|
|
|
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
37
|
Statements of changes in net assets
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2013 (unaudited)
and the Year Ended December 31, 2012
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
35,790,478
|
|
|
$
|
71,855,176
|
|
|
Net realized loss
|
|
|
(1,943,779)
|
|
|
|
(52,144,323)
|
|
|
Change in net unrealized appreciation (depreciation)
|
|
|
(121,337,745)
|
|
|
|
173,530,110
|
|
|
Increase (Decrease) in Net Assets From Operations
|
|
|
(87,491,046)
|
|
|
|
193,240,963
|
|
|
|
|
|
|
Distributions to
Shareholders From (Notes 1 and 6):
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(39,962,402)
|
|
|
|
(77,141,995)
|
|
|
Decrease in Net Assets From Distributions to
Shareholders
|
|
|
(39,962,402)
|
|
|
|
(77,141,995)
|
|
|
|
|
|
|
Fund Share Transactions
(Note 7):
|
|
|
|
|
|
|
|
|
|
Net proceeds from sale of shares
|
|
|
315,069,192
|
|
|
|
1,714,558,710
|
|
|
Reinvestment of distributions
|
|
|
38,281,310
|
|
|
|
72,580,172
|
|
|
Cost of shares repurchased
|
|
|
(557,860,167)
|
|
|
|
(1,187,648,956)
|
|
|
Net assets of shares issued in connection with merger (Note 8)
|
|
|
—
|
|
|
|
314,994,056
|
|
|
Increase (Decrease) in Net Assets From Fund Share
Transactions
|
|
|
(204,509,665)
|
|
|
|
914,483,982
|
|
|
Increase (Decrease) in Net Assets
|
|
|
(331,963,113)
|
|
|
|
1,030,582,950
|
|
|
|
|
|
|
Net
Assets:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
3,407,511,719
|
|
|
|
2,376,928,769
|
|
|
End of period*
|
|
$
|
3,075,548,606
|
|
|
$
|
3,407,511,719
|
|
|
* Includes undistributed net investment income of:
|
|
|
$1,880,306
|
|
|
|
$6,052,230
|
|
See Notes to Financial
Statements.
|
|
|
|
|
38
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
Financial highlights
|
|
|
|
|
|
|
|
|
|
For a share of each class of capital
stock outstanding throughout each year ended December 31,
unless otherwise noted:
|
|
|
Class A Shares
1
|
|
2013
2
|
|
|
2012
3
|
|
|
|
|
|
|
Net asset value, beginning
of period
|
|
|
$12.37
|
|
|
|
$12.08
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.12
|
|
|
|
0.17
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.48)
|
|
|
|
0.31
|
|
|
Total income (loss) from operations
|
|
|
(0.36)
|
|
|
|
0.48
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.13)
|
|
|
|
(0.19)
|
|
|
Total distributions
|
|
|
(0.13)
|
|
|
|
(0.19)
|
|
|
|
|
|
|
Net asset value, end of
period
|
|
|
$11.88
|
|
|
|
$12.37
|
|
|
Total return
4
|
|
|
(2.92)
|
%
|
|
|
3.96
|
%
|
|
|
|
|
|
Net assets, end of period
(000s)
|
|
|
$219,052
|
|
|
|
$263,926
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
Gross expenses
5
|
|
|
0.87
|
%
|
|
|
0.84
|
%
|
|
Net expenses
5,6,7
|
|
|
0.87
|
|
|
|
0.84
|
|
|
Net investment income
5
|
|
|
1.92
|
|
|
|
2.06
|
|
|
|
|
|
|
Portfolio turnover rate
8
|
|
|
78
|
%
|
|
|
149
|
%
|
|
1
|
Per share amounts have been calculated using the average shares method.
|
|
2
|
For the six months ended June 30, 2013 (unaudited).
|
|
3
|
For the period April 30, 2012 (commencement of operations) to December 31, 2012.
|
|
4
|
Performance figures, exclusive of sales charges, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of
compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
6
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
7
|
As a result of an expense limitation arrangement, the ratio of expenses, other than interest, brokerage commissions, taxes, extraordinary expenses and deferred
organizational expenses, to average net assets of Class A shares did not exceed 0.90%. This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Directors’ consent.
|
|
8
|
Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 166% for the six
months ended June 30, 2013 and 418% for the period ended December 31, 2012.
|
See Notes to Financial Statements.
|
|
|
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
39
|
Financial highlights (cont’d)
|
|
|
|
|
|
|
|
|
|
For a share of each class of capital
stock outstanding throughout each year ended December 31,
unless otherwise noted:
|
|
|
Class C Shares
1
|
|
2013
2
|
|
|
2012
3
|
|
|
|
|
|
|
Net asset value, beginning
of period
|
|
|
$12.37
|
|
|
|
$12.08
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.08
|
|
|
|
0.11
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.47)
|
|
|
|
0.30
|
|
|
Total income (loss) from operations
|
|
|
(0.39)
|
|
|
|
0.41
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.09)
|
|
|
|
(0.12)
|
|
|
Total distributions
|
|
|
(0.09)
|
|
|
|
(0.12)
|
|
|
|
|
|
|
Net asset value, end of
period
|
|
|
$11.89
|
|
|
|
$12.37
|
|
|
Total return
4
|
|
|
(3.16)
|
%
|
|
|
3.43
|
%
|
|
|
|
|
|
Net assets, end of period
(000s)
|
|
|
$3,049
|
|
|
|
$1,897
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
Gross expenses
5
|
|
|
1.55
|
%
|
|
|
1.47
|
%
|
|
Net expenses
5,6,7
|
|
|
1.55
|
8
|
|
|
1.47
|
|
|
Net investment income
5
|
|
|
1.25
|
|
|
|
1.35
|
|
|
|
|
|
|
Portfolio turnover rate
9
|
|
|
78
|
%
|
|
|
149
|
%
|
|
1
|
Per share amounts have been calculated using the average shares method.
|
|
2
|
For the six months ended June 30, 2013 (unaudited).
|
|
3
|
For the period April 30, 2012 (commencement of operations) to December 31, 2012.
|
|
4
|
Performance figures, exclusive of CDSC, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating
balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
6
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
7
|
As a result of an expense limitation arrangement, the ratio of expenses, other than interest, brokerage commissions, taxes, extraordinary expenses and deferred
organizational expenses, to average net assets of Class C shares did not exceed 1.65%. This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Directors’ consent.
|
|
8
|
Reflects fee waivers and/or expense reimbursements.
|
|
9
|
Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 166% for the six
months ended June 30, 2013 and 418% for the period ended December 31, 2012.
|
See Notes to Financial Statements.
|
|
|
|
|
40
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
|
|
|
|
|
|
|
|
|
For a share of each class of capital
stock outstanding throughout each year ended December 31,
unless otherwise noted:
|
|
|
Class C1 Shares
1
|
|
2013
2
|
|
|
2012
3
|
|
|
|
|
|
|
Net asset value, beginning
of period
|
|
|
$12.37
|
|
|
|
$12.40
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.09
|
|
|
|
0.05
|
|
|
Net realized and unrealized loss
|
|
|
(0.46)
|
|
|
|
(0.03)
|
|
|
Total income (loss) from operations
|
|
|
(0.37)
|
|
|
|
0.02
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.11)
|
|
|
|
(0.05)
|
|
|
Total distributions
|
|
|
(0.11)
|
|
|
|
(0.05)
|
|
|
|
|
|
|
Net asset value, end of
period
|
|
|
$11.89
|
|
|
|
$12.37
|
|
|
Total return
4
|
|
|
(3.04)
|
%
|
|
|
0.17
|
%
|
|
|
|
|
|
Net assets, end of period
(000s)
|
|
|
$34,377
|
|
|
|
$41,417
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
Gross expenses
5
|
|
|
1.29
|
%
|
|
|
1.28
|
%
|
|
Net expenses
5,6,7
|
|
|
1.29
|
|
|
|
1.28
|
|
|
Net investment income
5
|
|
|
1.50
|
|
|
|
1.63
|
|
|
|
|
|
|
Portfolio turnover rate
8
|
|
|
78
|
%
|
|
|
149
|
%
|
|
1
|
Per share amounts have been calculated using the average shares method.
|
|
2
|
For the six months ended June 30, 2013 (unaudited).
|
|
3
|
For the period October 3, 2012 (commencement of operations) to December 31, 2012.
|
|
4
|
Performance figures, exclusive of CDSC, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating
balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
6
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
7
|
As a result of an expense limitation arrangement, the ratio of expenses, other than interest, brokerage commissions, taxes, extraordinary expenses and deferred
organizational expenses, to average net assets of Class C1 shares did not exceed 1.42%. This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Directors’ consent.
|
|
8
|
Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 166% for the six
months ended June 30, 2013 and 418% for the period ended December 31, 2012.
|
See Notes to Financial Statements.
|
|
|
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
41
|
Financial highlights (cont’d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of each class of capital stock outstanding throughout each year ended December 31,
unless otherwise noted:
|
|
|
Class FI Shares
1,2
|
|
2013
3
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
4
|
|
|
2008
5
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning
of period
|
|
|
$12.37
|
|
|
|
$11.87
|
|
|
|
$11.42
|
|
|
|
$10.62
|
|
|
|
$9.08
|
|
|
|
$10.54
|
|
|
|
$11.37
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.12
|
|
|
|
0.28
|
|
|
|
0.35
|
|
|
|
0.43
|
|
|
|
0.45
|
|
|
|
0.40
|
|
|
|
0.56
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.46)
|
|
|
|
0.52
|
|
|
|
0.47
|
|
|
|
0.82
|
|
|
|
1.61
|
|
|
|
(1.34)
|
|
|
|
(0.79)
|
|
|
Total income (loss) from operations
|
|
|
(0.34)
|
|
|
|
0.80
|
|
|
|
0.82
|
|
|
|
1.25
|
|
|
|
2.06
|
|
|
|
(0.94)
|
|
|
|
(0.23)
|
|
|
|
|
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.14)
|
|
|
|
(0.30)
|
|
|
|
(0.37)
|
|
|
|
(0.45)
|
|
|
|
(0.52)
|
|
|
|
(0.52)
|
|
|
|
(0.55)
|
|
|
Net realized gains
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.05)
|
|
|
Total distributions
|
|
|
(0.14)
|
|
|
|
(0.30)
|
|
|
|
(0.37)
|
|
|
|
(0.45)
|
|
|
|
(0.52)
|
|
|
|
(0.52)
|
|
|
|
(0.60)
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of
period
|
|
|
$11.89
|
|
|
|
$12.37
|
|
|
|
$11.87
|
|
|
|
$11.42
|
|
|
|
$10.62
|
|
|
|
$9.08
|
|
|
|
$10.54
|
|
|
Total return
6
|
|
|
(2.79)
|
%
|
|
|
6.82
|
%
|
|
|
7.24
|
%
|
|
|
11.91
|
%
|
|
|
23.37
|
%
|
|
|
(9.06)
|
%
|
|
|
(2.12)
|
%
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period
(000s)
|
|
|
$938,184
|
|
|
|
$942,713
|
|
|
|
$639,281
|
|
|
|
$384,186
|
|
|
|
$1,199,219
|
|
|
|
$1,169,174
|
|
|
|
$1,627,400
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
0.81
|
%
7,8
|
|
|
0.75
|
%
7
|
|
|
0.75
|
%
|
|
|
0.79
|
%
|
|
|
0.78
|
%
|
|
|
0.77
|
%
8
|
|
|
0.69
|
%
|
|
Net expenses
9
|
|
|
0.77
|
7,8,10,11
|
|
|
0.75
|
7,10,11
|
|
|
0.74
|
10
|
|
|
0.75
|
10
|
|
|
0.75
|
10
|
|
|
0.72
|
8,10
|
|
|
0.69
|
|
|
Net investment income
|
|
|
2.02
|
8
|
|
|
2.29
|
|
|
|
3.01
|
|
|
|
3.85
|
|
|
|
4.70
|
|
|
|
5.30
|
8
|
|
|
5.10
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
78
|
%
12
|
|
|
149
|
%
12
|
|
|
141
|
%
12
|
|
|
406
|
%
|
|
|
221
|
%
|
|
|
141
|
%
13
|
|
|
455
|
%
|
|
1
|
In April 2010, Financial Intermediary Class shares were renamed Class FI shares.
|
|
2
|
Per share amounts have been calculated using the average shares method.
|
|
3
|
For the six months ended June 30, 2013 (unaudited).
|
|
4
|
For the period April 1, 2008 through December 31, 2008.
|
|
5
|
For the year ended March 31.
|
|
6
|
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance
arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
7
|
Reflects recapture of expenses waived/reimbursed from prior fiscal years.
|
|
9
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
10
|
Reflects fee waivers and/or expense reimbursements.
|
|
11
|
As a result of an expense limitation arrangement, effective May 1, 2012, the ratio of expenses to average net assets of Class FI shares did not exceed 0.85%.
This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Directors’ consent. The manager currently intends to voluntarily waive fees and/or reimburse operating expenses so that total annual
operating expenses are not expected to exceed 0.79%. This arrangement is expected to continue until April 30, 2014, but may be terminated at any time by the manager. Prior to May 1, 2013, the manager voluntarily waived fees and/or reimbursed
operating expenses so that total annual operating expenses would not exceed 0.77%. Prior to May 1, 2012, as the result of an expense limitation arrangement, the ratio of expenses to average net assets of Class FI shares did not exceed 0.75%. These
expense limitations do not include interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses.
|
|
12
|
Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 166% for the six
months ended June 30, 2013 and 418% and 556% for the years ended December 31, 2012 and 2011, respectively.
|
See Notes to Financial Statements.
|
|
|
|
|
42
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
|
|
|
|
|
|
|
|
|
For a share of each class of capital
stock outstanding throughout each year ended December 31,
unless otherwise noted:
|
|
|
Class R Shares
1
|
|
2013
2
|
|
|
2012
3
|
|
|
|
|
|
|
Net asset value, beginning
of period
|
|
|
$12.37
|
|
|
|
$12.08
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.10
|
|
|
|
0.14
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.46)
|
|
|
|
0.31
|
|
|
Total income (loss) from operations
|
|
|
(0.36)
|
|
|
|
0.45
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.12)
|
|
|
|
(0.16)
|
|
|
Total distributions
|
|
|
(0.12)
|
|
|
|
(0.16)
|
|
|
|
|
|
|
Net asset value, end of
period
|
|
|
$11.89
|
|
|
|
$12.37
|
|
|
Total return
4
|
|
|
(2.97)
|
%
|
|
|
3.73
|
%
|
|
|
|
|
|
Net assets, end of period
(000s)
|
|
|
$1,007
|
|
|
|
$1,511
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
Gross expenses
5
|
|
|
1.38
|
%
6
|
|
|
1.40
|
%
|
|
Net expenses
5,7,8,9
|
|
|
1.15
|
|
|
|
1.15
|
|
|
Net investment income
5
|
|
|
1.62
|
|
|
|
1.72
|
|
|
|
|
|
|
Portfolio turnover rate
10
|
|
|
78
|
%
|
|
|
149
|
%
|
|
1
|
Per share amounts have been calculated using the average shares method.
|
|
2
|
For the six months ended June 30, 2013 (unaudited).
|
|
3
|
For the period April 30, 2012 (commencement of operations) to December 31, 2012.
|
|
4
|
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance
arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
6
|
Reflects recapture of expenses waived/reimbursed from prior fiscal years.
|
|
7
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
8
|
As a result of an expense limitation arrangement, the ratio of expenses, other than interest, brokerage commissions, taxes, extraordinary expenses and deferred
organizational expenses, to average net assets of Class R shares did not exceed 1.15%. This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Directors’ consent.
|
|
9
|
Reflects fee waivers and/or expense reimbursements.
|
|
10
|
Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 166% for the six
months ended June 30, 2013 and 418% for the period ended December 31, 2012.
|
See Notes to Financial Statements.
|
|
|
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
43
|
Financial highlights (cont’d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of each class of
capital stock outstanding throughout each year ended December 31,
unless otherwise noted:
|
|
|
Class I Shares
1,2
|
|
2013
3
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
4
|
|
|
2008
5
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning
of period
|
|
|
$12.37
|
|
|
|
$11.86
|
|
|
|
$11.42
|
|
|
|
$10.62
|
|
|
|
$9.08
|
|
|
|
$10.54
|
|
|
|
$11.37
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.14
|
|
|
|
0.31
|
|
|
|
0.38
|
|
|
|
0.46
|
|
|
|
0.48
|
|
|
|
0.42
|
|
|
|
0.58
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.48)
|
|
|
|
0.53
|
|
|
|
0.45
|
|
|
|
0.82
|
|
|
|
1.61
|
|
|
|
(1.34)
|
|
|
|
(0.78)
|
|
|
Total income (loss) from operations
|
|
|
(0.34)
|
|
|
|
0.84
|
|
|
|
0.83
|
|
|
|
1.28
|
|
|
|
2.09
|
|
|
|
(0.92)
|
|
|
|
(0.20)
|
|
|
|
|
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.15)
|
|
|
|
(0.33)
|
|
|
|
(0.39)
|
|
|
|
(0.48)
|
|
|
|
(0.55)
|
|
|
|
(0.54)
|
|
|
|
(0.58)
|
|
|
Net realized gains
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.05)
|
|
|
Total distributions
|
|
|
(0.15)
|
|
|
|
(0.33)
|
|
|
|
(0.39)
|
|
|
|
(0.48)
|
|
|
|
(0.55)
|
|
|
|
(0.54)
|
|
|
|
(0.63)
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of
period
|
|
|
$11.88
|
|
|
|
$12.37
|
|
|
|
$11.86
|
|
|
|
$11.42
|
|
|
|
$10.62
|
|
|
|
$9.08
|
|
|
|
$10.54
|
|
|
Total return
6
|
|
|
(2.74)
|
%
|
|
|
7.15
|
%
|
|
|
7.38
|
%
|
|
|
12.20
|
%
|
|
|
23.68
|
%
|
|
|
(8.88)
|
%
|
|
|
(1.88)
|
%
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period
(000s)
|
|
|
$748,061
|
|
|
|
$938,146
|
|
|
|
$1,576,949
|
|
|
|
$1,689,352
|
|
|
|
$2,170,146
|
|
|
|
$2,558,597
|
|
|
|
$5,140,277
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
0.51
|
%
7
|
|
|
0.52
|
%
|
|
|
0.52
|
%
|
|
|
0.50
|
%
|
|
|
0.49
|
%
|
|
|
0.47
|
%
7
|
|
|
0.44
|
%
|
|
Net expenses
8
|
|
|
0.51
|
7
|
|
|
0.52
|
|
|
|
0.52
|
|
|
|
0.50
|
|
|
|
0.49
|
|
|
|
0.47
|
7
|
|
|
0.44
|
|
|
Net investment income
|
|
|
2.27
|
7
|
|
|
2.57
|
|
|
|
3.25
|
|
|
|
4.07
|
|
|
|
5.00
|
|
|
|
5.60
|
7
|
|
|
5.30
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
78
|
%
9
|
|
|
149
|
%
9
|
|
|
141
|
%
9
|
|
|
406
|
%
|
|
|
221
|
%
|
|
|
141
|
%
10
|
|
|
455
|
%
|
|
1
|
In April 2010, Institutional Class shares were renamed Class I shares.
|
|
2
|
Per share amounts have been calculated using the average shares method.
|
|
3
|
For the six months ended June 30, 2013 (unaudited).
|
|
4
|
For the period April 1, 2008 through December 31, 2008.
|
|
5
|
For the year ended March 31.
|
|
6
|
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance
arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
8
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
9
|
Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 166% for the six
months ended June 30, 2013 and 418% and 556% for the years ended December 31, 2012 and 2011, respectively.
|
See Notes to Financial Statements.
|
|
|
|
|
44
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of each class of
capital stock outstanding throughout each year ended December 31,
unless otherwise noted:
|
|
|
Class IS Shares
1,2
|
|
2013
3
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
4
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning
of period
|
|
|
$12.38
|
|
|
|
$11.87
|
|
|
|
$11.43
|
|
|
|
$10.63
|
|
|
|
$9.09
|
|
|
|
$10.11
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.14
|
|
|
|
0.31
|
|
|
|
0.39
|
|
|
|
0.47
|
|
|
|
0.48
|
|
|
|
0.15
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.46)
|
|
|
|
0.54
|
|
|
|
0.45
|
|
|
|
0.82
|
|
|
|
1.61
|
|
|
|
(0.87)
|
|
|
Total income (loss) from operations
|
|
|
(0.32)
|
|
|
|
0.85
|
|
|
|
0.84
|
|
|
|
1.29
|
|
|
|
2.09
|
|
|
|
(0.72)
|
|
|
|
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.16)
|
|
|
|
(0.34)
|
|
|
|
(0.40)
|
|
|
|
(0.49)
|
|
|
|
(0.55)
|
|
|
|
(0.30)
|
|
|
Total distributions
|
|
|
(0.16)
|
|
|
|
(0.34)
|
|
|
|
(0.40)
|
|
|
|
(0.49)
|
|
|
|
(0.55)
|
|
|
|
(0.30)
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of
period
|
|
|
$11.90
|
|
|
|
$12.38
|
|
|
|
$11.87
|
|
|
|
$11.43
|
|
|
|
$10.63
|
|
|
|
$9.09
|
|
|
Total return
5
|
|
|
(2.63)
|
%
|
|
|
7.23
|
%
|
|
|
7.46
|
%
|
|
|
12.25
|
%
|
|
|
23.72
|
%
|
|
|
(7.08)
|
%
|
|
|
|
|
|
|
|
|
|
Net assets, end of period
(000s)
|
|
|
$1,131,819
|
|
|
|
$1,217,902
|
|
|
|
$160,699
|
|
|
|
$109,098
|
|
|
|
$247,070
|
|
|
|
$240,681
|
|
|
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
0.45
|
%
6,7
|
|
|
0.45
|
%
|
|
|
0.45
|
%
|
|
|
0.44
|
%
|
|
|
0.44
|
%
|
|
|
0.45
|
%
6
|
|
Net expenses
8
|
|
|
0.45
|
6,9,10
|
|
|
0.45
|
9,10
|
|
|
0.45
|
|
|
|
0.44
|
10
|
|
|
0.44
|
|
|
|
0.45
|
6
|
|
Net investment income
|
|
|
2.34
|
6
|
|
|
2.51
|
|
|
|
3.31
|
|
|
|
4.13
|
|
|
|
5.00
|
|
|
|
5.20
|
6
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
78
|
%
11
|
|
|
149
|
%
11
|
|
|
141
|
%
11
|
|
|
406
|
%
|
|
|
221
|
%
|
|
|
141
|
%
12
|
|
1
|
In April 2010, Institutional Select Class shares were renamed Class IS shares.
|
|
2
|
Per share amounts have been calculated using the average shares method.
|
|
3
|
For the six months ended June 30, 2013 (unaudited).
|
|
4
|
For the period April 29, 2008 (commencement of operations) to December 31, 2008.
|
|
5
|
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance
arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
7
|
Reflects recapture of expenses waived/reimbursed from prior fiscal years.
|
|
8
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
9
|
As a result of an expense limitation arrangement, effective May 1, 2012, the ratio of expenses, other than interest, brokerage commissions, taxes,
extraordinary expenses and deferred organizational expenses, to average net assets of Class IS shares did not exceed 0.45%. This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Directors’
consent. Prior to May 1, 2012, as a result of expense limitation arrangement, the ratio of expenses, other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses, to average net assets of Class
IS shares did not exceed 0.50%.
|
|
10
|
Reflects fee waivers and/or expense reimbursements.
|
|
11
|
Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 166% for the six
months ended June 30, 2013 and 418% and 556% for the years ended December 31, 2012 and 2011, respectively.
|
See Notes to Financial Statements.
|
|
|
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
45
|
Notes to financial statements
(unaudited)
1. Organization and significant accounting policies
Western Asset Core Bond Fund (the “Fund”) is a separate diversified investment series of Western Asset Funds, Inc. (the “Corporation”). The Corporation, a Maryland corporation, is registered
under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company.
The following are
significant accounting policies consistently followed by the Funds and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and
changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.
Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation.
The valuations for fixed income securities (which may include, but are not limited to, corporate, government,
municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or
broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit
risks/spreads, default rates and quoted prices for similar securities. Short-term fixed income securities that will mature in 60 days or less are valued at amortized cost, unless it is determined that using this method would not reflect an
investment’s fair value. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded
.
Equity securities for which market quotations are available are valued at the
last reported sales price or official closing price on the primary market or exchange on which they trade. If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by
the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a
pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded,
but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Directors.
The Board of Directors is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North American Fund Valuation Committee (the “Valuation
Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Directors, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board
of Directors. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence
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Western Asset Core Bond Fund 2013 Semi-Annual Report
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reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of
earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will
also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the
security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the
security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted
securities.
For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Directors, the fair value price is
compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Directors quarterly.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and
the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future
cash flows to present value.
GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and
liabilities at measurement date. These inputs are summarized in the three broad levels listed below:
|
Ÿ
|
|
Level 1 — quoted prices in active markets for identical investments
|
|
Ÿ
|
|
Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)
|
|
Ÿ
|
|
Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)
|
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those
securities.
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Western Asset Core Bond Fund 2013 Semi-Annual Report
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47
|
Notes to financial statements
(unaudited)
(cont’d)
The following is a summary of the inputs used in valuing the Fund’s assets and liabilities carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
Description
|
|
Quoted Prices
(Level 1)
|
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Long-term investments†:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds & notes
|
|
|
—
|
|
|
$
|
1,007,696,876
|
|
|
|
—
|
|
|
$
|
1,007,696,876
|
|
|
Asset-backed securities
|
|
|
—
|
|
|
|
89,754,203
|
|
|
|
—
|
|
|
|
89,754,203
|
|
|
Collateralized mortgage obligations
|
|
|
—
|
|
|
|
431,428,443
|
|
|
|
—
|
|
|
|
431,428,443
|
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
875,196,520
|
|
|
|
—
|
|
|
|
875,196,520
|
|
|
Municipal bonds
|
|
|
—
|
|
|
|
20,232,721
|
|
|
|
—
|
|
|
|
20,232,721
|
|
|
Sovereign bonds
|
|
|
—
|
|
|
|
2,726,038
|
|
|
|
—
|
|
|
|
2,726,038
|
|
|
U.S. government & agency obligations
|
|
|
—
|
|
|
|
689,044,409
|
|
|
|
—
|
|
|
|
689,044,409
|
|
|
U.S. Treasury inflation protected securities
|
|
|
—
|
|
|
|
19,906,840
|
|
|
|
—
|
|
|
|
19,906,840
|
|
|
Total long-term investments
|
|
|
—
|
|
|
$
|
3,135,986,050
|
|
|
|
—
|
|
|
$
|
3,135,986,050
|
|
|
Short-term investments†
|
|
|
—
|
|
|
|
352,277,471
|
|
|
|
—
|
|
|
|
352,277,471
|
|
|
Total investments
|
|
|
—
|
|
|
$
|
3,488,263,521
|
|
|
|
—
|
|
|
$
|
3,488,263,521
|
|
|
Other financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures contracts
|
|
$
|
12,401,156
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
12,401,156
|
|
|
Credit default swaps on corporate issues — sell protection‡
|
|
|
—
|
|
|
$
|
66,350
|
|
|
|
—
|
|
|
|
66,350
|
|
|
Credit default swaps on corporate issues — buy protection
|
|
|
—
|
|
|
|
155,137
|
|
|
|
—
|
|
|
|
155,137
|
|
|
Credit default swaps on credit indices — sell protection‡
|
|
|
—
|
|
|
|
589,200
|
|
|
|
—
|
|
|
|
589,200
|
|
|
Total return swaps‡
|
|
|
—
|
|
|
|
12,629
|
|
|
|
—
|
|
|
|
12,629
|
|
|
Total other financial instruments
|
|
$
|
12,401,156
|
|
|
$
|
823,316
|
|
|
|
—
|
|
|
$
|
13,224,472
|
|
|
Total
|
|
$
|
12,401,156
|
|
|
$
|
3,489,086,837
|
|
|
|
—
|
|
|
$
|
3,501,487,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
Description
|
|
Quoted Prices
(Level 1)
|
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Other financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written options
|
|
|
—
|
|
|
$
|
4,763,279
|
|
|
|
—
|
|
|
$
|
4,763,279
|
|
|
Futures contracts
|
|
$
|
2,701,489
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,701,489
|
|
|
Interest rate swaps‡
|
|
|
—
|
|
|
|
4,396,601
|
|
|
|
—
|
|
|
|
4,396,601
|
|
|
Credit default swaps on corporate issues — sell protection‡
|
|
|
—
|
|
|
|
65,223
|
|
|
|
—
|
|
|
|
65,223
|
|
|
Credit default swaps on corporate issues — buy protection
|
|
|
—
|
|
|
|
270,512
|
|
|
|
—
|
|
|
|
270,512
|
|
|
Total
|
|
$
|
2,701,489
|
|
|
$
|
9,495,615
|
|
|
|
—
|
|
|
$
|
12,197,104
|
|
|
†
|
See Schedule of Investments for additional detailed categorizations.
|
|
‡
|
Values include any premiums paid or received with respect to swap contracts.
|
|
|
|
|
|
48
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Western Asset Core Bond Fund 2013 Semi-Annual Report
|
(b) Repurchase agreements.
The Fund may enter into repurchase agreements with institutions that its investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase
agreement, the Fund acquires a debt security subject to an obligation of the seller to repurchase, and of the Fund to resell, the security at an agreed-upon price and time, thereby determining the yield during the Fund’s holding period. When
entering into repurchase agreements, it is the Fund’s policy that its custodian or a third party custodian, acting on the Fund’s behalf, take possession of the underlying collateral securities, the market value of which, at all times, at
least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction maturity exceeds one business day, the value of the collateral is marked-to-market and measured against the
value of the agreement in an effort to ensure the adequacy of the collateral. If the counterparty defaults, the Fund generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of
the collateral declines during the period in which the Fund seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.
(c) Securities traded on a to-be-announced basis.
The Fund may trade securities on a to-be-announced (“TBA”) basis. In a TBA transaction, the Fund commits to purchasing or selling securities which have not yet been issued by the issuer and for which
specific information, such as the face amount, maturity date and underlying pool of investments in U.S. government agency mortgage pass-through securities, is not announced. Securities purchased on a TBA basis are not settled until they are
delivered to the Fund. Beginning on the date the Fund enters into a TBA transaction, cash, U.S. government securities or other liquid high-grade debt obligations are segregated in an amount equal in value to the purchase price of the TBA security.
These securities are subject to market fluctuations and their current value is determined in the same manner as for other securities.
(d) Mortgage dollar rolls.
The Fund may enter into mortgage dollar rolls in which the Fund sells mortgage-backed securities for delivery in the
current month, realizing a gain or loss, and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities to settle on a specified future date.
The Fund executes its mortgage dollar rolls entirely in the TBA market, whereby the Fund makes a forward commitment to purchase a security and, instead of accepting delivery, the position is offset by a sale of the
security with a simultaneous agreement to repurchase at a future date. The Fund accounts for mortgage dollar rolls as purchases and sales.
The risk of
entering into mortgage dollar rolls is that the market value of the securities the Fund is obligated to repurchase under the agreement may decline below the repurchase price. In the event the buyer of securities under a mortgage dollar roll files
for bankruptcy or becomes insolvent, the Fund’s use of the proceeds of the mortgage dollar roll may be restricted pending a determination by the counterparty, or its trustee or receiver, whether to enforce the Fund’s obligation to
repurchase the securities.
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Western Asset Core Bond Fund 2013 Semi-Annual Report
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49
|
Notes to financial statements
(unaudited)
(cont’d)
(e) Inflation-indexed bonds.
Inflation-indexed bonds are fixed-income securities whose principal value or interest rate is periodically adjusted according to the rate of inflation. As the index measuring inflation changes, the principal value or interest rate of
inflation-indexed bonds will be adjusted accordingly. Inflation adjustments to the principal amount of inflation-indexed bonds are reflected as an increase or decrease to investment income on the Statement of Operations. Repayment of the original
bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be less
than the original principal.
(f) Loan participations.
The Fund may invest in loans arranged through private negotiation between one or more financial institutions. The Fund’s investment in any such loan may be in the form of a participation in or an assignment
of the loan. In connection with purchasing participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement related to the loan, or any rights of off-set against the borrower and the
Fund may not benefit directly from any collateral supporting the loan in which it has purchased the participation.
The Fund assumes the credit risk of
the borrower, the lender that is selling the participation and any other persons interpositioned between the Fund and the borrower. In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor
of the lender and may not benefit from any off-set between the lender and the borrower.
(g) Written options.
When the Fund writes an
option, an amount equal to the premium received by the Fund is recorded as a liability, the value of which is marked-to-market daily to reflect the current market value of the option written. If the option expires, the premium received is recorded
as a realized gain. When a written call option is exercised, the difference between the premium received plus the option exercise price and the Fund’s basis in the underlying security (in the case of a covered written call option), or the cost
to purchase the underlying security (in the case of an uncovered written call option), including brokerage commission, is recognized as a realized gain or loss. When a written put option is exercised, the amount of the premium received is subtracted
from the cost of the security purchased by the Fund from the exercise of the written put option to form the Fund’s basis in the underlying security purchased. The writer or buyer of an option traded on an exchange can liquidate the position
before the exercise of the option by entering into a closing transaction. The cost of a closing transaction is deducted from the original premium received resulting in a realized gain or loss to the Fund.
The risk in writing a covered call option is that the Fund may forego the opportunity of profit if the market price of the underlying security increases and the
option is exercised. The risk in writing a put option is that the Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. The risk in writing an uncovered call option is that the Fund is exposed to
the risk of loss if the market price of the underlying security increases. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
|
|
|
|
|
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Western Asset Core Bond Fund 2013 Semi-Annual Report
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(h) Futures contracts.
The Fund uses futures contracts generally to gain exposure to, or hedge against, changes in interest rates or gain exposure to, or hedge against, changes in certain asset classes. A futures contract represents a
commitment for the future purchase or sale of an asset at a specified price on a specified date.
Upon entering into a futures contract, the Fund is
required to deposit cash or cash equivalents with a broker in an amount equal to a certain percentage of the contract amount. This is known as the ‘‘initial margin’’ and subsequent payments (‘‘variation
margin’’) are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. For certain futures, including foreign denominated futures, variation margin is not settled daily, but is recorded as a
net variation margin payable or receivable. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. The daily changes in contract value are recorded as unrealized gains or
losses in the Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.
Futures contracts involve, to varying
degrees, risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
(i) Swaptions.
The Fund purchases and writes
swaption contracts to manage exposure to an underlying instrument. The Fund may also purchase or write options to manage exposure to fluctuations in interest rates or to enhance yield. Swaption contracts written by the Fund represent an option that
gives the purchaser the right, but not the obligation, to enter into a previously agreed upon swap contract at a future date. Swaption contracts purchased by the Fund represent an option that gives the Fund the right, but not the obligation, to
enter into a previously agreed upon swap contract at a future date.
When the Fund writes a swaption, an amount equal to the premium received by the Fund
is recorded as a liability, the value of which is marked-to-market daily to reflect the current market value of the swaption written. If the swaption expires, the Fund realizes a gain equal to the amount of the premium received.
When the Fund purchases a swaption, an amount equal to the premium paid by the Fund is recorded as an investment on the Statement of Assets and Liabilities, the
value of which is marked-to-market daily to reflect the current market value of the swaption purchased. If the swaption expires, the Fund realizes a loss equal to the amount of the premium paid.
Swaptions are marked-to-market daily based upon quotations from market makers. Changes in the value of the swaption are reported as unrealized gains or losses in
the Statement of Operations.
(j) Swap agreements.
The Fund invests in swaps for the purpose of managing its exposure to interest rate, credit or market risk, or for other purposes. The use of swaps involves risks that are different from those associated with
other portfolio transactions. Swap agreements are privately negotiated in the over-the-counter market (“OTC Swaps”) or
may be executed on a
registered exchange (“Centrally Cleared Swaps”). Unlike Centrally Cleared Swaps, the Fund has credit exposure to the counterparties of OTC Swaps.
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Western Asset Core Bond Fund 2013 Semi-Annual Report
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51
|
Notes to financial statements
(unaudited)
(cont’d)
Swap contracts are marked-to-market daily and changes in value are recorded as unrealized appreciation (depreciation). The daily change in valuation of Centrally
Cleared Swaps, if any, is recorded as a receivable or payable for variation margin on the Statement of Assets and Liabilities. Gains or losses are realized upon termination of the swap agreement. Collateral, in the form of restricted cash or
securities, may be required to be held in segregated accounts with the Fund’s custodian in compliance with the terms of the swap contracts. Securities posted as collateral for swap contracts are identified in the Schedule of Investments and
restricted cash, if any, is identified on the Statement of Assets and Liabilities. Risks may exceed amounts recorded in the Statement of Assets and Liabilities. These risks include changes in the returns of the underlying instruments, failure of the
counterparties to perform under the contracts’ terms, and the possible lack of liquidity with respect to the swap agreements.
OTC Swap payments
received or made at the beginning of the measurement period are reflected as a premium or deposit, respectively, on the Statement of Assets and Liabilities. These upfront payments are amortized over the life of the swap and are recognized as
realized gain or loss in the Statement of Operations. Net periodic payments received or paid by the Fund are recognized as a realized gain or loss in the Statement of Operations.
The Fund’s maximum exposure in the event of a defined credit event on a credit default swap to sell protection is the notional amount. As of June 30, 2013, the total notional value of all credit default
swaps to sell protection is $13,311,996. This amount would be offset by the value of the swap’s reference entity, upfront premiums received on the swap and any amounts received from the settlement of a credit default swap where the Fund bought
protection for the same referenced security/entity.
For average notional amounts of swaps held during the six months ended June 30, 2013, see Note
4.
Credit default swaps
The Fund enters into credit default swap (“CDS”) contracts for investment purposes, to manage its credit risk or to add leverage. CDS agreements involve one party making a stream of payments to another
party in exchange for the right to receive a specified return in the event of a default by a third party, typically corporate or sovereign issuers, on a specified obligation, or in the event of a write-down, principal shortfall, interest shortfall
or default of all or part of the referenced entities comprising a credit index. The Fund may use a CDS to provide protection against defaults of the issuers (i.e., to reduce risk where the Fund has exposure to an issuer) or to take an active long or
short position with respect to the likelihood of a particular issuer’s default. As a seller of protection, the Fund generally receives an upfront payment or a stream of payments throughout the term of the swap provided that there is no credit
event. If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the maximum potential amount of future payments (undiscounted) that the Fund could be required to make under a
credit default swap agreement would be an amount equal to the notional amount of the agreement. These amounts of potential payments will be partially offset by any recovery of values from the respective referenced obligations. As a seller of
protection, the Fund effectively adds leverage to its portfolio because, in addition to its total net assets, the
|
|
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52
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Western Asset Core Bond Fund 2013 Semi-Annual Report
|
Fund is subject to investment exposure on the notional amount of the swap. As a buyer of protection, the Fund generally receives an amount up to the notional value of the swap if a credit event
occurs.
Implied spreads are the theoretical prices a lender receives for credit default protection. When spreads rise, market perceived credit risk
rises and when spreads fall, market perceived credit risk falls. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to enter into the agreement. Wider
credit spreads and decreasing market values, when compared to the notional amount of the swap, represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as
defined under the terms of the agreement. Credit spreads utilized in determining the period end market value of credit default swap agreements on corporate or sovereign issues are disclosed in the Notes to Financial Statements and serve as an
indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for credit derivatives. For credit default swap agreements on asset-backed securities and credit indices, the quoted market prices and
resulting values, particularly in relation to the notional amount of the contract as well as the annual payment rate, serve as an indication of the current status of the payment/performance risk.
The Fund’s maximum risk of loss from counterparty risk, as the protection buyer, is the fair value of the contract (this risk is mitigated by the posting of
collateral by the counterparty to the Fund to cover the Fund’s exposure to the counterparty). As the protection seller, the Fund’s maximum risk is the notional amount of the contract. Credit default swaps are considered to have credit
risk-related contingent features since they require payment by the protection seller to the protection buyer upon the occurrence of a defined credit event.
Entering into a CDS agreement involves, to varying degrees, elements of credit, market and documentation risk in excess of the related amounts recognized on the Statement of Assets and Liabilities. Such risks
involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreement may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreement, and that there
will be unfavorable changes in net interest rates.
Interest rate swaps
The Fund enters into interest rate swap contracts to manage its exposure to interest rate risk. Interest rate swaps are agreements between two parties to exchange
cash flows based on a notional principal amount. The Fund may elect to pay a fixed rate and receive a floating rate, or receive a fixed rate and pay a floating rate, on a notional principal amount. Interest rate swaps are marked-to-market daily
based upon quotations from market makers and the change, if any, is recorded as an unrealized gain or loss in the Statement of Operations. When a swap contract is terminated early, the Fund records a realized gain or loss equal to the difference
between the original cost and the settlement amount of the closing transaction.
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Western Asset Core Bond Fund 2013 Semi-Annual Report
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53
|
Notes to financial statements
(unaudited)
(cont’d)
The risks of interest rate swaps include changes in market conditions that will affect the value of the contract or changes in the present value of the future cash
flow streams and the possible inability of the counterparty to fulfill its obligations under the agreement. The Fund’s maximum risk of loss from counterparty credit risk is the discounted net value of the cash flows to be received from the
counterparty over the contract’s remaining life, to the extent that that amount is positive. This risk is mitigated by the posting of collateral by the counterparty to the Fund to cover the Fund’s exposure to the counterparty.
Total return swaps
The Fund
enters into total return swaps for investment purposes. Total return swaps are agreements to exchange the return generated by one instrument for the return generated by another instrument. For example, the agreement to pay a predetermined or fixed
interest rate in exchange for a market-linked return based on a notional amount. To the extent the total return of a referenced index or instrument exceeds the offsetting interest obligation, the Fund will receive a payment from the counterparty. To
the extent it is less, the Fund will make a payment to the counterparty.
(k) Stripped
securities.
The Fund may invest in ‘‘Stripped Securities,’’ a term used collectively for components, or strips, of fixed income securities. Stripped securities can be principal
only securities (“PO”), which are debt obligations that have been stripped of unmatured interest coupons, or interest only securities (“IO”), which are unmatured interest coupons that have been stripped from debt obligations. The
market value of Stripped Securities will fluctuate in response to changes in economic conditions, rates of pre-payment, interest rates and the market’s perception of the securities. However, fluctuations in response to interest rates may be
greater in Stripped Securities than for debt obligations of comparable maturities that pay interest currently. The amount of fluctuation may increase with a longer period of maturity.
The yield to maturity on IO’s is sensitive to the rate of principal repayments (including prepayments) on the related underlying debt obligation and principal payments may have a material effect on yield to
maturity. If the underlying debt obligation experiences greater than anticipated prepayments of principal, the Fund may not fully recoup its initial investment in IO’s.
(l) Credit and market risk.
Investments in securities that are collateralized by residential
real estate mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and the foreclosure values of underlying real estate properties are materially below
the outstanding amount of these underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments
and may result in a lack of correlation between their credit ratings and values.
(m)
Counterparty risk and credit-risk-related contingent features of derivative instruments.
The Fund may invest in certain securities or engage in other transactions,
|
|
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|
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54
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Western Asset Core Bond Fund 2013 Semi-Annual Report
|
where the Fund is exposed to counterparty credit risk in addition to broader market risks. The Fund may invest in securities of issuers, which may also be considered counterparties as trading
partners in other transactions. This may increase the risk of loss in the event of default or bankruptcy by the counterparty or if the counterparty otherwise fails to meet its contractual obligations. The Fund’s investment manager attempts to
mitigate counterparty risk by (i) periodically assessing the creditworthiness of its trading partners, (ii) monitoring and/or limiting the amount of its net exposure to each individual counterparty based on its assessment and
(iii) requiring collateral from the counterparty for certain transactions. Market events and changes in overall economic conditions may impact the assessment of such counterparty risk by the investment manager. In addition, declines in the
values of underlying collateral received may expose the Fund to increased risk of loss.
The Fund has entered into master agreements with certain of its
derivative counterparties that provide for general obligations, representations, agreements, collateral, events of default or termination and credit related contingent features. The credit related contingent features include, but are not limited to,
a percentage decrease in the Fund’s net assets or NAV over a specified period of time. If these credit related contingent features were triggered, the derivatives counterparty could terminate the positions and demand payment or require
additional collateral.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange
clearing house for exchange traded derivatives while collateral terms are contract specific for over-the-counter traded derivatives. Cash collateral that has been pledged to cover obligations of the Fund under derivative contracts, if any, will be
reported separately in the Statement of Assets and Liabilities. Securities pledged as collateral, if any, for the same purpose are noted in the Schedule of Investments.
Absent an event of default by the counterparty or a termination of the agreement, the terms of the master agreements do not result in an offset of reported amounts of financial assets and financial liabilities in
the Statement of Assets and Liabilities across transactions between the Fund and the applicable counterparty. The enforceability of the right to offset may vary by jurisdiction.
As of June 30, 2013, the Fund held written options, credit default swaps and interest rate swaps with credit related contingent features which had a liability position of $9,495,615. If a contingent feature in
the master agreements would have been triggered, the Fund would have been required to pay this amount to its derivatives counterparties. As of June 30, 2013, the Fund had posted with its counterparties cash and/or securities as collateral to
cover the net liability of these derivatives amounting to $9,500,000, which could be used to reduce the required payment.
(n) Security transactions and investment income.
Security transactions are accounted for on a trade date basis. Interest income, adjusted for
amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by use of the specific
|
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Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
55
|
Notes to financial statements
(unaudited)
(cont’d)
identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional interest income accruals and consider the realizability
of interest accrued up to the date of default or credit event.
(o) Distributions to
shareholders.
Distributions from net investment income of the Fund are declared each business day to shareholders of record, and are paid monthly. Distributions of net realized gains, if any, are
declared at least annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(p) Share class accounting.
Investment
income, common expenses and realized/unrealized gains (losses) on investments are allocated to the various classes of the Fund on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that share
class.
(q) Compensating balance arrangements.
The Fund has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash on deposit with the bank.
(r) Federal and other taxes.
It is the
Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its
taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.
Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of June 30, 2013, no
provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to
examination by the Internal Revenue Service and state departments of revenue.
(s)
Reclassification.
GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on
net assets or net asset value per share.
2. Investment management agreement and other transactions with affiliates
The Fund has an investment management agreement with Legg Mason Partners Fund Advisor, LLC (“LMPFA”). Western Asset Management Company (“Western
Asset”) is the investment adviser. LMPFA and Western Asset are wholly owned subsidiaries of Legg Mason, Inc (“Legg Mason”).
LMPFA
provides the Fund with management and administrative services for which the Fund pays a fee calculated daily and paid monthly, at an annual rate of 0.450% of the Fund’s average daily net assets up to $500 million, 0.425% of the Fund’s
average daily net assets
|
|
|
|
|
56
|
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Western Asset Core Bond Fund 2013 Semi-Annual Report
|
of the next $500 million and 0.400% of the Fund’s average daily net assets in excess of $1 billion.
The investment manager has agreed to waive fees and/or reimburse operating expenses (other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses) so that total
operating expenses are not expected to exceed: 0.90%, 1.65%, 1.42%, 0.85%, 1.15% and 0.45% for Class A, Class C, Class C1, Class FI, Class R, and Class IS shares, respectively. These arrangements cannot be terminated prior to December 31,
2014 without the Board of Directors’ consent. Prior to May 1, 2012, the investment manager had agreed to waive fees and/or reimburse operating expenses (other than interest, brokerage commissions, taxes, extraordinary expenses and deferred
organizational fees) so that total operating expenses did not exceed: 0.50% and 0.75% for Class IS and Class FI shares, respectively.
The manager
currently intends to voluntarily waive fees and/or reimburse expenses other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational fees so that total annual operating expenses are not expected to exceed 0.79%
for Class FI shares. This arrangement is expected to continue until April 30, 2014, but may be terminated at any time by the investment manager. Prior to May 1, 2013, the manager voluntarily waived fees and/or reimbursed operating expenses
so that total annual operating expenses (other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses) would not exceed 0.77%.
During the six months ended June 30, 2013, fees waived and/or expenses reimbursed amounted to $186,944.
The
investment manager is permitted to recapture amounts waived and/or reimbursed to a class within two years after the fiscal year in which the investment manager earned the fee or incurred the expense if the class’ total annual operating expenses
have fallen to a level below the expense limitation (“expense cap”) in effect at the time the fees were earned or the expenses incurred. In no case will the investment manager recapture any amount that would result, on any particular
business day of the Fund, in the class’ total annual operating expenses exceeding the expense cap or any other lower limit then in effect.
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Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
57
|
Notes to financial statements
(unaudited)
(cont’d)
Pursuant to this arrangement, at June 30, 2013, the Fund had remaining fee waivers and/or expense reimbursements subject to recapture by LMPFA and respective
dates of expiration as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A*
|
|
|
Class C*
|
|
|
Class C1†
|
|
|
Class FI
|
|
|
Class R
|
|
|
Class I
|
|
|
Class IS
|
|
|
Expires December 31, 2013
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
25,836
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Expires December 31, 2014
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,184
|
|
|
$
|
551
|
|
|
|
—
|
|
|
$
|
38,930
|
|
|
Expires December 31, 2015
|
|
|
—
|
|
|
$
|
107
|
|
|
|
—
|
|
|
|
183,740
|
|
|
|
1,380
|
|
|
|
—
|
|
|
|
1,717
|
|
|
Fee waivers/expense reimbursements subject to recapture
|
|
|
—
|
|
|
$
|
107
|
|
|
|
—
|
|
|
$
|
212,760
|
|
|
$
|
1,931
|
|
|
|
—
|
|
|
$
|
40,647
|
|
|
*
|
The class commenced operations on April 30, 2012.
|
|
†
|
The class commenced operations on October 3, 2012.
|
For the six
months ended June 30, 2013, LMPFA recaptured $45,442, $324, and $9,156 for Class FI, R and IS shares, respectively.
Legg Mason Investor Services,
LLC (“LMIS”), a wholly-owned broker-dealer subsidiary of Legg Mason, serves as the distributor of the Fund’s shares.
There is a maximum
initial sales charge of 4.25% for Class A shares. There is a contingent deferred sales charge (“CDSC”) of 1.00% on Class C shares and Class C1 shares (formerly Class C shares), which applies if redemption occurs within 12 months from
purchase payment. In certain cases, Class A shares have a 1.00% CDSC, which applies if redemption occurs within 18 months from purchase payment (or within 12 months for shares purchased prior to August 1, 2012). This CDSC only applies to
those purchases of Class A shares, which, when combined with current holdings of other shares of funds sold by LMIS, equal or exceed $1,000,000 in the aggregate. These purchases do not incur an initial sales charge.
For the six months ended June 30, 2013, LMIS and its affiliates retained sales charges of $25,815 on sales of the Fund’s Class A shares. In addition,
for the six months ended June 30, 2013, CDSCs paid to LMIS and its affiliates were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class C
|
|
|
Class C1
|
|
|
CDSCs
|
|
$
|
339
|
|
|
$
|
521
|
|
|
$
|
254
|
|
All officers of the Corporation are employees of Legg Mason or its affiliates and do not receive compensation from the Corporation.
3. Investments
During the six
months ended June 30, 2013, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) and U.S Government & Agency Obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
U.S. Government &
Agency Obligations
|
|
|
Purchases
|
|
$
|
210,477,483
|
|
|
$
|
5,233,519,024
|
|
|
Sales
|
|
|
139,262,476
|
|
|
|
5,277,660,130
|
|
|
|
|
|
|
58
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
At June 30, 2013, the aggregate gross unrealized appreciation and depreciation of investments for federal income
tax purposes were substantially as follows:
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
$
|
84,387,177
|
|
|
Gross unrealized depreciation
|
|
|
(132,494,195)
|
|
|
Net unrealized depreciation
|
|
$
|
(48,107,018)
|
|
At June 30, 2013, the Fund had the following open futures contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Contracts
|
|
|
Expiration
Date
|
|
|
Basis
Value
|
|
|
Market
Value
|
|
|
Unrealized
Gain (Loss)
|
|
|
Contracts to
Buy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90-Day Eurodollar
|
|
|
332
|
|
|
|
3/15
|
|
|
$
|
82,223,254
|
|
|
$
|
82,315,250
|
|
|
$
|
91,996
|
|
|
U.S. Treasury 5-Year Notes
|
|
|
1,499
|
|
|
|
9/13
|
|
|
|
184,150,755
|
|
|
|
181,449,266
|
|
|
|
(2,701,489)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,609,493)
|
|
|
Contracts to
Sell:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury 2-Year Notes
|
|
|
77
|
|
|
|
9/13
|
|
|
$
|
16,954,094
|
|
|
$
|
16,940,000
|
|
|
$
|
14,094
|
|
|
U.S. Treasury 10-Year Notes
|
|
|
3,427
|
|
|
|
9/13
|
|
|
|
444,694,956
|
|
|
|
433,729,687
|
|
|
|
10,965,269
|
|
|
U.S. Treasury Ultra Long-Term Bonds
|
|
|
163
|
|
|
|
9/13
|
|
|
|
22,890,213
|
|
|
|
22,142,531
|
|
|
|
747,682
|
|
|
U.S. Treasury Ultra Long-Term Bonds
|
|
|
109
|
|
|
|
9/13
|
|
|
|
16,639,177
|
|
|
|
16,057,062
|
|
|
|
582,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,309,160
|
|
|
Net unrealized gain on open futures contracts
|
|
|
|
|
|
|
|
|
|
|
$
|
9,699,667
|
|
During the six months ended June 30, 2013, written option transactions for the Fund were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Contracts/
Notional Par
|
|
|
Premiums
|
|
|
Written options, outstanding as of December 31, 2012
|
|
|
50,600,000
|
|
|
$
|
3,061,300
|
|
|
Options written
|
|
|
3,032
|
|
|
|
752,071
|
|
|
Options closed
|
|
|
(2,178)
|
|
|
|
(572,174)
|
|
|
Options exercised
|
|
|
(214)
|
|
|
|
(64,836)
|
|
|
Options expired
|
|
|
(640)
|
|
|
|
(115,061)
|
|
|
Written options, outstanding as of June 30, 2013
|
|
|
50,600,000
|
|
|
$
|
3,061,300
|
|
At June 30, 2013, the Fund held TBA securities with a total cost of $443,192,000.
At June 30, 2013, the Fund held the following open OTC swap contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST RATE SWAPS
|
|
|
Swap Counterparty
|
|
Notional
Amount
|
|
|
Termination
Date
|
|
|
Payments
Made By
The
Fund
†
|
|
Payments
Received By
The Fund
†
|
|
|
Upfront
Premiums
Paid
(Received)
|
|
|
Unrealized
Depreciation
|
|
|
Banc of America Securities LLC
|
|
$
|
2,740,000
|
|
|
|
12/16/13
|
|
|
5.381% semi-annually
|
|
|
3-Month LIBOR
|
|
|
|
—
|
|
|
$
|
(64,934)
|
|
|
Banc of America Securities LLC
|
|
|
4,400,000
|
|
|
|
11/10/15
|
|
|
4.864% semi-annually
|
|
|
3-Month LIBOR
|
|
|
|
—
|
|
|
|
(442,387)
|
|
|
Banc of America Securities LLC
|
|
|
2,750,000
|
|
|
|
1/15/16
|
|
|
5.451% semi-annually
|
|
|
3-Month LIBOR
|
|
|
|
—
|
|
|
|
(334,635)
|
|
|
Banc of America Securities LLC
|
|
|
4,120,000
|
|
|
|
10/3/16
|
|
|
5.425% semi-annually
|
|
|
3-Month LIBOR
|
|
|
|
—
|
|
|
|
(603,455)
|
|
|
Credit Suisse
|
|
|
3,020,000
|
|
|
|
8/15/13
|
|
|
5.023% semi-annually
|
|
|
3-Month LIBOR
|
|
|
|
—
|
|
|
|
(18,684)
|
|
|
Credit Suisse
|
|
|
3,290,000
|
|
|
|
3/15/14
|
|
|
5.131% semi-annually
|
|
|
3-Month LIBOR
|
|
|
|
—
|
|
|
|
(113,677)
|
|
|
|
|
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
59
|
Notes to financial statements
(unaudited)
(cont’d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST RATE SWAPS
|
|
|
Swap Counterparty
|
|
Notional
Amount
|
|
|
Termination
Date
|
|
|
Payments
Made By
The Fund†
|
|
Payments
Received By
The Fund†
|
|
|
Upfront
Premiums
Paid
(Received)
|
|
|
Unrealized
Depreciation
|
|
|
Credit Suisse
|
|
|
3,050,000
|
|
|
|
9/15/15
|
|
|
5.160% semi-annually
|
|
|
3-Month LIBOR
|
|
|
|
—
|
|
|
|
(309,890)
|
|
|
Credit Suisse
|
|
|
2,420,000
|
|
|
|
3/1/17
|
|
|
5.335% semi-annually
|
|
|
3-Month LIBOR
|
|
|
|
—
|
|
|
|
(376,455)
|
|
|
Deutsche Bank AG
|
|
|
5,620,000
|
|
|
|
6/15/16
|
|
|
5.183% semi-annually
|
|
|
3-Month LIBOR
|
|
|
|
—
|
|
|
|
(726,695)
|
|
|
Deutsche Bank AG
|
|
|
4,120,000
|
|
|
|
4/1/17
|
|
|
5.435% semi-annually
|
|
|
3-Month LIBOR
|
|
|
|
—
|
|
|
|
(666,092)
|
|
|
JPMorgan Chase & Co.
|
|
|
4,270,000
|
|
|
|
9/15/14
|
|
|
5.000% semi-annually
|
|
|
3-Month LIBOR
|
|
|
|
—
|
|
|
|
(239,008)
|
|
|
RBS Greenwich
|
|
|
4,250,000
|
|
|
|
3/1/16
|
|
|
5.120% semi-annually
|
|
|
3-Month LIBOR
|
|
|
|
—
|
|
|
|
(500,689)
|
|
|
Total
|
|
$
|
44,050,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
$
|
(4,396,601)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CREDIT DEFAULT SWAPS ON CORPORATE ISSUES — SELL PROTECTION
1
|
|
Swap Counterparty
(Reference Entity)
|
|
Notional
Amount
2
|
|
|
Termination
Date
|
|
|
Implied
Credit
Spread
At
June 30,
2013
3
|
|
Periodic
Payments
Received By
The Fund†
|
|
Market
Value
|
|
|
Upfront
Premiums
Paid
(Received)
|
|
|
Unrealized
Appreciation
|
|
|
Deutsche Bank AG (Ford Motor Credit Co., 7.450%, due 7/16/31)
|
|
$
|
1,700,000
|
|
|
|
3/20/15
|
|
|
0.67%
|
|
2.930% quarterly
|
|
$
|
66,350
|
|
|
|
—
|
|
|
$
|
66,350
|
|
|
Deutsche Bank AG (MetLife Inc., 5.000%, due 6/15/15)
|
|
|
5,720,000
|
|
|
|
6/20/18
|
|
|
1.24%
|
|
1.000% quarterly
|
|
|
(65,223)
|
|
|
$
|
(169,827)
|
|
|
|
104,604
|
|
|
Total
|
|
$
|
7,420,000
|
|
|
|
|
|
|
|
|
|
|
$
|
1,127
|
|
|
$
|
(169,827)
|
|
|
$
|
170,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CREDIT DEFAULT SWAPS ON CORPORATE ISSUES — BUY PROTECTION
4
|
|
Swap Counterparty (Reference
Entity)
|
|
Notional
Amount
2
|
|
|
Termination
Date
|
|
|
Implied
Credit
Spread
At
June 30,
2013
3
|
|
Periodic
Payments
Made By
The Fund†
|
|
Market
Value
|
|
|
Upfront
Premiums
Paid
(Received)
|
|
|
Unrealized
Appreciation
(Depreciation)
|
|
|
Banc of America Securities LLC (Home Depot Inc., 5.875%, due 12/16/36)
|
|
$
|
2,740,000
|
|
|
|
12/20/13
|
|
|
0.05%
|
|
0.635% quarterly
|
|
$
|
(7,758)
|
|
|
|
—
|
|
|
$
|
(7,758)
|
|
|
Banc of America Securities LLC (Marriot International Inc., 5.810%, due 11/10/15)
|
|
|
4,400,000
|
|
|
|
12/20/15
|
|
|
0.26%
|
|
0.730% monthly
|
|
|
(50,913)
|
|
|
|
—
|
|
|
|
(50,913)
|
|
|
Banc of America Securities LLC (Masco Corp., 6.125%, due 10/3/16)
|
|
|
4,120,000
|
|
|
|
12/20/16
|
|
|
1.38%
|
|
1.040% quarterly
|
|
|
47,686
|
|
|
|
—
|
|
|
|
47,686
|
|
|
Banc of America Securities LLC (Viacom Inc., 4.625%, due 5/15/18)
|
|
|
2,750,000
|
|
|
|
12/20/15
|
|
|
0.32%
|
|
1.130% quarterly
|
|
|
(55,097)
|
|
|
|
—
|
|
|
|
(55,097)
|
|
|
Credit Suisse (AmerisourceBergen Corp., 5.875%, due 9/15/15)
|
|
|
3,050,000
|
|
|
|
9/20/15
|
|
|
0.21%
|
|
0.900% quarterly
|
|
|
(47,232)
|
|
|
|
—
|
|
|
|
(47,232)
|
|
|
Credit Suisse (Masco Corp., 6.125%, due 10/3/16)
|
|
|
3,320,000
|
|
|
|
9/20/13
|
|
|
0.34%
|
|
0.750% quarterly
|
|
|
(3,145)
|
|
|
|
—
|
|
|
|
(3,145)
|
|
|
Credit Suisse (Southwest Airlines Co., 5.250%, due 10/1/14)
|
|
|
2,420,000
|
|
|
|
3/20/17
|
|
|
0.76%
|
|
0.690% quarterly
|
|
|
6,584
|
|
|
|
—
|
|
|
|
6,584
|
|
|
|
|
|
|
60
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CREDIT DEFAULT SWAPS ON CORPORATE ISSUES — BUY PROTECTION
4
|
|
Swap Counterparty (Reference
Entity)
|
|
Notional
Amount
2
|
|
|
Termination
Date
|
|
|
Implied
Credit
Spread
At
June 30,
2013
3
|
|
Periodic
Payments
Made By
The Fund†
|
|
Market
Value
|
|
|
Upfront
Premiums
Paid
(Received)
|
|
|
Unrealized
Appreciation
(Depreciation)
|
|
|
Credit Suisse (Waste Management Inc., 5.000%, due 3/15/14)
|
|
|
3,290,000
|
|
|
|
3/20/14
|
|
|
0.11%
|
|
0.490% quarterly
|
|
|
(9,265)
|
|
|
|
—
|
|
|
|
(9,265)
|
|
|
Deutsche Bank AG (AutoZone Inc., 6.950%, due 6/15/16)
|
|
|
5,620,000
|
|
|
|
6/20/16
|
|
|
0.27%
|
|
0.580% quarterly
|
|
|
(51,232)
|
|
|
|
—
|
|
|
|
(51,232)
|
|
|
Deutsche Bank AG (CenturyLink Inc., 6.000%, due 4/1/17)
|
|
|
4,120,000
|
|
|
|
3/20/17
|
|
|
1.57%
|
|
0.890% quarterly
|
|
|
100,867
|
|
|
|
—
|
|
|
|
100,867
|
|
|
JPMorgan Chase & Co. (Bell South Corp., 6.000%, due 11/15/34)
|
|
|
4,270,000
|
|
|
|
9/20/14
|
|
|
0.07%
|
|
0.280% quarterly
|
|
|
(11,045)
|
|
|
|
—
|
|
|
|
(11,045)
|
|
|
RBS Greenwich (Home Depot Inc., 5.400%, due 3/1/16)
|
|
|
4,250,000
|
|
|
|
3/20/16
|
|
|
0.18%
|
|
0.480% monthly
|
|
|
(34,825)
|
|
|
|
—
|
|
|
|
(34,825)
|
|
|
Total
|
|
$
|
44,350,000
|
|
|
|
|
|
|
|
|
|
|
$
|
(115,375)
|
|
|
|
—
|
|
|
$
|
(115,375)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CREDIT DEFAULT SWAPS ON CREDIT INDICES — SELL PROTECTION
1
|
|
Swap Counterparty
(Reference Entity)
|
|
Notional
Amount
2
|
|
|
Termination
Date
|
|
|
Periodic
Payments
Received By
The Fund†
|
|
Market
Value
5
|
|
|
Upfront
Premiums
Paid
(Received)
|
|
|
Unrealized
Appreciation
|
|
|
Banc of America Securities LLC (PrimeX.FRM.1)
|
|
$
|
5,891,996
|
|
|
|
7/25/36
|
|
|
4.420% monthly
|
|
|
$ 589,200
|
|
|
$
|
492,621
|
|
|
$
|
96,579
|
|
|
|
|
TOTAL RETURN
SWAPS
1
|
|
|
Swap Counterparty
|
|
Notional
Amount
|
|
|
Termination
Date
|
|
|
Periodic
Payments
Made By
The Fund†
|
|
Periodic
Payments
Received By
The Fund‡
|
|
|
Upfront
Premiums
Paid
(Received)
|
|
|
Unrealized
Appreciation
|
|
|
Barclays Capital Inc.
|
|
|
$640,061
|
|
|
|
1/12/41
|
|
|
1-Month LIBOR
|
|
|
IOS.FN30.400.10
|
|
|
|
$ (118)
|
|
|
$
|
12,747
|
|
|
1
|
If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay
to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or
securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
|
|
2
|
The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event
occurs as defined under the terms of that particular swap agreement.
|
|
3
|
Implied credit spreads, utilized in determining the market value of credit default swap agreements on corporate issues or sovereign issues of an emerging country
as of period end serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of
buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default
or other credit event occurring as defined under the terms of the agreement. A credit spread identified as “Defaulted” indicates a credit event has occurred for the referenced entity or obligation.
|
|
4
|
If the Fund is a buyer of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either
(i) receive from the seller of protection an amount equal to the notional amount of the swap and deliver the referenced obligation or the underlying securities comprising the referenced index or (ii) receive a net settlement amount in the
form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or the underlying securities comprising the referenced index.
|
|
|
|
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
61
|
Notes to financial statements
(unaudited)
(cont’d)
|
5
|
The quoted market prices and resulting values for credit default swap agreements on asset-backed securities and credit indices serve as an indicator of the
current status of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement be closed/sold as of the period end. Decreasing market values
(sell protection) or increasing market values (buy protection) when compared to the notional amount of the swap, represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit
event occurring as defined under the terms of the agreement.
|
|
†
|
Percentage shown is an annual percentage rate.
|
|
‡
|
Periodic payments made/received by the Fund are based on the total return of the referenced entity.
|
4. Derivative instruments and hedging activities
GAAP requires enhanced disclosure about an
entity’s derivative and hedging activities.
Below is a table, grouped by derivative type, that provides information about the fair value and the
location of derivatives within the Statement of Assets and Liabilities at June 30, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSET DERIVATIVES
1
|
|
|
|
|
Interest
Rate Risk
|
|
|
Credit
Risk
|
|
|
Total
|
|
|
Futures contracts
2
|
|
$
|
12,401,156
|
|
|
|
—
|
|
|
$
|
12,401,156
|
|
|
OTC swap contracts
3
|
|
|
12,629
|
|
|
$
|
810,687
|
|
|
|
823,316
|
|
|
Total
|
|
$
|
12,413,785
|
|
|
$
|
810,687
|
|
|
$
|
13,224,472
|
|
|
|
|
LIABILITY
DERIVATIVES
1
|
|
|
|
|
Interest
Rate Risk
|
|
|
Credit
Risk
|
|
|
Total
|
|
|
Written options
|
|
$
|
4,763,279
|
|
|
|
—
|
|
|
$
|
4,763,279
|
|
|
Futures contracts
2
|
|
|
2,701,489
|
|
|
|
—
|
|
|
|
2,701,489
|
|
|
OTC swap contracts
3
|
|
|
4,396,601
|
|
|
$
|
335,735
|
|
|
|
4,732,336
|
|
|
Total
|
|
$
|
11,861,369
|
|
|
$
|
335,735
|
|
|
$
|
12,197,104
|
|
|
1
|
Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation (depreciation) and for liability derivatives is
payables/net unrealized appreciation (depreciation).
|
|
2
|
Includes cumulative appreciation (depreciation) of futures contracts as reported in the footnotes. Only variation margin is reported within the receivables
and/or payables of the Statement of Assets and Liabilities.
|
|
3
|
Values include premiums paid (received) on swap contracts which are shown separately in the Statement of Assets and Liabilities.
|
The following tables provide information about the effect of derivatives and hedging activities on the Fund’s Statement of Operations for the six months ended
June 30, 2013. The first table provides additional detail about the amounts and sources of gains (losses) realized on derivatives during the period. The second table provides additional information about the change in unrealized appreciation
(depreciation) resulting from the Fund’s derivatives and hedging activities during the period.
|
|
|
|
|
62
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED
|
|
|
|
|
Interest Rate
Risk
|
|
|
Credit
Risk
|
|
|
Total
|
|
|
Purchased options
1
|
|
$
|
(606,736)
|
|
|
|
—
|
|
|
$
|
(606,736)
|
|
|
Written options
|
|
|
431,304
|
|
|
|
—
|
|
|
|
431,304
|
|
|
Futures contracts
|
|
|
13,233,743
|
|
|
|
—
|
|
|
|
13,233,743
|
|
|
Swap contracts
|
|
|
(1,047,593)
|
|
|
$
|
(141,032)
|
|
|
|
(1,188,625)
|
|
|
Total
|
|
$
|
12,010,718
|
|
|
$
|
(141,032)
|
|
|
$
|
11,869,686
|
|
|
1
|
Net realized gain (loss) from purchased options is reported in net realized gain (loss) from investment transactions in the Statement of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED
|
|
|
|
|
Interest Rate
Risk
|
|
|
Credit
Risk
|
|
|
Total
|
|
|
Purchased options
1
|
|
$
|
233,094
|
|
|
|
—
|
|
|
$
|
233,094
|
|
|
Written options
|
|
|
1,897,798
|
|
|
|
—
|
|
|
|
1,897,798
|
|
|
Futures contracts
|
|
|
8,275,145
|
|
|
|
—
|
|
|
|
8,275,145
|
|
|
Swap contracts
|
|
|
1,271,100
|
|
|
$
|
(65,655)
|
|
|
|
1,205,445
|
|
|
Total
|
|
$
|
11,677,137
|
|
|
$
|
(65,655)
|
|
|
$
|
11,611,482
|
|
1
The change in unrealized appreciation (depreciation) from purchased options is reported in the change in net unrealized
appreciation (depreciation) from investments in the Statement of Operations.
During the six months ended June 30, 2013, the volume of derivative
activity for the Fund was as follows:
|
|
|
|
|
|
|
|
|
Average Market
Value
|
|
|
Purchased options†
|
|
$
|
84,797
|
|
|
Written options
|
|
|
6,124,301
|
|
|
Futures contracts (to buy)
|
|
|
207,046,267
|
|
|
Futures contracts (to sell)
|
|
|
664,181,524
|
|
|
|
|
|
|
|
Average Notional
Balance
|
|
|
Interest rate swap contracts
|
|
$
|
44,727,143
|
|
|
Credit default swap contracts (to buy protection)
|
|
|
56,076,234
|
|
|
Credit default swap contracts (to sell protection)
|
|
|
19,683,220
|
|
|
Total return swap contracts†
|
|
|
705,179
|
|
|
†
|
At June 30, 2013, there were no open positions held in this derivative.
|
The following table presents by financial instrument, the Fund’s derivative assets net of the related collateral held by the Fund at June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amount of
Derivative Assets in
the Statement of
Assets
and Liabilities
1
|
|
|
Collateral
Received
3,4,5
|
|
|
Net
Amount
|
|
|
Futures contracts
2
|
|
$
|
162,140
|
|
|
$
|
(162,140)
|
|
|
|
—
|
|
|
OTC swap contracts
|
|
|
823,316
|
|
|
|
(823,316)
|
|
|
|
—
|
|
|
Total
|
|
$
|
985,456
|
|
|
$
|
(985,456)
|
|
|
|
—
|
|
|
|
|
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
63
|
Notes to financial statements
(unaudited)
(cont’d)
The following table presents by financial instrument, the Fund’s derivative liabilities net of the related collateral pledged by the Fund at June 30,
2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amount of
Derivative Liabilities in
the Statement of
Assets
and Liabilities
1
|
|
|
Collateral
Pledged
3,4
|
|
|
Net
Amount
|
|
|
Written options
|
|
$
|
4,763,279
|
|
|
|
—
|
|
|
$
|
4,763,279
|
|
|
OTC swap contracts
|
|
|
4,732,336
|
|
|
$
|
(4,732,336)
|
|
|
|
—
|
|
|
Total
|
|
$
|
9,495,615
|
|
|
$
|
(4,732,336)
|
|
|
$
|
4,763,279
|
|
|
1
|
Absent an event of default or early termination, derivative assets and liabilities are presented gross and not offset in the Statement of Assets and
Liabilities.
|
|
2
|
Amount represents the current day’s variation margin as reported in the Statement of Assets and Liabilities. It differs from the cumulative
appreciation (depreciation) presented in the previous table.
|
|
3
|
Gross amounts not offset in the Statement of Assets and Liabilities.
|
|
4
|
In some instances, the actual collateral received and/or pledged may be more than the amount shown here due to overcollateralization.
|
|
5
|
See the accompanying Schedule of Investments for securities pledged as collateral for certain derivatives.
|
5. Class specific expenses, waivers and/or expense reimbursements
The Fund has adopted a Rule 12b-1 distribution plan and under that plan the Fund pays a service and/or distribution fee with respect to its Class A, Class C, Class C1, Class FI and Class R shares calculated at
the annual rate of 0.25%, 1.00%, 0.70%, 0.25% and 0.50% of the average daily net assets of each class respectively. The Rule 12b-1 plan for Class FI shares provides for payments of distribution and service fees to LMIS at annual rate of up 0.40% of
the Class’s average net assets, subject to the authority of the Board of Directors of the Fund to set a lower amount. The Board of Directors has currently approved payments under the plan of 0.25% of the average daily net assets of Class FI
shares. Service and distribution fees are accrued daily and paid monthly.
For the six months ended June 30, 2013, class specific expenses were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and/or
Distribution Fees
|
|
|
Transfer Agent
Fees
|
|
|
Class A
|
|
$
|
297,924
|
|
|
$
|
209,564
|
|
|
Class C
|
|
|
14,971
|
|
|
|
1,704
|
|
|
Class C1
|
|
|
132,709
|
|
|
|
27,141
|
|
|
Class FI
|
|
|
1,196,064
|
|
|
|
516,336
|
|
|
Class R
|
|
|
3,001
|
|
|
|
2,305
|
|
|
Class I
|
|
|
—
|
|
|
|
296,441
|
|
|
Class IS
|
|
|
—
|
|
|
|
41,559
|
|
|
Total
|
|
$
|
1,644,669
|
|
|
$
|
1,095,050
|
|
|
|
|
|
|
64
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
For the six months ended June 30, 2013, waivers and/or expense reimbursements by class were as follows:
|
|
|
|
|
|
|
|
|
Waivers/Expense
Reimbursements
|
|
|
Class A
|
|
|
—
|
|
|
Class C
|
|
$
|
107
|
|
|
Class C1
|
|
|
—
|
|
|
Class FI
|
|
|
183,740
|
|
|
Class R
|
|
|
1,380
|
|
|
Class I
|
|
|
—
|
|
|
Class IS
|
|
|
1,717
|
|
|
Total
|
|
$
|
186,944
|
|
6. Distributions to shareholders by class
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2013
|
|
|
Year Ended
December 31, 2012
|
|
|
Net Investment
Income:
|
|
|
|
|
|
|
|
|
|
Class A
|
|
$
|
2,589,114
|
|
|
$
|
1,384,254
|
†
|
|
Class C
|
|
|
22,377
|
|
|
|
3,356
|
†
|
|
Class C1
|
|
|
332,999
|
|
|
|
175,976
|
‡
|
|
Class FI
|
|
|
10,876,886
|
|
|
|
20,269,375
|
|
|
Class R
|
|
|
11,324
|
|
|
|
6,724
|
†
|
|
Class I
|
|
|
10,752,177
|
|
|
|
30,139,759
|
|
|
Class IS
|
|
|
15,377,525
|
|
|
|
25,162,551
|
|
|
Total
|
|
$
|
39,962,402
|
|
|
$
|
77,141,995
|
|
|
†
|
For the period April 30, 2012 (commencement of operations) to December 31, 2012.
|
|
‡
|
For the period October 3, 2012 (commencement of operations) to December 31, 2012.
|
7. Capital shares
At June 30, 2013, the
Corporation had 37.5 billion shares of capital stock authorized with a par value of $0.001 per share. Transactions in shares of each class were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June
30, 2013
|
|
|
Year Ended
December 31,
2012
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Class
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares sold
|
|
|
1,703,134
|
|
|
$
|
20,867,626
|
|
|
|
1,175,537
|
†
|
|
$
|
14,559,472
|
†
|
|
Shares issued on reinvestment
|
|
|
206,903
|
|
|
|
2,527,302
|
|
|
|
109,219
|
†
|
|
|
1,353,497
|
†
|
|
Shares repurchased
|
|
|
(4,818,418)
|
|
|
|
(59,074,024)
|
|
|
|
(1,783,658)
|
†
|
|
|
(22,102,758)
|
†
|
|
Shares issued with merger
|
|
|
—
|
|
|
|
—
|
|
|
|
21,838,559
|
†
|
|
|
269,918,032
|
†
|
|
Net increase (decrease)
|
|
|
(2,908,381)
|
|
|
$
|
(35,679,096)
|
|
|
|
21,339,657
|
†
|
|
$
|
263,728,243
|
†
|
|
|
|
|
|
|
|
Class
C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares sold
|
|
|
197,054
|
|
|
$
|
2,423,554
|
|
|
|
122,905
|
†
|
|
$
|
1,521,927
|
†
|
|
Shares issued on reinvestment
|
|
|
1,510
|
|
|
|
18,426
|
|
|
|
229
|
†
|
|
|
2,840
|
†
|
|
Shares repurchased
|
|
|
(95,404)
|
|
|
|
(1,158,734)
|
|
|
|
(1,113)
|
†
|
|
|
(13,809)
|
†
|
|
Shares issued with merger
|
|
|
—
|
|
|
|
—
|
|
|
|
31,374
|
†
|
|
|
387,812
|
†
|
|
Net increase
|
|
|
103,160
|
|
|
$
|
1,283,246
|
|
|
|
153,395
|
†
|
|
$
|
1,898,770
|
†
|
|
|
|
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
65
|
Notes to financial statements
(unaudited)
(cont’d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June
30, 2013
|
|
|
Year Ended
December 31,
2012
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
Class
C1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares sold
|
|
|
8,968
|
|
|
$
|
110,175
|
|
|
|
16,401
|
‡
|
|
$
|
203,188
|
‡
|
|
Shares issued on reinvestment
|
|
|
23,504
|
|
|
|
287,132
|
|
|
|
11,932
|
‡
|
|
|
147,862
|
‡
|
|
Shares repurchased
|
|
|
(488,592)
|
|
|
|
(5,984,376)
|
|
|
|
(174,672)
|
‡
|
|
|
(2,164,928)
|
‡
|
|
Shares issued with merger
|
|
|
—
|
|
|
|
—
|
|
|
|
3,494,414
|
‡
|
|
|
43,197,939
|
‡
|
|
Net increase (decrease)
|
|
|
(456,120)
|
|
|
$
|
(5,587,069)
|
|
|
|
3,348,075
|
‡
|
|
$
|
41,384,061
|
‡
|
|
|
|
|
|
|
|
Class
FI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares sold
|
|
|
11,294,336
|
|
|
$
|
138,570,009
|
|
|
|
29,432,500
|
|
|
$
|
356,925,583
|
|
|
Shares issued on reinvestment
|
|
|
883,745
|
|
|
|
10,793,765
|
|
|
|
1,640,450
|
|
|
|
20,036,713
|
|
|
Shares repurchased
|
|
|
(9,460,981)
|
|
|
|
(115,864,733)
|
|
|
|
(8,744,181)
|
|
|
|
(106,459,400)
|
|
|
Net increase
|
|
|
2,717,100
|
|
|
$
|
33,499,041
|
|
|
|
22,328,769
|
|
|
$
|
270,502,896
|
|
|
|
|
|
|
|
|
Class
R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares sold
|
|
|
31,165
|
|
|
$
|
383,807
|
|
|
|
3,746
|
†
|
|
$
|
46,139
|
†
|
|
Shares issued on reinvestment
|
|
|
842
|
|
|
|
10,294
|
|
|
|
542
|
†
|
|
|
6,714
|
†
|
|
Shares repurchased
|
|
|
(69,511)
|
|
|
|
(854,139)
|
|
|
|
(2,653)
|
†
|
|
|
(32,871)
|
†
|
|
Shares issued with merger
|
|
|
—
|
|
|
|
—
|
|
|
|
120,562
|
†
|
|
|
1,490,273
|
†
|
|
Net increase (decrease)
|
|
|
(37,504)
|
|
|
$
|
(460,038)
|
|
|
|
122,197
|
†
|
|
$
|
1,510,255
|
†
|
|
|
|
|
|
|
|
Class
I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares sold
|
|
|
5,384,318
|
|
|
$
|
65,974,937
|
|
|
|
17,980,742
|
|
|
$
|
218,937,655
|
|
|
Shares issued on reinvestment
|
|
|
791,336
|
|
|
|
9,667,726
|
|
|
|
2,159,075
|
|
|
|
26,300,460
|
|
|
Shares repurchased
|
|
|
(19,089,314)
|
|
|
|
(233,803,748)
|
|
|
|
(77,212,172)
|
|
|
|
(929,304,819)
|
|
|
Net decrease
|
|
|
(12,913,660)
|
|
|
$
|
(158,161,085)
|
|
|
|
(57,072,355)
|
|
|
$
|
(684,066,704)
|
|
|
|
|
|
|
|
|
Class
IS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares sold
|
|
|
7,065,786
|
|
|
$
|
86,739,084
|
|
|
|
93,246,896
|
|
|
$
|
1,122,364,746
|
|
|
Shares issued on reinvestment
|
|
|
1,225,172
|
|
|
|
14,976,665
|
|
|
|
2,013,809
|
|
|
|
24,732,086
|
|
|
Shares repurchased
|
|
|
(11,528,705)
|
|
|
|
(141,120,413)
|
|
|
|
(10,411,246)
|
|
|
|
(127,570,371)
|
|
|
Net increase (decrease)
|
|
|
(3,237,747)
|
|
|
$
|
(39,404,664)
|
|
|
|
84,849,459
|
|
|
$
|
1,019,526,461
|
|
|
†
|
For the period April 30, 2012 (commencement of operations) to December 31, 2012.
|
|
‡
|
For the period October 3, 2012 (commencement of operations) to December 31, 2012.
|
8. Transfer of net assets
On October 5, 2012, the Fund acquired the assets and certain
liabilities of the Legg Mason Western Asset Core Bond Fund (the “Acquired Fund”), pursuant to a plan of reorganization approved by the Acquired Fund shareholders. Total shares issued by the Fund and the total net assets of the Acquired
Fund and the Fund on the date of the transfer were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Fund
|
|
Shares
Issued by
the Fund
|
|
|
Total Net
Assets of the
Acquired
Fund
|
|
|
Total Net
Assets of the
Fund
|
|
|
Legg Mason Western Asset Core Bond Fund
|
|
|
25,484,909
|
|
|
$
|
314,994,056
|
|
|
$
|
3,047,530,714
|
|
|
|
|
|
|
66
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
As part of the reorganization, for each share they held, shareholders of the Acquired Fund Class A, Class C and
Class C1 and Class R received 0.984538, 0.984839, 0.983773 and 0.984175 shares of Class A, Class C, Class C1 and Class R shares, respectively.
The
total net assets of the Acquired Fund before acquisition included unrealized appreciation of $8,320,250, accumulated net realized loss of $899,296 and accumulated net investment loss of $88,259. Total net assets of the Fund immediately after the
transfer were $3,362,524,770. The transaction was structured to qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended.
Proforma results of operations of the combined entity for the entire year ended December 31, 2012, as though the acquisition had occurred as of the beginning
of the year (rather than on the actual acquisition date), are as follows:
|
|
|
|
|
|
|
Net investment income
|
|
$
|
75,997,371
|
|
|
Net realized loss
|
|
|
(50,861,263)
|
|
|
Change in net unrealized appreciation
|
|
|
186,252,868
|
|
|
Increase in net assets from operations
|
|
$
|
211,388,976
|
|
Because the combined investment portfolios have been managed as a single portfolio since the acquisition was completed, it is not
practicable to separate the amounts of revenue and earnings of the Acquired Fund that have been included in the Fund’s accompanying Statement of Operations since the close of business on October 5, 2012.
9. Capital loss carryforward
As of
December 31, 2012 the Fund had the following net capital loss carryforwards remaining:
|
|
|
|
|
|
|
Year of Expiration
|
|
Amount
|
|
|
No Expiration
|
|
$
|
(59,109,517)
|
*
|
|
12/31/2015
|
|
|
(84,734,017)
|
|
|
12/31/2016
|
|
|
(33,885,094)
|
|
|
12/31/2017
|
|
|
(250,607,702)
|
|
|
12/31/2018
|
|
|
(33,363,704)
|
|
|
|
|
$
|
(461,700,034)
|
|
These amounts will be available to offset any future taxable capital gains.
|
*
|
Under the Regulated Investment Company Modernization Act of 2010, the Fund is permitted to carry forward these capital losses for an unlimited period. However, these losses will
be required to be utilized prior to the Fund’s other capital losses with the expiration dates listed above. Additionally, these capital losses retain their character as either short-term or long-term capital losses rather than being considered
all short-term as under previous law.
|
10. Recent accounting pronouncement
The Fund has adopted the disclosure provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Update 2011-11 (“ASU
2011-11”),
Balance Sheet (Topic 210) — Disclosures about Offsetting Assets and Liabilities
along with the related scope clarification provisions of FASB Accounting Standards Update 2013-01 (“ASU 2013-01”) entitled
Balance Sheet (Topic 210) — Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities
. ASU 2011-11 is intended to enhance disclosures on the offsetting of financial assets and liabilities by requiring entities to
disclose both gross and net information about
|
|
|
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
|
67
|
Notes to financial statements
(unaudited)
(cont’d)
financial instruments and transactions that are either offset in the statement of assets and liabilities or subject to a master netting agreement or similar arrangement. ASU 2013-01 limits the
scope of ASU 2011-11’s disclosure requirements on offsetting to financial assets and financial liabilities related to derivatives, repurchase and reverse repurchase agreements, and securities lending and securities borrowing transactions.
|
|
|
|
|
68
|
|
Western Asset Core Bond Fund 2013 Semi-Annual Report
|
Western Asset
Core Bond Fund
Directors
William E. B. Siart,
Chairman
Robert Abeles*
Ronald J. Arnault
Anita L. DeFrantz
Ronald L. Olson
Avedick B. Poladian
Jaynie M. Studenmund
Investment manager
Legg Mason Partners Fund Advisor, LLC
Investment adviser
Western Asset Management
Company
Transfer agent
Boston
Financial Data Services
2000 Crown Colony Drive
Quincy,
MA 02169
Custodian
State Street
Bank and Trust Company
Independent registered public accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
Legal counsel
Ropes & Gray LLP
1211 Avenue of the Americas
New York, NY 10036
|
*
|
Effective May 22, 2013, Mr. Abeles became a Director.
|
Western Asset Core Bond Fund
The Fund is a
separate investment series of Western Asset Funds, Inc.
Western Asset Core Bond Fund
Legg Mason Funds
620 Eighth Avenue 49
th
Floor
New York, NY 10018
The Fund files its complete schedule of portfolio holdings with the Securities and
Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms
N-Q
are available on the SEC’s website at www.sec.gov. The Fund’s Forms
N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
To obtain information on Form N-Q, shareholders can call the Fund at
1-877-721-1926.
Information on how the Fund voted proxies relating to portfolio securities during the prior
12-month
period ended June 30th
of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling the Fund at
1-877-721-1926,
(2) on the Fund’s website at www.leggmason.com/individualinvestors and (3) on the SEC’s website at www.sec.gov.
This report is submitted for the general information of the shareholders of Western
Asset Core Bond Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by a current prospectus.
Investors should consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the Fund. Please read
the prospectus carefully before investing.
www.leggmason.com/individualinvestors
© 2013 Legg Mason Investor Services, LLC
Member FINRA, SIPC
Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds
This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to
nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsored closed-end funds and certain closed-end funds managed or
sub-advised by Legg Mason or its affiliates. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:
|
Ÿ
|
|
Personal information included on applications or other forms;
|
|
Ÿ
|
|
Account balances, transactions, and mutual fund holdings and positions;
|
|
Ÿ
|
|
Online account access user IDs, passwords, security challenge question responses; and
|
|
Ÿ
|
|
Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt,
payment history, etc.).
|
How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial
institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have
authorized or as permitted or required by law. The Funds may disclose information about you to:
|
Ÿ
|
|
Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business or comply with obligations to government
regulators;
|
|
Ÿ
|
|
Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or
processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform marketing services solely for the Funds;
|
|
Ÿ
|
|
The Funds’ representatives such as legal counsel, accountants and auditors; and
|
|
Ÿ
|
|
Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.
|
|
|
|
NOT PART OF THE SEMI-ANNUAL REPORT
|
Legg Mason Funds Privacy and Security Notice (cont’d)
Except as otherwise permitted by applicable law, companies acting on the Funds’
behalf are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to perform.
The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by
applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your
nonpublic personal information to third parties. While it is the Funds’ practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.
Keeping You Informed of the Funds’ Privacy and Security Practices
The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy
changes.
The Funds’ Security Practices
The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data security policies restrict access to your nonpublic
personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive
to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your
nonpublic personal information, the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify
you under such circumstances using the most current email address you have on record with them.
In order for the Funds to provide effective service to
you, keeping your account information accurate is very important. If you believe that your account information is incomplete, not accurate or not current, or if you have questions about the Funds’ privacy practices, write the Funds using the
contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at www.leggmason.com, or contact the Fund at 1-877-721-1926.
Revised April 2011
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NOT PART OF THE SEMI-ANNUAL REPORT
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Western Asset Management Company
Legg Mason, Inc. Subsidiaries
www.leggmason.com/individualinvestors
©2013
Legg Mason Investor Services, LLC Member FINRA, SIPC
WASX012825 8/13 SR13-2004