WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
REPORT TO SHAREHOLDERS
FOR THE SIX MONTHS ENDED
DECEMBER 31, 1996
<PAGE>
February 25, 1997
Dear Shareholder:
Enclosed are the mid-year financial statements for the Western Asset
Trust Limited Duration Portfolio, covering the period July 1 - December 31,
1996.
Still in its first year of operation, the fund has produced positive
investment results relative to its benchmark for this period. Though total
assets are only $18 million, we do expect to see this grow substantially over
time.
The principal factors behind the fund's recent good performance, when
it returned 4.3% (net of all fees) versus the Merrill Lynch 1-3 year Treasury
Index's 3.6% return , were its longer than market duration posture, which was
rewarded by declining interest rates, and its emphasis on corporate and
mortgage-backed securities, which profited from a narrowing of their yield
spreads versus other domestic market sectors.
Please feel free to call if you have any questions.
Sincerely,
/s/ W. Curtis Livingston
W. Curtis Livingston
President
Enclosure
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
December 31, 1996
(Amounts in Thousands)
(Unaudited)
Principal
Amount Value
-------------- ---------
CORPORATE BONDS AND NOTES - 17.4 %
Finance - 10.1%
Donaldson Lufkin + Jenrette
5.625% 2/15/16 $ 500 $ 482
Ford Motor Credit Company
7.90% 5/17/99 500 517
Heller Financial Incorporated
6.27% 5/20/98 500 502
Wachovia Capital Trust I(A)
7.64% 1/15/27 500 497
---------
1,998
---------
Food and Beverage - 2.0%
Philip Morris Companies, Inc.
6.95% 6/1/06 400 405
---------
Media and Entertainment - 2.6%
Time Warner, Inc.
7.45% 2/1/98 500 506
---------
Utilities - 2.7%
Long Island Lighting Company
9.75% 5/1/21 500 534
---------
Total Corporate Bonds and Notes
(Identified Cost - $3,399) 3,443
- -----------------------------------------------------------------------------
ASSET-BACKED SECURITIES - 21.9%
Bridgestone/Firestone Master Trust
6.17% 7/1/03 500 497
---------
FASCO Auto Trust 1996-1
6.65% 11/15/01 272 274
---------
2
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
-------------- ---------
ASSET-BACKED SECURITIES - Continued
FASCO Auto Trust 1996-BA1(A)
9.05% 3/17/03 $ 231 $ 237
---------
Fleet Finance Home Equity Trust
6.70% 10/15/06 377 379
---------
Irwin Home Equity Corporation
6.65% 4/15/05 342 342
---------
Lehman FHA Title I Loan Trust
6.84% 2/25/04 500 502
---------
Merrill Lynch Mortgage Investors, Inc.
9.20% 1/15/11 372 379
---------
Olympic Automobile Receivables Trust
7.875% 7/15/01 305 310
---------
Onyx Acceptance Grantor Trust
6.45% 12/15/02 455 457
---------
Tyron Mortgage Funding, Inc.
6.35% 5/20/01 372 372
---------
World Financial Network Credit Card Master
Trust
6.95% 4/15/06 400 406
---------
World Omni Automobile Lease Securitization
Trust
6.05% 11/25/01 189 189
---------
Total Asset-backed Securities
(Identified Cost - $4,328) 4,344
- -----------------------------------------------------------------------------
3
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
--------------- ---------
MORTGAGE-BACKED SECURITIES - 24.4%
Fixed-rate Securities - 22.0%
Criimi Mae Trust 1(A)
6.77% 5/30/98 $ 500 $ 498
---------
Green Tree Home Improvement Loan Trust
6.45% 7/15/21 1,674 1,679
---------
International Mortgage Acceptance
Corporation
12.25% 3/1/14 281 297
---------
Merrill Lynch Mortgage Investors, Inc.
6.69% 11/21/28 249 249
---------
Resolution Trust Corporation
8.40% 7/25/24 436 438
---------
Structured Asset Securities Corp.
6.60% 10/25/24 303 303
7.75% 2/25/28 882 893
---------
1,196
---------
Indexed Securities(B) - 2.4%
Resolution Trust Corporation
6.339% 5/25/19 490 487
---------
Total Mortgage-backed Securities
(Identified Cost - $4,856) 4,844
- ------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATION - 2.6%
United States Treasury Note
7.00% 7/15/06 500 519
---------
Total U.S. Government Obligation
(Identified Cost - $527) 519
- -----------------------------------------------------------------------------
4
<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 - 8.6%
Fixed-rate Securities - 5.1%
Federal Home Loan Mortgage Corporation
10.15% 4/15/06 $ 182 $ 186
6.50% 1/1/12(C) 700 688
---------
874
---------
Government National Mortgage Association
9.25% 3/15/01 124 129
---------
Variable-rate Securities(D) - 3.5%
Government National Mortgage Association
6.50% 1/20/25 687 702
---------
Total U.S. Government Agency Mortgage-backed
Securities
(Identified Cost - $1,699) 1,705
- -----------------------------------------------------------------------------
YANKEE BONDS(E) - 6.2%
Fixed-rate Securities - 4.4%
Hydro - Quebec
9.75% 9/29/98 500 527
YPF Sociedad Anonima
7.50% 10/26/02 347 351
---------
877
---------
Indexed Securities(B) - 1.8%
United Mexican States(A)
7.5625% 8/6/01 350 351
---------
Total Yankee Bonds
(Identified Cost - $1,228) 1,228
- -----------------------------------------------------------------------------
5
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Principal
Amount Value
-------------- ---------
SHORT-TERM INVESTMENTS - 21.3%
Corporate - 7.1%
John Deere Capital Corporation
5.95% 6/30/97 $ 400 $ 400
Texas Gas Transmission Corporation
9.625% 7/15/97 500 509
Trinova Corporation
7.95% 5/1/97 500 503
---------
1,412
---------
U.S. Government Obligations - 0.5%
United States Treasury Bills
5.26% 1/9/97 50 50(F)
5.30% 1/9/97 50 50(F)
---------
100
---------
Repurchase Agreement - 13.7%
J.P. Morgan Securities, Inc.
6.80% dated 12/31/96, to be repurchased
at $2,711 on 1/2/97 (Collateral: $2,835
Federal National Mortgage Association
Medium-term note, 5.82% due 11/4/03,
value $2,805) 2,710 2,710
---------
Actual
Contracts
---------------
Option Purchased - N.M.
Eurodollar Future Call
March 97 Strike Price $94.25 10 2
---------
Total Short-term Investments
(Identified Cost - $4,227) 4,224
- -----------------------------------------------------------------------------
Total Investments - 102.4%
(Identified Cost - $20,264) $ 20,307
=============================================================================
6
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
PORTFOLIO OF INVESTMENTS - Continued
(Amounts in Thousands)
Expiration Actual Appreciation/
Date Contracts (Depreciation)
---------- --------- --------------
OPTIONS WRITTEN
Eurodollar Future Call
Strike Price $94.75 March 97 10 $ 1
-----
FUTURES CONTRACTS SOLD
Treasury Bond Future March 97 5 8
-----
(A) 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.
(B) Indexed Scurities - The rate of interest earned on these securities is tied
to an index such as the Cost of Funds Index (COFI) or the London Interbank
Offered Rate (LIBOR). The coupon rate shown is the rate at December 31,
1996.
(C) When-issued Security - Security purchased on a delayed delivery basis.
Final settlement amount and maturity date have not yet been determined.
(D) The coupon rate shown on the variable rate security is the rate at December
31, 1996. This rate varies with the weighted average coupon of the
underlying loans.
(E) Yankee Bond - Dollar denominated bond issued in the U.S. by foreign
entities.
(F) Collateral to cover futures sold.
N.M. Not meaningful.
See notes to financial statements.
7
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF ASSETS AND LIABLITIES
December 31, 1996
(Unaudited)
Assets
Investments at value (Identified Cost - $20,263,523) $20,307,262
Receivable for:
Investments sold 786,125
Futures variation margin 6,250
Interest receivable 183,011
Due from Adviser 35,561
Other assets 70,413
----------
Total assets 21,388,622
Liabilities
Payable for investments purchased 1,480,781
Options written, at market (premiums received $1,425) 375
Accrued expenses 68,106
----------
Total liabilities 1,549,262
----------
Net assets $19,839,360
==========
Analysis of Net Assets
Common stock at par value $.001 per share, authorized
100,000,000 shares: issued and outstanding
197,036 shares $ 197
Accumulated paid-in capital 19,762,089
Overdistribution of net investment income (35,764)
Undistributed net realized gain on investments,
options and futures 59,806
Unrealized appreciation of investments,
options and futures 53,032
----------
Net assets $19,839,360
==========
Net asset value, offering price, and redemption
price per share $100.69
=======
- ----------
See notes to financial statements.
8
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF OPERATIONS
For the Six Months Ended December 31, 1996
(Unaudited)
<TABLE>
<S> <C>
Investment Income:
Interest $566,239
Expenses:
Advisory fee $ 25,922
Administrative fee 4,320
Custodian fee 25,700
Legal and audit fees 13,300
Registration fees 10,695
Directors' fees 10,153
Organizational expense 7,875
Transfer agent and shareholder servicing expense 318
Other expenses 124
--------
98,407
Less fees waived and expenses reimbursed (62,211)
Total expenses, net of waivers and reimbursements 36,196
--------
Net Investment Income 530,043
Net Realized and Unrealized Gain on Investments:
Realized gain on investments, options and futures 131,208
Unrealized appreciation of investments, options and
futures 66,519
Net Realized and Unrealized Gain on Investments 197,727
--------
Increase in Net Assets Resulting from Operations $727,770
========
</TABLE>
- ----------
See notes to financial statements.
9
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the May 1, 1996(A)
Six Months Ended to
December 31, 1996 June 30, 1996
-------------------------- ----------------------
(Unaudited)
<S> <C>
Increase in Net Assets:
Net investment income $ 530,043 $ 134,065
Net realized gain on investments, options and futures 131,208 (11,629)
Change in unrealized appreciation of investments 66,519 (13,487)
---------------- -----------------
Increase in net assets resulting from operations 727,770 108,949
Distributions to shareholders from:
Net investment income (699,872) -
Net realized gain on investments (59,773) -
Increase in net assets from Fund share transactions 3,761,286 16,000,000
---------------- -----------------
Increase in net assets 3,729,411 16,108,949
Net Assets:
Beginning of period 16,109,949 1,000
---------------- -----------------
End of period (including (over)/under
distributed net investment income
of ($35,764) and $134,065, respectively) $ 19,839,360 $ 16,109,949
================ =================
</TABLE>
- ----------
(A) Commencement of Operations
See notes to financial statements.
10
<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)
Six Months Ended to
December 31, 1996 June 30, 1996
----------------- ---------------
(Unaudited)
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 100.76 $ 100.00
------------ -------------
Net investment income(B) 2.97 0.84
Net realized and unrealized gain (loss) on investments 1.32 (0.08)
------------ -------------
Total from investment operations 4.29 0.76
------------ -------------
Distributions to shareholders from:
Net investment income (3.99) -
Net realized gain on investments (0.37) -
------------ -------------
Total distributions (4.36) -
------------ -------------
Net asset value, end of period $ 100.69 $ 100.76
============ =============
Total return(B) 4.29%(C) 0.76%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses(B) .42%(D) .50%(D)
Net investment income(B) 6.12%(D) 5.58%(D)
Portfolio turnover rate 346.23%(D) 1,042%(D)
Net assets, end of period (in thousands) $ 19,839 $ 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% through August 5, 1996 and 0.40%
thereafter.
(C) Not annualized
(D) Annualized
See notes to financial statements.
11
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 continue to qualify as a regulated investment company and distribute
all of its taxable income to its shareholders.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS - 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. 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 48 $11,109 1,018 $ 9,740
Options closed (38) (9,684) (1,018) (9,740)
Options expired - - - -
Options exercised - - - -
- ----------------------------------------------------------------- -----------------------
Options outstanding at December 31, 1996 10 $ 1,425 - $ -
================================================================= =======================
</TABLE>
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 December 31, 1996 are
described at the end of the "Portfolio of Investments," page 7.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
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 six months ended December 31, 1996, aggregated $18,429,843 and $10,788,523,
respectively. Purchases and sales of U.S. Government securities aggregated
$15,115,994 and $18,976,466, respectively for the same period.
At December 31, 1996, the cost of securities for federal income tax purposes was
$20,263,523. Aggregate gross unrealized appreciation for all securities in which
there was an excess of value over tax cost was $82,620 and aggregate gross
unrealized depreciation for all securities in which there was an excess of tax
cost over value was $38,881.
4. Fund Share Transactions:
At December 31, 1996, 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)
Six Months Ended to
December 31, 1996 June 30, 1996
--------------------------- -------------------------------
Shares Amount Shares Amount
--------------------------- -------------------------------
<S> <C>
Sold 53,858 5,501,641 159,880 $16,000,000
Reinvestment of distributions 7,505 759,645 - -
Repurchased (24,218) (2,500,000) - -
- -------------------------------------------------------------- -------------------------------
Net increase 37,145 $ 3,761,286 159,880 $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. At December 31, 1996, $728 was due from 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 $25,922 were waived and reimbursements of $36,289 were made for
the six months ended December 31, 1996. At December 31, 1996, $35,561 was due
from the Adviser as reimbursement for expenses paid in excess of the 0.40%
annual limit.
14
