February 25, 1998
Dear Shareholder:
Enclosed are the mid-year financial statements for the Western Asset Trust
Limited Duration Portfolio, covering the period July 1 - December 31, 1997.
Now in its second year of operation, the fund continues to produce positive
investment results relative to its benchmark. Total assets have now exceeded $30
million, and we see the fund's growth momentum building over time.
The principal factors behind the fund's recent good performance, when it
returned 3.9% (net of all fees) versus the benchmark Merrill Lynch 1-3 year
Treasury Index's 3.7% return, were its longer than market duration posture,
which was rewarded by declining interest rates and its barbelled exposure to
maturities, which benefited from a pronounced flattening of the yield curve.
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
REPORT TO SHAREHOLDERS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S><C>
CORPORATE BONDS AND NOTES 13.19%
FINANCE 5.89%
BankAmerica Capital III 6.33% 01/15/27 $500 $ 485(A)
First National Bank 6.50% 01/14/00 500 503
Traveler's Group, Inc. 7.30% 05/15/02 700 722
-------
1,710
FOOD, BEVERAGE AND TOBACCO 2.14%
Philip Morris Companies, Inc. 6.95% 06/01/06 600 621
INDUSTRIAL 5.16%
Long Island Lighting Company 9.75% 05/01/21 500 508
Time Warner PATS 4.90% 07/29/99 500 490(B)
TCI Communications, Inc. 6.82% 09/15/10 500 502
-------
1,500
Total Corporate Bonds and Notes
(Identified Cost - $3,799) 3,831
- --------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS 28.06%
United States Treasury Notes 5.875% 09/30/02 1,700 1,709
United States Treasury Notes 5.75% 11/30/02 900 901
United States Treasury Notes 7.00% 07/15/06 800 863
United States Treasury Notes 5.75% 11/15/00 2,000 2,004
United States Treasury Notes 6.00% 08/15/00 350 353
United States Treasury Notes 6.50% 05/31/02 900 926
United States Treasury Notes 5.75% 08/15/03 300 300
United States Treasury Notes 6.63% 05/15/07 420 445
United States Treasury Notes 6.13% 08/15/07 90 92
United States Treasury Notes 7.88% 11/15/04 500 559
-------
Total U.S Government Obligations
(Identified Cost - $8,073) 8,152
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S><C>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES 14.57%
FIXED-RATE SECURITIES 7.76%
Fannie Mae 6.00% 10/01/11 $1,616 $1,593
Fannie Mae 7.00% 08/01/13 467 477
Freddie Mac 10.15% 04/15/06 104 105
Government National Mortgage Association 9.25% 03/15/01 76 78
-------
2,253
VARIABLE-RATE SECURITY 2.72%
Government National Mortgage Association 7.00% 08/20/22 277 284(C)
Government National Mortgage Association 7.00% 09/20/20 493 506(C)
-------
790
INDEXED-SECURITY 4.09%
Fannie Mae - Inflation Linked 5.122% 03/13/02 1,220 1,189(A)
Total U.S. Government Agency Mortgage-backed Securities
(Identified Cost - $4,186) 4,232
- --------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES 7.99%
FIXED-RATE SECURITIES
Aesop Funding II LLC 6.40% 10/20/03 200 201(B)
Bridgestone/Firestone Master Trust 6.17% 07/01/03 500 501
FASCO Auto Trust 6.65% 11/15/01 174 175
FASCO Auto Trust 9.05% 03/17/03 6 6(B)
Fleet Finance Home Equity Trust 6.70% 10/16/06 129 130
Irwin Home Equity Corporation 6.65% 04/15/05 189 192
Lehman FHA Title I Loan Trust 6.84% 02/25/04 158 158
Merrill Lynch Mortgage Investors, Inc. 9.20% 01/15/11 148 150
Onyx Acceptance Grantor Trust 6.45% 12/15/02 284 284
Tyron Mortgage Funding, Inc. 6.35% 05/20/01 117 116
Union Acceptance Corp. 6.375% 10/08/03 300 301
World Omni Automobile Lease Securitization Trust 6.05% 11/25/01 106 106
-------
Total Asset-backed Securities
(Identified Cost - $2,310) 2,320
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S><C>
MORTGAGE-BACKED SECURITIES 18.53%
FIXED-RATE SECURITIES 16.79%
CRIIMI MAE Financial Corporation 6.77% 05/30/98 $375 $372(B)
Chevy Chase Home Loan Trust 6.55% 01/20/18 751 750
Cityscape Home Equity Loan 7.40% 09/25/28 875 883(B)
Green Tree Home Improvement Loan Trust 6.45% 07/15/21 275 276
International Mortgage Acceptance Corp. 12.25% 03/01/14 213 241
JP Morgan Commercial Mortgage Finance 6.94% 12/26/28 447 453
Merrill Lynch Mortgage Investors, Inc. 6.69% 11/21/28 237 240
Morgan Stanley Capital I 6.85% 02/15/20 731 742
Resolution Trust Corporation 8.40% 07/25/24 150 150
Structured Asset Securities Corp. 6.60% 10/25/24 47 47
Structured Asset Securities Corp. 7.75% 02/25/28 717 723
-------
4,877
VARIABLE-RATE SECURITIES 1.74%
CBA Mortgage Corp. 7.76% 12/01/03 500 504(C)
Total Mortgage-backed Securities
(Identified Cost - $5,355) 5,381
- --------------------------------------------------------------------------------------------------------------------------
YANKEE BONDS 1.82%
FIXED-RATE SECURITIES
YPF Sociedad Anonima 7.50% 10/26/02 521 529(D)
Total Yankee Bonds
(Identified Cost - $533) 529
- --------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND EQUITY INTERESTS 2.45%
Black Rock 2001 Term Trust 82 shrs 711
Total Common Stocks and Equity Interests
(Identified Cost - $671) 711
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
% OF MATURITY
NET ASSETS RATE DATE PAR VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S><C>
SHORT-TERM INVESTMENTS 8.11%
CORPORATE 3.45%
Heller Financial 6.27% 05/20/98 $500 $ 501
Time Warner, Inc. 7.45% 02/01/98 500 500
-------
1,001
YANKEE BONDS
Hydro Quebec 1.77% 9.75% 09/29/98 500 513(D)
U.S. GOVERNMENT OBLIGATIONS 0.68%
United States Treasury Bills 5.04% 03/05/98 100 99(E)
United States Treasury Bills 5.23% 03/05/98 100 99(E)
-------
198
REPURCHASE AGREEMENT 2.19%
Merrill Lynch Securities Inc.
6.60% dated 12/31/97, to be repurchased at $637 on 1/2/98
(Collateral: $650 Fannie Mae Medium-term Notes, 6.58%
due 12/17/07, value $657) 637 637
ACTUAL
CONTRACTS
---------
OPTIONS PURCHASED 0.03%
Eurodollar Future Call June 98, Strike Price $94.25 23 8
Total Short-Term Investments
(Identified Cost - $2,351) 2,357
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------
<S><C>
Total Investments 94.72% $27,278 $27,514
Other Assets Less Liabilities 5.28% 1,533
-------
NET ASSETS CONSISTING OF:
Accumulated paid-in-capital applicable to
287 shares outstanding $28,765
Undistributed net investment income 12
Undistributed net realized gain on investments 48
Unrealized appreciation of investments 222
-------
NET ASSETS 100.00% $29,047
=======
NET ASSET VALUE PER SHARE $101.23
=======
ACTUAL APPRECIATION/
EXPIRATON CONTRACTS (DEPRECIATION)
--------- --------- --------------
OPTIONS WRITTEN
Eurodollar Future Call, Strike Price $94.75 June 98 18 $1
FUTURES WRITTEN
U.S. Treasury Bond Futures March 98 26 (9)
U.S. Treasury Note Futures March 98 4 (6)
</TABLE>
- ----------------------
(A) Indexed Security - The rate of interest earned on this type of security is
tied to the London Interbank Offered Rate (LIBOR), the Consumer Price Index
(CPI) or the one year Treasury Bill rate. The coupon rate is the rate as of
December 31,1997
(B) Rule 144a Security - A security purchased pursuant to Rule 144a under the
Securities Act of 1933 which may not be resold subject to that rule except
to qualified buyers.
(C) The coupon rate shown on the variable securities is the rate at December 31,
1997. This rate varies with the weighted average coupon of the underlying
loans.
(D) Yankee Bond- Dollar denominated bond issued in the U.S. by foreign entities.
(E) Collateral to cover futures written.
6
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
(AMOUNT IN THOUSANDS)
(UNAUDITED)
INVESTMENT INCOME:
Interest $1,034
Dividends 16
------
Total income $1,050
EXPENSES:
Management fee 50
Administrative fee 8
Custodian fees 32
Legal and audit fees 15
Registration fees 17
Directors' fees 8
Reports to shareholders 1
Transfer agent and
shareholder servicing expense 1
Organizational expense 8
Other expenses 17
------
157
Less fees waived (91)
------
Total expenses, net of waivers 66
------
NET INVESTMENT INCOME 984
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain on investments, options
and futures 67
Change in unrealized appreciation of
investments, options and futures 209
------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS 276
------
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS $1,260
======
================================================================================
STATEMENT OF CHANGES IN NET ASSETS
(AMOUNT IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
DECEMBER 31, 1997 JUNE 30, 1997
----------------- -------------
(UNAUDITED)
<S><C>
CHANGE IN NET ASSETS:
Net investment income $ 984 $ 1,259
Net realized gain (loss) on investments,
options and futures 67 140
Change in unrealized appreciation
of investments, options and futures 209 26
------- -------
Change in net assets resulting
from operations 1,260 1,425
Distributions to shareholders from:
Net investment income (1,337) (1,012)
Net realized gain on investment (103) (60)
Change in net assets from
Fund share transactions 2,690 10,074
------- -------
Change in net assets 2,510 10,427
NET ASSETS:
Beginning of period 26,537 16,110
------- -------
End of period (including
undistributed net investment
income of $12 and $365,
respectively) $29,047 $26,537
======= =======
</TABLE>
7
<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 FOR THE MAY 1, 1996
SIX MONTHS ENDED YEAR ENDED TO
DECEMBER 31, 1997 JUNE 30, 1997 JUNE 30, 1996(A)
----------------- ------------- ----------------
(UNAUDITED)
<S><C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period (B) $102.36 $100.76 $100.00
Net investment income (B) 3.36 5.94 0.84
Net realized and unrealized gain (loss)
on investments, options and futures 0.58 1.34 (0.08)
------- ------- -------
Total from investment operations 3.94 7.28 0.76
------- ------- -------
Distributions to shareholders from:
Net investment income (4.72) (5.31) -
Net realized gain on investments (0.35) (0.37) -
------- ------- -------
Total distributions (5.07) (5.68) 0.00
------- ------- -------
Net asset value, end of period $101.23 $102.36 $100.76
======= ======= =======
Total return (B) 3.90%(C) 7.42% 0.76%(C)
RATIOS/SUPPLEMENTAL DATA:
Ratios to average net assets:
Expenses (B) 0.40%(D) 0.41% 0.50%(D)
Net investment income (B) 5.97%(D) 6.24% 5.58%(D)
Portfolio turnover rate 418.30%(D) 435.47% 1,042(D)
Net assets, end of period
(in thousands) $29,047 $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 0.95% for the six months ended December 31, 1997, 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.
8
<PAGE>
WESTERN ASSET TRUST, INC.
LIMITED DURATION PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
(AMOUNT IN THOUSANDS)
(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 a 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 gain for financial reporting purposes.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
SECURITY TRANSACTIONS
Security transactions are recorded on the trade date. Realized gains and losses
from securities transactions are reported on the identified cost basis.
DEFERRED ORGANIZATIONAL EXPENSES
Deferred organizational expenses of $79 are being amortized on a straight-line
basis through April 2001.
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.
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.
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 issure of the repurchase agreement
fail financially.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS - CONTINUED
FINANCIAL INSTRUMENTS - CONTINUED
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 were as follows:
<TABLE>
<CAPTION>
CALLS PUTS
----------------------------------------------------------------------------------
CONTRACTS PREMIUMS CONTRACTS PREMIUMS
- --------------------------------------------------------------------------------------- ---------------------------------------
<S> <C>
Options outstanding at December 31, 1996 - - 5 $4
Options written 133 $96 18 7
Options closed (115) (94) (23) (11)
Options expired - - - -
Options excercised - - - -
- --------------------------------------------------------------------------------------- ---------------------------------------
Options outstanding at December 31, 1997 18 $2 - $ -
======================================================================================= =======================================
</TABLE>
FUTURES
The Fund may enter 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, 1997 are
described at the end of the "Statement of Net Assets", page 6.
11
<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 year ended December 31, 1997, aggregated $14,247 and $12,361, respectively.
Purchases and sales of U.S. Government securities aggregated $50,395 and
$50,316, respectively for the same period.
At December 31, 1997, the cost of securities for federal income tax purposes was
$27,278 Aggregate gross unrealized appreciation for all securities in which
there was an excess of value over tax cost was $262 and aggregate gross
unrealized depreciation for all securities in which there was an excess of tax
cost over value was $26.
4. FUND SHARE TRANSACTIONS:
At December 31, 1997, there were 5,000,000 shares of common stock of the
Corporation authorized at $.001 par value. Transactions in Fund shares were as
follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED
---------------------------------------- --------------------------------------------------
DECEMBER 31, 1997 JUNE 30, 1997
---------------------------------------- --------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------- --------------------------------------------------
<S> <C>
Sold 177 $ 18,150 113 $ 11,502
Reinvestment of Distributions 14 1,440 10 1,072
Repurchased (163) (16,900) (24) (2,500)
- -------------------------------------------------------------------------- --------------------------------------------------
Net increase 28 $ 2,690 99 $ 10,074
========================================================================== ==================================================
</TABLE>
12
<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 annual fee to 0.05% of the Fund's average daily
net assets. At December 31, 1997, $1 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 $50 were waived and reimbursements of $41 were made for the six
months ended December 31, 1997. At December 31, 1997, $4 was due from the
Advisor as reimbursement for expenses paid in excess of the 0.40% annual limit.
13
