WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED
JUNE 30, 1997
<PAGE>
August 20, 1997
Dear Shareholder:
Enclosed are the financial statements for the Western Asset Trust Limited
Duration Portfolio for the year ending June 30, 1997.
I am pleased to report that the fund continues to produce positive investment
results returning 7.4% (net) versus its benchmark, the Merrill Lynch 1-3 year
Treasury Index, which returned 6.6%. At the close of the fund's first full year
of operation, total assets have risen to just over $25 million, and we expect to
see further growth in the year ahead.
The mainstay of the fund's returns continues to be our reliance on a variety of
strategies, with close attention paid to the interplay of risks involved in the
aggregate. Factors contributing to performance in this latest period include the
portfolio's long duration posture, successful anticipation of shifts in the
yield curve, and an overweighting to both the corporate and mortgage sectors.
Please feel free to call if you have any questions.
Sincerely,
W. Curtis Livingston
President
Enclosure
<PAGE>
WESTERN ASSET TRUST
LIMITED DURATION PORTFOLIO
PORTFOLIO MANAGER: Western Asset Management Investment Strategy Group
The fund's performance was on balance favorably impacted by market conditions in
the 12 months ended June 30, 1997. Although interest rates were unusually
volatile during the period, yields overall declined somewhat. The fund's total
return exceeded that of its benchmark, the Merrill Lynch 1-3 Year Index,
returning 7.4% (net) vs. 6.6%, as major strategies produced generally positive
results. The fund benefited from a long duration posture which it held
throughout most of the period, and yield curve strategies correctly anticipated
the periods when short- and long-term interest rates moved by greater and lesser
degrees relative to each other. A modest overweighting to the corporate sector
was rewarded as yield spreads narrowed, and a modest overweighting to the
mortgage sector benefited from tighter spreads as well.
[Graph Appears Here -- See Plots Points Below]
Average Annual Total Return
WAT Ltd ML 1-3 yr
1 Year 7.4% 6.6%
Since Inception 7.0% 6.3%
Western Asset Trust Merrill Lynch
Limited Duration Portfolio (net) 1-3 Year Index
5/1/96 $10,000 $10,000
6/30/96 10,073 10,072
9/30/96 10,243 10,238
12/31/96 10,505 10,433
3/31/97 10,572 10,502
6/30/97 10,823 10,734
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
June 30, 1997
(Amounts in Thousands)
Principal
Amount Value
---------- -----
CORPORATE BONDS AND NOTES - 11.7%
Banking and Finance - 5.6%
Bankamerica Capital III(A)
6.386% 1/15/27 $ 500 $ 491
First National Bank Commerce
6.50% 1/14/00 500 499
Ford Motor Credit Company
7.90% 5/17/99 500 513
-----------
1,503
-----------
Food and Beverage - 2.3%
Philip Morris Companies, Inc.
6.95% 6/1/06 600 602
-----------
Industrial - 3.8%
Long Island Lighting Company
9.75% 5/1/21 500 507
TCI Communications, Inc.
6.82% 9/15/10 500 500
-----------
1,007
-----------
Total Corporate Bonds and Notes
(Identified Cost - $3,108) 3,112
- ---------------------------------------------------------------------------
ASSET-BACKED SECURITIES - 17.3%
Bridgestone/Firestone Master Trust
6.17% 7/1/03 500 495
Cityscape Home Equity Loan Trust(B)
7.40% 9/25/28 944 945
FASCO Auto Trust 1996-1
6.65% 11/15/01 221 221
FASCO Auto Trust 1996-BA1(B)
9.05% 3/17/03 179 182
3
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Principal
Amount Value
--------- -----
<S> <C>
ASSET-BACKED SECURITIES - Continued
Fleet Finance Home Equity Trust
6.70% 10/15/06 $ 224 $ 225
Irwin Home Equity Corporation
6.65% 4/15/05 282 282
Lehman FHA Title I Loan Trust
6.84% 2/25/04 500 500
Merrill Lynch Mortgage Investors, Inc.
9.20% 1/15/11 260 265
Onyx Acceptance Grantor Trust
6.45% 12/15/02 365 366
Tyron Mortgage Funding, Inc.
6.35% 5/20/01 245 245
Union Acceptance Corp.
6.375% 10/8/03 300 299
World Financial Network Credit Card Master Trust
6.95% 4/15/06 400 403
World Omni Automobile Lease Securitization Trust
6.05% 11/25/01 151 151
-----------
Total Asset-backed Securities
(Identified Cost - $4,570) 4,579
- -------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES - 16.1%
Fixed-rate Securities - 14.2%
Criimi Mae Trust 1(B)
6.77% 5/30/98 500 499
Green Tree Home Improvement Loan Trust
6.45% 7/15/21 996 999
International Mortgage Acceptance Corporation
12.25% 3/1/14 248 262
J.P. Morgan Commercial Mortgage Finance Corporation
6.939% 12/26/28 480 481
</TABLE>
4
<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 - Continued
Fixed-rate Securities - Continued
Merrill Lynch Mortgage Investors, Inc.
6.69% 11/21/28 $ 244 $ 244
Resolution Trust Corporation
8.40% 7/25/24 338 338
Structured Asset Securities Corp.
6.60% 10/25/24 147 147
7.75% 2/25/28 785 795
-----------
3,765
-----------
Variable-rate Securities(C) - 1.9%
CBA Mortgage Corporation
7.76% 12/1/03 500 508
-----------
Total Mortgage-backed Securities
(Identified Cost - $4,282) 4,273
- --------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 23.7%
Fixed-rate Securities - 19.1%
United States Treasury Bonds
6.50% 11/15/26 420 403
-----------
United States Treasury Notes
6.50% 5/31/02 4,300 4,317
6.25% 6/30/02 360 358
-----------
4,675
-----------
Indexed Securities(D) - 4.6%
United States Treasury Inflation-Indexed Security
3.375% 1/15/07 1,234 1,204
-----------
Total U.S. Government and Agency Obligations
(Identified Cost - $6,317) 6,282
- --------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
--------- -----
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES - 10.7%
Fixed-rate Securities - 7.1%
Federal Home Loan Mortgage Corporation
10.15% 4/1/06 $ 141 $ 142
-----------
Federal National Mortgage Association
6.00% 7/1/12(E) 1,700 1,639
-----------
Government National Mortgage Association
9.25% 3/15/01 96 100
-----------
Indexed Securities(A)- 3.6%
Government National Mortgage Association
7.125% 8/20/22 307 317
7.00% 1/20/25 624 640
-----------
957
-----------
Total U.S. Government Agency Mortgage-backed
Securities
(Identified Cost - $2,824) 2,838
- ------------------------------------------------------------------------------
YANKEE BONDS(F)- 4.5%
Fixed-rate Securities - 3.2%
Hydro - Quebec
9.75% 9/29/98 500 519
YPF Sociedad Anonima
7.50% 10/26/02 323 327
-----------
846
-----------
Indexed Securities(A)- 1.3%
United Mexican States(B)
7.875% 8/6/01 350 351
-----------
Total Yankee Bonds
(Identified Cost - $1,196) 1,197
- ------------------------------------------------------------------------------
6
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Shares Value
------ -----
<S> <C>
COMMON STOCKS AND EQUITY INTERESTS - 2.0%
Blackrock 2001 Term Trust, Inc. 65 $ 524
-----------
Total Common Stocks and Equity Interests
(Identified Cost - $519) 524
- ----------------------------------------------------------------------------------
<CAPTION>
Principal
Amount
---------
<S> <C>
SHORT-TERM INVESTMENTS - 19.2%
Corporate - 5.6%
Heller Financial Incorporated
6.27% 5/20/98 $ 500 501
Texas Gas Transmission Corporation
9.625% 7/15/97 500 500
Time Warner, Inc.
7.45% 2/1/98 500 503
-----------
1,504
-----------
U. S. Government Agency - 0.4%
United States Treasury Bills
5.16% 8/21/97 100 99(G)
-----------
Repurchase Agreement - 13.2%
J.P. Morgan Securities, Inc.
6.05% dated 6/30/97, to be repurchased
at $2,578 on 7/1/97 (Collateral: $2,650
Federal National Mortgage Association
Medium-term notes, 6.49% due 1/19/06,
value $2,724) 2,578 2,578
-----------
State Street Bank and Trust Company, N.A.
4.25% dated 6/30/97, to be repurchased
at $917 on 7/1/97 (Collateral: $870 U.S.
Treasury note 7.875 % due 11/15/07,
value $944) 917 917
-----------
</TABLE>
7
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
<TABLE>
<CAPTION>
Actual
Contracts Value
--------- -----
<S> <C>
SHORT-TERM INVESTMENTS - Continued
Options Purchased - N.M.
Eurodollar Future Put
September 97, Strike Price $94 7 $ 1
Five-year U.S. Treasury Note Future Put
September 97, Strike Price $105.50 12 5
-----------
6
-----------
Total Short-term Investments
(Identified Cost - $5,099) 5,104
- ------------------------------------------------------------------------------
Total Investments - 105.2%
(Identified Cost - $27,915) $ 27,909
- ------------------------------------------------------------------------------
<CAPTION>
Expiration Actual Appreciation/
Date Contracts (Depreciation)
---------- --------- --------------
<S> <C>
OPTION WRITTEN
U.S. Treasury Bond Future September 97 5 1
------
FUTURES CONTRACT WRITTEN
Five-year Treasury Note Future September 97 40 17
===============================================================================
</TABLE>
(A) Indexed Security - The rate of interest earned on these securities is tied
to an index such as the Cost of Funds Index (COFI), the London Interbank
Offered Rate (LIBOR), the One Year Treasury Constant Maturity Rate or the
Consumer Price Index (CPI).The coupon rate shown is the rate at June 30,
1997.
(B) Rule 144a Security - A security purchased pursant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified institutional buyers.
(C) The coupon rates shown on variable rate securities is the rate at June 30,
1997. This rate varies with the weighted average coupon of the underlying
loans.
(D) United States Treasury Inflation Indexed Security - U.S. Treasury
Securities whose principal value is adjusted daily in accordance with
changes to the Consumer Price Index. Interest is calculated on the basis of
the current adjusted principal value.
(E) When-issued Security - Security purchased on a delayed delivery basis.
Final settlement amount and maturity date have not yet been determined.
(F) Yankee Bond - Dollar denominated bond issued in the U.S. by foreign
entities.
(G) Collateral to cover futures sold.
N.M. Not meaningful.
See notes to financial statements.
8
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF ASSETS AND LIABLITIES
June 30, 1997
Assets
Investments at value (Identified Cost - $27,915,125) $27,909,155
Receivable for futures variation margin 10,000
Interest receivable 255,824
Due from Adviser 26,040
Other assets 60,592
-----------
Total assets 28,261,611
Liabilities
Payable for investments purchased 1,672,654
Options written, at market (premiums received $3,681) 2,266
Accrued expenses 50,000
-----------
Total liabilities 1,724,920
-----------
Net assets $26,536,691
===========
Analysis of Net Assets
Common stock at par value $.001 per share, authorized
100,000,000 shares: issued and outstanding 259,252 shares 259
Accumulated paid-in capital 26,074,618
Undistributed net investment income 364,806
Undistributed net realized gain on investments, options
and futures 84,269
Unrealized appreciation of investments, options and futures 12,739
-----------
Net assets $26,536,691
===========
Net asset value, offering price, and redemption price per share $102.36
=======
- ----------
See notes to financial statements.
9
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF OPERATIONS
For the Year Ended June 30, 1997
<TABLE>
<S> <C>
Investment Income:
Interest $1,339,752
Dividends 1,752
----------
$1,341,504
Expenses:
Advisory fee 60,550
Administrative fee 10,092
Custodian fee 60,700
Legal and audit fees 37,165
Registration fees 36,445
Directors' fees 19,867
Organizational expense 15,751
Reports to shareholders 1,620
Transfer agent and shareholder servicing expense 985
Other expenses 569
----------
243,744
Less fees waived (161,357)
----------
Total expenses, net of fees waived and reimbursed 82,387
----------
Net Investment Income 1,259,117
Net Realized and Unrealized Gain on Investments:
Realized gain on investments, options and futures 139,480
Unrealized appreciation of investments, options
and futures 26,226
----------
Net Realized and Unrealized Gain on Investments 165,706
----------
Increase in Net Assets Resulting from Operations $1,424,823
==========
</TABLE>
- ----------
See notes to financial statements.
10
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
For the May 1, 1996(A)
Year Ended to
June 30, 1997 June 30, 1996
------------- -------------
Increase in Net Assets:
Net investment income $ 1,259,117 $ 134,065
Change in realized gain on investments,
options and futures 139,480 (11,629)
Change in unrealized appreciation of
investments, options and futures 26,226 (13,487)
----------- -----------
Increase in net assets resulting from operations 1,424,823 108,949
Distributions to shareholders from:
Net investment income (1,012,185) --
Net realized gain on investments (59,773) --
Increase in net assets from Fund share
transactions 10,073,877 16,000,000
----------- -----------
Increase in net assets 10,426,742 16,108,949
Net Assets:
Beginning of period 16,109,949 1,000
----------- -----------
End of period (including undistributed
net investment income of $380,996
and $134,065, respectively) $26,536,691 $16,109,949
=========== ===========
- -------------
(A) Commencement of Operations
See notes to financial statements.
11
<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 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>
For the May 1, 1996(A)
Year Ended to
June 30, 1997 June 30, 1996
------------- -------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $100.76 $100.00
------- -------
Net investment income(B) 5.94 0.84
Net realized and unrealized gain (loss) on investments,
options and futures 1.34 (0.08)
------- ------
Total from investment operations 7.28 0.76
------- ------
Distributions to shareholders from:
Net investment income (5.31) --
Net realized gain on investments (0.37) --
------- ------
Total distributions (5.68) --
------- ------
Net asset value, end of year $102.36 $100.76
======= =======
Total return(B) 7.42% 0.76%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses(B) .41% .50%(D)
Net investment income(B) 6.24% 5.58%(D)
Portfolio turnover rate 435.47% 1,042%(D)
Net assets, end of year(in thousands) $26,537 $16,110
</TABLE>
- ----------
(A) Commencement of Operations
(B) Net of investment advisory fees waived pursuant to a voluntary expense
limitation of 0.50% through August 5, 1996 and 0.40% thereafter. In the
absence of this limitation, the ratio of expenses to average net assets
would have been 1.21% for the year ended June 30, 1997 and 0.80% for the
period ended June 30, 1996.
(C) Not annualized
(D) Annualized
See notes to financial statements.
12
<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.
Distributions to Shareholders
Net investment income for dividend purposes is recorded on the accrual basis and
consists of interest and dividend 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.
Distributions are determined on a tax basis and may differ from net investment
income and realized capital gains for financial reporting purposes.
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.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
1. Significant Accounting Policies - Continued
Federal Income Taxes
No provision for federal income or excise taxes is required since the Fund
intends to continue to qualify as a regulated investment company and distribute
all of its taxable income to its shareholders.
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. Call and put options written by
the Fund and related premiums received during the period are as follows:
<TABLE>
<CAPTION>
Calls Puts
-------------------------- ------------------------------
Contracts Premiums Contracts Premiums
- ------------------------------------------------------------------- ------------------------------
<S> <C>
Options outstanding at June 30, 1996 - $ - - $ -
Options written 62 17,104 1,059 17,714
Options closed (62) (17,104) (1,054) (14,033)
Options expired - - - -
Options exercised - - - -
- ------------------------------------------------------------------- ------------------------------
Options outstanding at June 30, 1997 - $ - 5 $ 3,681
=================================================================== ==============================
</TABLE>
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
2. Financial Instruments - Continued
Futures
The Fund has entered into futures contracts in connection with its interest rate
management strategy. 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. The open long and short futures
positions and related appreciation or depreciation at June 30, 1997 are
described at the end of the "Portfolio of Investments," page 7.
3. Portfolio Transactions:
Purchases and sales of portfolio securities (excluding short-term, U.S.
Government securities, written and purchased options and futures contracts) for
the year ended June 30, 1997, aggregated $37,481,628 and $28,727,110,
respectively. Purchases and sales of U.S. Government securities aggregated
$53,141,701 and $51,235,505, respectively for the same period.
At June 30, 1997, the cost of securities for federal income tax purposes was
$27,915,125. Aggregate gross unrealized appreciation for all securities in which
there was an excess of value over tax cost was $55,559 and aggregate gross
unrealized depreciation for all securities in which there was an excess of tax
cost over value was $61,529.
4. Fund Share Transactions:
At June 30, 1997, there were 100,000,000 Fund shares authorized at $.001 par
value. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
For the May 1, 1996(A)
Year Ended to
June 30, 1997 June 30, 1996
---------------------- -----------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------- -----------------------------
<S> <C>
Sold 112,955 $11,501,918 159,880 $16,000,000
Reinvestment of distributions 10,624 1,071,959 - -
Repurchased (24,218) (2,500,000) - -
- --------------------------------------------------------------------- -----------------------------
Net increase 99,361 $10,073,877 159,890 $16,000,000
===================================================================== =============================
</TABLE>
(A) Commencement of Operations
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
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. At June 30, 1997, $1,006 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 0.40% of the Fund's average daily net assets. Pursuant to this agreement,
advisory fees of $60,550 were waived and reimbursements of $100,807 were made
for the year ended June 30, 1997. At June 30, 1997, $27,046 was due from the
Adviser as reimbursement for expenses paid in excess of the 0.40% annual limit.
16
