is borrowing money or otherwise leveraging its portfolio, the
value of an investment in that Portfolio will be more volatile and all other
risks will tend to be compounded. This is because leverage tends to exaggerate
the effect of any increase or decrease in the value of a Portfolio's holdings.
Portfolios may take on borrowing risk or similar risks by using reverse
repurchase agreements, dollar rolls and other borrowings, by investing
collateral from loans of portfolio securities, through the use of when-issued,
delayed-delivery or forward commitment transactions or by using other
derivatives. The use of leverage may also cause a Portfolio to liquidate
positions when it may not be advantageous to do so to satisfy its obligations or
meet segregation requirements.
Liquidity Risk
Liquidity risk exists when particular investments are difficult to sell. A
Portfolio may not be able to sell these illiquid investments at the best prices.
Investments in derivatives, foreign investments, restricted securities,
securities having small market capitalization, and securities having substantial
market and/or credit risk tend to involve greater liquidity risk.
Special Risks of Mortgage-Backed and Asset-Backed Securities
Mortgage-backed securities represent an interest in a pool of mortgages. When
market interest rates decline, many mortgages are refinanced, and mortgage-
backed securities are paid off earlier than expected. Prepayments may also occur
on a scheduled basis or due to foreclosure. The effect on a Portfolio's return
is similar to that discussed above for call risk.
When market interest rates increase, the market values of mortgage-backed
securities decline. At the same time, however, mortgage refinancings and
prepayments slow, which lengthens the effective maturities of these securities.
As a result, the negative effect of the rate increase on the market value of
mortgage-backed securities is usually more pronounced than it is for other types
of fixed income securities, potentially increasing the volatility of a
Portfolio.
Asset-backed securities are structured like mortgage-backed securities, but
instead of mortgage loans or interests in mortgage loans, the underlying assets
may include such items as motor vehicle installment sales or installment loan
contracts, leases of various types of real and personal property, and
receivables from credit card agreements. The ability of an issuer of asset-
backed securities to enforce its security interest in the underlying assets may
be limited. Asset-backed securities are subject to many of the same risks as
mortgage-backed securities.
Prepayments may cause losses on securities purchased at a premium. At times,
some of the mortgage-backed and asset-backed securities in which a Portfolio may
invest will have higher than market interest rates and therefore will be
purchased at a premium above their par value. Unscheduled prepayments, which are
made at par, will cause a Portfolio to experience a loss equal to any
unamortized premium.
Non-Diversification
The Western Asset Non-U.S. Fixed Income Portfolio and the Western Asset Global
Strategic Income Portfolio are non-diversified, meaning each may invest a
greater percentage of its total assets in securities of any one issuer, or may
invest in a smaller number of different issuers, than it could if it were a
"diversified" company under the Investment Company Act. When a Portfolio's
assets are invested in the securities of a limited number of issuers, or in a
limited number of countries or currencies, the value of its shares will be more
susceptible to any single economic, political or regulatory event than shares of
a more diversified fund.
Derivatives Risk
A Portfolio may engage in a variety of transactions using "derivatives," such as
futures, options, warrants and swaps. Derivatives are financial instruments
whose value depends upon, or is derived from, the value of something else, such
as one or more under-
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lying investments, indexes or currencies. Derivatives may be traded on organized
exchanges, or in individually negotiated transactions with other parties (these
are known as "over the counter"). A Portfolio may use derivatives both for
hedging and non-hedging purposes, including for purposes of enhancing returns.
Although the Advisers have the flexibility to make use of derivatives, they may
choose not to for a variety of reasons, even under very volatile market
conditions.
Derivatives involve special risks and costs and may result in losses to a
Portfolio. The successful use of derivatives requires sophisticated management,
and a Portfolio will depend on the Adviser's ability to analyze and manage
derivatives transactions. The prices of derivatives may move in unexpected ways,
especially in abnormal market conditions. Some derivatives are "leveraged" and
therefore may magnify or otherwise increase investment losses to a Portfolio. A
Portfolio's use of derivatives may also increase the amount of taxes payable by
shareholders.
Other risks arise from the potential inability to terminate or sell derivatives
positions. A liquid secondary market may not always exist for a Portfolio's
derivatives positions at any time. In fact, many over-the-counter instruments
will not be liquid. Over-the-counter instruments also involve the risk that the
other party will not meet its obligations to a Portfolio.
Hedging Risk
The decision as to whether and to what extent a Portfolio will engage in hedging
transactions to hedge against such risks as credit risk, currency risk and
market risk will depend on a number of factors, including prevailing market
conditions, the composition of the Portfolio and the availability of suitable
transactions. Accordingly, there can be no assurance that a Portfolio will
engage in hedging transactions at any given time or from time to time or that
any such strategies will be successful. Hedging transactions involve costs and
may result in losses.
Turnover
The length of time a Portfolio has held a particular security is not generally a
consideration in investment decisions. A change in the securities held by a
Portfolio is known as "portfolio turnover." As a result of a Portfolio's
investment policies, under certain market conditions a Portfolio's turnover rate
may be higher than that of other mutual funds. Portfolio turnover generally
involves some expense to a Portfolio, including brokerage commissions or dealer
mark-ups and other transaction costs on the sale of securities and reinvestment
in other securities. These transactions may result in realization of taxable
capital gains. Higher portfolio turnover rates, such as those above 100%, are
likely to result in higher brokerage commissions or other transactions costs and
could give rise to a greater amount of taxable capital gains.
Risks Associated with Other Policies the Portfolios May Pursue
In addition to the investment strategies described above, a Portfolio may also
make other types of investments, and therefore may be subject to other risks.
Some of these risks are described in each Portfolio's Statement of Additional
Information ("SAI"). The terms "debt" and "fixed income securities" are used in
this Prospectus interchangeably, and, where used, are not intended to be
limiting.
At times the Advisers may judge that market conditions make pursuing a
Portfolio's investment strategies inconsistent with the best interests of its
shareholders. The Advisers then may temporarily use alternative strategies that
are mainly designed to limit a Portfolio's losses. Although the Advisers have
the flexibility to use these strategies, they may choose not to for a variety of
reasons, even in very volatile market conditions. These strategies may cause a
Portfolio to miss out on investment opportunities, and may prevent a Portfolio
from achieving its goal. In addition, an Adviser may also keep a portion of a
Portfolio's assets in cash for temporary or defensive purposes, in order to meet
redemption requests or for investment purposes.
Except for the investment objective of each of the Western Asset Core, Western
Asset Intermediate and Western Asset Money Market Portfolios, the Directors may
change a Portfolio's investment objective, investment strategies and other
policies without shareholder approval.
18
<PAGE>
PERFORMANCE INFORMATION
The following information provides some indication of a Portfolio's risks. The
charts and tables show year-to-year changes in the performance of the
Institutional Class shares for the Western Asset Core, Western Asset
Intermediate, Western Asset Core Plus, Western Asset Non-U.S. Fixed Income, and
LM Value Institutional Portfolios. The tables following the charts compare each
Portfolio's performance to that of a broad measure of market performance. SEC
Rules do not require charts and tables for the other Portfolios or for the
Financial Intermediary Class shares. However, the performance for the Financial
Intermediary Class would be lower for each Portfolio since this Class has higher
expenses. Of course, a Portfolio's past performance is not an indication of
future performance.
Western Asset Core Portfolio
Calendar-Year Total Returns(dagger)
[GRAPH APPEARS HERE -- SEE PERCENTAGES BELOW]
1991 18.02%
1992 7.85%
1993 13.86%
1994 -4.33%
1995 20.97%
1996 3.70%
1997 10.17%
1998 8.34%
1999 -1.69%
(dagger)Best quarter: Second quarter 1995: +6.91%
Worst quarter: First quarter 1994: -2.60%
More recent return information: January 1, 2000 - June 30, 2000: 4.81%
Average Annual Total Returns for periods ended December 31, 1999
Portfolio Inception
1 Year 5 Years (September 4, 1990)
--------------------------------------------------------------------------
Core Portfolio -1.69% 8.04% 8.58%
--------------------------------------------------------------------------
Salomon Broad Market Index* -0.83% 7.73% 7.99%**
--------------------------------------------------------------------------
*The Salomon Brothers Broad Market Index is an unmanaged index that measures the
performance of the investment-grade universe of bonds issued in the United
States. The Index includes institutionally traded U.S. Treasury, government-
sponsored, mortgage and corporate securities. The Index does not incur fees and
expenses and cannot be purchased directly by investors.
**The average annual total return since inception shown for the Index is
calculated from August 31, 1990.
19
<PAGE>
Western Asset Intermediate Portfolio
Calendar-Year Total Returns(dagger)
[GRAPH APPEARS HERE -- SEE PERCENTAGES BELOW]
1995 15.51%
1996 4.69%
1997 8.40%
1998 7.71%
1999 0.39%
(dagger)Best quarter: Second quarter 1995: +5.17%
Worst quarter: First quarter 1996: -0.61%
More recent return information: January 1, 2000 - June 30, 2000: 3.70%
Average Annual Total Returns for periods ended December 31, 1999
Portfolio Inception
1 Year 5 Years (July 1, 1994)
--------------------------------------------------------------------------------
Intermediate Portfolio 0.39% 7.22% 6.65%
--------------------------------------------------------------------------------
Lehman Intermediate Gov't/Corp Bond Index* 0.39% 7.10% 6.57%**
*The Lehman Brothers Intermediate Gov't/Corp Bond Index is an unmanaged index
that measures the performance of intermediate (1-10 year) government and
corporate fixed-rate debt issues. The Index does not incur fees and expenses and
cannot be purchased directly by investors.
**The average annual total return since inception shown for the Index is
calculated from June 30, 1994.
Western Asset Core Plus Portfolio
Calendar-Year Total Returns(dagger)
[GRAPH APPEARS HERE -- SEE PERCENTAGES BELOW]
1999 -1.15%
(dagger)Best quarter: Second quarter 2000: +1.82%
Worst quarter: Second quarter 1999: -1.12%
More recent return information: January 1, 2000 - June 30, 2000: 3.96%
20
<PAGE>
Average Annual Total Returns for periods ended December 31, 1999
Portfolio Inception
1 Year (July 8, 1998)
---------------------------------------------------------------
Core Plus Portfolio -1.15% 1.63%
---------------------------------------------------------------
Salomon Broad Market Index* -0.83% 2.45%**
---------------------------------------------------------------
*The Salomon Brothers Broad Market Index is an unmanaged index that measures the
performance of the investment-grade universe of bonds issued in the United
States. The Index includes institutionally traded U.S. Treasury, government-
sponsored, mortgage and corporate securities. The Index does not incur fees and
expenses and cannot be purchased directly by investors.
**The average annual total return since inception shown for the Index is
calculated from June 30, 1998.
Western Asset Non-U.S. Fixed Income Portfolio
Calendar-Year Total Returns(dagger)
[GRAPH APPEARS HERE -- SEE PERCENTAGES BELOW]
1999 -1.78%
(dagger)Best quarter: Fourth quarter 1999: +1.10%
Worst quarter: Second quarter 2000: -1.29%
More recent return information: January 1, 2000 - June 30, 2000: 0.38%
Average Annual Total Returns for periods ended December 31, 1999
Portfolio Inception
1 Year (July 15, 1998)
-------------------------------------------------------------------------------
Non-U.S. Portfolio -1.78% 3.14%
-------------------------------------------------------------------------------
Salomon World Gov't ex-U.S. Index (Hedged)* 2.88% 5.47%**
-------------------------------------------------------------------------------
*The Salomon Brothers World Government ex-U.S. Index (Hedged) is an unmanaged
index that tracks debt issues traded in 14 world government bond markets. The
Index does not incur fees and expenses and cannot be purchased directly by
investors.
**The average annual total return since inception shown for the Index is
calculated from July 31, 1998.
21
<PAGE>
LM Value Institutional Portfolio
Calendar-Year Total Returns(dagger)
[GRAPH APPEARS HERE -- SEE PERCENTAGES BELOW]
1999 27.27%
(dagger)Best quarter: Fourth quarter 1999: +19.69%
Worst quarter: Third quarter 1999: -9.45%
More recent return information: January 1, 2000 - June 30, 2000: -2.43%
Average Annual Total Returns for periods ended December 31, 1999
Portfolio Inception
1 Year (September 22, 1998)
------------------------------------------------------------------------
Value Institutional Portfolio 27.27% 52.02%
------------------------------------------------------------------------
S&P 500 Index* 21.04% 35.97%**
------------------------------------------------------------------------
*The S&P 500 Index is an unmanaged of 500 common stocks and is considered to be
a broad indicator of general market performance. The Index does not incur fees
and expenses and cannot be purchased directly by investors.
**The average annual total return since inception shown for the Index is
calculated from September 30, 1998.
FEES AND EXPENSES
The following tables describe the fees and expenses that you may pay if you buy
and hold shares of a Portfolio.
Expenses are based on actual expenses for the fiscal year ended March 31, 2000
for the Western Asset Intermediate Portfolio, Western Asset Core Portfolio,
Western Asset Core Plus Portfolio, Western Asset Non-U.S. Fixed Income Portfolio
and LM Value Institutional Portfolio, reduced by expense waivers in effect
during the period, except for the information with respect to Western Asset Core
Plus Portfolio, which reflects a revised expense waiver recently adopted.
Expenses for the other Portfolios are based on estimated amounts for the current
fiscal year.
The examples below the tables are intended to help you compare the cost of
investing in a Portfolio with the cost of investing in other mutual funds. The
examples assume that you invest $10,000 in a Portfolio for the time periods
indicated and then redeem all of your shares at the end of those periods. The
examples also assume that your investment has a 5% return each year and that the
Portfolio's operating expenses remain the same. Your actual costs may be higher
or lower.
22
<PAGE>
Western Asset Government Money Market Portfolio
<TABLE>
<CAPTION>
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.20% 0.20%
Distribution (12b-1) Fees* None 0.10%
Other Expenses 0.15% 0.15%
------ ------
Total Annual Fund Operating Expenses 0.35% 0.45%
====== ======
Expense Reimbursement/Waiver (0.05)% (0.05)%
====== ======
Net Expenses** 0.30% 0.40%
====== ======
Examples
1 Year $ 36 $ 46
3 Years $ 113 $ 144
<CAPTION>
Western Asset Money Market Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.20% 0.20%
Distribution (12b-1) Fees* None 0.10%
Other Expenses 0.15% 0.15%
------ ------
Total Annual Fund Operating Expenses 0.35% 0.45%
====== ======
Expense Reimbursement/Waiver (0.05)% (0.05)%
====== ======
Net Expenses** 0.30% 0.40%
====== ======
Examples
1 Year $ 36 $ 46
3 Years $ 113 $ 144
<CAPTION>
Western Asset Intermediate Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.40% 0.40%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.08% 0.08%
------ ------
Total Annual Fund Operating Expenses 0.48% 0.73%
====== ======
Expense Reimbursement/Waiver (0.03)% (0.03)%
====== ======
Net Expenses** 0.45% 0.70%
====== ======
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C>
Examples
1 Year $ 49 $ 75
3 Years $ 154 $ 233
5 Years $ 269 $ 406
10 Years $ 604 $ 906
</TABLE>
<TABLE>
<CAPTION>
Western Asset Intermediate Plus Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.40% 0.40%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.15% 0.15%
------ ------
Total Annual Fund Operating Expenses 0.55% 0.80%
====== ======
Expense Reimbursement/Waiver (0.10)% (0.10)%
====== ======
Net Expenses** 0.45% 0.70%
====== ======
Examples
1 Year $ 56 $ 82
3 Years $ 176 $ 255
<CAPTION>
Western Asset Core Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.45% 0.45%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.06% 0.06%
------ ------
Total Annual Fund Operating Expenses 0.51% 0.76%
====== ======
Expense Reimbursement/Waiver (0.01)% (0.01)%
====== ======
Net Expenses** 0.50% 0.75%
====== ======
Examples
1 Year $ 52 $ 78
3 Years $ 164 $ 243
5 Years $ 285 $ 422
10 Years $ 640 $ 942
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Western Asset Core Plus Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.45% 0.45%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.20% 0.20%
------ ------
Total Annual Fund Operating Expenses 0.65% 0.90%
====== ======
Expense Reimbursement/Waiver (0.20)% (0.20)%
====== ======
Net Expenses** 0.45% 0.70%
====== ======
Examples
1 Year $ 66 $ 92
3 Years $ 208 $ 287
5 Years $ 362 $ 498
10 Years $ 810 $1,108
<CAPTION>
Western Asset Inflation Indexed Bond Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.20% 0.20%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.15% 0.15%
------ ------
Total Annual Fund Operating Expenses 0.35% 0.60%
====== ======
Expense Reimbursement/Waiver (0.10)% (0.10)%
====== ======
Net Expenses** 0.25% 0.50%
====== ======
Examples
1 Year $ 36 $ 61
3 Years $ 113 $ 192
<CAPTION>
Western Asset High Yield Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.55% 0.55%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.15% 0.15%
------ ------
Total Annual Fund Operating Expenses 0.70% 0.95%
====== ======
Expense Reimbursement/Waiver (0.15)% (0.15)%
====== ======
Net Expenses** 0.55% 0.80%
====== ======
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C>
Examples
1 Year $ 72 $ 97
3 Years $ 224 $ 303
</TABLE>
<TABLE>
<CAPTION>
Western Asset Non-U.S. Fixed Income Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.45% 0.45%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.38% 0.38%
------ ------
Total Annual Fund Operating Expenses 0.83% 1.08%
====== ======
Expense Reimbursement/Waiver (0.28)% (0.28)%
====== ======
Net Expenses** 0.55% 0.80%
====== ======
Examples
1 Year $ 85 $ 110
3 Years $ 265 $ 343
5 Years $ 460 $ 595
10 Years $1,025 $1,317
<CAPTION>
Western Asset Global Strategic Income Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.45% 0.45%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.40% 0.40%
------ ------
Total Annual Fund Operating Expenses 0.85% 1.10%
====== ======
Expense Reimbursement/Waiver (0.05)% (0.05)%
====== ======
Net Expenses** 0.80% 1.05%
====== ======
Examples
1 Year $ 87 $ 112
3 Years $ 271 $ 350
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Western Asset Enhanced Equity Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.55% 0.55%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.20% 0.20%
------ ------
Total Annual Fund Operating Expenses 0.75% 1.00%
====== ======
Expense Reimbursement/Waiver (0.10)% (0.10)%
====== ======
Net Expenses** 0.65% 0.90%
====== ======
Examples
1 Year $ 77 $ 102
3 Years $ 240 $ 318
<CAPTION>
LM Value Institutional Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.60% 0.60%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.15% 0.16%
------ ------
Total Annual Fund Operating Expenses 0.75% 1.01%
====== ======
Expense Reimbursement/Waiver None (0.01)%
====== ======
Net Expenses** 0.75% 1.00%
====== ======
Examples
1 Year $ 77 $ 102
3 Years $ 240 $ 321
5 Years $ 417 $ 557
10 Years $ 930 $1,235
<CAPTION>
LM Special Investment Institutional Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.60% 0.60%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.25% 0.25%
------ ------
Total Annual Fund Operating Expenses 0.85% 1.10%
====== ======
Expense Reimbursement/Waiver (0.10)% (0.10)%
====== ======
Net Expenses** 0.75% 1.00%
====== ======
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C>
Examples
1 Year $ 77 $ 102
3 Years $ 261 $ 340
</TABLE>
<TABLE>
<CAPTION>
LM Total Return Institutional Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.60% 0.60%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.25% 0.25%
------ ------
Total Annual Fund Operating Expenses 0.85% 1.10%
====== ======
Expense Reimbursement/Waiver (0.10)% (0.10)%
====== ======
Net Expenses** 0.75% 1.00%
====== ======
Examples
1 Year $ 77 $ 102
3 Years $ 261 $ 340
<CAPTION>
LM Balanced Institutional Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.05% 0.05%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.25% 0.25%
------ ------
Total Annual Fund Operating Expenses** 0.30% 0.55%
====== ======
Total Annual Expenses of Underlying Portfolios+ 0.65% 0.65%
====== ======
Total Expenses of Balanced Portfolio and
Underlying Portfolios 0.95% 1.20%
====== ======
Examples
1 Year $ 97 $ 122
3 Years $ 303 $ 381
<CAPTION>
Batterymarch U.S. MidCapitalization Equity Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.50% 0.50%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.25% 0.25%
------ ------
Total Annual Fund Operating Expenses** 0.75% 1.00%
====== ======
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C>
Examples
1 Year $ 77 $ 102
3 Years $ 240 $ 318
</TABLE>
<TABLE>
<CAPTION>
Batterymarch U.S. Small Capitalization Equity Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.70% 0.70%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.25% 0.25%
------ ------
Total Annual Fund Operating Expenses** 0.95% 1.20%
====== ======
Examples
1 Year $ 97 $ 122
3 Years $ 303 $ 381
<CAPTION>
Batterymarch International Equity Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.65% 0.65%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.40% 0.40%
------ ------
Total Annual Fund Operating Expenses 1.05% 1.30%
====== ======
Expense Reimbursement/Waiver (0.05)% (0.05)%
====== ======
Net Expenses** 1.00% 1.25%
====== ======
Examples
1 Year $ 102 $ 127
3 Years $ 329 $ 407
<CAPTION>
Batterymarch Emerging Markets Portfolio
Institutional Class Financial Intermediary Class
------------------- ----------------------------
<S> <C> <C>
Shareholder Fees
(Fees paid directly from your investment) None None
Annual Fund Operating Expenses
(Expenses deducted from Portfolio assets)
Management Fees 0.65% 0.65%
Distribution (12b-1) Fees* None 0.25%
Other Expenses 0.85% 0.85%
------ ------
Total Annual Fund Operating Expenses 1.50% 1.75%
====== ======
Expense Reimbursement/Waiver (0.05)% (0.05)%
====== ======
Net Expenses** 1.45% 1.70%
====== ======
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C>
Examples
1 Year $ 148 $ 173
3 Years $ 469 $ 546
</TABLE>
*The 12b-1 fees shown in the tables reflect the amount to which the Directors
have currently limited payments under the Portfolios' Distribution Plans.
Pursuant to each Portfolio's Distribution Plan, the Directors may increase the
12b-1 fees to 0.40% of average net assets without shareholder approval.
**The Manager is contractually obligated to limit Portfolio expenses to the
level shown through August 1, 2001.
+Shareholders of the LM Balanced Institutional Portfolio ("Balanced
Portfolio") will indirectly bear the Balanced Portfolio's pro rata share of
the operating expenses incurred by the underlying Portfolios in which the
Balanced Portfolio invests. Consequently, the fees and corresponding examples
for the Balanced Portfolio include both the estimated fees of the Balanced
Portfolio and a composite of the fees of the Core Portfolio and the Value
Institutional Portfolio actually incurred in the last fiscal year. The Manager
is contractually obligated to limit the expenses of the underlying Portfolios
through August 1, 2001. For the purposes of calculating the effect of the fees
of the underlying Portfolios on Balanced Portfolio shareholders, it has been
assumed that LMFM will allocate 60% of the Balanced Portfolio's assets to the
Value Institutional Portfolio and 40% to the Core Portfolio. LMFM reserves the
right to vary the allocation of the Balanced Portfolio's assets, as it deems
appropriate, subject to certain limitations discussed earlier in this
Prospectus. The actual fees and expenses incurred directly and indirectly by
shareholders of the Balanced Portfolio may be higher or lower than those shown
above.
MANAGEMENT OF THE PORTFOLIOS
General
LMIFA I and LMIFA II are open-end management investment companies comprised of a
variety of separate investment portfolios. LMIFA I was incorporated in Maryland
on May 16, 1990. LMIFA II was incorporated in Maryland on January 13, 1998.
Board of Directors
The business affairs of LMIFA I and LMIFA II are managed under the direction of
a Board of Directors for each corporation, and the Directors of each corporation
are responsible for generally overseeing the conduct of the relevant Portfolio's
business. Information about the Directors and executive officers may be found in
the relevant SAI.
Each Board of Directors has retained the Manager and the Advisers to manage the
Portfolios' affairs, furnish a continuing investment program for the Portfolios
and make investment decisions on their behalf, subject to such policies as the
Directors may determine.
30
<PAGE>
Manager, Advisers and Portfolio Managers
The Portfolios are managed by the Manager. Each Portfolio pays the Manager a
monthly fee based on the average net assets of the Portfolio at the following
annual rates (shown prior to any waivers or reimbursements):
Annual Percentage
Portfolio of Average Net Assets
--------- ---------------------
Western Asset Money Market Portfolio 0.20%
Western Asset Government Money Market Portfolio 0.20%
Western Asset Intermediate Portfolio 0.40%
Western Asset Intermediate Plus Portfolio 0.40%
Western Asset Core Portfolio 0.45%
Western Asset Core Plus Portfolio 0.45%
Western Asset Inflation Indexed Bond Portfolio 0.20%
Western Asset High Yield Portfolio 0.55%
Western Asset Non-U.S. Fixed Income Portfolio 0.45%
Western Asset Global Strategic Income Portfolio 0.45%
Western Asset Enhanced Equity Portfolio 0.55%
LM Value Institutional Portfolio 0.60%
LM Special Investment Institutional Portfolio 0.60%
LM Total Return Institutional Portfolio 0.60%
LM Balanced Institutional Portfolio 0.05%*
Batterymarch U.S. MidCapitalization Equity Portfolio 0.50%
Batterymarch U.S. Small Capitalization Equity Portfolio 0.70%
Batterymarch International Equity Portfolio 0.65%
Batterymarch Emerging Markets Portfolio 0.65%
*Does not include management fees attributable to the Portfolio's investment
in the Value Institutional and Core Portfolios. See "Fees and Expenses--LM
Balanced Institutional Portfolio" and the related notes for a description of
these fees.
The Manager is a Maryland corporation formed on February 20, 1998 and is a
wholly owned subsidiary of Legg Mason, Inc., a financial services holding
company. The Manager acts as investment manager of only these investment company
portfolios. The Manager's address is 100 Light Street, Baltimore, Maryland
21202.
In order to assist in carrying out its investment advisory responsibilities, the
Manager has retained the Advisers to render advisory services to the Portfolios.
The Manager pays the fees of the Advisers.
To the extent the Manager receives a management fee after taking into account
its contractual obligation to limit expenses as discussed in "Fees and Expenses"
above, the Manager will pay a Portfolio's Adviser the entire management fee it
receives from the Portfolio.
LMFM. LMFM, a wholly owned subsidiary of Legg Mason, Inc., acts as investment
adviser or manager to regulated investment companies. Total assets under
management by LMFM were approximately $18.0 billion as of June 30, 2000. On
August 1, 2000, LMFM replaced Legg Mason Fund Adviser, Inc. ("LMFA") as the
investment adviser for LM Value Institutional, LM Special Investment
Institutional, LM Total Return Institutional and LM Balanced Institutional
Portfolios. The advisory personnel who previously managed these portfolios as
employees of LMFA continue to do so as employees of LMFM. LMFM is newly
organized; however, its principal employees advised the Portfolios during their
association with LMFA. The address of LMFM is 100 Light Street, Baltimore,
Maryland 21202.
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<PAGE>
Batterymarch. Batterymarch, founded in 1969 and now a wholly owned subsidiary of
Legg Mason, Inc., acts as investment adviser to institutional accounts, such as
corporate pension plans, mutual funds and endowment funds, as well as to
individual investors. Total assets under management by Batterymarch were
approximately $6.6 billion as of June 30, 2000. The address of Batterymarch is
200 Clarendon Street, Boston, Massachusetts 02116.
Western Asset. Western Asset, established in 1971 and now a wholly owned
subsidiary of Legg Mason, Inc., acts as investment adviser to institutional
accounts, such as corporate pension plans, mutual funds and endowment funds.
Total assets under management by Western Asset were approximately $60.3 billion
as of June 30, 2000. The address of Western Asset is 117 East Colorado
Boulevard, Pasadena, CA 91105.
WAML. WAML, a wholly owned subsidiary of Legg Mason, Inc., acts as investment
adviser to institutional accounts, such as corporate pension plans, mutual funds
and endowment funds. Total assets under management by WAML were approximately
$4.9 billion as of June 30, 2000. The address of WAML is 155 Bishopsgate,
London, England.
Expense Limitations
The Manager has, until August 1, 2001, contractually agreed to waive its fees
and/or reimburse each Portfolio to the extent a Portfolio's expenses (exclusive
of taxes, interest, deferred organization expenses, 12b-1 fees, brokerage and
extraordinary expenses) for any class exceed during that month the annual rate
set forth in the Fees and Expenses section. Any amounts waived or reimbursed in
a particular fiscal year will be subject to repayment by a Portfolio to the
Manager to the extent that from time to time during the next three fiscal years
the repayment will not cause a Portfolio's expenses to exceed the limit, if any,
agreed to by the Manager at that time.
Portfolio Managers
The names and business experience for each portfolio manager for the past five
years are set forth in the following chart.
<TABLE>
<CAPTION>
Portfolio Manager and Business Experience (past 5 years)
<S> <C>
LM Value Institutional Portfolio Bill Miller is a portfolio manager and President of LMFM. Mr. Miller has been
employed by LMFM as a portfolio manager since 1982.
------------------------------------------------------------------------------------------------------------------------------------
LM Special Investment Institutional Portfolio Bill Miller (see above)
------------------------------------------------------------------------------------------------------------------------------------
LM Total Return Institutional Portfolio Nancy T. Dennin is a portfolio manager and Senior Vice President of LMFM. Ms.
Dennin has been employed by LMFM since 1985 and has served as a portfolio manager
or co-manager for over seven years.
------------------------------------------------------------------------------------------------------------------------------------
LM Balanced Institutional Portfolio Bill Miller (see above)
</TABLE>
Neither Western Asset, WAML nor Batterymarch employs individual portfolio
managers to determine the investments of a Portfolio. Instead, the day-to-day
management of the various Portfolios' investments will be the responsibility of
the Western Asset Investment Strategy Group, the WAML Investment Strategy Group,
the Batterymarch Developed Markets (U.S.) team, the Batterymarch Developed
Markets (EAFE) team or the Batterymarch Emerging Markets team, as the case may
be.
Expenses
Each Portfolio pays its share of all expenses that are not assumed by the
Manager, the Adviser or other parties, including Directors', auditing, legal,
custodial, transfer agency and distribution fees (which are in turn allocated to
the Financial Intermediary Class of shares).
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<PAGE>
PURCHASE OF SHARES
The Portfolios offer two classes of shares: Institutional Class and Financial
Intermediary Class. Shares in the Financial Intermediary Class bear a 12b-1 fee.
See "Distribution Plans" below for more information.
Initial Investment
Prior to or concurrent with the initial purchase of shares in any Portfolio,
each investor must open an account for that Portfolio by completing and signing
an Application and mailing it to LM Institutional Advisors, Inc. at the
following address: P.O. Box 17635, Baltimore, Maryland 21297-1635. The
Portfolios have established minimum investment criteria that vary depending upon
which class of shares you wish to purchase. For Institutional Class shares,
investors must have at least $50 million in investable assets and invest in the
aggregate at least $1 million in the Portfolios. For Financial Intermediary
Class shares, investors must have at least $30 million in investable assets and
invest in the aggregate at least $1 million in the Portfolios. The Portfolios
reserve the right to revise the minimum investment requirement and may waive it
at their sole discretion.
A purchase order, together with payment in one of the forms described in the
following paragraphs, received by Boston Financial Data Services (the "Transfer
Agent" or "BFDS") prior to the close of regular trading on the New York Stock
Exchange (ordinarily 4:00 p.m., Eastern time) ("close of the Exchange") will be
effected at that day's net asset value. An order received after the close of the
Exchange will generally be effected at the net asset value determined on the
next business day. However, orders received by certain retirement plans and
other financial intermediaries by the close of the Exchange and communicated to
the Transfer Agent by 9:00 a.m., Eastern time, on the following business day
will be effected at the net asset value determined on the prior business day.
Purchases of shares can be made by wiring federal funds to State Street Bank and
Trust Company. Purchases of shares of the Western Asset Money Market Portfolio
or the Western Asset Government Money Market Portfolio may ONLY be made by
federal funds wire. Before wiring federal funds, the investor must first
telephone the Portfolio at 1-888-425-6432 to receive instructions for wire
transfer. On the telephone, the following information will be required:
shareholder name; name of the per-son authorizing the transaction; shareholder
account number; name of the Portfolio and class of shares to be purchased;
amount being wired; and name of the wiring bank.
Funds should be wired through the Federal Reserve System to:
State Street Bank and Trust Company
ABA #011-000-028
DDA #99046096
LM Institutional Fund Advisors [insert name of Portfolio]
[Insert your account name and number]
The wire should state that the funds are for the purchase of shares of a
specific Portfolio and share class and include the account name and number.
With respect to the Western Asset Government Money Market Portfolio and Western
Asset Money Market Portfolio, if a purchase order for shares is received prior
to 12:00 noon, Eastern time, and payment in federal funds is received by the
Transfer Agent by the close of the federal funds wire on the day the purchase
order is received, dividends will accrue starting that day. If a purchase order
is received after 12:00 noon, Eastern time, and payment in federal funds is
received by the Transfer Agent by the close of the federal funds wire on the day
the purchase order is received, or as otherwise agreed to by the relevant
Portfolio, the order will be effected at that day's net asset value, but
dividends will not begin to accrue until the following business day.
With respect to the Western Asset Intermediate Portfolio, Western Asset
Intermediate Plus Portfolio, Western Asset Core Portfolio, Western Asset Core
Plus Portfolio and Western Asset Inflation Indexed Bond Portfolio, dividends
will begin to accrue on the first business day following the day payment in
federal funds is received by the Transfer Agent.
33
<PAGE>
Shares may also be purchased and paid for by the contribution of eligible
portfolio securities, subject in each case to approval by the Manager. Approval
will depend on, among other things, the nature and quality of the securities
offered and the current needs of the Portfolio in question. Securities offered
in payment for shares will be valued in the same way and at the same time the
Portfolio values its portfolio securities for purposes of determining net asset
value. (See "Net Asset Value" below.) Investors who wish to purchase Portfolio
shares through the contribution of securities should contact the Portfolio at 1-
888-425-6432 for instructions. Investors should also realize that at the time of
contribution they may be required to recognize a gain or loss for tax purposes
on securities contributed. The Portfolio has full discretion to reject any
securities offered as payment for shares.
As described below, each Portfolio may offer Financial Intermediary Class shares
that are offered primarily through financial intermediaries. Each Portfolio may
pay financial intermediaries for their services out of that class' assets
pursuant to the class' distribution plan or otherwise. Legg Mason and its
affiliates (including the Manager and the Advisers) may also from time to time,
at their own expense, make payments to financial intermediaries that sell shares
of the Portfolios or to other parties in connection with the sale of shares. If
investors effect transactions through a broker or agent, investors may be
charged a fee by that broker or agent.
Any shares purchased or received as a distribution will be credited directly to
the investor's account.
Additional Investments
Additional investments may be made at any time at the relevant net asset value
for that class by following the procedures outlined above. Investors should
always furnish a shareholder account number when making additional purchases.
Other Purchase Information
Purchases will be made in full and fractional shares. In the interest of economy
and convenience, certificates for shares will not be issued.
Each Portfolio and Legg Mason Wood Walker, Incorporated, the Portfolios'
Distributor ("LMWW"), reserves the right, in its sole discretion, to suspend the
offering of shares or to reject any purchase order, in whole or in part, when,
in the judgment of management, such suspension or rejection is in the best
interests of the Portfolio; to waive the minimum initial investment for certain
investors; and to redeem shares if information provided in the Application
should prove to be incorrect in any manner judged by a Portfolio to be material
(e.g., in a manner such as to render the shareholder ineligible to purchase
shares of a Portfolio). A Portfolio may suspend the offering of shares at any
time and resume it at any time thereafter.
Shares of the Portfolios may not be qualified or registered for sale in all
States. Prospective investors should inquire as to whether shares of a
particular Portfolio are available for offer and sale in their State of
residence. Shares of the Portfolio may not be offered or sold in any State
unless registered or qualified in that jurisdiction or unless an exemption from
registration or qualification is available.
Purchases and sales of Portfolio shares should be made for long-term investment
purposes only. Each Portfolio reserves the right to restrict purchases of shares
(including exchanges) when it determines that a pattern of frequent purchases
and sales made in response to short-term fluctuations in share price appears
evident.
Retirement Plans
Shares of the Portfolios are available for purchase by retirement plans,
including 401(k) plans, 403(b) plans and Individual Retirement Accounts
("IRAs"). The administrator of a plan or employee benefits office can provide
participants or employees with detailed information on how to participate in the
plan and how to elect a Portfolio as an investment option. Participants in a
retirement or savings plan may be permitted to elect different investment
options, alter the amounts contributed to the plan, or change how contributions
are allocated among investment options in accordance with the plan's specific
provisions.
34
<PAGE>
The plan administrator or employee benefits office should be consulted for
details. For questions about participant accounts, participants should contact
their employee benefits office, the plan administrator, or the organization that
provides recordkeeping services for the plan. Investors who purchase shares
through retirement plans should be aware that the plan administrator may
aggregate purchase and redemption orders of participants in the plan. Therefore,
there may be a delay between the time the investor places an order with the plan
administrator and the time the order is forwarded to the Transfer Agent for
execution.
Account Registration Changes
Changes in registration or account privileges may be made in writing to the
Portfolio. Signature guarantees may be required. See "Signature Guarantee"
below. All correspondence must include the account number and must be sent to:
LM Institutional Advisors, Inc.
P.O. Box 17635
Baltimore, Maryland 21297-1635
DISTRIBUTION PLANS
The Board of Directors has adopted Distribution Plans pursuant to Rule 12b-1
under the 1940 Act with respect to shares of the Financial Intermediary Class of
each Portfolio. Under the terms of each Plan, a Portfolio is permitted to pay,
out of the assets of the Financial Intermediary Class of the Portfolio, in an
amount up to 0.40% on an annual basis of the average daily net assets of that
class, LMWW, financial intermediaries and other parties that provide services in
connection with or are otherwise involved in the distribution of shares or
administration of plans or programs that use Portfolio shares as their funding
medium, and to reimburse certain other expenses and payments. Payments under the
Plans are currently limited to 0.25% (or 0.10% in the case of the Western Asset
Government Money Market Portfolio and the Western Asset Money Market Portfolio)
of average daily net assets. Because the fees are paid out of a Portfolio's
assets on an ongoing basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges. For
more information regarding the Plans and their terms, see the relevant SAI.
REDEMPTION OF SHARES
Portfolio shares may be redeemed through three methods: (1) by sending a written
request for redemption to LM Institutional Advisors, Inc. at P.O. Box 17635,
Baltimore, Maryland 21297-1635; (2) by calling the Portfolio at 1-888-425-6432;
or (3) by wire communication with the Transfer Agent. In each case, the investor
should first notify the Portfolio at 1-888-425-6432 of the intention to redeem.
No charge is made for redemptions. Shareholders who wish to be able to redeem by
telephone or wire communication must complete an authorization form in advance.
Redemptions over $10,000,000 may be initiated by telephone, but must be
confirmed in writing prior to processing.
Upon receipt of a request for redemption as described below (a request "in good
order") before the close of the Exchange on any day when the Exchange is open,
the Transfer Agent will redeem Portfolio shares at that day's net asset value
per share. Requests for redemption received by the Transfer Agent after the
close of the Exchange will be executed at the net asset value next determined.
However, orders received by certain retirement plans and other financial
intermediaries by the close of the Exchange and communicated to the Transfer
Agent by 9:00 a.m., Eastern time, on the following business day will be effected
at the net asset value determined on the prior business day. The Portfolios may
refuse to effect redemption requests during periods permitted by federal
securities laws.
35
<PAGE>
Requests for redemption should indicate:
1) The number of shares or dollar amount to be redeemed and the investor's
shareholder account number;
2) The investor's name and the names of any co-owner of the account, using
exactly the same name or names used in establishing the account;
3) Proof of authorization to request redemption on behalf of any co-owner of
the account (please contact the Portfolio for further details); and
4) The name, address, and account number to which the redemption payment should
be sent.
Payment of the redemption price normally will be made by wire one business day
after receipt of a redemption request in good order. However, each Portfolio
reserves the right to postpone the payment date when the Exchange is closed,
when trading is restricted, or during other periods as permitted by federal
securities laws, or to take up to seven days to make payment upon redemption if
the Portfolio involved could be adversely affected by immediate payment.
Redemption proceeds may also be paid in kind at the discretion of the Portfolio.
Shareholders who receive a redemption in kind may incur costs to dispose of such
securities. In addition, depending upon the circumstances, a shareholder may
incur additional tax liability upon the sale of securities received in a
redemption in kind.
Other supporting legal documents, such as copies of the trust instrument or
power of attorney, may be required from corporations or other organizations,
fiduciaries or persons other than the shareholder of record making the request
for redemption or repurchase. If you have a question concerning the sale or
redemption of shares, please contact the Portfolio by calling 1-888-425-6432.
Any Portfolio may elect to close any shareholder account when the current value
of the account is less than $1 million due to redemptions or exchanges by the
shareholder by redeeming all of the shares in the account and mailing the
proceeds to the investor. If a Portfolio elects to redeem the shares in an
account, the shareholder will be notified that the account is below $1 million
and will be allowed 30 days in which to make an additional investment in order
to avoid having the account closed. Shares will be redeemed at the net asset
value calculated on the day of redemption. Any Portfolio may change the $1
million minimum account balance from time to time without notice to
shareholders.
Signature Guarantee
When a signature guarantee is called for, the shareholder should have "Signature
Guaranteed" stamped under his or her signature and guaranteed by any of the
following entities: U.S. banks, foreign banks having a U.S. correspondent bank,
credit unions, savings associations, U.S. registered dealers and brokers,
municipal securities dealers and brokers, government securities dealers and
brokers, national securities exchanges, registered securities associations and
clearing agencies (each an "Eligible Guarantor Institution"). Each Portfolio and
its agents reserve the right to reject any signature guarantee pursuant to
written signature guarantee standards or procedures, which may be revised in the
future to permit them to reject signature guarantees from Eligible Guarantor
Institutions that do not, based on credit guidelines, satisfy such written
standards or procedures. Any Portfolio may change the signature guarantee
requirements from time to time without prior notice to shareholders.
EXCHANGE PRIVILEGE
Shareholders in any Portfolio may exchange their shares for shares of the same
class of any of the other Portfolios, provided that the shares of that class are
being offered at the time of the proposed exchange. Investments by exchange
among any of the Portfolios are made at the per share net asset values next
determined after the order for exchange is received in good order.
The exchange privilege is not intended as a vehicle for short-term trading.
Excessive exchange activity may interfere with portfolio management and have an
adverse effect on all shareholders. In order to limit excessive exchange
activity and in other cir-
36
<PAGE>
cumstances where a Portfolio believes doing so would be in its best interest,
the Portfolio reserves the right to revise or terminate the exchange privilege
without notice to the extent permitted by applicable law, limit the amount or
number of exchanges or reject any exchange. For further information concerning
the exchange privilege, or to make an exchange, please contact the Portfolio at
1-888-425-6432.
NET ASSET VALUE
Net asset value per share of each class of shares is determined daily for each
Portfolio as of the close of regular trading on the Exchange, on every day the
Exchange is open. The Exchange is normally closed on all national holidays and
Good Friday. To calculate each Portfolio's Institutional Class or Financial
Intermediary Class share price, the Portfolio's assets attributable to that
class of shares are valued and totaled, liabilities attributable to that class
of shares are subtracted, and the resulting net assets are divided by the number
of shares outstanding for that class.
Except for the Western Asset Money Market Portfolio and the Western Asset
Government Money Market Portfolio, portfolio securities and other assets for
which market quotations are readily available are valued at current market
value. Current market value means the last sale price of the day for a
comparable position, or, in the absence of any such sales, the mean between
representative bid and asked prices obtained from a quotation reporting system.
Securities with remaining maturities of 60 days or less are generally valued at
amortized cost. Fixed income securities, including those to be purchased under
firm commitment agreements, are normally valued on the basis of quotations
obtained from brokers and dealers or pricing services which take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data. Certain fixed income securities for which
daily market quotations are not readily available may be valued with reference
to fixed income securities whose prices are more readily available and whose
durations are comparable to those of the securities being valued.
Other assets and securities for which no quotations are readily available are
valued at fair value as determined in good faith by the Directors or persons
acting at their direction. The values of foreign securities quoted in foreign
currencies are translated into U.S. dollars at current exchange rates or at such
other rates as the Directors or persons acting at their direction may determine
in computing net asset value. Because of time zone differences, foreign
exchanges and securities markets will usually be closed prior to the time of the
closing of the Exchange and values of foreign investments will be determined as
of the earlier closing of such exchanges and securities markets. However, events
affecting the values of such foreign securities may occasionally occur between
the earlier closings of such exchanges and securities market and the closings of
the Exchange that will not be reflected in the computation of the net asset
value. If an event materially affecting the value of such foreign securities
occurs during such period, then such securities will be valued at fair value as
determined in good faith by the Directors or persons acting at their direction.
In addition, if a Portfolio holds securities that are primarily listed on
foreign exchanges that trade on days when the Exchange is not open, the net
asset value of the Portfolio's shares may be subject to change on days when
shareholders will not be able to purchase or redeem the Portfolio's shares.
The Western Asset Money Market Portfolio and the Western Asset Government Money
Market Portfolio each attempts to maintain a per share net asset value of $1.00
by using the amortized cost method of valuation as permitted by SEC Rule 2a-7.
Neither Portfolio can guarantee that the net asset value will always remain at
$1.00 per share.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Western Asset High Yield Portfolio, Western Asset Non-U.S. Fixed Income
Portfolio, Western Asset Global Strategic Income Portfolio, Western Asset
Enhanced Equity Portfolio and LM Total Return Institutional Portfolio declare
and pay dividends quarterly out of their net investment income, if available,
for that quarter.
The Western Asset Money Market Portfolio and Western Asset Government Money
Market Portfolio declare as a dividend at the close of regular trading on the
Exchange each business day, to shareholders of record as of 12:00 noon, Eastern
Time, that day, substantially all of their net investment income since the prior
business day's dividend.
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<PAGE>
The Western Asset Intermediate Portfolio, Western Asset Intermediate Plus
Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio and
Western Asset Inflation Indexed Bond Portfolio declare as a dividend at the
close of regular trading on the Exchange each business day, to shareholders of
record as of the close of the Exchange that day, substantially all of their net
investment income since the prior business day's dividend.
The Western Asset Money Market Portfolio, Western Asset Government Money Market
Portfolio, Western Asset Intermediate Portfolio, Western Asset Intermediate Plus
Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio and
Western Asset Inflation Indexed Bond Portfolio pay dividends monthly. Other than
the LM Total Return Institutional Portfolio, all LMIFA II Portfolios declare and
pay dividends annually out of their net investment income, if available, for
that year. Distributions of net realized capital gains are made annually.
Shareholders may elect to receive dividends and distributions in one of four
ways:
1) Receive both dividends and other distributions in shares of the same class
of the distributing Portfolio;
2) Receive dividends in cash and other distributions in shares of the same
class of the distributing Portfolio;
3) Receive dividends in shares of the same class of the distributing Portfolio
and other distributions in cash; or
4) Receive both dividends and other distributions in cash.
If no election is made, both dividends and other distributions are credited to a
shareholder's Portfolio account in shares (of the same class as the shares
already held) at the net asset value of the shares determined as of the close of
the Exchange on the reinvestment date.
For the Western Money Market Portfolio, Western Asset Government Money Market
Portfolio, Western Asset Intermediate Portfolio, Western Asset Intermediate Plus
Portfolio, Western Asset Core Portfolio, Western Asset Core Plus Portfolio and
Western Asset Inflation Indexed Bond Portfolio, reinvestment of dividends and
other distributions occurs on the payment date. A shareholder who redeems all
shares in the Western Asset Money Market Portfolio, Western Asset Government
Money Market Portfolio, Western Asset Intermediate Portfolio, Western Asset
Intermediate Plus Portfolio, Western Asset Core Portfolio, Western Asset Core
Plus Portfolio or Western Asset Inflation Indexed Bond Portfolio will receive
all dividends and other distributions declared for that monthly cycle prior to
the redemption date (i.e., all dividends and other distributions from the first
day of that monthly cycle, if invested on that first day, to the date of the
redemption). For the other Portfolios, reinvestment occurs on the ex-dividend
date. An election to receive dividends or other distributions in cash rather
than additional shares may be made by notifying the Portfolio in writing.
The Directors reserve the right to revise the dividend policy or postpone the
payment of dividends if warranted in their judgment due to unusual
circumstances, such as an unexpected large expense, loss or fluctuation in net
asset value.
TAX INFORMATION
Each Portfolio intends to qualify or continue to qualify as a "regulated
investment company" for federal income tax purposes and to meet all other
requirements necessary for it to be relieved of federal taxes on income and
gains it distributes to shareholders. Each Portfolio will distribute
substantially all its net investment income and net realized capital gains to
its shareholders on a current basis. Early each year, each Portfolio will notify
its shareholders of the amount and tax status of distributions paid during that
year.
Distributions from a Portfolio (whether paid in cash or reinvested in shares of
the Portfolio) will be taxable to shareholders (other than IRAs, other qualified
retirement plans and other tax-exempt investors) as ordinary income to the
extent derived from the Portfolio's investment income and net short-term gains.
Portfolio distributions of net capital gains (that is, the excess of net gains
from capital assets held for more than one year over net losses from capital
assets held for not more than one year) will be taxable as long-term capital
gain (generally at a 20% rate for non-corporate shareholders). If a dividend or
distribution is made shortly after a shareholder purchases shares in a
Portfolio, while in effect a return of capital to the shareholder, the dividend
or distribution is taxable as described above.
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<PAGE>
Special tax rules apply to investments through defined contributions plans and
other tax-qualified plans. Shareholders should consult their tax adviser to
determine the suitability of shares of a Portfolio as an investment through such
plans and the precise effect of an investment on their particular tax situation.
A Portfolio's investments in foreign securities may be subject to withholding
taxes at the source on dividend or interest payments. In that case, a
Portfolio's yield on those securities would be decreased. Shareholders may be
entitled to claim a credit or deduction with respect to foreign taxes. In
addition, a Portfolio's investments in foreign securities or foreign currencies
may increase or accelerate the Portfolio's recognition of ordinary income and
may affect the timing or amount of the Portfolio's distributions.
In addition to income tax on a Portfolio's distributions, any gain that results
if a shareholder (other than an IRA or other tax-exempt investor) sells or
exchanges its shares generally is subject to income tax.
The LM Balanced Institutional Portfolio's use of a "fund of funds" structure
could adversely affect the character, timing and amount of distributions to
shareholders.
Investments in certain debt obligations, including obligations issued at a
discount and inflation-indexed investments made by the Western Asset Inflation
Indexed Bond Portfolio, may cause the Portfolio to recognize taxable income in
excess of the cash generated by such obligations. Thus a Portfolio could be
required at times to liquidate other investments, including when it is not
advantageous to do so, in order to satisfy its distribution requirements.
The foregoing is a summary of certain federal income tax consequences of
investing in a Portfolio. Shareholders are urged to consult their tax advisers
with respect to the effects of this investment on their particular tax situation
(including possible liability for state and local taxes).
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each
Portfolio's recent financial performance for the past five years or, if shorter,
since the inception of the Portfolio's operations. Certain information reflects
financial results for a single Portfolio share. The total returns represent the
rate that an investor would have earned or lost on an investment in the
Portfolios, assuming reinvestment of all dividends and distributions. This
information has been derived from the financial statements of LMIFA I and LMIFA
II, which have been audited by PricewaterhouseCoopers LLP and Ernst & Young LLP,
respectively. Their reports and the Portfolios' financial statements are
included in the Portfolios' annual reports to shareholders, which are available
upon request.
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<PAGE>
Financial Highlights
LM Institutional Fund Advisors I, Inc.
Contained below is per share operating performance data for a share of common
stock outstanding throughout each period shown, total investment return, ratios
to average net assets and other supplemental data. This information has been
derived from information in the financial statements.
<TABLE>
<CAPTION>
Investment Operations Distributions
--------------------------------------- ------------------------------------------
Net realized
and Unrealized
Gain (Loss) on
Investments, From
Net Asset Options, Futures Total From Net
Value, Net and Foreign From Net Realized
Beginning Investment Currency Investment Investment Gain on Total
of Period Income Transactions Operations Income Investments Distributions
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Western Asset Core Portfolio
Institutional Class/A/
Years Ended March 31,
2000 $11.01 $0.67/I/ $(0.46) $0.21 $(0.80) $(0.03) $(0.83)
1999 11.59 0.64/I/ (0.01) 0.63 (0.65) (0.56) (1.21)
Nine Months Ended March 31,
1998/B/ 11.28 0.49/I/ 0.49 0.98 (0.53) (0.14) (0.67)
Years Ended June 30,
1997 11.05 0.70/I/ 0.19 0.89 (0.65) (0.01) (0.66)
1996 11.22 0.67/I/ (0.14) 0.53 (0.66) (0.04) (0.70)
1995 10.50 0.69/I/ 0.72 1.41 (0.69) -- (0.69)
Financial Intermediary Class
Year Ended March 31, 2000/E/ $10.69 $0.45/J/ $(0.25) $0.20 $(0.49) -- $(0.49)
------------------------------------------------------------------------------------------------------------------------------------
Western Asset Core Plus Portfolio
Years Ended March 31,
2000 $ 9.97 $0.55/K/ $(0.37) $0.18 $(0.67) -- $(0.67)
1999/F/ 10.00 0.34/K/ (0.08) 0.26 (0.22) (0.07) (0.29)
------------------------------------------------------------------------------------------------------------------------------------
Western Asset Intermediate Portfolio
Institutional Class/A/
Years Ended March 31,
2000 $10.62 $0.63/L/ $(0.38) $0.25 $(0.78) -- $(0.78)
1999 10.85 0.58/L/ 0.06 0.64 (0.57) (0.30) (0.87)
Nine Months Ended March 31,
1998/B/ 10.72 0.46/L/ 0.23 0.69 (0.46) (0.10) (0.56)
Years Ended June 30,
1997 10.48 0.55/L/ 0.30 0.85 (0.54) (0.07) (0.61)
1996 10.74 0.54/L/ (0.01) 0.53 (0.54) (0.25) (0.79)
1995 10.00 0.39/L/ 0.60 0.99 (0.24) (0.01) (0.25)
Financial Intermediary Class
Period Ended
November 30, 1999/O/ $10.61 $0.41/M/ $(0.33) $0.08 $(0.43) -- $(0.43)
Year Ended March 31, 1999/G/ 10.60 0.12/M/ (0.11) 0.01 -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Western Asset Non-U.S Fixed
Income Portfolio
Years Ended March 31,
2000 $10.21 $0.49/N/ $(0.47) $0.02 $(0.50) $(0.14) $(0.64)
1999/H/ 10.00 0.30/N/ 0.31 0.61 (0.20) (0.20) (0.40
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/All per share figures for the Institutional Class reflect the 10 for 1 stock
split effective May 29, 1998.
/B/The Fund's year end changed from June 30 to March 31.
/C/Not annualized
/D/Annualized
/E/For the period July 22, 1999 (commencement of operations) to March 31, 2000
/F/For the period July 8, 1998 (commencement of operations) to March 31, 1999.
/G/For the period January 7, 1999 (commencement of operations) to March 31,
1999.
/H/For the period July 15, 1998 (commencement of operations) to March 31, 1999.
/I/Net of advisory fees waived pursuant to a voluntary expense limitation of
0.50%. In the absence of this limitation, the ratio of expenses to average
net assets would have been 0.51%, 0.50% and 0.50% for the years ended March
31, 2000, 1999 and the nine months ended March 31, 1998, and 0.50%, 0.53% and
0.53% for the years ended June 30, 1997, 1996 and 1995, respectively.
/J/Net of advisory fees waived pursuant to a voluntary expense limitation of
0.75%. In the absence of this limitation, the ratio of expenses to average
net assets would have been 0.76% for the period July 22, 1999 (commencement
of operations) to March 31, 2000.
40
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
------------------------------------------------------
Net
Net Asset Investment Net Assets
Value, Expenses Income Portfolio End of
End of Total to Average to Average Turnover Period
Period Return Net Assets Net Assets Rate (in thousands)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10.39 1.99%/I/ 0.50%/I/ 6.3%/I/ 260.4% $649,038
11.01 5.61%/I/ 0.50%/I/ 5.7%/I/ 484.3% 685,489
11.59 8.91%/I,C/ 0.50%/I,D/ 6.0%/I,D/ 226.9%/D/ 617,676
11.28 8.27%/I/ 0.50%/I/ 6.4%/I/ 384.8% 508,353
11.05 4.86%/I/ 0.50%/I/ 6.3%/I/ 266.0% 453,699
11.22 14.12%/I/ 0.50%/I/ 7.0%/I/ 257.9% 336,774
$10.40 1.97%/J,C/ 0.75%/J,D/ 6.2%/J,D/ 260.4%/D/ $ 1,456
--------------------------------------------------------------------------------------
$ 9.48 1.95%/K/ 0.50%/K/ 6.2%/K/ 315.9% $215,184
9.97 2.58%/K,C/ 0.50%/K,D/ 5.4%/K,D/ 565.7%/D/ 119,646
--------------------------------------------------------------------------------------
$10.09 2.49%/L/ 0.45%/L/ 6.3%/L/ 440.8% $376,056
10.62 6.01%/L/ 0.45%/L/ 5.5%/L/ 389.6% 314,534
10.85 6.59%/L,C/ 0.45%/L,D/ 5.8%/L,D/ 401.4%/D/ 293,531
10.72 8.32%/L/ 0.45%/L/ 6.3%/L/ 419.3% 224,497
10.48 5.15%/L/ 0.50%/L/ 6.3%/L/ 841.3% 66,079
10.74 10.08%/L/ 0.50%/L/ 6.1%/L/ 764.5% 20,313
$10.26 0.81%/M,C/ 0.70%/M,D/ 5.9%/M,D/ 471.8%/D/ --
10.61 0.09%/M,C/ 0.70%/M,D/ 5.2%/M,D/ 389.6%/D/ 3,792
--------------------------------------------------------------------------------------
$ 9.59 0.57%/N/ 0.55%/N/ 4.9%/N/ 347.1% $ 62,526
10.21 5.81%/N,D/ 0.55%/N,D/ 4.1%/N,D/ 388.0%/D/ 65,358
--------------------------------------------------------------------------------------
</TABLE>
/K/Net of advisory fees waived pursuant to a voluntary expense limitation of
0.50%. In the absence of this limitation, the ratio of expenses to average
net assets would have been 0.65% for the year ended March 31, 2000 and 0.65%
for the period July 8, 1998 (commencement of operations) to March 31, 1999.
/L/Net of advisory fees waived pursuant to a voluntary expense limitation of
0.50% until August 5, 1996 and 0.45% thereafter. In the absence of this
limitation, the ratio of expenses to average net assets would have been 0.48%
for the years ended March 31, 2000 and 1999, respectively, 0.52% for the nine
months ended March 31, 1998, and 0.55%, 1.03% and 1.60% for the years ended
June 30, 1997, 1996 and 1995, respectively.
/M/Net of advisory fees waived pursuant to a voluntary expense limitation of
0.70%. In the absence of this limitation, the ratio of expenses to average
net assets would have been 0.74% for the period ending November 30, 1999
(liquidation of Financial Intermediary Class) and 0.73% for the period
January 7, 1999 (commencement of operations) to March 31, 1999.
/N/Net of advisory fees waived pursuant to a voluntary expense limitation of
0.55%. In the absence of this limitation, the ratio of expenses to average
net assets would have been 0.83% for the year ended March 31, 2000, and 0.85%
for the period July 15, 1998 (commencement of operations) to March 31, 1999.
/O/Liquidation of Financial Intermediary Class of shares.
41
<PAGE>
Financial Highlights
LM Institutional Fund Advisors II, Inc.
Contained below is per share operating performance data for a share of common
stock outstanding throughout each period shown, total investment return, ratios
to average net assets and other supplemental data. This information has been
derived from information in the financial statements.
<TABLE>
<CAPTION>
Investment Operations Distributions
----------------------------------- ---------------------------------------
Net
Realized & Net
Net Asset Unrealized From Net Asset
Value, Net Gain (Loss) Total From From Net Realized Value,
Beginning Investment on Investment Investment Gain on Total End of
of Period Income Investments Operations Income Investments Distributions Period
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LM Value Institutional Portfolio
Institutional Class
Year Ended March 31, 2000 $15.85 $0.05 $ 1.17 $ 1.22 $(0.05) $(0.08) $(0.13) $16.94
September 22, 1998/A/ to
March 31, 1999 10.00 0.04/B/ 5.83 5.87 (0.02) -- (0.02) 15.85
Financial Intermediary Class
Year Ended March 31, 2000 $15.86 $0.02/C/ $ 1.15 $ 1.17 $(0.02) $(0.08) $(0.10) $16.93
October 22, 1998/A/ to
March 31, 1999 10.71 0.03/C/ 5.14 5.17 (0.02) -- (0.02) 15.86
Batterymarch U.S. Small
Capitalization Equity Portfolio
March 13, 2000/A/ to
March 31, 2000 $10.00 N.M./D/ $(0.32) $(0.32) $ -- $ -- $ -- $ 9.68
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/A/Commencement of operations
/B/Net of fees waived or reimbursements made by the Adviser in excess of a
voluntary expense limitation of 0.75% until July 31, 1999. If no fees had
been waived the annualized ratio of expenses to average daily net assets for
the period would have been 1.08%.
/C/Net of fees waived or reimbursements made by the Adviser in excess of a
contractual expense limitation of 1.00% until August 1, 2000. If no fees had
been waived the annualized ratio of expenses to average daily net assets for
the year ended March 31, 2000 would have been 1.01% and for the period ended
March 31, 1999 would have been 1.33%.
/D/Net of fees waived and expenses reimbursed by the Manager pursuant to a
contractual expense limitation of 0.95% until August 1, 2000. If no fees had
been waived or expenses reimbursed by the Manager, the annualized ratio of
expenses to average daily net assets for the period would have been 5.70%.
/E/Not annualized
/F/Annualized
N.M. Not meaningful
42
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
-----------------------------------------------------------
Net Investment
Expenses Income Net assets,
Total to Average to Average Portfolio End of Period
Return Net Assets Net Assets Turnover Rate (In Thousands)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7.74% 0.75% 0.44% 23.1% $433,036
58.81%/E/ 0.75%/B,F/ 0.84%/B,F/ 28.6%/F/ 115,798
7.41% 1.00%/C/ 0.22%/C/ 23.1% $180,647
48.32%/E/ 1.00%/C,F/ 0.43%/C,F/ 28.6%/F/ 18,751
(3.20)%/E/ 0.95%/D,F/ 3.42%/D,F/ N.M. $ 6,757
--------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
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<PAGE>
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<PAGE>
LM INSTITUTIONAL FUND ADVISORS I
LM INSTITUTIONAL FUND ADVISORS II
Investment Manager
LM Institutional Advisors, Inc.
P.O. Box 17635
Baltimore, Maryland 21297-1635
1-888-425-6432
Custodian Transfer Agent
State Street Bank and Trust Co. Boston Financial Data Services
P.O. Box 1713 P.O. Box 953
Boston, Massachusetts 02105 Boston, Massachusetts 02103
Counsel
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Independent Accountants Independent Auditors
For LMIFA I Portfolios: For LMIFA II Portfolios:
PricewaterhouseCoopers LLP Ernst & Young LLP
250 W. Pratt Street 2001 Market Street
Baltimore, Maryland 21201 Philadelphia, PA 19103
Distributors
For all Portfolios: For LMIFA I Portfolios:
Legg Mason Wood Walker, Incorporated Arroyo Seco, Inc.
100 Light Street P.O. Box 1476 117 East Colorado Boulevard
Baltimore, Maryland 21203-1476 Pasadena, California 91105
For investors who want more information about LM Institutional Fund Advisors I,
Inc. ("LMIFA I") and LM Institutional Fund Advisors II, Inc. ("LMIFA II"), the
following documents are available upon request.
Annual Reports
Annual and semi-annual reports provide additional information about the
Portfolios' investments. In the annual report, you will also find a discussion
of the market conditions and investment strategies that significantly affected
the performance of a Portfolio during the last fiscal year.
Statement of Additional Information
The SAI of each of LMIFA I and LMIFA II contains additional detailed information
about LMIFA I and LMIFA II and is incorporated by reference into (legally part
of) this prospectus.
Investors can receive free copies of these materials, request other information
about the Portfolios and make shareholder inquiries by calling 1-888-425-6432.
Information about the Portfolios, including the SAI, can be reviewed and copied
at the SEC's public reference room in Washington, D.C. Information on the
operation of the public reference room may be obtained by calling the SEC at 1-
202-942-8090. Reports and other information about the Portfolios are available
on the EDGAR database on the SEC's Internet site at http://www.sec.gov.
Investors may also make an electronic request at: [email protected] or write
to: SEC, Public Reference Section, Washington, D.C. 20549-0102. A fee will be
charged for making copies.
The Investment Company Act of 1940 file numbers for LMIFA I and LMIFA II are
811-06110 and 811-8611, respectively.
