WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
REPORT TO SHAREHOLDERS
FOR THE PERIOD MAY 1, 1996
(Commencement of Operations)
TO
JUNE 30, 1996
<PAGE>
[WESTERN ASSET MANAGEMENT COMPANY LETTERHEAD]
August 26, 1996
Dear Shareholder:
Enclosed are the fiscal year-end financial statements for the Western Asset
Trust Limited Duration Portfolio.
The fund is still relatively new, having started up May 1, 1996. Especially in
light of the rather volatile conditions prevailing these days in the markets,
the fund's early performance is encouraging and should improve relatively as
asset growth allows for more diversified strategies. Assets in the fund were $16
million at the end of the June quarter and we expect to see this total grow
substantially in the coming year.
Please give us a call if you have any questions on the enclosed.
Sincerely,
/s/ W. Curtis Livingston
W. Curtis Livingston
President
<PAGE>
WESTERN ASSET TRUST
LIMITED DURATION PORTFOLIO
PORTFOLIO MANAGER: WESTERN ASSET MANAGEMENT INVESTMENT STRATEGY GROUP
The Fund's performance in its first two months of operation, ended June 30,
1996, trailed that of its benchmark, as portfolio strategies produced mixed
results. Interest rates were unusually volatile, and on balance rose for the
period. As a result the portfolio's longer than market interest rate exposure
was a significant drag on returns. Other strategies, however, helped offset this
negative. An overweighting to the corporate sector was rewarded as yield spreads
narrowed, and the portfolio's overweighting to the mortgage sector contributed
significantly to returns, since reduced prepayment risk propelled the mortgage
sector to substantial relative grains. Yield curve exposure was generally
"barbelled" during the period, and this contributed to performance since the
yield curve flattened noticeably. The fund produced a total return (net) of
.76%, vs. 0.93% for its benchmark, the Merrill Lynch 1-2.99 Government Index.
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1996
(Amounts in Thousands)
Principal
Amount Value
CORPORATE BONDS AND NOTES - 12.0%
Finance - 6.3%
Ford Motor Credit Company
7.90% 5/17/99 $ 500 $ 517
Heller Financial
6.27% 5/20/98 500 497
--------
1,014
--------
Food, Beverage and Tobacco - 2.5%
Philip Morris Companies, Inc.
6.95% 6/1/06 400 403
--------
Oil and Gas - 3.2%
Texas Gas Transmission Company
9.625% 7/15/97 500 516
--------
Total Corporate Bonds and Notes
(Identified Cost - $1,932) 1,933
- -------------------------------------------------------------------------------
ASSET-BACKED SECURITIES - 12.8%
ContiMortgage Home Equity Loan Trust
5.90% 7/15/97 500 500
Fasco Automobile Trust
6.65% 11/15/01 300 300
Olympic Automobile Receivables Trust
7.875% 7/15/01 381 387
Tyron Mortgage Funding, Inc.
6.35% 5/20/01 481 479
World Financial Network Credit Card Master Trust
6.95% 4/15/06 400 399
--------
Total Asset-backed Securities
(Identified Cost - $2,065) 2,065
- -------------------------------------------------------------------------------
3
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C>
MORTGAGE-BACKED SECURITIES - 8.3%
International Mortgage Acceptance Corp.
12.25% 3/1/14 $ 350 $ 364
Resolution Trust Corporation
8.40% 7/25/24 538 537
Structured Asset Securities Corp.
6.60% 10/15/24 442 439
-----------
Total Mortgage-backed Securities
(Identified Cost - $1,360) 1,340
- ---------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES - 38.0%
United States Treasury Notes
5.25% 12/31/97 1,520 1,504
5.875% 4/30/98 1,470 1,464
6.375% 5/15/99 2,340 2,345
6.50% 5/31/01 260 260
6.625% 6/30/01 540 544
-----------
Total U.S. Government Securities
(Identified Cost - $6,104) 6,117
- ---------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES - 10.6%
Fixed-rate Securities - 5.9%
Federal Home Loan Mortgage Corporation
6.50% 7/1/26(B) 1,000 958
-----------
Variable-rate Securities(A) - 4.7%
Government National Mortgage Association
6.50% 1/20/25 733 739
-----------
Total U.S. Government Agency Mortgage-backed
Securities
(Identified Cost - $1,704) 1,697
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
<S> <C>
SHORT-TERM INVESTMENTS - 29.3%
Corporate Bonds and Notes - 2.5%
John Deere Capital Corporation
5.95% 6/30/97 $ 400 $ 400
U. S. Government Securities - 11.9%
U.S. Treasury Bill
5.305% 5/1/97 2,000 1,910
Repurchase Agreements - 14.9%
J.P. Morgan Securities, Inc.
5.47% dated 6/28/96, to be repurchased
at $2,015 on 7/1/96 (Collateral: $1,995
Federal National Mortgage Association,
8.625% due 9/10/96, value $2,109) 2,014 2,014
State Street Bank and Trust Company
4.00% dated 6/28/96, to be repurchased
at $400 on 7/1/96 (Collateral: $405
U.S Treasury Note, 6.125% due 3/31/98,
value $416) 400 400
---------------
Total Short-term Investments
(Identified Cost - $4,724) 4,724
- ---------------------------------------------------------------------------------------------------------------------
Total Investments - 111.0%
(Identified Cost - $17,889) $ 17,876
======================================================================================================================
</TABLE>
(A) The coupon rate shown on the variable-rate security is the rate as of June
30, 1996. This rate varies with the weighted average coupon of the
underlying loans.
(B) When-issued Security - Security purchased on a delayed basis. Final
settlement amount and maturity date have not yet been announced. See notes
to financial statements.
5
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996
<TABLE>
<CAPTION>
Assets
<S> <C>
Investments at value (Identified Cost -$17,889,138) $ 17,875,651
Interest receivable 147,727
Other assets 76,580
---------------
Total assets 18,099,958
---------------
Liabilities
Payable for investments purchased 1,901,860
Accrued expenses 8,261
Due to adviser and administrator 79,888
---------------
Total liabilities 1,990,009
---------------
Net assets $ 16,109,949
===============
Analysis of Net Assets
Common stock at par value $.001 per share, authorized
100,000,000 shares: issued and outstanding 159,890 shares $ 160
Accumulated paid-in capital 16,000,840
Undistributed net investment income 134,065
Accumulated net realized loss on investments (11,629)
Unrealized depreciation of investments (13,487)
---------------
Net assets $ 16,109,949
===============
Net asset value, offering price, and redemption price
per share $100.76
=======
</TABLE>
See notes to financial statements.
6
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF OPERATIONS
For the period May 1, 1996
(Commencement of Operations) to
June 30, 1996
<TABLE>
<S> <C>
Investment Income:
Interest $ 146,085
Expenses:
Advisory fee $ 7,212
Administrative fee 1,202
Custodian fee 5,100
Organizational expense 2,625
Audit fees 2,000
Registration fees 1,000
Shareholder servicing expense 150
Transfer agent fees 12
-------------
19,301
Less fees waived and expenses reimbursed (7,281)
Total expenses, net of waivers
and reimbursements 12,020
-----------
Net Investment Income 134,065
Net Realized and Unrealized Loss on Investments:
Realized loss on investments (11,629)
Unrealized depreciation of investments (13,487)
Net Realized and Unrealized Loss on Investments ------------- (25,116)
------------
Increase in Net Assets Resulting from Operations $ 108,949
============
</TABLE>
See notes to financial statements.
7
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
May 1, 1996(A)
to
June 30, 1996
<S> <C>
Increase in Net Assets:
Net investment income $ 134,065
Net realized loss on investments (11,629)
Unrealized depreciation of investments (13,487)
----------------
Increase in net assets resulting from operations 108,949
----------------
Increase in net assets from Fund share transactions 16,000,000
----------------
Increase in net assets 16,108,949
Net Assets:
Beginning of period 1,000
----------------
End of period (including undistributed
net investment income of $134,065) $ 16,109,949
================
</TABLE>
(A) Commencement of Operations.
See notes to financial statements.
8
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
FINANCIAL HIGHLIGHTS
Contained below is per share operating performance data for a share of
common stock outstanding throughout the 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>
May 1, 1996(A)
to
June 30, 1996
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 100.00
Net investment income(B) 0.84
Net realized and unrealized loss on investments (0.08)
-------------
Total from investment operations 0.76
-------------
Net asset value, end of period $ 100.76
=============
Total return(B) 0.76%C
RATIOS/SUPPLEMENTAL DATA:
RATIOS TO AVERAGE NET ASSETS:
Expenses(B) .50%D
Net investment income(B) 5.58%D
Portfolio turnover rate 1,042%D
Net assets, end of period (in thousands) $ 16,110
</TABLE>
(A) Commencement of Operations
(B) Net of investment advisory and administrative fees waived pursuant to a
voluntary expense limitation of 0.50%.
(C) Not annualized
(D) Annualized
See notes to financial statements.
9
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
The Western Asset Trust, Inc. ("Corporation") is registered under the Investment
Company Act of 1940, as amended. The Western Asset Trust Limited Duration
Portfolio ("Fund"), a diversified, open-end management investment company, is
one of the portfolios established by the Corporation. The Fund was organized on
May 16, 1990 and had no operations prior to May 1, 1996, other than those
related to organizational matters.
Security Valuation
Portfolio securities are valued based upon market quotations. When market
quotations are not readily available, securities are valued based on prices
received from recognized broker-dealers in the same or similar securities. The
amortized cost method of valuation is used for debt obligations with 60 days or
less remaining to maturity.
Options and Futures
The current market value of a traded option is the last sale price or, in the
absence of a sale, the mean between the closing bid and asked price. Futures
contracts are marked-to-market on a daily basis. As the contract's value
fluctuates, payments known as variation margin are made to or received from the
futures commission merchant.
Dividends to Shareholders
Net investment income for dividend purposes is recorded on the accrual basis and
consists of interest income less expenses. Bond premium and original issue
discount are amortized for financial reporting and tax purposes using the
effective interest method over the period to maturity of the security and serve
to reduce or increase interest income.
Security Transactions
Security transactions are recorded on the trade date. Realized gains and losses
from security transactions are reported on an identified cost basis.
Deferred Organizational Expense
Deferred organizational expenses of $78,755 are being amortized on a
straight-line basis through April 2001.
Federal Income Taxes
No provision for federal income or excise taxes is required since the Fund
intends to qualify as a regulated investment company and distribute all of its
taxable income to its shareholders.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
1. Significant Accounting Policies - Continued
Use of Estimates
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from these estimates.
2. Financial Instruments:
As part of the Fund's investment program, the Fund utilizes repurchase
agreements, options and futures contracts. The nature and risk of these
financial instruments and the reasons for using them are set forth more fully in
the Corporation's Prospectus and Statement of Additional Information.
Repurchase Agreements
All repurchase agreements are fully collateralized by obligations issued by the
U.S. Government or its agencies and such collateral is in the possession of the
Fund's custodian. Risks arise from the possible delay in recovery or potential
loss of rights in the collateral should the issuer of the repurchase agreement
fail financially.
Option Transactions
A call option gives the option holder the right to purchase the underlying
security at a specified price until a specified date. A put option gives the
option holder the right to sell the underlying security at a specified price
until a specified date. Risks arise from the possible illiquidity of the options
market and from movements in security values.
Futures
The Fund may enter into futures contracts in connection with its interest rate
management strategy. The potential for risks arise from the possible illiquidity
of the futures market and from the possibility that a change in the value of a
contract may not correlate with changes in interest rates.
3. Portfolio Transactions:
Purchases and sales of portfolio securities (excluding short-term and U.S.
Government securities) for the period ended June 30, 1996, aggregated $9,402,275
and $1,929,081, respectively. Purchases and sales of U.S. Government securities
aggregated $20,710,002 and $14,604,851, respectively for the same period.
At June 30, 1996, the cost of securities for federal income tax purposes was
$17,889,138. Aggregate gross unrealized appreciation for all securities in which
there was an excess of value over tax cost was $17,966 and aggregate gross
unrealized depreciation for all securities in which there was an excess of tax
cost over value was $31,453.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
4. Fund Share Transactions:
At June 30, 1996, there were 100,000,000 Fund shares authorized at $.001 par
value. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
May 1, 1996(A)
to
June 30, 1996
Shares Amount
<S> <C>
Sold 159,880 $ 16,000,000
Repurchased (0) (0)
- ----------------------------------------------------------------------------------------------------------
Net increase 159,880 $ 16,000,000
=========== ================
</TABLE>
(A) Commencement of Operations
5. Transactions with Affiliates:
The Fund has an administration agreement with Legg Mason Fund Adviser, Inc.
("Administrator"), a corporate affiliate of Legg Mason Wood Walker, Incorporated
("Legg Mason"), a member of the New York Stock Exchange and the distributor for
the Fund. Under this agreement, the Administrator provides the Fund with
administrative services for which the Fund pays a fee at an annual rate of 0.10%
of average daily net assets of the Fund. The Administrator has voluntarily
agreed to indefinitely limit its fee to 0.05% of average daily net assets of the
Fund and to further temporarily waive its fees to the extent necessary to
indefinitely limit total expenses to an annual rate of 0.50% of the Fund's
average daily net assets. Pursuant to this agreement, administration fees of $69
were waived for the period ended June 30, 1996.
At June 30, 1996, $1,133 was due to the Administrator.
Western Asset Management Company ("Adviser"), a corporate affiliate of the
Administrator and Legg Mason, serves as investment adviser to the Fund. The
Adviser is responsible for the actual investment activity of the Fund, for which
the Fund pays a fee at an annual rate of 0.50% of average daily net assets of
the Fund. The Adviser has voluntarily agreed to indefinitely limit its fee to
0.30% of average daily net assets and to further waive its fees and reimburse
the Fund to the extent necessary to limit the total expenses to an annual rate
of 0.50% of the Fund's average daily net assets. Pursuant to this agreement,
advisory fees of $7,212 were waived for the period ended June 30, 1996.
12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Western Asset Trust Limited Duration Portfolio
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and financial highlights present fairly, in all material
respects, the financial position of Western Asset Trust Limited Duration
Portfolio (the "Fund") (one of the portfolios constituting Western Asset Trust,
Inc.) at June 30, 1996, the results of its operations, the changes in its net
assets and the financial highlights for the period May 1, 1996 (commencement of
operations) through June 30, 1996, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at June 30, 1996 by correspondence with the custodian
and the application of alternative auditing procedures for unsettled security
transactions, provides a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Baltimore, Maryland
July 31, 1996
