Certified Annual Shareholder Report for Management Investment Companies (n-csr)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-23598

Western Asset Diversified Income Fund

Exact name of registrant as specified in charter)

620 Eighth Avenue, 47th Floor, New York, NY 10018

(Address of principal executive offices) (Zip code)

George P. Hoyt

Franklin Templeton

100 First Stamford Place

Stamford, CT 06902

(Name and address of agent for service)

Registrant’s telephone number, including area code: (888) 777-0102

Date of fiscal year end: December 31

Date of reporting period: December 31, 2021

ITEM 1.

REPORT TO STOCKHOLDERS.

The Annual Report to Stockholders is filed herewith.

LOGO


Annual Report		December 31, 2021

WESTERN ASSET

DIVERSIFIED INCOME

FUND (WDI)

LOGO

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE


What’s inside
Letter from the chairman			III
Fund overview			1
Fund at a glance			7
Fund performance			8
Schedule of investments			10
Statement of assets and liabilities			36
Statement of operations			37
Statement of changes in net assets			38
Statement of cash flows			39
Financial highlights			41
Notes to financial statements			43
Report of independent registered public accounting firm			64
Additional information			65
Annual chief executive officer and principal financial officer certifications			71
Other shareholder communications regarding accounting matters			72
Summary of information regarding the Fund			73
Dividend reinvestment plan			88
Important tax information			91

Fund objectives

The Fund’s primary investment objective is to seek high current income. As a secondary investment objective, the Fund will seek capital appreciation.

The Fund seeks to achieve its investment objectives by investing, under normal market conditions, across fixed income sectors and securities in seeking to deliver a well-diversified portfolio. It is anticipated that the Fund will dissolve on or about June 24, 2033, unless an Eligible Tender Offer is conducted and certain other conditions are satisfied, as described in this report.

Western Asset Diversified Income Fund

Letter from the chairman

LOGO

Dear Shareholder,

We are pleased to provide the annual report of Western Asset Diversified Income Fund for the period since the Fund’s commencement of operations on June 25, 2021 through December 31, 2021. Please read on for a detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund performance.

As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our website, www.franklintempleton.com. Here you can gain immediate access to market and investment information, including:

•

Fund prices and performance,

•

Market insights and commentaries from our portfolio managers, and

•

A host of educational resources.

We look forward to helping you meet your financial goals.

Sincerely,

LOGO

Jane Trust, CFA

Chairman, President and Chief Executive Officer

January 31, 2022

Western Asset Diversified Income Fund

III

Fund overview

Q. What is the Fund’s investment strategy?

A. The Fund’s primary investment objective is to seek high current income. As a secondary investment objective, the Fund will seek capital appreciation. Under normal circumstances, the Fund will invest across fixed income sectors and securities to deliver a well-diversified portfolio. Western Asset Management Company, LLC (“Western Asset”) will seek to dynamically rotate investments into sectors and securities that it believes to be undervalued from a fundamental perspective with an attractive return profile and away from investments that it believes to be overvalued. The Fund may invest in investment-grade and high-yield corporate debt securities, senior loans, agency and non-agency residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”), government (i.e., sovereign) debt (including U.S. government obligations), floating rate securities, bank loans, collateralized loan obligations (“CLOs”), asset-backed securities (whose underlying asset classes include, but are not limited to, equipment leases, solar and student loans), private debt and mortgage whole loans.

The Fund may invest up to 15% of its Managed Assets in securities issued by CLOs, including up to 5% of its Managed Assets in equity securities issued by CLOs (i.e., subordinated, or residual tranches of CLO securities). “Managed Assets” means the net assets of the Fund plus the principal amount of any borrowings or preferred shares that may be outstanding, reverse repurchase agreements, dollar rolls or similar transactions. Although the Fund does not specifically target covenant lite loans, the Fund may invest in covenant lite loans if market conditions result in loans having fewer covenants. With respect to all of the securities in which the Fund may invest, the Fund may invest in securities rated below investment grade (that is, securities rated below the Baa/BBB categories, or, if unrated, determined to be of comparable credit quality by Western Asset). These below investment grade securities that comprise the Fund’s portfolio are commonly referred to as either “high yield” securities or “junk bonds.” The Fund may invest up to 25% of its Managed Assets in securities, including structured instruments such as mortgage-backed securities and CMBS, rated CCC or below (or, if unrated, determined to be of comparable credit quality by Western Asset) at the time of investment. For this purpose, if a security is rated by multiple nationally recognized statistical rating organizations (“NRSROs”) and receives different ratings, the Fund will treat the security as being rated in the highest rating category received from an NRSRO. The Fund may invest in foreign securities denominated either in U.S. dollars or foreign currencies. Under normal market circumstances, the Fund will invest at least 70% of its Managed Assets in U.S. securities and at least 80% of its Managed Assets in U.S. dollar-denominated investments. Investments in non-U.S. securities may include emerging market corporate, government and quasi-sovereign debt. The Fund may invest in securities of any maturity.

At Western Asset, the Fund’s subadviser, we utilize a fixed income team approach, with decisions derived from interaction among various investment management sector specialists. The sector teams are comprised of Western Asset’s senior portfolio management personnel, research analysts and an in-house economist. Under this team

Western Asset Diversified Income Fund 2021 Annual Report

Fund overview (cont’d)

approach, management of client fixed income portfolios will reflect a consensus of interdisciplinary views within the Western Asset organization. The individuals responsible for development of investment strategy, day to-day portfolio management, oversight and coordination of the Fund are S. Kenneth Leech, Michael C. Buchanan, Greg E. Handler, Christopher F. Kilpatrick and Annabel Rudebeck.

Q. What were the overall market conditions during the Funds’ reporting period?

A. Fixed income markets experienced periods of volatility and, overall, were relatively flat over the period from the Fund’s commencement of operations on June 25, 2021 through December 31, 2021 (the “reporting period”). Volatility was driven by a number of factors, including the repercussions from the COVID-19 pandemic, rebounding global growth, sharply rising inflation, fluctuating interest rates, and expectations for less accommodative central bank monetary policy. Most spread sectors (non-Treasuries) outperformed similar duration Treasuries, as many investors looked to generate incremental yield in the relatively low interest rate environment.

Short-term U.S. Treasury yields moved sharply higher as the Federal Reserve Board (the “Fed”) telegraphed that it was poised to begin raising interest rates in 2022. The yield for the two-year Treasury note began the reporting period at 0.28% and ended the reporting period at 0.73%. Long-term U.S. Treasury yields edged lower, despite rising inflation that triggered expectations that the Fed would remove its monetary policy accommodation sooner than previously anticipated. The yield for the ten-year Treasury began the reporting period at 1.54% and ended the period at 1.52%.

Q. How did we respond to these changing market conditions?

A. During the reporting period, we constructed the portfolio as we looked to meet the Fund’s primary investment objective of seeking high current income, with capital appreciation as a secondary objective. At the end of the year, high-yield corporate bonds represented approximately half of the Fund’s portfolio. Over the past months, we took advantage of price inefficiencies and relative value opportunities that availed themselves in both the primary and secondary markets to calibrate the Fund’s high-yield exposure. In particular, we emphasized “rising star” candidates (high yield-rated issuers that have the potential to move to investment-grade status over the next nine to twelve months) and “recovery” stories, such as energy, airlines and hospitality-related issuers that stood poised to benefit as the COVID-19 pandemic further abated. The Fund also holds a meaningful allocation to bank loans and CLOs. Given the floating rate nature of bank loans and CLOs, we incrementally added to these sectors earlier in the reporting period to provide the portfolio with a buffer against a rising rate environment and to exploit the high income offered by those securities. By the end of the reporting period, the Fund began to reduce a portion of its bank loan exposure in favor of CMBS given the latter sector’s compelling relative value, especially within the single-asset, single-borrower segment of the market. The remaining allocations in the Fund are primarily in investment-grade corporate bonds,

Western Asset Diversified Income Fund 2021 Annual Report

RMBS, and emerging market sovereign and corporate debt which offer diversification and liquidity benefits for the portfolio.

The Fund used U.S. Treasury futures, Eurodollar futures, options and interest rate swaps to manage its duration and yield curve exposure. In aggregate, these instruments detracted from performance. Index credit default swaps (“CDX”) were used to manage the Fund’s exposure to credit index spread levels and contributed positively to results. Finally, the use of currency forwards to both take outright positions in and to hedge the Fund’s non-U.S. dollar currency exposure was positive for returns.

Performance review

For the period from its commencement of operations on June 25, 2021 through December 31, 2021, Western Asset Diversified Income Fund returned 1.19% based on its net asset value (“NAV”)ⁱ and -5.62% based on its New York Stock Exchange (“NYSE”) market price per share. The Fund’s unmanaged benchmark, the Bloomberg U.S. Corporate High Yield — 2% Issuer Cap Index (USD)ii, returned 1.86%% for the same period. The Lipper General Bond Closed-End Funds Category Averageⁱⁱⁱ returned 2.53% for the six-month period ended December 31, 2021. Please note that Lipper performance returns are based on each fund’s NAV.

The Fund has a practice of seeking to maintain a relatively stable level of distributions to shareholders. This practice has no impact on the Fund’s investment strategy and may reduce the Fund’s NAV. The Fund’s manager believes the practice helps maintain the Fund’s competitiveness and may benefit the Fund’s market price and premium/discount to the Fund’s NAV.

During the reporting period, the Fund made distributions to shareholders totaling $0.59 per share.* The performance table shows the Fund’s total return since its commencement of operations based on its NAV and market price as of December 31, 2021. Past performance is no guarantee of future results.

*	For the tax character of distributions paid during the tax period ended December 31, 2021, please refer to page 62 of this report.

Western Asset Diversified Income Fund 2021 Annual Report

Fund overview (cont’d)


Performance Snapshot as of December 31, 2021
Price Per Share	Total Return Since Commencement of Operations*
$19.65 (NAV)		1.19	%†
$18.31 (Market Price)		-5.62	%‡

All figures represent past performance and are not a guarantee of future results.

** Total returns are based on changes in NAV or market price, respectively. Returns reflect the deduction of all Fund expenses, including management fees, operating expenses, and other Fund expenses. Returns do not reflect the deduction of brokerage commissions or taxes that investors may pay on distributions or the sale of shares.

† Total return assumes the reinvestment of all distributions at NAV.

‡ Total return assumes the reinvestment of all distributions in additional shares in accordance with the Fund’s Dividend Reinvestment Plan.

*** The Fund commenced operations on June 25, 2021.

Q. What were the leading contributors to performance?

A. The largest contributor to the Fund’s relative performance during the reporting period was its allocation to corporate bonds. In particular, the Fund’s exposures to high-yield corporate bonds (specifically, industrials and energy issuers) were beneficial, as commodity prices moved higher and spreads continued to narrow over the course of the reporting period.

Allocations to both bank loans and CLOs were also rewarded, given solid demand for those asset classes, along with the Fund’s exposure to CMBS and non-agency RMBS which continue to generate incremental yield in the relatively low yield environment.

Q. What were the leading detractors from performance?

A. The largest detractor from the Fund’s relative performance during the reporting period was its duration positioning. Being long U.S. duration overall was a negative as rates moved sharply higher across the yield curve. This was driven by elevated inflation and less monetary policy accommodation by the Fed.

The Fund’s exposure to emerging market sovereign and corporate debt also detracted from returns as a result of skittish investor sentiment toward the asset class. Spreads widened across the emerging market complex over the course of the reporting period on increasing concerns over rising U.S. yields, a stronger U.S. dollar and idiosyncratic risks across a number of countries.

Looking for additional information?

The Fund is traded under the symbol “WDI” and its closing market price is available in most newspapers under the NYSE listings. The daily NAV is available online under the symbol

Western Asset Diversified Income Fund 2021 Annual Report

“XWDIX” on most financial websites. Barron’s and The Wall Street Journal’s Monday edition both carry closed-end fund tables that provide additional information. In addition, the Fund issues a quarterly press release that can be found on most major financial websites as well as www.franklintempleton.com.

In a continuing effort to provide information concerning the Fund, shareholders may call 1-888-777-0102 (toll free), Monday through Friday from 8:00 a.m. to 5:30 p.m. Eastern Time, for the Fund’s current NAV, market price and other information.

Thank you for your investment in Western Asset Diversified Income Fund. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.

Sincerely,

Western Asset Management Company, LLC

January 28, 2022

Risks: The Fund is a diversified limited term closed-end management investment company designed primarily as a long-term investment and not as a trading vehicle. The Fund is not intended to be a complete investment program and, due to the uncertainty inherent in all investments, there can be no assurance that the Fund will achieve its investment objectives. The Fund’s common shares are traded on the New York Stock Exchange. Similar to stocks, the Fund’s share price will fluctuate with market conditions and, at the time of sale, may be worth more or less than the original investment. Shares of closed-end funds often trade at a discount to their net asset value. Diversification does not assure against market loss. The Fund’s investments are subject to a number of risks, such as credit risk, inflation risk and interest rate risk. As interest rates rise, the value of fixed income securities falls. The Fund may invest in lower-rated high-yield bonds (commonly known as “junk bonds”), which are subject to greater liquidity risk and credit risk (risk of default) than higher-rated obligations. Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks. The Fund may invest in securities backed by subprime mortgages which involve a higher degree of risk and chance of loss. International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Emerging market countries tend to have economic, political, and legal systems that are less developed and are less stable than those of more developed countries. The Fund may make significant investments in derivative instruments. Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. Leverage may result in greater volatility of NAV and the market price of common shares and increases a shareholder’s risk of loss. The Fund may also invest in money market funds, including funds affiliated with the Fund’s manager and subadvisers. For more information on Fund risks, see Summary of information regarding the Fund - Principal Risk Factors in this report.

Western Asset Diversified Income Fund 2021 Annual Report

Fund overview (cont’d)

Portfolio holdings and breakdowns are as of December 31, 2021 and are subject to change and may not be representative of the portfolio managers’ current or future investments. Please refer to pages 10 through 35 for a list and percentage breakdown of the Fund’s holdings.

The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. Portfolio holdings are subject to change at any time and may not be representative of the portfolio managers’ current or future investments. The Fund’s top five sector holdings (as a percentage of net assets) as of December 31, 2021 were: collateralized mortgage obligations (24.5%), asset-backed securities (23.0%), consumer discretionary (16.9%), financials (12.1%) and industrials (11.6%). The Fund’s portfolio composition is subject to change at any time.

All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.

ⁱ

Net asset value (“NAV”) is calculated by subtracting total liabilities, including liabilities associated with financial leverage (if any) from the closing value of all securities held by the Fund (plus all other assets) and dividing the result (total net assets) by the total number of the common shares outstanding. The NAV fluctuates with changes in the market prices of securities in which the Fund has invested. However, the price at which an investor may buy or sell shares of the Fund is the Fund’s market price as determined by supply of and demand for the Fund’s shares.

ⁱⁱ	The Bloomberg U.S. Corporate High Yield — 2% Issuer Cap Index (USD) is an index of the 2% Issuer Cap component of the Bloomberg U.S. Corporate High Yield Index, which covers the U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond market.

ⁱⁱⁱ

Lipper, Inc., a wholly-owned subsidiary of Refinitiv, provides independent insight on global collective investments. Returns are based on the six-month period ended December 31, 2021, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 68 funds in the Fund’s Lipper category.

Western Asset Diversified Income Fund 2021 Annual Report

Fund at a glance^† (unaudited)

Investment breakdown (%) as a percent of total investments

LOGO

†

The bar graph above represents the composition of the Fund’s investments as of December 31, 2021 and does not include derivatives, such as written options, futures contracts, forward foreign currency contracts and swap contracts. The Fund is actively managed. As a result, the composition of the Fund’s investments is subject to change at any time.

‡	Represents less than 0.1%.

Western Asset Diversified Income Fund 2021 Annual Report

Fund performance (unaudited)


Net Asset Value
Average annual total returns¹
Commencement* through 12/31/21	1.19	%

Cumulative total returns¹
Commencement date of 6/25/21 through 12/31/21	1.19	%

Market Price
Average annual total returns²
Commencement* through 12/31/21	-5.62	%

Cumulative total returns²
Commencement date of 6/25/21 through 12/31/21	-5.62	%

All figures represent past performance and are not a guarantee of future results. Returns reflect the deduction of all Fund expenses, including management fees, operating expenses, and other Fund expenses. Returns do not reflect the deduction of brokerage commissions or taxes that investors may pay on distributions or the sale of shares.

¹	Assumes the reinvestment of all distributions, including returns of capital, if any, at net asset value.

²	Assumes the reinvestment of all distributions, including returns of capital, if any, in additional shares in accordance with the Fund’s Dividend Reinvestment Plan.

*	Commencement of operations for the Fund is June 25, 2021.

Western Asset Diversified Income Fund 2021 Annual Report

Historical performance

Value of $10,000 invested in

Western Asset Diversified Income Fund vs. Bloomberg U.S. Corporate High Yield — 2% Issuer Cap Index† — June 25, 2021 - December 31, 2021

LOGO

†

Hypothetical illustration of $10,000 invested in Western Asset Diversified Income Fund on June 25, 2021 (commencement of operations), assuming the reinvestment of all distributions, including returns of capital, if any, at net asset value and also assuming the reinvestment of all distributions, including returns of capital, if any, in additional shares in accordance with the Fund’s Dividend Reinvestment Plan through December 31, 2021. The hypothetical illustration also assumes a $10,000 investment in the Bloomberg U.S. Corporate High Yield — 2% Issuer Cap Index. The Bloomberg U.S. Corporate High Yield — 2% Issuer Cap Index (the “Index”) is an index of the 2% Issuer Cap component of the Bloomberg U.S. Corporate High Yield Index, which covers the U.S. dollar denominated, non-investment grade, fixed-rate, taxable corporate bond market. The Index is unmanaged. Please note that an investor cannot invest directly in an index.

Western Asset Diversified Income Fund 2021 Annual Report

Schedule of investments

December 31, 2021

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†		Value
Corporate Bonds & Notes — 47.7%
Communication Services — 5.0%
Entertainment — 1.9%
Allen Media LLC/Allen Media Co-Issuer Inc., Senior Notes		10.500	%		2/15/28		9,160,000	$	9,569,635	^(a)
AMC Entertainment Holdings Inc., Secured Notes (10.00% Cash or 12.000% PIK)		10.000	%		6/15/26		6,000,000		5,937,000	^(a)(b)
Cinemark USA Inc., Senior Notes		5.250	%		7/15/28		3,500,000		3,418,485	^(a)
Total Entertainment									18,925,120
Media — 3.1%
Clear Channel Outdoor Holdings Inc., Senior Notes		7.500	%		6/1/29		10,303,000		11,016,174	^(a)
Directv Financing LLC/Directv Financing Co-Obligor Inc., Senior Secured Notes		5.875	%		8/15/27		10,000,000		10,252,000	^(a)
DISH DBS Corp., Senior Notes		5.125	%		6/1/29		4,000,000		3,646,480
Liberty Interactive LLC, Senior Notes		8.500	%		7/15/29		6,000,000		6,548,430
Total Media									31,463,084
Total Communication Services									50,388,204
Consumer Discretionary — 10.1%
Auto Components — 0.7%
Dornoch Debt Merger Sub Inc., Senior Notes		6.625	%		10/15/29		6,890,000		6,812,487	^(a)
Automobiles — 1.7%
Mclaren Finance PLC, Senior Secured Notes		7.500	%		8/1/26		9,000,000		9,119,475	^(a)
PM General Purchaser LLC, Senior Secured Notes		9.500	%		10/1/28		8,000,000		8,116,680	^(a)
Total Automobiles									17,236,155
Distributors — 0.4%
American News Co. LLC, Secured Notes (8.500% Cash or 10.000% PIK)		8.500	%		9/1/26		3,307,906		3,786,179	^(a)(b)
Diversified Consumer Services — 1.2%
StoneMor Inc., Senior Secured Notes		8.500	%		5/15/29		12,000,000		12,413,820	^(a)
Hotels, Restaurants & Leisure — 3.4%
Carrols Restaurant Group Inc., Senior Notes		5.875	%		7/1/29		3,000,000		2,704,215	^(a)

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†			Value
Hotels, Restaurants & Leisure — continued
Full House Resorts Inc., Senior Secured Notes		8.250	%		2/15/28		5,000,000		$	5,257,100	^(a)
Saga PLC, Senior Notes		5.500	%		7/15/26		3,000,000	^GBP		3,938,831	^(c)
Sizzling Platter LLC/Sizzling Platter Finance Corp., Senior Secured Notes		8.500	%		11/28/25		7,000,000			7,209,230	^(a)
Viking Ocean Cruises Ship VII Ltd., Senior Secured Notes		5.625	%		2/15/29		3,000,000			3,000,465	^(a)
Wheel Bidco Ltd., Senior Secured Notes		6.750	%		7/15/26		5,180,000	^GBP		6,904,465	^(a)
Wynn Macau Ltd., Senior Notes		4.875	%		10/1/24		3,000,000			2,823,255	^(a)
Wynn Macau Ltd., Senior Notes		5.625	%		8/26/28		3,500,000			3,246,250	^(a)
Total Hotels, Restaurants & Leisure										35,083,811
Multiline Retail — 0.3%
Nordstrom Inc., Senior Notes		5.000	%		1/15/44		3,330,000			3,110,420
Specialty Retail — 2.4%
Bed Bath & Beyond Inc., Senior Notes		5.165	%		8/1/44		8,500,000			7,073,105
Michaels Cos. Inc., Senior Notes		7.875	%		5/1/29		10,000,000			9,867,050	^(a)
NMG Holding Co. Inc./Neiman Marcus Group LLC, Senior Secured Notes		7.125	%		4/1/26		3,000,000			3,188,820	^(a)
Party City Holdings Inc., Senior Secured Notes (6 mo. USD LIBOR + 5.000%)		5.750	%		7/15/25		5,000,000			4,717,875	^(a)(d)
Total Specialty Retail										24,846,850
Total Consumer Discretionary										103,289,722
Consumer Staples — 1.3%
Beverages — 0.5%
Triton Water Holdings Inc., Senior Notes		6.250	%		4/1/29		5,000,000			4,802,550	^(a)
Tobacco — 0.8%
Vector Group Ltd., Senior Notes		10.500	%		11/1/26		8,000,000			8,298,320	^(a)
Total Consumer Staples										13,100,870
Energy — 7.0%
Energy Equipment & Services — 0.0%††
Weatherford International Ltd., Senior Notes		11.000	%		12/1/24		553,000			570,165	^(a)
Oil, Gas & Consumable Fuels — 7.0%
Berry Petroleum Co. LLC, Senior Notes		7.000	%		2/15/26		5,400,000			5,351,616	^(a)

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Schedule of investments (cont’d)

December 31, 2021

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†		Value
Oil, Gas & Consumable Fuels — continued
DCP Midstream LP, Junior Subordinated Notes (7.375% to 12/15/22 then 3 mo. USD LIBOR + 5.148%)		7.375	%		12/15/22		8,115,000	$	8,033,850	^(d)(e)
Energy Transfer LP, Junior Subordinated Notes (6.250% to 2/15/23 then 3 mo. USD LIBOR + 4.028%)		6.250	%		2/15/23		7,298,000		6,358,820	^(d)(e)
Energy Transfer LP, Junior Subordinated Notes (7.125% to 5/15/30 then 5 year Treasury Constant Maturity Rate + 5.306%)		7.125	%		5/15/30		9,842,000		10,014,235	^(d)(e)
EQM Midstream Partners LP, Senior Notes		6.500	%		7/15/48		3,000,000		3,649,230
Northern Oil and Gas Inc., Senior Notes		8.125	%		3/1/28		1,000,000		1,056,420	^(a)
Penn Virginia Holdings LLC, Senior Notes		9.250	%		8/15/26		8,000,000		8,310,000	^(a)
Plains All American Pipeline LP, Junior Subordinated Notes (6.125% to 11/15/22 then 3 mo. USD LIBOR + 4.110%)		6.125	%		11/15/22		10,000,000		8,537,500	^(d)(e)
Rockies Express Pipeline LLC, Senior Notes		7.500	%		7/15/38		4,700,000		5,311,917	^(a)
Strathcona Resources Ltd., Senior Notes		6.875	%		8/1/26		5,000,000		4,919,800	^(a)
Transportadora de Gas del Sur SA, Senior Notes		6.750	%		5/2/25		5,250,000		4,837,665	^(a)
YPF SA, Senior Notes		8.500	%		7/28/25		6,300,000		4,740,813	^(c)
Total Oil, Gas & Consumable Fuels									71,121,866
Total Energy									71,692,031
Financials — 7.1%
Capital Markets — 0.2%
B3 SA - Brasil Bolsa Balcao, Senior Notes		4.125	%		9/20/31		2,200,000		2,123,022	^(a)
Consumer Finance — 1.7%
Midcap Financial Issuer Trust, Senior Notes		5.625	%		1/15/30		7,500,000		7,530,900	^(a)
Navient Corp., Senior Notes		5.625	%		8/1/33		10,000,000		9,539,100
Total Consumer Finance									17,070,000

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†		Value
Diversified Financial Services — 4.4%
Global Aircraft Leasing Co. Ltd., Senior Notes (6.500% Cash or 7.250% PIK)		6.500	%		9/15/24		11,507,570	$	11,117,636	^(a)(b)
Huarong Finance 2017 Co. Ltd., Senior Notes (3 mo. USD LIBOR + 1.325%)		1.539	%		7/3/23		1,240,000		1,210,922	^(c)(d)
Huarong Finance 2019 Co. Ltd., Senior Notes		2.500	%		2/24/23		2,520,000		2,506,594	^(c)
Huarong Finance 2019 Co. Ltd., Senior Notes		2.125	%		9/30/23		1,210,000		1,193,362	^(c)
Hunt Cos. Inc., Senior Secured Notes		5.250	%		4/15/29		9,000,000		8,877,960	^(a)
LD Holdings Group LLC, Senior Notes		6.125	%		4/1/28		5,400,000		5,097,168	^(a)
TKC Holdings Inc., Senior Notes		10.500	%		5/15/29		8,000,000		8,651,360	^(a)
VistaJet Malta Finance PLC/XO Management Holding Inc., Senior Notes		10.500	%		6/1/24		5,875,000		6,292,360	^(a)
Total Diversified Financial Services									44,947,362
Insurance — 0.3%
Highlands Holdings Bond Issuer Ltd./Highlands Holdings Bond Co-Issuer Inc., Senior Secured Notes (7.625% Cash or 8.375% PIK)		7.625	%		10/15/25		2,891,203		3,067,812	^(a)(b)
Mortgage Real Estate Investment Trusts (REITs) — 0.5%
AFC Gamma Inc., Senior Notes		5.750	%		5/1/27		5,000,000		4,949,352	^(a)
Total Financials									72,157,548
Health Care — 5.1%
Health Care Providers & Services — 3.9%
Akumin Inc., Senior Secured Notes		7.000	%		11/1/25		5,000,000		4,763,700	^(a)
CHS/Community Health Systems Inc., Senior Notes		6.875	%		4/1/28		20,000,000		19,628,300	^(a)
MPH Acquisition Holdings LLC, Senior Notes		5.750	%		11/1/28		10,000,000		9,525,150	^(a)
US Renal Care Inc., Senior Notes		10.625	%		7/15/27		5,380,000		5,466,080	^(a)
Total Health Care Providers & Services									39,383,230

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Schedule of investments (cont’d)

December 31, 2021

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†			Value
Pharmaceuticals — 1.2%
Bausch Health Cos. Inc., Senior Notes		7.250	%		5/30/29		8,375,000		$	8,303,017	^(a)
Par Pharmaceutical Inc., Senior Secured Notes		7.500	%		4/1/27		4,000,000			4,093,720	^(a)
Total Pharmaceuticals										12,396,737
Total Health Care										51,779,967
Industrials — 5.8%
Airlines — 0.9%
American Airlines Inc., Senior Secured Notes		11.750	%		7/15/25		7,000,000			8,645,665	^(a)
Building Products — 1.0%
CP Atlas Buyer Inc., Senior Notes		7.000	%		12/1/28		3,459,000			3,446,565	^(a)
Ideal Standard International SA, Senior Secured Notes		6.375	%		7/30/26		6,760,000	^EUR		6,907,393	^(a)
Total Building Products										10,353,958
Commercial Services & Supplies — 1.4%
CoreCivic Inc., Senior Notes		8.250	%		4/15/26		10,546,000			11,035,598
PECF USS Intermediate Holding III Corp., Senior Notes		8.000	%		11/15/29		3,000,000			3,111,120	^(a)
Total Commercial Services & Supplies										14,146,718
Machinery — 1.7%
Granite US Holdings Corp., Senior Notes		11.000	%		10/1/27		5,000,000			5,442,500	^(a)
Park-Ohio Industries Inc., Senior Notes		6.625	%		4/15/27		11,600,000			11,269,400
Titan International Inc., Senior Secured Notes		7.000	%		4/30/28		935,000			997,103
Total Machinery										17,709,003
Trading Companies & Distributors — 0.2%
Doman Building Materials Group Ltd., Senior Notes		5.250	%		5/15/26		3,000,000	^CAD		2,341,990	^(a)
Transportation Infrastructure — 0.6%
Carriage Purchaser Inc., Senior Notes		7.875	%		10/15/29		6,000,000			5,768,430	^(a)
Total Industrials										58,965,764
Information Technology — 2.2%
Communications Equipment — 0.4%
CommScope Inc., Senior Notes		8.250	%		3/1/27		4,000,000			4,115,680	^(a)
Software — 1.0%
LogMeIn Inc., Senior Secured Notes		5.500	%		9/1/27		219,000			221,856	^(a)

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†		Value
Software — continued
Rocket Software Inc., Senior Notes		6.500	%		2/15/29		4,500,000	$	4,396,522	^(a)
Uniquify Inc., Senior Secured Notes		6.000	%		6/15/24		5,270,000		5,317,187	^(a)
Total Software									9,935,565
Technology Hardware, Storage & Peripherals — 0.8%
Vericast Corp., Senior Secured Notes		11.000	%		9/15/26		7,420,000		7,874,475	^(a)
Vericast Corp./Harland Clarke/ Checks in the Mail/Valassis Comm/ Valassis Direct, Secured Notes		13.000	%		10/15/27		590,000		727,913	^(a)
Total Technology Hardware, Storage & Peripherals									8,602,388
Total Information Technology									22,653,633
Materials — 0.5%
Chemicals — 0.4%
LSF11 A5 Holdco LLC, Senior Notes		6.625	%		10/15/29		3,950,000		3,896,300	^(a)
Metals & Mining — 0.1%
Mountain Province Diamonds Inc., Secured Notes		8.000	%		12/15/22		1,000,000		927,430	^(a)
Total Materials									4,823,730
Real Estate — 3.0%
Equity Real Estate Investment Trusts (REITs) — 1.4%
GEO Group Inc., Senior Notes		5.875	%		10/15/24		5,000,000		4,426,450
GEO Group Inc., Senior Notes		6.000	%		4/15/26		6,048,000		4,885,816
Service Properties Trust, Senior Notes		4.375	%		2/15/30		5,000,000		4,607,300
Total Equity Real Estate Investment Trusts (REITs)									13,919,566
Real Estate Management & Development — 1.6%
China Aoyuan Group Ltd., Senior Secured Notes		6.350	%		2/8/24		3,200,000		632,000	*^(c)(f)
China SCE Group Holdings Ltd., Senior Secured Notes		7.375	%		4/9/24		3,100,000		2,641,408	^(c)
Country Garden Holdings Co. Ltd., Senior Secured Notes		8.000	%		1/27/24		3,500,000		3,535,603	^(c)
WeWork Cos. Inc., Senior Notes		7.875	%		5/1/25		8,750,000		8,373,137	^(a)
Yuzhou Group Holdings Co. Ltd., Senior Secured Notes		8.375	%		10/30/24		5,550,000		1,623,375	^(c)
Total Real Estate Management & Development									16,805,523
Total Real Estate									30,725,089

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Schedule of investments (cont’d)

December 31, 2021

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†		Value
Utilities — 0.6%
Electric Utilities — 0.6%
Talen Energy Supply LLC, Senior Secured Notes		6.625	%		1/15/28		7,000,000	$	6,152,405	^(a)
Total Corporate Bonds & Notes (Cost — $496,951,260)									485,728,963
Collateralized Mortgage Obligations ^(g)— 24.5%
Benchmark Mortgage Trust, 2021- B27 F		2.250	%		7/15/54		5,000,000		3,526,982	^(a)(d)
Benchmark Mortgage Trust, 2021- B27 G		2.250	%		7/15/54		5,000,000		3,195,035	^(a)(d)
BSREP Commercial Mortgage Trust, 2021-DC HRR (1 mo. USD LIBOR + 5.500%)		5.610	%		8/15/38		18,664,000		18,710,561	^(a)(d)
BX Commercial Mortgage Trust, 2020-VIVA D		3.549	%		3/11/44		3,400,000		3,398,862	^(a)(d)
BX Trust, 2018-GW G (1 mo. USD LIBOR + 2.920%)		3.030	%		5/15/35		5,345,000		5,314,030	^(a)(d)
CSMC Trust, 2021-ADV G (1 mo. USD LIBOR + 6.250%)		6.360	%		7/15/38		8,350,000		8,345,188	^(a)(d)
CSMC Trust, 2021-RPL2 B1		3.458	%		1/25/60		6,233,900		6,050,708	^(a)(d)
Federal Home Loan Mortgage Corp. (FHLMC) Multifamily Structured Pass-Through Certificates, 2021- MN2 B1 (30 Day Average SOFR + 5.500%)		5.550	%		7/25/41		2,500,000		2,527,979	^(a)(d)
Federal Home Loan Mortgage Corp. (FHLMC) Multifamily Structured Pass-Through Certificates, 2021- MN2 M2 (30 Day Average SOFR + 3.400%)		3.400	%		7/25/41		2,500,000		2,489,221	^(a)(d)
Federal Home Loan Mortgage Corp. (FHLMC) REMIC, Structured Agency Credit Risk Debt Notes, 2020-DNA1 B2 (1 mo. USD LIBOR + 5.250%)		5.353	%		1/25/50		2,225,000		2,253,544	^(a)(d)
Federal Home Loan Mortgage Corp. (FHLMC) REMIC, Structured Agency Credit Risk Debt Notes, 2020-DNA2 B2 (1 mo. USD LIBOR + 4.800%)		4.903	%		2/25/50		7,250,000		7,314,141	^(a)(d)
Federal Home Loan Mortgage Corp. (FHLMC) REMIC, Structured Agency Credit Risk Debt Notes, 2020-DNA6 B2 (30 Day Average SOFR + 5.650%)		5.700	%		12/25/50		5,000,000		5,270,240	^(a)(d)

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†		Value
Collateralized Mortgage Obligations ^(g)— continued
Federal Home Loan Mortgage Corp. (FHLMC) REMIC, Structured Agency Credit Risk Debt Notes, 2021-DNA1 B2 (30 Day Average SOFR + 4.750%)		4.800	%		1/25/51		5,500,000	$	5,596,524	^(a)(d)
Federal Home Loan Mortgage Corp. (FHLMC) REMIC, Structured Agency Credit Risk Debt Notes, 2021-DNA3 B2 (30 Day Average SOFR + 6.250%)		6.300	%		10/25/33		5,000,000		5,631,733	^(a)(d)
Federal Home Loan Mortgage Corp. (FHLMC) REMIC, Structured Agency Credit Risk Debt Notes, 2021-DNA5 B2 (30 Day Average SOFR + 5.500%)		5.550	%		1/25/34		6,700,000		7,008,942	^(a)(d)
Federal Home Loan Mortgage Corp. (FHLMC) REMIC, Structured Agency Credit Risk Debt Notes, 2021-DNA6 B2 (30 Day Average SOFR + 7.500%)		7.550	%		10/25/41		6,590,000		6,870,780	^(a)(d)
Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2018-3 BX		0.000	%		8/25/57		9,597,649		4,869,175	^(a)(d)
Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2018-HRP1 B2 (1 mo. USD LIBOR + 11.750%)		11.853	%		5/25/43		4,806,268		5,404,183	^(a)(d)
Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2018-SPI2 B		3.808	%		5/25/48		7,778,824		7,638,687	^(a)(d)
Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2021-DNA2 B2 (30 Day Average SOFR + 6.000%)		6.050	%		8/25/33		6,000,000		6,599,549	^(a)(d)
Federal National Mortgage Association (FNMA) — CAS, 2016- C04 1B (1 mo. USD LIBOR + 10.250%)		10.353	%		1/25/29		2,227,847		2,510,889	^(a)(d)
Federal National Mortgage Association (FNMA) — CAS, 2019- R07 1B1 (1 mo. USD LIBOR + 3.400%)		3.503	%		10/25/39		4,940,000		4,978,631	^(a)(d)
Federal National Mortgage Association (FNMA) — CAS, 2020- R01 1B1 (1 mo. USD LIBOR + 3.250%)		3.353	%		1/25/40		5,700,000		5,732,018	^(a)(d)

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Schedule of investments (cont’d)

December 31, 2021

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†		Value
Collateralized Mortgage Obligations ^(g)— continued
FREMF Mortgage Trust, 21K-F117 CS (30 Day Average SOFR + 6.400%)		6.450	%		7/25/31		10,300,000	$	10,302,222	^(a)(d)
FRR Re-REMIC Trust, 2018-C1 D720		0.000	%		8/27/47		7,920,000		7,346,117	^(a)(d)
Great Wolf Trust, 2019-WOLF E (1 mo. USD LIBOR + 2.732%)		2.842	%		12/15/36		3,943,000		3,834,222	^(a)(d)
GS Mortgage Securities Trust, 2018- LUAU G (1 mo. USD LIBOR + 4.450%)		4.560	%		11/15/32		5,000,000		5,011,967	^(a)(d)
GS Mortgage Securities Trust, 2021- ARDN H (1 mo. USD LIBOR + 5.933%)		6.043	%		11/15/26		5,000,000		5,016,988	^(a)(d)
JPMorgan Chase Commercial Mortgage Securities Trust, 2018- WPT GFX		5.542	%		7/5/33		4,000,000		3,971,058	^(a)(d)
JPMorgan Chase Commercial Mortgage Securities Trust, 2020- NNN GFL (1 mo. USD LIBOR + 3.000%)		3.108	%		1/16/37		933,842		912,585	^(a)(d)
JPMorgan Chase Commercial Mortgage Securities Trust, 2020- NNN GFX		4.688	%		1/16/37		1,580,000		1,507,893	^(a)(d)
JPMorgan Chase Commercial Mortgage Securities Trust, 2021- NYMZ M (1 mo. USD LIBOR + 7.250%)		7.400	%		6/15/26		10,000,000		10,011,193	^(a)(d)
KIND Trust, 2021-KIND F (1 mo. USD LIBOR + 3.950%)		4.060	%		8/15/38		7,500,000		7,514,083	^(a)(d)
MBRT, 2019-MBR H1 (1 mo. USD LIBOR + 4.250%)		4.360	%		11/15/36		3,000,000		2,962,491	^(a)(d)
Med Trust, 2021-MDLN F (1 mo. USD LIBOR + 4.000%)		4.110	%		11/15/38		6,590,000		6,552,486	^(a)(d)
Mello Warehouse Securitization Trust, 2021-1 G (1 mo. USD LIBOR + 4.375%)		4.476	%		2/25/55		2,500,000		2,506,327	^(a)(d)
Morgan Stanley Capital I Trust, 2021-L6 F		2.250	%		6/15/54		7,195,000		4,818,801	^(a)
Motel Trust, 2021-MTL6 H (1 mo. USD LIBOR + 6.000%)		6.110	%		9/15/38		5,950,000		5,988,397	^(a)(d)
Multifamily CAS Trust, 2019-1 CE (1 mo. USD LIBOR + 8.750%)		8.852	%		10/15/49		2,000,000		2,162,986	^(a)(d)

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†		Value
Collateralized Mortgage Obligations ^(g)— continued
Multifamily CAS Trust, 2020-1 CE (1 mo. USD LIBOR + 7.500%)		7.602	%		3/25/50		2,500,000	$	2,691,731	^(a)(d)
New Residential Mortgage Loan Trust, 2017-2A B5		5.334	%		3/25/57		2,819,937		3,048,160	^(a)(d)
New Residential Mortgage Loan Trust, 2020-2A B5D		2.653	%		10/25/46		5,205,443		4,948,738	^(a)(d)
River Haus, 2021 A-2		6.950	%		8/15/24		8,500,000		8,501,065	^(h)(i)
Soho Trust, 2021-SOHO D		2.697	%		8/10/38		7,000,000		6,225,110	^(a)(d)
Tharaldson Hotel Portfolio Trust, 2018-THL F (1 mo. USD LIBOR + 4.252%)		4.356	%		11/11/34		4,455,441		4,321,462	^(a)(d)
UBS Commercial Mortgage Trust, 2018-NYCH F (1 mo. USD LIBOR + 3.821%)		3.931	%		2/15/32		6,000,000		5,841,663	^(a)(d)
UBS Commercial Mortgage Trust, 2018-NYCH G (1 mo. USD LIBOR + 4.838%)		4.948	%		2/15/32		2,000,000		1,901,263	^(a)(d)
Total Collateralized Mortgage Obligations (Cost — $248,575,238)									249,136,610
Senior Loans — 24.2%
Communication Services — 0.7%
Entertainment — 0.7%
Allen Media LLC, 2021 Delayed Draw Term Loan B (3 mo. USD LIBOR + 5.500%)		5.632	%		2/10/27		3,553,571		3,556,681	^(d)(j)(k)
Allen Media LLC, 2021 Incremental Term Loan B (3 mo. USD LIBOR + 5.500%		5.632	%		2/10/27		3,908,677		3,912,097	^(d)(j)(k)
Total Communication Services									7,468,778
Consumer Discretionary — 6.8%
Auto Components — 1.5%
Autokiniton US Holdings Inc., Closing Date Term Loan B (the greater of 3 mo. USD LIBOR or 0.500% + 4.500%)		5.000	%		4/6/28		3,980,000		3,991,085	^(d)(j)(k)
First Brands Group LLC, 2021 First Lien Term Loan (the greater of 1 mo. USD LIBOR or 1.000% + 5.000%)		6.000	%		3/30/27		5,964,950		6,003,722	^(d)(j)(k)
First Brands Group LLC, 2021 Second Lien Term Loan (the greater of 3 mo. USD LIBOR or 1.000% + 8.500%)		9.500	%		3/30/28		5,390,000		5,440,558	^(d)(j)(k)
Total Auto Components									15,435,365

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Schedule of investments (cont’d)

December 31, 2021

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†		Value
Diversified Consumer Services — 0.5%
Adtalem Global Education Inc., Term Loan B (the greater of 1 mo. USD LIBOR or 0.750% + 4.500%)		5.250	%		8/12/28		5,000,000	$	5,019,275	^(d)(j)(k)
Hotels, Restaurants & Leisure — 1.6%
ClubCorp. Holdings Inc., First Lien Term Loan B (3 mo. USD LIBOR + 2.750%)		2.974	%		9/18/24		7,461,039		7,200,947	^(d)(j)(k)
Equinox Holdings Inc., Term Loan B2 (the greater of 3 mo. USD LIBOR or 1.000% + 9.000%)		10.000	%		3/8/24		1,182,000		1,208,595	^(d)(i)(j)(k)
Hornblower Sub LLC, PIK Term Loan (the greater of 3 mo. USD LIBOR or 1.000% + 4.500%)		5.500	%		4/27/25		7,498,150		7,098,236	^(d)(j)(k)
Total Hotels, Restaurants & Leisure									15,507,778
Multiline Retail — 0.6%
Franchise Group Inc., First Lien Initial Term Loan (the greater of 3 mo. USD LIBOR or 0.750% + 4.750%)		5.500	%		3/10/26		6,077,225		6,094,940	^(d)(j)(k)
Specialty Retail — 2.6%
Empire Today LLC, Closing Date Term Loan (the greater of 3 mo. USD LIBOR or 0.750% + 5.000%)		5.750	%		4/3/28		2,487,500		2,448,633	^(d)(i)(j)(k)
Great Outdoors Group LLC, Term Loan B2 (the greater of 1 mo. USD LIBOR or 0.750% + 3.750%)		4.500	%		3/6/28		4,974,969		4,986,884	^(d)(j)(k)
Michaels Cos. Inc., Term Loan B (the greater of 3 mo. USD LIBOR or 0.750% + 4.250%)		5.000	%		4/15/28		680,789		675,806	^(d)(j)(k)
Rising Tide Holdings Inc., First Lien Initial Term Loan (the greater of 1 mo. USD LIBOR or 0.750% + 4.750%)		5.500	%		6/1/28		6,467,500		6,459,415	^(d)(j)(k)
RVR Dealership Holdings LLC, Term Loan (the greater of 3 mo. USD LIBOR or 0.750% + 4.000%)		4.750	%		2/8/28		2,977,500		2,975,654	^(d)(j)(k)
Spencer Spirit IH LLC, Initial Term Loan		—			6/19/26		9,084,731		9,071,104	^(l)
Total Specialty Retail									26,617,496
Total Consumer Discretionary									68,674,854

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†		Value
Consumer Staples — 0.5%
Household Products — 0.5%
Knight Health Holdings LLC		—			12/15/28		5,000,000	$	4,725,000	^(i)(l)
Financials — 2.4%
Diversified Financial Services — 0.7%
Greystone Select Holdings LLC, Term Loan B (the greater of 3 mo. USD LIBOR or 0.750% + 5.000%)		5.750	%		6/16/28		3,478,395		3,504,483	^(d)(j)(k)
Resolute Investment Managers Inc., First Lien Term Loan C (the greater of 3 mo. USD LIBOR or 1.000% + 4.250%)		5.250	%		4/30/24		3,556,065		3,567,178	^(d)(i)(j)(k)
Total Diversified Financial Services									7,071,661
Insurance — 1.7%
Asurion LLC, New Term Loan B4 (1 mo. USD LIBOR + 5.250%)		5.354	%		1/20/29		5,000,000		4,985,950	^(d)(j)(k)
Asurion LLC, New Term Loan B9 (1 mo. USD LIBOR + 3.250%)		3.354	%		7/31/27		6,964,913		6,930,958	^(d)(j)(k)
Asurion LLC, Second Lien Term Loan B3 (1 mo. USD LIBOR + 5.250%)		5.354	%		1/31/28		5,000,000		5,021,875	^(d)(i)(j)(k)
Total Insurance									16,938,783
Total Financials									24,010,444
Health Care — 3.4%
Health Care Providers & Services — 2.7%
Cano Health LLC, Initial Term Loan (the greater of 3 mo. USD LIBOR or 0.750% + 4.500%)		5.250	%		11/23/27		6,947,500		6,955,316	^(d)(j)(k)
EyeCare Partners LLC, Second Lien Initial Term Loan (the greater of 3 mo. USD LIBOR or 0.500% + 6.750%)		7.250	%		11/15/29		2,590,000		2,602,950	^(d)(j)(k)
Global Medical Response Inc., 2020 Term Loan (the greater of 3 mo. USD LIBOR or 1.000% + 4.250%)		5.250	%		10/2/25		4,974,875		4,961,193	^(d)(j)(k)
One Call Corp., First Lien Term Loan B (the greater of 3 mo. USD LIBOR or 0.750% + 5.500%)		6.250	%		4/22/27		6,965,000		6,997,666	^(d)(j)(k)
U.S. Renal Care Inc., First Lien Term Loan B (1 mo. USD LIBOR + 5.000%)		5.125	%		6/26/26		5,961,890		5,813,618	^(d)(j)(k)
Total Health Care Providers & Services									27,330,743

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Schedule of investments (cont’d)

December 31, 2021

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†			Value
Health Care Technology — 0.7%
FinThrive Software Intermediate Holdings Inc.		—			12/17/29		1,200,000	$		1,199,622	^(l)
Virgin Pulse Inc., Second Lien Initial Term Loan (the greater of 3 mo. USD LIBOR or 0.750% + 7.250%)		8.000	%		4/6/29		6,500,000			6,443,125	^(d)(i)(j)(k)
Total Health Care Technology										7,642,747
Total Health Care										34,973,490
Industrials — 5.8%
Aerospace & Defense — 0.9%
WP CPP Holdings LLC, First Lien Initial Term Loan (the greater of 3 mo. USD LIBOR or 1.000% + 3.750%)		4.750	%		4/30/25		3,742,275			3,597,262	^(d)(j)(k)
WP CPP Holdings LLC, Second Lien Second Amendment Term Loan (the greater of 3 mo. USD LIBOR or 1.000% + 7.750%)		8.750	%		4/30/26		6,000,000			5,872,500	^(d)(j)(k)
Total Aerospace & Defense										9,469,762
Airlines — 0.7%
Mileage Plus Holdings LLC, Initial Term Loan (the greater of 3 mo. USD LIBOR or 1.000% + 5.250%)		6.250	%		6/21/27		7,000,000			7,400,785	^(d)(j)(k)
Commercial Services & Supplies — 3.4%
Amentum Government Services Holdings LLC, First Lien Term Loan 2 (the greater of 3 mo. USD LIBOR or 0.750% + 4.750%)		5.500	%		1/29/27		4,962,500			4,971,805	^(d)(j)(k)
Brand Industrial Services Inc., Initial Term Loan		—			6/21/24		4,973,959			4,877,240	^(l)
Donlen LLC, Term Loan B (the greater of 1 mo. USD LIBOR or 1.000% + 5.500%)		6.500	%		3/30/28		8,954,887			8,905,635	^{(d)(h)(i)(j)(k)}
LTR Intermediate Holdings Inc., Initial Term Loan (the greater of 3 mo. USD LIBOR or 1.000% + 4.500%)		5.500	%		5/5/28		4,975,000			4,956,369	^(d)(j)(k)

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†		Value
Commercial Services & Supplies — continued
Monitronics International Inc., Term Loan (the greater of 3 mo. USD LIBOR or 1.250% + 6.500%)		7.750	%		3/29/24		7,563,545	$	7,109,732	^(d)(j)(k)
PAE Inc., First Lien Initial Term Loan (the greater of 1 mo. USD LIBOR or 0.750% + 4.500%)		5.250	%		10/19/27		3,473,684		3,482,368	^(d)(j)(k)
Total Commercial Services & Supplies									34,303,149
Construction & Engineering — 0.1%
KKR Apple Bidco LLC, Second Lien Term Loan (the greater of 1 mo. USD LIBOR or 0.500% + 5.750%)		6.250	%		9/21/29		1,000,000		1,015,315	^(d)(j)(k)
Transportation Infrastructure — 0.7%
WWEX Uni Topco Holdings LLC, Second Lien Initial Term Loan (the greater of 3 mo. USD LIBOR or 0.750% + 7.000%)		7.750	%		7/26/29		7,000,000		7,030,625	^(d)(j)(k)
Total Industrials									59,219,636
Information Technology — 4.1%
IT Services — 1.2%
Redstone Holdco 2 LP, First Lien Initial Term Loan (the greater of 3 mo. USD LIBOR or 0.750% + 4.750%)		5.500	%		4/27/28		6,982,500		6,690,108	^(d)(j)(k)
Redstone Holdco 2 LP, Second Lien Initial Term Loan (the greater of 3 mo. USD LIBOR or 0.750% + 7.750%)		8.500	%		4/27/29		3,050,000		2,836,500	^(d)(j)(k)
VT Topco Inc., 2021 Second Lien Term Loan (the greater of 1 mo. USD LIBOR or 0.750% + 6.750%)		7.500	%		7/31/26		2,700,000		2,713,500	^(d)(i)(j)(k)
Total IT Services									12,240,108
Software — 2.9%
Cloudera Inc., Second Lien Term Loan (the greater of 1 mo. USD LIBOR or 0.500% + 6.000%)		6.500	%		10/8/29		5,000,000		5,012,500	^(d)(i)(j)(k)
DCert Buyer Inc., First Lien Initial Term Loan (1 mo. USD LIBOR + 4.000%)		4.104	%		10/16/26		4,974,683		4,971,574	^(d)(j)(k)
DCert Buyer Inc., Second Lien Initial Term Loan (1 mo. USD LIBOR + 7.000%)		7.104	%		2/19/29		500,000		502,083	^(d)(j)(k)

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Schedule of investments (cont’d)

December 31, 2021

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†		Value
Software — continued
Magenta Buyer LLC, First Lien Initial Term Loan (the greater of 3 mo. USD LIBOR or 0.750% + 5.000%)		5.750	%		7/27/28		5,985,000	$	5,978,446	^(d)(j)(k)
Magenta Buyer LLC, Second Lien Initial Term Loan (the greater of 3 mo. USD LIBOR or 0.750% + 8.250%)		9.000	%		7/27/29		6,500,000		6,473,610	^(d)(j)(k)
Particle Investments Sarl, First Lien Initial Term Loan (the greater of 3 mo. USD LIBOR or 0.500% + 5.250%)		5.750	%		2/18/27		1,740,599		1,742,775	^(d)(j)(k)
Symplr Software Inc., First Lien Term Loan (the greater of 3 mo. USD LIBOR or 0.750% + 4.500%)		5.250	%		12/22/27		4,962,500		4,977,239	^(d)(j)(k)
Total Software									29,658,227
Total Information Technology									41,898,335
Materials — 0.5%
Chemicals — 0.5%
Plastics Management LLC, First Lien Initial Term Loan (the greater of 3 mo. USD LIBOR or 1.000% + 5.000%)		6.000	%		8/3/27		3,085,106		3,029,883	^{(d)(h)(i)(j)(k)}
Plastics Management LLC, First Lien Primary Delayed Draw Term Loan		—			8/3/27		1,276,596		1,253,745	^(h)(i)(l)
Plastics Management LLC, Secondary Delayed Draw Term Loan		—			8/3/27		638,298		626,872	^(h)(i)(l)
Total Materials									4,910,500
Total Senior Loans (Cost — $246,998,331)									245,881,037

						Face Amount†/ Units
Asset-Backed Securities — 23.0%
AGL CLO 6 Ltd., 2020-6A ER (3 mo. USD LIBOR + 6.500%)		6.632	%		7/20/34		6,990,000		6,944,267	^(a)(d)
AIMCO CLO 10 Ltd., 2019-10A ER (3 mo. USD LIBOR + 5.950%)		6.078	%		7/22/32		8,000,000		7,861,971	^(a)(d)
Anchorage Capital CLO 3-R Ltd., 2014-3RA E (3 mo. USD LIBOR + 5.500%)		5.636	%		1/28/31		3,625,000		3,542,961	^(a)(d)

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†/ Units		Value
Asset-Backed Securities — continued
Ballyrock CLO Ltd., 2016-1A ER (3 mo. USD LIBOR + 6.950%)		7.074	%		10/15/28		6,300,000	$	6,310,704	^(a)(d)
Barings CLO Ltd., 2020-4A E (3 mo. USD LIBOR + 5.680%)		5.812	%		1/20/32		1,090,000		1,060,793	^(a)(d)
BlueMountain CLO XXIX Ltd., 2020-29A ER (3 mo. USD LIBOR + 6.860%)		6.984	%		7/25/34		7,000,000		6,939,565	^(a)(d)
BlueMountain Fuji US Clo II Ltd, 2017-2A D (3 mo. USD LIBOR + 6.150%)		6.282	%		10/20/30		5,350,000		5,266,980	^(a)(d)
CARLYLE US CLO Ltd., 2020-1A ER (3 mo. USD LIBOR + 0.000%)		0.132	%		7/20/34		5,000,000		4,848,675	^(a)(d)
Cayuga Park CLO Ltd., 2020-1A ER (3 mo. USD LIBOR + 6.000%)		6.122	%		7/17/34		1,250,000		1,226,269	^(a)(d)
College Avenue Student Loans LLC, 2021-B R		0.000	%		6/25/52		17,241		5,343,466	^(a)
Credit Suisse European Mortgage Capital Ltd., 2019-1OTF A (3 mo. USD LIBOR + 2.900%)		3.032	%		8/9/24		2,054,400		1,993,257	^(a)(d)
Credit Suisse European Mortgage Capital Ltd., 2020-1OTF A		3.114	%		8/9/24		1,128,844		1,072,881	^(a)(h)(i)
Dryden 95 CLO Ltd., 2021-95A SUB		0.000	%		8/20/34		6,870,000		6,403,287	^(a)(d)
Elmwood CLO II Ltd., 2019-2A SUB		0.000	%		4/20/34		4,600,000		3,993,208	^(a)(d)
Fortress Credit BSL XII Ltd., 2021-4A E (3 mo. USD LIBOR + 7.130%)		7.266	%		10/15/34		5,000,000		4,826,605	^(a)(d)
Goldentree Loan Management US CLO 6 Ltd., 2019-6A E (3 mo. USD LIBOR + 5.220%)		5.352	%		1/20/33		4,350,000		4,139,825	^(a)(d)
Goldentree Loan Management US CLO 8 Ltd., 2020-8A FR (3 mo. USD LIBOR + 8.050%)		8.182	%		10/20/34		7,000,000		6,560,563	^(a)(d)
Greywolf CLO V Ltd., 2015-1A DR (3 mo. USD LIBOR + 5.850%)		5.974	%		1/27/31		6,250,000		6,143,014	^(a)(d)
Greywolf CLO VI Ltd., 2018-1A D (3 mo. USD LIBOR + 5.750%)		5.875	%		4/26/31		3,800,000		3,717,017	^(a)(d)
Hayfin US XIV Ltd., 2021-14A E (3 mo. USD LIBOR + 7.180%)		7.329	%		7/20/34		7,000,000		6,722,025	^(a)(d)
LCM 29 Ltd., 29A ER (3 mo. USD LIBOR + 6.830%)		6.954	%		4/15/31		2,000,000		1,975,971	^(a)(d)
LCM 33 Ltd., 33A E (3 mo. USD LIBOR + 6.350%)		6.462	%		7/20/34		3,000,000		2,935,672	^(a)(d)

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Schedule of investments (cont’d)

December 31, 2021

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†/ Units		Value
Asset-Backed Securities — continued
Loanpal Solar Loan Ltd., 2021-1GS C		3.500	%		1/20/48		4,848,783	$	4,742,926	^(a)
Lunar Structured Aircraft Portfolio Notes, 2021-1 C		5.682	%		10/15/46		7,278,297		7,136,952	^(a)
MACH 1 Cayman Ltd., 2019-1 B		4.335	%		10/15/39		868,376		827,038	^(a)
Magnetite XXVI Ltd., 2020-26A ER (3 mo. USD LIBOR + 5.950%)		6.040	%		7/25/34		6,750,000		6,681,860	^(a)(d)
MAPS Trust, 2021-1A C		5.437	%		6/15/46		3,593,682		3,557,725	^(a)
Marathon CLO XIII Ltd., 2019-1A C (3 mo. USD LIBOR + 4.070%)		4.194	%		4/15/32		4,625,000		4,500,691	^(a)(d)
National Collegiate Student Loan Trust, 2005-3 B (1 mo. USD LIBOR + 0.500%)		0.603	%		7/27/37		5,000,000		4,150,879	^(d)
National Collegiate Class A-3L Commutation Trust, 2007-4VI O (1 mo. USD LIBOR + 0.850%)		0.952	%		3/29/38		28,567,353		7,140,067	^(a)(d)
Ocean Trails CLO VI, 2016-6A ER (3 mo. USD LIBOR + 7.450%)		7.574	%		7/15/28		2,500,000		2,504,737	^(a)(d)
Ocean Trails CLO X, 2020-10A ER (3 mo. USD LIBOR + 7.570%)		7.779	%		10/15/34		3,750,000		3,731,393	^(a)(d)
Park Avenue Institutional Advisers CLO Ltd., 2019-1A D (3 mo. USD LIBOR + 6.850%)		7.006	%		5/15/32		6,950,000		6,836,470	^(a)(d)
Rad CLO 1 Ltd., 2018-1A E (3 mo. USD LIBOR + 5.620%)		5.744	%		7/15/31		3,000,000		2,922,520	^(a)(d)
Riserva CLO Ltd., 2016-3A ERR (3 mo. USD LIBOR + 6.500%)		6.622	%		1/18/34		2,450,000		2,411,338	^(a)(d)
Riserva CLO Ltd., 2016-3A FRR (3 mo. USD LIBOR + 8.510%)		8.632	%		1/18/34		2,500,000		2,409,109	^(a)(d)
RR 18 Ltd., 2021-18A D (3 mo. USD LIBOR + 6.250%)		6.334	%		10/15/34		7,190,000		7,158,903	^(a)(d)
Saratoga Investment Corp. CLO Ltd., 2013-1A (3 mo. USD LIBOR + 10.000%)		10.130	%		4/20/33		4,000,000		3,913,800	^(a)
SMB Private Education Loan Trust, 2015-C R		0.000	%		9/18/46		7,570		3,206,357	^(a)
Sound Point CLO XXVI Ltd., 2020-1A ER (3 mo. USD LIBOR + 6.860%)		6.992	%		7/20/34		3,700,000		3,654,081	^(a)(d)
Stonepeak, 2021-1A B		3.821	%		2/28/33		4,264,985		4,235,080	^(a)
Sunnova Hellios II Issuer LLC, 2018-1A B		7.710	%		7/20/48		5,086,289		5,207,522	^(a)

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†/ Units		Value
Asset-Backed Securities — continued
Symphony CLO XVIII Ltd., 2016-18A ER (3 mo. USD LIBOR + 7.070%)		7.199	%		7/23/33		3,000,000	$	2,975,199	^(a)(d)
Symphony CLO XXI Ltd., 2019-21A ER (3 mo. USD LIBOR + 6.600%)		6.724	%		7/15/32		2,800,000		2,753,396	^(a)(d)
Symphony CLO XXVIII Ltd., 2021-28A SUB		0.000	%		10/23/50		6,045,000		5,675,348	^(a)(d)
TCI-Symphony CLO Ltd., 2016-1A ER2 (3 mo. USD LIBOR + 6.750%)		6.868	%		10/13/32		3,500,000		3,471,545	^(a)(d)
Thrust Engine Leasing, 2021-1A A		4.163	%		7/15/40		939,047		942,815	^(a)
TRTX Issuer Ltd., 2019-FL3 D (30 Day Average SOFR + 2.564%)		2.614	%		10/15/34		2,500,000		2,479,682	^(a)(d)
Venture 43 CLO Ltd., 2021-43A D (3 mo. USD LIBOR + 3.470%)		3.594	%		4/15/34		4,000,000		3,961,376	^(a)(d)
Voya CLO Ltd., 2018-2A E (3 mo. USD LIBOR + 5.250%)		5.374	%		7/15/31		6,750,000		6,331,639	^(a)(d)
Voya CLO Ltd., 2021-1A E (3 mo. USD LIBOR + 6.350%)		6.460	%		7/15/34		2,250,000		2,240,050	^(a)(d)
Wellfleet CLO Ltd., 2017-2A D (3 mo. USD LIBOR + 6.750%)		6.882	%		10/20/29		3,287,000		3,217,360	^(a)(d)
Whitebox CLO II Ltd., 2020-2A ER (3 mo. USD LIBOR + 7.100%)		7.275	%		10/24/34		2,175,000		2,153,672	^(a)(d)
Wind River CLO Ltd., 2021-4A E3 (3 mo. USD LIBOR + 8.250%)		8.466	%		1/20/35		3,000,000		2,949,699	^(a)(d)
Wind River CLO Ltd., 2021-4A F (3 mo. USD LIBOR + 6.260%)		6.476	%		1/20/35		2,450,000		2,201,274	^(a)(d)
Zais CLO 17 Ltd., 2021-17A E (3 mo. USD LIBOR + 8.250%)		8.411	%		10/20/33		6,000,000		5,529,665	^(a)(d)
Total Asset-Backed Securities (Cost — $235,873,625)									233,641,144

						Face Amount†
Sovereign Bonds — 5.0%
Argentina — 1.1%
Ciudad Autonoma De Buenos Aires, Senior Notes		7.500	%		6/1/27		5,100,000		4,568,478	^(a)

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Schedule of investments (cont’d)

December 31, 2021

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)


Security	Rate			Maturity Date		Face Amount†			Value
Argentina — continued
Ciudad Autonoma De Buenos Aires, Senior Notes		7.500	%		6/1/27		2,000,000		$	1,791,560	^(c)
Provincia de Cordoba, Senior Notes, Step bond (5.000% to 6/10/22 then 6.875%)		5.000	%		12/10/25		6,500,000			4,915,690	^(a)
Total Argentina										11,275,728
Ecuador — 0.4%
Ecuador Government International Bond, Senior Notes		0.000	%		7/31/30		5,593,000			3,174,028	^(a)
Ecuador Government International Bond, Senior Notes, Step bond (5.000% to 7/31/22 then 5.500%)		5.000	%		7/31/30		1,609,000			1,337,481	^(a)
Total Ecuador										4,511,509
Gabon — 0.2%
Gabon Government International Bond, Senior Notes		7.000	%		11/24/31		1,540,000			1,513,050	^(a)
Ghana — 0.6%
Ghana Government International Bond, Senior Notes		7.875	%		3/26/27		3,200,000			2,822,621	^(a)
Ghana Treasury Note, Bonds		18.500	%		10/3/22		19,020,000	^GHS		3,099,947
Total Ghana										5,922,568
Kenya — 0.3%
Republic of Kenya Government International Bond, Senior Notes		6.300	%		1/23/34		3,200,000			3,150,227	^(a)
Russia — 0.3%
Russian Federal Bond — OFZ		7.700	%		3/23/33		239,730,000	^RUB		3,075,740
Supranational — 1.5%
International Bank for Reconstruction & Development, Senior Notes		8.250	%		6/14/23		1,660,000,000	^KZT		3,769,553
International Finance Corp., Senior Notes		15.250	%		7/8/22		100,000,000	^UAH		3,682,580	^(h)(i)
International Finance Corp., Senior Notes		11.000	%		11/14/22		37,000,000,000	^UZS		3,389,762
International Finance Corp., Senior Notes		6.140	%		6/3/24		225,000,000	^UYU		4,907,033
Total Supranational										15,748,928
Turkey — 0.3%
Turkiye Ihracat Kredi Bankasi AS, Senior Notes		5.750	%		7/6/26		3,200,000			2,942,624	^(a)

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)

Security

Rate

Maturity
Date

Face
Amount†

Value

Ukraine — 0.3%

Ukraine Government International Bond, Senior Notes

6.876

5/21/29

3,000,000

2,665,050

^(a)

Total Sovereign Bonds (Cost — $53,217,024)

50,805,424

Convertible Preferred Stocks — 3.1%

Energy — 3.1%

Oil, Gas & Consumable Fuels — 3.1%

MPLX LP

8.462

501,254

17,794,517

^(h)(i)

Targa Resources Corp., Non Voting Shares

9.500

12,500

13,521,575

Total Convertible Preferred Stocks (Cost — $31,144,219)

31,316,092

Preferred Stocks — 2.4%

Energy — 0.7%

Oil, Gas & Consumable Fuels — 0.7%

Crestwood Equity Partners LP

9.250

750,000

7,380,000

Financials — 1.7%

Capital Markets — 1.2%

B Riley Financial Inc.

6.500

383,800

10,132,320

Prospect Capital Corp.

5.350

100,000

2,188,000

Total Capital Markets

12,320,320

Mortgage Real Estate Investment Trusts (REITs) — 0.5%

Granite Point Mortgage Trust Inc., Non Voting Shares (SOFR + 5.830%)

7.000

200,000

5,110,000

^(d)

Total Financials

17,430,320

Total Preferred Stocks (Cost — $24,503,166)

24,810,320

Maturity
Date

Face
Amount†

Convertible Bonds & Notes — 1.3%

Communication Services — 0.4%

Media — 0.4%

Liberty Interactive LLC, Senior Notes

4.000

11/15/29

5,023,605

3,792,822

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Schedule of investments (cont’d)

December 31, 2021

Western Asset Diversified Income Fund

(Percentages shown based on Fund net assets)

Security

Rate

Maturity
Date

Face
Amount†

Value

Financials — 0.9%

Mortgage Real Estate Investment Trusts (REITs) — 0.9%

Granite Point Mortgage Trust Inc., Senior Notes

5.625

12/1/22

2,000,000

2,010,000

^(a)

Granite Point Mortgage Trust Inc., Senior Notes

6.375

10/1/23

7,554,000

7,738,317

Total Financials

9,748,317

Total Convertible Bonds & Notes (Cost — $13,406,477)

13,541,139

Counterparty

Expiration
Date

Contracts

Notional
Amount†

Purchased Options — 0.0%††

OTC Purchased Options — 0.0%††

Credit default swaption to buy protection on Markit CDX.NA.HY.37 Index, Call @ $109.00
(Cost — $43,860)

BNP Paribas SA

1/19/22

10,200,000

38,353

Total Investments before Short-Term Investments (Cost — $1,350,713,200)

1,334,899,082


	Rate			Shares
Short-Term Investments — 4.3%
Western Asset Premier Institutional Government Reserves, Premium Shares (Cost — $44,173,390)		0.010	%		44,173,390		44,173,390	^(m)
Total Investments — 135.5% (Cost — $1,394,886,590)							1,379,072,472
Liabilities in Excess of Other Assets — (35.5)%							(361,331,315	)
Total Net Assets — 100.0%						$	1,017,741,157

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Western Asset Diversified Income Fund

^†	Face amount/notional amount denominated in U.S. dollars, unless otherwise noted.

^††	Represents less than 0.1%.

*	Non-income producing security.

^(a)

Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Trustees.

^(b)	Payment-in-kind security for which the issuer has the option at each interest payment date of making interest payments in cash or additional securities.

^(c)

Security is exempt from registration under Regulation S of the Securities Act of 1933. Regulation S applies to securities offerings that are made outside of the United States and do not involve direct selling efforts in the United States. This security has been deemed liquid pursuant to guidelines approved by the Board of Trustees.

^(d)

Variable rate security. Interest rate disclosed is as of the most recent information available. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions. These securities do not indicate a reference rate and spread in their description above.

^(e)	Security has no maturity date. The date shown represents the next call date.

^(f)	The coupon payment on this security is currently in default as of December 31, 2021.

^(g)

Collateralized mortgage obligations are secured by an underlying pool of mortgages or mortgage pass-through certificates that are structured to direct payments on underlying collateral to different series or classes of the obligations. The interest rate may change positively or inversely in relation to one or more interest rates, financial indices or other financial indicators and may be subject to an upper and/or lower limit.

^(h)	Security is valued in good faith in accordance with procedures approved by the Board of Trustees (Note 1).

⁽ⁱ⁾	Security is valued using significant unobservable inputs (Note 1).

^(j)	Interest rates disclosed represent the effective rates on senior loans. Ranges in interest rates are attributable to multiple contracts under the same loan.

^(k)	Senior loans may be considered restricted in that the Fund ordinarily is contractually obligated to receive approval from the agent bank and/or borrower prior to the disposition of a senior loan.

^(l)	All or a portion of this loan is unfunded as of December 31, 2021. The interest rate for fully unfunded term loans is to be determined.

^(m)

In this instance, as defined in the Investment Company Act of 1940, an “Affiliated Company” represents Fund ownership of at least 5% of the outstanding voting securities of an issuer, or a company which is under common ownership or control with the Fund. At December 31, 2021, the total market value of investments in Affiliated Companies was $44,173,390 and the cost was $44,173,390 (Note 8).

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Schedule of investments (cont’d)

December 31, 2021

Western Asset Diversified Income Fund


Abbreviation(s) used in this schedule:

CAD		— Canadian Dollar

CAS		— Connecticut Avenue Securities

CLO		— Collateralized Loan Obligation

EUR		— Euro

GBP		— British Pound

GHS		— Ghanaian Cedi

LIBOR		— London Interbank Offered Rate

OFZ		— Obligatsyi Federal’novo Zaima (Russian Federal Loan Obligation)

PIK		— Payment-In-Kind

REMIC		— Real Estate Mortgage Investment Conduit

Re-REMIC		— Resecuritization of Real Estate Mortgage Investment Conduit

RUB		— Russian Ruble

SOFR		— Secured Overnight Financing Rate

UAH		— Ukrainian Hryvnia

USD		— United States Dollar

UYU		— Uruguayan Peso

UZS		— Uzbekistani Som

Schedule of Written Options

OTC Written Options

Security

Counterparty

Expiration
Date

Strike
Price

Contracts

Notional
Amount†

Value

Credit default swaption to sell protection on Markit CDX.NA.HY.37 Index, Put (Premiums received — $58,956)

BNP Paribas SA

1/19/22

106.00

10,200,000

(8,279)

†	Notional amount denominated in U.S. dollar unless otherwise noted.

At December 31, 2021, the Fund had the following open futures contracts:


	Number of Contracts		Expiration Date		Notional Amount		Market Value		Unrealized Appreciation (Depreciation)
Contracts to Buy:
90-Day Eurodollar		1,489		12/23	$	367,378,160	$	366,331,225	$	(1,046,935	)
U.S. Treasury Ultra 10-Year Notes		54		3/22		7,771,594		7,907,625		136,031
										(910,904	)
Contracts to Sell:
U.S. Treasury 5-Year
Notes		303		3/22		36,769,429		36,655,898		113,531
U.S. Treasury 10-Year
Notes		204		3/22		26,672,539		26,615,625		56,914

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Western Asset Diversified Income Fund


	Number of Contracts		Expiration Date		Notional Amount		Market Value		Unrealized Appreciation (Depreciation)
Contracts to Sell *continued*
U.S. Treasury Long-Term Bonds		82		3/22	$	13,273,440	$	13,155,875	$	117,565
U.S. Treasury Ultra Long- Term Bonds		21		3/22		4,285,995		4,139,625		146,370
										434,380
Net unrealized depreciation on open futures contracts									$	(476,524)

At December 31, 2021, the Fund had the following open forward foreign currency contracts:

Currency
Purchased

Currency

Sold

Counterparty

Settlement
Date

Unrealized
Appreciation
(Depreciation)

USD

1,725,278

EUR

1,490,000

BNP Paribas SA

1/18/22

28,305

USD

2,500,944

EUR

2,160,000

BNP Paribas SA

1/18/22

40,903

USD

2,627,284

CAD

3,300,000

Citibank N.A.

1/18/22

18,529

USD

362,648

EUR

320,000

Citibank N.A.

1/18/22

(1,802)

USD

5,042,481

EUR

4,350,000

Citibank N.A.

1/18/22

88,231

USD

12,267,558

GBP

9,000,000

Citibank N.A.

1/18/22

86,114

RUB

22,580,000

USD

305,365

Morgan Stanley & Co. Inc.

1/18/22

(5,890)

Total

254,390


Abbreviation(s) used in this table:

CAD		— Canadian Dollar

EUR		— Euro

GBP		— British Pound

RUB		— Russian Ruble

USD		— United States Dollar

At December 31, 2021, the Fund had the following open swap contracts:


CENTRALLY CLEARED INTEREST RATE SWAPS
	Notional Amount*		Termination Date		Payments Made by the Fund^†	Payments Received by the Fund^†	Upfront Premiums Paid (Received)		Unrealized Appreciation (Depreciation)
	$	12,890,000		11/18/23	3.970%**	CPURNSA**	$	(47,529)	$	(15,978)
		12,890,000		11/18/26	CPURNSA**	3.370%**		134,250		22,543
		14,650,000		11/20/26	1.520% annually	Daily SOFR Compound annually		(25,135)		(38,138)
Total	$	40,430,000					$	61,586	$	(31,573)

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Schedule of investments (cont’d)

December 31, 2021

Western Asset Diversified Income Fund


CENTRALLY CLEARED CREDIT DEFAULT SWAPS ON CORPORATE ISSUES — SELL PROTECTION¹
Reference Entity	Notional Amount²		Termination Date		Implied Credit Spread at December 31, 2021³	Periodic Payments Received by the Fund^†	Market Value		Upfront Premiums Paid (Received)		Unrealized Appreciation
Ford Motor Co., 4.346%, due 12/8/26	$	4,320,000		6/20/26	1.402%	5.000% quarterly	$	661,347	$	560,410	$	100,937


CENTRALLY CLEARED CREDIT DEFAULT SWAPS ON CORPORATE ISSUES — BUY PROTECTION⁴
Reference Entity	Notional Amount²		Termination Date		Implied Credit Spread at December 31, 2021³	Periodic Payments Made by the Fund^†	Market Value		Upfront Premiums Paid (Received)		Unrealized Depreciation
General Motors Co., 4.875%, due 10/2/23	$	4,320,000		6/20/26	0.909%	5.000% quarterly	$	(764,661)	$	(753,219)	$	(11,442)

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.

Implied credit spreads, utilized in determining the market value of credit default swap agreements on corporate or sovereign issues 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.

†	Percentage shown is an annual percentage rate.

*	Notional amount denominated in U.S. dollars, unless otherwise noted.

** One time payment made at termination date.

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Western Asset Diversified Income Fund


Abbreviation(s) used in this table:

CPURNSA		— U.S. CPI Urban Consumers NSA Index

SOFR		— Secured Overnight Financing Rate

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Statement of assets and liabilities

December 31, 2021



Assets:
Investments in unaffiliated securities, at value (Cost — $1,350,713,200)	$1,334,899,082
Investments in affiliated securities, at value (Cost — $44,173,390)	44,173,390
Foreign currency, at value (Cost — $3,271,184)	3,216,900
Cash	619,844
Interest and dividends receivable	15,085,544
Receivable for securities sold	6,703,432
Receivable from broker — net variation margin on centrally cleared swap contracts	4,085,122
Deposits with brokers for open futures contracts and exchange-traded options	1,675,024
Deposits with brokers for centrally cleared swap contracts	586,000
Unrealized appreciation on forward foreign currency contracts	262,082
Foreign currency collateral for open futures contracts and exchange-traded options, at value (Cost — $42,842)	43,965
Principal paydown receivable	2,845
Prepaid expenses	5,500
*Total Assets*	*1,411,358,730*

Liabilities:
Loan payable (Note 5)	370,000,000
Payable for securities purchased	21,761,740
Investment management fee payable	1,293,371
Interest expense payable	358,438
Trustees’ fees payable	45,188
Payable to broker — net variation margin on open futures contracts	42,810
Written options, at value (premiums received — $58,956)	8,279
Unrealized depreciation on forward foreign currency contracts	7,692
Accrued expenses	100,055
*Total Liabilities*	*393,617,573*
Total Net Assets	$1,017,741,157

Net Assets:
Par value ($0.001 par value; 51,788,210 shares issued and outstanding; Unlimited shares authorized)	$ 51,788
Paid-in capital in excess of par value	1,035,712,966
Total distributable earnings (loss)	(18,023,597	)
Total Net Assets	$1,017,741,157

Shares Outstanding	51,788,210

Net Asset Value	$19.65

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Statement of operations

For the Period Ended December 31, 2021†



Investment Income:
Interest	$	38,372,326
Dividends from unaffiliated investments		993,822
Dividends from affiliated investments		10,106
Less: Foreign taxes withheld		(59,546)
*Total Investment Income*		*39,316,708*

Expenses:
Investment management fee (Note 2)		7,368,333
Interest expense (Note 5)		1,599,575
Commitment fees (Note 5)		227,500
Trustees’ fees		155,066
Legal fees		129,867
Audit and tax fees		78,000
Transfer agent fees		75,905
Fund accounting fees		38,885
Shareholder reports		15,000
Custody fees		3,384
Miscellaneous expenses		7,537
*Total Expenses*		*9,699,052*
Less: Fee waivers and/or expense reimbursements (Note 2)		(13,731)
*Net Expenses*		*9,685,321*
Net Investment Income		29,631,387

Realized and Unrealized Gain (Loss) on Investments, Futures Contracts, Written Options, Swap Contracts, Forward Foreign Currency Contracts and Foreign Currency Transactions (Notes 1, 3 and 4):
Net Realized Gain (Loss) From:
Investment transactions in unaffiliated securities		(2,219,271)
Futures contracts		375,535
Written options		83,252
Swap contracts		40,790
Forward foreign currency contracts		386,358
Foreign currency transactions		(30,286)
*Net Realized Loss*		*(1,363,622)*
Change in Net Unrealized Appreciation (Depreciation) From:
Investments in unaffiliated securities		(15,814,118)
Futures contracts		(476,524	)
Written options		50,677
Swap contracts		57,922
Forward foreign currency contracts		254,390
Foreign currencies		(69,226	)
*Change in Net Unrealized Appreciation (Depreciation)*		*(15,996,879*	)
Net Loss on Investments, Futures Contracts, Written Options, Swap Contracts, Forward Foreign Currency Contracts and Foreign Currency Transactions		(17,360,501	)
Increase in Net Assets From Operations		$ 12,270,886

†	For the period June 25, 2021 (commencement of operations) to December 31, 2021.

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Statement of changes in net assets


For the Period Ended December 31, 2021^†	2021

Operations:
Net investment income	$	29,631,387
Net realized loss		(1,363,622)
Change in net unrealized appreciation (depreciation)		(15,996,879)
*Increase in Net Assets From Operations*		*12,270,886*

Distributions to Shareholders From (Note 1):
Total distributable earnings		(30,294,483)
*Decrease in Net Assets From Distributions to Shareholders*		*(30,294,483)*

Fund Share Transactions:
Net proceeds from sale of shares (51,769,367 shares issued) (Note 7)		1,035,387,340
Reinvestment of distributions (13,843 shares issued)		277,414
*Increase in Net Assets From Fund Share Transactions*		*1,035,664,754*
*Increase in Net Assets*		*1,017,641,157*

Net Assets:
Beginning of period*		100,000
End of period	$	1,017,741,157

†	For the period June 25, 2021 (commencement of operations) to December 31, 2021.

*	5,000 shares issued and outstanding (5,000 shares were issued to Franklin Resources, Inc. as of April 9, 2021).

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Statement of cash flows

For the Period Ended December 31, 2021†



Increase (Decrease) in Cash:
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations	$	12,270,886
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided (used) by operating activities:
Purchases of portfolio securities		(1,578,196,587)
Sales of portfolio securities		227,368,566
Net purchases, sales and maturities of short-term investments		(44,247,632)
Payment-in-kind		(273,722)
Net amortization of premium (accretion of discount)		(1,756,486)
Increase in receivable for securities sold		(6,703,432)
Increase in interest and dividends receivable		(15,085,544)
Increase in receivable from broker — net variation margin on centrally cleared swap contracts		(4,085,122)
Increase in prepaid expenses		(5,500)
Increase in principal paydown receivable		(2,845)
Increase in payable for securities purchased		21,761,740
Increase in investment management fee payable		1,293,371
Increase in Trustees’ fees payable		45,188
Increase in interest expense payable		358,438
Increase in accrued expenses		100,055
Increase in premiums received from written options		58,956
Increase in payable to broker — net variation margin on futures contracts		42,810
Net realized loss on investments		2,219,271
Change in net unrealized appreciation (depreciation) of investments, written options and forward foreign currency contracts		15,509,051
Net Cash Used in Operating Activities*		*(1,369,328,538)*

Cash Flows from Financing Activities:
Distributions paid on common stock		(30,017,069)
Proceeds from loan facility borrowings		370,000,000
Proceeds from sale of shares		1,035,387,340
*Net Cash Provided by Financing Activities*		*1,375,370,271*
Net Increase in Cash and Restricted Cash		6,041,733
Cash and restricted cash at beginning of period		100,000
Cash and restricted cash at end of period	$	6,141,733

*Included

in operating expenses is cash of $1,462,179 paid for interest and commitment fees on borrowings.

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Statement of cash flows (cont’d)

For the Period Ended December 31, 2021†

The following table provides a reconciliation of cash (including foreign currency) and restricted cash reported within the Statement of Assets and Liabilities that sums to the total of such amounts shown on the Statement of Cash Flows.


	December 31, 2021
Cash	$	3,836,744
Restricted cash		2,304,989
Total cash and restricted cash shown in the Statement of Cash Flows	$	6,141,733

Restricted cash consists of cash that has been segregated to cover the Fund’s collateral or margin obligations under derivative contracts. It is separately reported on the Statement of Assets and Liabilities as Deposits with brokers.



Non-Cash Financing Activities:
Proceeds from reinvestment of distributions	$	277,414

†	For the period June 25, 2021 (commencement of operations) to December 31, 2021.

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Financial highlights


For a share of capital stock outstanding throughout each year ended December 31, unless otherwise noted:
	2021^1,2

Net asset value, beginning of period		$20.00

Income (loss) from operations:
Net investment income		0.58
Net realized and unrealized loss		(0.34)
*Total income from operations*		*0.24*

Less distributions from:
Net investment income		(0.59)
*Total distributions*		*(0.59)*

Net asset value, end of period		$19.65
Market price, end of period		$18.31
*Total return, based on NAV^3,4*		*1.19*	%
*Total return, based on Market Price⁵*		*(5.62)*	%

Net assets, end of period (millions)		$1,018

Ratios to average net assets:
Gross expenses⁶		1.82	%
Net expenses^6,7,8		1.82
Net investment income⁶		5.57

Portfolio turnover rate		19	%

Supplemental data:
Loan Outstanding, End of Period (000s)		$370,000
Asset Coverage Ratio for Loan Outstanding⁹		375	%
Asset Coverage, per $1,000 Principal Amount of Loan Outstanding⁹		$3,751
Weighted Average Loan (000s)		$314,938
Weighted Average Interest Rate on Loan		1.13	%

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Financial highlights (cont’d)

¹	Per share amounts have been calculated using the average shares method.

²	For the period June 25, 2021 (commencement of operations) to December 31, 2021.

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.

⁴	The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

⁵	The total return calculation assumes that distributions are reinvested in accordance with the Fund’s dividend reinvestment plan. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

⁶	Annualized.

⁷	Reflects fee waivers and/or expense reimbursements.

⁸	The manager has agreed to waive the Fund’s management fee to an extent sufficient to offset the net management fee payable in connection with any investment in an affiliated money market fund.

⁹	Represents value of net assets plus the loan outstanding at the end of the period divided by the loan outstanding at the end of the period.

See Notes to Financial Statements.

Western Asset Diversified Income Fund 2021 Annual Report

Notes to financial statements

1. Organization and significant accounting policies

Western Asset Diversified Income Fund (the “Fund”) was organized in Maryland on July 27, 2020 and is registered as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Board of Trustees has authorized the issuance of an unlimited amount of common shares of beneficial interest, $0.001 par value per share (the “Common Shares”). The Fund’s primary investment objective is to seek high current income. As a secondary investment objective, the Fund will seek capital appreciation. The Fund seeks to achieve its investment objectives by investing, under normal market conditions, across fixed income sectors and securities in seeking to deliver a well-diversified portfolio. The Fund expects to dissolve on or about June 24, 2033 (the “Dissolution Date”); provided that the Board of Trustees may, without shareholder approval, extend the Dissolution Date for up to two years. As of a date within the 6-18 months preceding the Dissolution Date, the Board of Trustees may cause the Fund to conduct a tender offer to all shareholders to purchase 100% of the then outstanding Common Shares of the Fund at a price equal to the NAV per Common Share on the expiration date of the tender offer (the “Eligible Tender Offer”). The Board of Trustees has established that the Fund must have at least $200 million of aggregate net assets immediately following the completion of an Eligible Tender Offer to ensure the continued viability of the Fund (the “Dissolution Threshold”). In an Eligible Tender Offer, the Fund will offer to purchase all Common Shares held by each Common Shareholder; provided that if the payment for properly tendered Common Shares would result in the Fund having aggregate net assets below the Dissolution Threshold, the Eligible Tender Offer will be canceled, no Common Shares will be repurchased and the Fund will dissolve as scheduled. If an Eligible Tender Offer is conducted and the payment for properly tendered Common Shares would result in the Fund having aggregate net assets greater than or equal to the Dissolution Threshold, all Common Shares properly tendered and not withdrawn will be purchased by the Fund pursuant to the terms of the Eligible Tender Offer. Following the completion of an Eligible Tender Offer, the Board may eliminate the Dissolution Date without shareholder approval and provide for the Fund’s perpetual existence. Upon its dissolution, it is anticipated that the Fund will have distributed substantially all of its net assets to shareholders, although securities for which no market exists or securities trading at depressed prices, if any, may be placed in a liquidating trust.

The following are significant accounting policies consistently followed by the Fund 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

Western Asset Diversified Income Fund 2021 Annual Report

Notes to financial statements (cont’d)

market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services typically 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. Investments in open-end funds are valued at the closing net asset value per share of each fund on the day of valuation. 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. When the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). 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 Trustees.

The Board of Trustees is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Global Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Trustees, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of Trustees. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence 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.

Western Asset Diversified Income Fund 2021 Annual Report

For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Trustees, 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 Trustees 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:

•

Level 1 — quoted prices in active markets for identical investments

•

Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

•

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.

Western Asset Diversified Income Fund 2021 Annual Report

Notes to financial statements (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		—	$	485,728,963		—	$	485,728,963
Collateralized Mortgage Obligations		—		240,635,545	$	8,501,065		249,136,610
Senior Loans:
Communication Services		—		7,468,778		—		7,468,778
Consumer Discretionary		—		65,017,626		3,657,228		68,674,854
Consumer Staples		—		—		4,725,000		4,725,000
Financials		—		15,421,391		8,589,053		24,010,444
Health Care		—		28,530,365		6,443,125		34,973,490
Industrials		—		50,314,001		8,905,635		59,219,636
Information Technology		—		34,172,335		7,726,000		41,898,335
Materials		—		—		4,910,500		4,910,500
Asset-Backed Securities		—		232,568,263		1,072,881		233,641,144
Sovereign Bonds		—		47,122,844		3,682,580		50,805,424
Convertible Preferred Stocks:
Energy		—		13,521,575		17,794,517		31,316,092
Preferred Stocks	$	24,810,320		—		—		24,810,320
Convertible Bonds & Notes		—		13,541,139		—		13,541,139
Purchased Options		—		38,353		—		38,353
Total Long-Term Investments		24,810,320		1,234,081,178		76,007,584		1,334,899,082
Short-Term Investments†		44,173,390		—		—		44,173,390
Total Investments	$	68,983,710	$	1,234,081,178	$	76,007,584	$	1,379,072,472
Other Financial Instruments:
Futures Contracts††	$	570,411		—		—	$	570,411
Forward Foreign Currency Contracts††		—	$	262,082		—		262,082
Centrally Cleared Interest Rate Swaps††		—		22,543		—		22,543
Centrally Cleared Credit Default Swaps on Corporate Issues — Sell Protection††		—		100,937		—		100,937
Total Other Financial Instruments	$	570,411	$	385,562		—	$	955,973
Total	$	69,554,121	$	1,234,466,740	$	76,007,584	$	1,380,028,445

Western Asset Diversified Income Fund 2021 Annual Report


LIABILITIES
Description	Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Other Financial Instruments:
Written Options		—	$	8,279		—	$	8,279
Futures Contracts††	$	1,046,935		—		—		1,046,935
Forward Foreign Currency Contracts††		—		7,692		—		7,692
Centrally Cleared Interest Rate Swaps††		—		54,116		—		54,116
Centrally Cleared Credit Default Swaps on Corporate Issues — Buy Protection††		—		11,442		—		11,442
Total	$	1,046,935	$	81,529		—	$	1,128,464

†	See Schedule of Investments for additional detailed categorizations.

††	Reflects the unrealized appreciation (depreciation) of the instruments.

The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value:


Investments in Securities	Balance as of June 25, 2021 (commencement of operations)		Accrued premiums/ discounts		Realized gain (loss)		Change in unrealized appreciation (depreciation)¹		Purchases
Collateralized Mortgage Obligations		—		$ 1,296		—		$ 11,239		$8,488,530
Senior Loans:
Consumer Discretionary		—		(2,043)	$	(125)		(43,667)		3,718,563
Consumer Staples		—		—		—		75,000		4,650,000
Financials		—		1,231		10,762		8,495		10,012,500
Health Care		—		459		—		(28,584)		6,471,250
Industrials		—		—		—		(49,252)		9,000,000
Information
Technology		—		2,031		8,787		70,432		9,644,750
Materials		—		3,570		—		(32,432)		4,939,362
Asset-Backed Securities		—		10,880		361		(27,283)		1,100,682
Sovereign Bonds:
Supranational		—		(99,479)		—		(96,323)		3,878,382

Western Asset Diversified Income Fund 2021 Annual Report

Notes to financial statements (cont’d)


Investments in Securities	Balance as of June 25, 2021 (commencement of operations)		Accrued premiums/ discounts		Realized gain (loss)		Change in unrealized appreciation (depreciation)¹		Purchases
Convertible Preferred Stocks:
Energy		—		—		—	$	119,048	$	17,675,469
Total		—	$	(82,055)	$	19,785	$	6,673	$	79,579,488


Investments in Securities (cont’d)	Sales		Transfers into Level 3		Transfers out of Level 3		Balance as of December 31, 2021		Net change in unrealized appreciation (depreciation) for investments in securities still held at December 31, 2021¹
Collateralized Mortgage Obligations		—		—		—		$8,501,065		$11,239
Senior Loans:
Consumer Discretionary	$	(15,500)		—		—		3,657,228		(43,667)
Consumer Staples		—		—		—		4,725,000		75,000
Financials		(1,443,935)		—		—		8,589,053		8,495
Health Care		—		—		—		6,443,125		(28,584)
Industrials		(45,113)		—		—		8,905,635		(49,252)
Information
Technology		(2,000,000)		—		—		7,726,000		70,432
Materials		—		—		—		4,910,500		(32,432)
Asset-Backed Securities		(11,759)		—		—		1,072,881		(27,283)
Sovereign Bonds:
Supranational		—		—		—		3,682,580		(96,323)
Convertible Preferred Stocks:
Energy		—		—		—		17,794,517		119,048
Total	$	(3,516,307)		—		—	$	76,007,584	$	6,673

This amount is included in the change in net unrealized appreciation (depreciation) in the accompanying Statement of Operations. Change in unrealized appreciation (depreciation) includes net unrealized appreciation (depreciation) resulting from changes in investment values during the reporting period and the reversal of previously recorded unrealized appreciation (depreciation) when gains or losses are realized.

The following table summarizes the valuation techniques used and unobservable inputs approved by the Valuation Committee to determine the fair value of certain material Level 3 investments. The table does not include Level 3 investments with values derived utilizing

Western Asset Diversified Income Fund 2021 Annual Report

prices from prior transactions or third party pricing information without adjustment (e.g., broker quotes, pricing services, net asset values).

Fair Value
at 12/31/21
(000’s)

Valuation
Technique(s)

Unobservable Input(s)

Value,
Range/Weighted
Average

Impact to Valuation
from an Increase in
Input*

Collateralized Mortgage Obligations

8,501.1

Discounted

Cash Flow
Method

Yield

7.79

Decrease

Senior Loans

8,905.6

Discounted
Cash Flow
Method

Discount Rate

7.08

Decrease

This column represents the directional change in the fair value of the Level 3 investments that would result in an increase from the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant increases and decreases in these unobservable inputs in isolation could result in significantly higher or lower fair value measurements.

(b) Purchased options. When the Fund purchases an option, 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 to reflect the current market value of the option purchased. If the purchased option expires, the Fund realizes a loss equal to the amount of premium paid. When an instrument is purchased or sold through the exercise of an option, the related premium paid is added to the basis of the instrument acquired or deducted from the proceeds of the instrument sold. The risk associated with purchasing put and call options is limited to the premium paid.

(c) 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

Western Asset Diversified Income Fund 2021 Annual Report

Notes to financial statements (cont’d)

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.

(d) 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 securities 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. The daily changes in contract value are recorded as unrealized appreciation or depreciation 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.

(e) Forward foreign currency contracts. The Fund enters into a forward foreign currency contract to hedge exposure of bond positions or in an attempt to increase the Fund’s return. A forward foreign currency contract is an agreement between two parties to buy and sell a currency at a set price with delivery and settlement at a future date. The contract is marked-to-market daily and the change in value is recorded by the Fund as an unrealized gain or loss. When a forward foreign currency contract is closed, through either delivery or offset by entering into another forward foreign currency contract, the Fund recognizes a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it is closed.

Forward foreign currency contracts involve elements of market risk in excess of the amounts reflected on the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rate underlying the forward foreign currency contract. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.

(f) 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 and may be entered into as a bilateral contract (“OTC Swaps”) or centrally cleared (“Centrally Cleared Swaps”). Unlike Centrally Cleared Swaps, the Fund has credit exposure to the counterparties of OTC Swaps.

In a Centrally Cleared Swap, immediately following execution of the swap, the swap agreement is submitted to a clearinghouse or central counterparty (the “CCP”) and the CCP

Western Asset Diversified Income Fund 2021 Annual Report

becomes the ultimate counterparty of the swap agreement. The Fund is required to interface with the CCP through a broker, acting in an agency capacity. All payments are settled with the CCP through the broker. Upon entering into a Centrally Cleared Swap, the Fund is required to deposit initial margin with the broker in the form of cash or securities.

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 net 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 December 31, 2021, the total notional value of all credit default swaps to sell protection was $4,320,000. 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 period ended December 31, 2021, 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

Western Asset Diversified Income Fund 2021 Annual Report

Notes to financial statements (cont’d)

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 CDS 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 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 CDS agreements on corporate or sovereign issues are disclosed in the Schedule of Investments 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 CDS 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. CDS 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

Western Asset Diversified Income Fund 2021 Annual Report

and the change, if any, is recorded as an unrealized appreciation or depreciation 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.

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 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.

(g) Swaptions. The Fund may purchase or write swaption contracts to manage exposure to fluctuations in interest rates or to enhance yield. The Fund may also purchase and write swaption contracts to manage exposure to an underlying instrument. 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.

(h) 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

Western Asset Diversified Income Fund 2021 Annual Report

Notes to financial statements (cont’d)

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.

(i) Unfunded loan commitments. The Fund may enter into certain credit agreements where all or a portion of the total amount committed may be unfunded. The Fund is obligated to fund these commitments at the borrower’s discretion. The commitments are disclosed in the accompanying Schedule of Investments. At December 31, 2021, the Fund had sufficient cash and/or securities to cover these commitments.

(j) Foreign currency translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.

The Fund does not isolate that portion of the results of operations resulting from fluctuations in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.

Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the values of assets and liabilities, other than investments in securities, on the date of valuation, resulting from changes in exchange rates.

Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.

(k) Credit and market risk. The Fund invests in high-yield instruments that are subject to certain credit and market risks. The yields of high-yield obligations reflect, among other things, perceived credit and market risks. The Fund’s investments in securities rated below investment grade typically involve risks not associated with higher rated securities including, among others, greater risk related to timely and ultimate payment of interest and principal, greater market price volatility and less liquid secondary market trading.

Investments in securities that are collateralized by 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

Western Asset Diversified Income Fund 2021 Annual Report

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.

(l) Foreign investment risks. The Fund’s investments in foreign securities may involve risks not present in domestic investments. Since securities may be denominated in foreign currencies, may require settlement in foreign currencies or may pay interest or dividends in foreign currencies, changes in the relationship of these foreign currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Fund. Foreign investments may also subject the Fund to foreign government exchange restrictions, expropriation, taxation or other political, social or economic developments, all of which affect the market and/or credit risk of the investments.

(m) Counterparty risk and credit-risk-related contingent features of derivative instruments. The Fund may invest in certain securities or engage in other transactions 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 subadviser 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 subadviser. In addition, declines in the values of underlying collateral received may expose the Fund to increased risk of loss.

With exchange traded and centrally cleared derivatives, there is less counterparty risk to the Fund since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; therefore, the credit risk is limited to failure of the clearinghouse. While offset rights may exist under applicable law, the Fund does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default of the clearing broker or clearinghouse.

The Fund has entered into master agreements, such as an International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”) or similar agreement, with certain of its derivative counterparties that govern over-the-counter (“OTC”) derivatives and provide for general obligations, representations, agreements, collateral posting terms, netting provisions in the event 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 net asset value per share 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.

Western Asset Diversified Income Fund 2021 Annual Report

Notes to financial statements (cont’d)

Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. However, absent an event of default by the counterparty or a termination of the agreement, the terms of the ISDA 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.

Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearinghouse for exchange traded derivatives while collateral terms are contract specific for OTC 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.

As of December 31, 2021, the Fund held OTC written options and forward foreign currency contracts with credit related contingent features which had a liability position of $15,971. 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.

(n) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income (including interest income from payment-in-kind securities), adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Paydown gains and losses on mortgage- and asset-backed securities are recorded as adjustments to interest income. Dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by use of the specific 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, if any, are declared and paid on a monthly basis. 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) 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.

(q) 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.

Western Asset Diversified Income Fund 2021 Annual Report

Under the applicable foreign tax laws, a withholding tax may be imposed on interest, dividends and capital gains at various rates. Realized gains upon disposition of securities issued in or by certain foreign countries are subject to capital gains tax imposed by those countries.

(r) 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. During the current period, the Fund had no reclassifications.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager. Western Asset Management Company, LLC (“Western Asset”), Western Asset Management Company Pte. Ltd. (“Western Asset Singapore”), Western Asset Management Company Ltd (“Western Asset Japan”) and Western Asset Management Company Limited (“Western Asset London”) are the Fund’s sub-subadvisers. LMPFA, Western Asset, Western Asset Singapore, Western Asset Japan and Western Asset London are indirect, wholly-owned subsidiaries of Franklin Resources, Inc. (“Franklin Resources”).

LMPFA provides administrative and certain oversight services to the Fund. The Fund pays LMPFA an investment management fee, calculated daily and paid monthly, at an annual rate of 1.10% of the Fund’s average daily managed assets, which are the net assets of the Fund plus the principal amount of any borrowings or preferred shares that may be outstanding, reverse repurchase agreements, dollar rolls or similar transactions.

LMPFA delegates to Western Asset the day-to-day portfolio management of the Fund. Western Asset Singapore, Western Asset Japan and Western Asset London provide certain subadvisory services to the Fund relating to currency transactions and investments in non-U.S. dollar denominated securities and related foreign currency instruments. For its services, LMPFA pays Western Asset a fee monthly, at an annual rate equal to 70% of the net management fee it receives from the Fund. In turn, Western Asset pays Western Asset Singapore, Western Asset Japan and Western Asset London a monthly subadvisory fee in an amount equal to 100% of the management fee paid to Western Asset on the assets that Western Asset allocates to each such non-U.S. subadviser to manage.

During periods in which the Fund utilizes financial leverage, the fees paid to LMPFA will be higher than if the Fund did not utilize leverage because the fees are calculated as a percentage of the Fund’s assets, including those investments purchased with leverage.

The manager has agreed to waive the Fund’s management fee to an extent sufficient to offset the net management fee payable in connection with any investment in an affiliated money market fund.

During the period ended December 31, 2021, fees waived and/or expenses reimbursed amounted to $13,731, all of which was an affiliated money market fund waiver.

Western Asset Diversified Income Fund 2021 Annual Report

Notes to financial statements (cont’d)

All officers and one Trustee of the Fund are employees of Franklin Resources or its affiliates and do not receive compensation from the Fund.

3. Investments

During the period ended December 31, 2021, 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	$	1,479,675,229	$	98,521,358
Sales		221,699,847		5,668,719

At December 31, 2021, the aggregate cost of investments and the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:


	Cost/Premiums Paid (Received)		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Net Unrealized Appreciation (Depreciation)
Securities	$	1,395,698,783	$	9,618,972	$	(26,245,283)	$	(16,626,311)
Written options		(58,956)		50,677		—		50,677
Futures contracts		—		570,411		(1,046,935)		(476,524)
Forward foreign currency contracts		—		262,082		(7,692)		254,390
Swap contracts		(131,223)		123,480		(65,558)		57,922

4. Derivative instruments 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 December 31, 2021.


ASSET DERIVATIVES¹
	Interest Rate Risk		Foreign Exchange Risk		Credit Risk		Total
Purchased options²		—		—	$	38,353	$	38,353
Futures contracts³	$	570,411		—		—		570,411
Forward foreign currency contracts		—	$	262,082		—		262,082
Centrally cleared swap contracts⁴		22,543		—		100,937		123,480
Total	$	592,954	$	262,082	$	139,290	$	994,326

Western Asset Diversified Income Fund 2021 Annual Report


LIABILITY DERIVATIVES¹
	Interest Rate Risk		Foreign Exchange Risk		Credit Risk		Total
Written options		—		—	$	8,279	$	8,279
Futures contracts³	$	1,046,935		—		—		1,046,935
Forward foreign currency contracts		—	$	7,692		—		7,692
Centrally cleared swap contracts⁴		54,116		—		11,442		65,558
Total	$	1,101,051	$	7,692	$	19,721	$	1,128,464

¹	Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation and for liability derivatives is payables/net unrealized depreciation.

²	Market value of purchased options is reported in Investments at value in the Statement of Assets and Liabilities.

³	Includes cumulative unrealized appreciation (depreciation) of futures contracts as reported in the Schedule of Investments. Only net variation margin is reported within the receivables and/or payables on the Statement of Assets and Liabilities.

⁴	Includes cumulative unrealized appreciation (depreciation) of centrally cleared swap contracts as reported in the Schedule of Investments. Only net variation margin is reported within the receivables and/or payables on 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 period ended December 31, 2021. 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.


AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED
	Interest Rate Risk		Foreign Exchange Risk		Total
Purchased options¹	$	(30,382)		—	$	(30,382)
Futures contracts		375,535		—		375,535
Written options		83,252		—		83,252
Swap contracts		40,790		—		40,790
Forward foreign currency contracts		—	$	386,358		386,358
Total	$	469,195	$	386,358	$	855,553

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		Foreign Exchange Risk		Credit Risk		Total
Purchased options¹		—		—	$	(5,507)	$	(5,507)
Futures contracts	$	(476,524)		—		—		(476,524)
Written options		—		—		50,677		50,677
Swap contracts		(31,573)		—		89,495		57,922
Forward foreign currency contracts		—	$	254,390		—		254,390
Total	$	(508,097)	$	254,390	$	134,665	$	(119,042)

Western Asset Diversified Income Fund 2021 Annual Report

Notes to financial statements (cont’d)

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 period ended December 31, 2021, the volume of derivative activity for the Fund was as follows:


	Average Market Value
Purchased options	$	8,612
Written options		67,469
Futures contracts (to buy)		214,862,930
Futures contracts (to sell)		27,277,148
Forward foreign currency contracts (to buy)		218,434
Forward foreign currency contracts (to sell)		20,159,090

	Average Notional Balance
Interest rate swap contracts	$	16,765,889
Credit default swap contracts (buy protection)		3,702,857
Credit default swap contracts (sell protection)		3,702,857

The following table presents the Fund’s OTC derivative assets and liabilities by counterparty net of amounts available for offset under an ISDA Master Agreement and net of the related collateral pledged (received) by the Fund as of December 31, 2021.


Counterparty	Gross Assets Subject to Master Agreements¹		Gross Liabilities Subject to Master Agreements¹		Net Assets (Liabilities) Subject to Master Agreements		Collateral Pledged (Received)		Net Amount²
BNP Paribas SA	$	107,561	$	(8,279)	$	99,282		—	$	99,282
Citibank N.A.		192,874		(1,802)		191,072		—		191,072
Morgan Stanley & Co. Inc.		—		(5,890)		(5,890)		—		(5,890)
Total	$	300,435	$	(15,971)	$	284,464		—	$	284,464

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	Represents the net amount receivable (payable) from (to) the counterparty in the event of default.

5. Loan

The Fund has a revolving credit agreement with Societe Generale (“Credit Agreement”), which allows the Fund to borrow up to an aggregate amount of $400,000,000 ($340,000,000 prior to August 30, 2021). The Credit Agreement renews daily for a 150-day term unless notice to the contrary is given to the Fund and it has a scheduled maturity date of June 30, 2023. The Fund pays a commitment fee on the unutilized portion of the loan commitment amount at an annual rate of 0.50%, except that the commitment fee is 0.25% in the event that the aggregate outstanding principal balance of the loan, plus the outstanding aggregate purchase price under all reverse repurchase agreements between the Fund and Societe Generale, is greater than 80% of the loan commitment amount. The interest on the

Western Asset Diversified Income Fund 2021 Annual Report

loan is calculated at a variable rate based on a benchmark (currently LIBOR, but subject to transition to adjusted SOFR, or an alternative benchmark, upon the occurrence of certain benchmark transition events including the cessation of publication of LIBOR) plus any applicable margin. Securities held by the Fund are subject to a lien, granted to Societe Generale, to the extent of the borrowing outstanding and any additional expenses. The Fund’s Credit Agreement contains customary covenants that, among other things, may limit the Fund’s ability to pay distributions in certain circumstances, incur additional debt, change its fundamental investment policies and engage in certain transactions, including mergers and consolidations, and require asset coverage ratios in addition to those required by the 1940 Act. In addition, the Credit Agreement may be subject to early termination under certain conditions and may contain other provisions that could limit the Fund’s ability to utilize borrowing under the agreement. Interest expense related to the loan for the period ended December 31, 2021 was $1,594,375. For the period ended December 31, 2021, the Fund incurred commitment fees in the amount of $227,500. For the period ended December 31, 2021, based on the number of days during the reporting period that the Fund had a loan balance outstanding, the average daily loan balance was $314,938,272 and the weighted average interest rate was 1.13%. At December 31, 2021, the Fund had $370,000,000 of borrowings outstanding.

6. Distributions subsequent to December 31, 2021

The following distributions have been declared by the Fund’s Board of Trustees and are payable subsequent to the period end of this report:


Record Date	Payable Date		Amount
1/24/2022		2/1/2022	$	0.1170
2/18/2022		3/1/2022	$	0.1170
3/24/2022		4/1/2022	$	0.1170
4/22/2022		5/2/2022	$	0.1170
5/23/2022		6/1/2022	$	0.1170

7. Stock repurchase program

On July 29, 2021, the Fund announced that the Fund’s Board of Trustees (the “Board”) had authorized the Fund to repurchase in the open market up to approximately 10% of the Fund’s outstanding common stock when the Fund’s shares are trading at a discount to net asset value. The Board has directed management of the Fund to repurchase shares of common stock at such times and in such amounts as management reasonably believes may enhance stockholder value. The Fund is under no obligation to purchase shares at any specific discount levels or in any specific amounts. During the period ended December 31, 2021, the Fund did not repurchase any shares.

8. Transactions with affiliated company

As defined by the 1940 Act, an affiliated company is one in which the Fund owns 5% or more of the outstanding voting securities, or a company which is under common ownership or control with the Fund. The following company was considered an affiliated company for

Western Asset Diversified Income Fund 2021 Annual Report

Notes to financial statements (cont’d)

all or some portion of the period ended December 31, 2021. The following transactions were effected in such company for the period ended December 31, 2021.


	Affiliate Value at June 25, 2021 (commencement		Purchased				Sold
	of operations)		Cost		Shares		Cost		Shares
Western Asset Premier Institutional Government Reserves, Premium Shares		—	$	1,377,527,946		1,377,527,946	$	1,333,354,556		1,333,354,556


(cont’d)	Realized Gain (Loss)		Dividend Income		Net Increase (Decrease) in Unrealized Appreciation (Depreciation)		Affiliate Value at December 31, 2021
Western Asset Premier Institutional Government Reserves, Premium Shares		—	$	10,106		—	$	44,173,390

9. Income tax information and distributions to shareholders

The tax character of distributions paid during the tax period ended December 31, 2021, was as follows:


	2021
Distributions paid from:
Ordinary income	$	30,294,483

As of December 31, 2021, the components of distributable earnings (loss) on a tax basis were as follows:


Undistributed ordinary income — net	$	1,138,901
Deferred capital losses*		(2,562,601)
Other book/tax temporary differences^(a)		209,175
Unrealized appreciation (depreciation)^(b)		(16,809,072)
Total distributable earnings (loss) — net	$	(18,023,597)

*	These capital losses have been deferred in the current year as either short-term or long-term losses. The losses will be deemed to occur on the first day of the next taxable year in the same character as they were originally deferred and will be available to offset future taxable capital gains.

(a)	Other book/tax temporary differences are attributable to the realization for tax purposes of unrealized gains (losses) on certain futures and foreign currency contracts and book/tax differences in the timing of the deductibility of various expenses.

(b)

The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable to the difference between book and tax amortization methods for premiums on fixed income securities, the difference between the book and tax cost basis of partnership investments and other book/tax basis adjustments.

Western Asset Diversified Income Fund 2021 Annual Report

10. Recent accounting pronouncement

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In January 2021, the FASB issued ASU No. 2021-01, with further amendments to Topic 848. The amendments in the ASUs provide optional temporary accounting recognition and financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of the LIBOR and other interbank-offered based reference rates as of the end of 2021 and 2023. The ASUs are effective for certain reference rate-related contract modifications that occur during the period March 12, 2020 through December 31, 2022. Management has reviewed the requirements and believes the adoption of these ASUs will not have a material impact on the financial statements.

11. Other matters

The outbreak of the respiratory illness COVID-19 (commonly referred to as “coronavirus”) has continued to rapidly spread around the world, causing considerable uncertainty for the global economy and financial markets. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, are not known. The COVID-19 pandemic could adversely affect the value and liquidity of the Fund’s investments and negatively impact the Fund’s performance. In addition, the outbreak of COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services provided to the Fund by its service providers.

* * *

The Fund’s investments, payment obligations, and financing terms may be based on floating rates, such as the London Interbank Offered Rate, or “LIBOR,” which is the offered rate for short-term Eurodollar deposits between major international banks. On March 5, 2021, the ICE Benchmark Administration, the administrator of LIBOR, stated that it will cease the publication of the overnight and one-, three-, six- and twelve-month USD LIBOR settings immediately following the LIBOR publication on Friday, June 30, 2023. All other LIBOR settings, including the one-week and two-month USD LIBOR settings, have ceased publication as of January 1, 2022. There remains uncertainty regarding the nature of any replacement rate and the impact of the transition from LIBOR on the Fund’s transactions and the financial markets generally. As such, the potential effect of a transition away from LIBOR on the Fund or the Fund’s investments cannot yet be determined.

Western Asset Diversified Income Fund 2021 Annual Report

Report of independent registered public accounting firm

To the Board of Trustees and Shareholders of Western Asset Diversified Income Fund

Opinion on the Financial Statements

We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Western Asset Diversified Income Fund (the “Fund”) as of December 31, 2021, and the related statements of operations, changes in net assets, and cash flows, including the related notes, and the financial highlights for the period June 25, 2021 (commencement of operations) through December 31, 2021 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2021, and the results of its operations, changes in its net assets, its cash flows and the financial highlights for the period June 25, 2021 (commencement of operations) through December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2021 by correspondence with the custodian, transfer agent, agent banks and brokers; when replies were not received, we performed other auditing procedures. We believe that our audit provides a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP

Baltimore, Maryland

February 23, 2022

We have served as the auditor of one or more investment companies in the Franklin Templeton Group of Funds since 1948.

Western Asset Diversified Income Fund 2021 Annual Report

Additional information (unaudited)

Information about Trustees and Officers

The business and affairs of Western Asset Diversified Income Fund (the “Fund”) are conducted by management under the supervision and subject to the direction of its Board of Trustees. The business address of each Trustee is c/o Jane Trust, Legg Mason, 100 International Drive, 11th Floor, Baltimore, Maryland 21202. Information pertaining to the Trustees and officers of the Fund is set forth below.

The Fund’s annual proxy statement includes additional information about Trustees and is available, without charge, upon request by calling the Fund at 1-888-777-0102.


Independent Trustees^†

Robert D. Agdern*

Year of birth		1950
Position(s) held with Fund¹		Trustee and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, and Compliance Liaison, Class I
Term of office¹and length of time served		Since 2021
Principal occupation(s) during the past five years		Member of the Advisory Committee of the Dispute Resolution Research Center at the Kellogg Graduate School of Business, Northwestern University (2002 to 2016); formerly, Deputy General Counsel responsible for western hemisphere matters for BP PLC (1999 to 2001); Associate General Counsel at Amoco Corporation responsible for corporate, chemical, and refining and marketing matters and special assignments (1993 to 1998) (Amoco merged with British Petroleum in 1998 forming BP PLC)
Number of portfolios in fund complex overseen by Trustee (including the Fund)		20
Other board memberships held by Trustee during the past five years		None

Carol L. Colman

Year of birth		1946
Position(s) held with Fund¹		Trustee and Member of Nominating, Audit and Compensation Committees, and Chair of Pricing and Valuation Committee, Class I
Term of office¹and length of time served		Since 2021
Principal occupation(s) during the past five years		President, Colman Consulting Company (consulting)
Number of portfolios in fund complex overseen by Trustee (including the Fund)		20
Other board memberships held by Trustee during the past five years		None

Western Asset Diversified Income Fund

Additional information (unaudited) (cont’d)

Information about Trustees and Officers


Independent Trustees^†(cont’d)

Daniel P. Cronin

Year of birth		1946
Position(s) held with Fund¹		Trustee and Member of Audit, Compensation and Pricing and Valuation Committees, and Chair of Nominating Committee, Class I
Term of office¹and length of time served		Since 2021
Principal occupation(s) during the past five years		Retired; formerly, Associate General Counsel, Pfizer Inc. (prior to and including 2004)
Number of portfolios in fund complex overseen by Trustee (including the Fund)		20
Other board memberships held by Trustee during the past five years		None

Paolo M. Cucchi

Year of birth		1941
Position(s) held with Fund¹		Trustee and Member of Nominating, Audit, and Pricing and Valuation Committees, and Chair of Compensation Committee, Class III
Term of office¹and length of time served		Since 2021
Principal occupation(s) during the past five years		Emeritus Professor of French and Italian (since 2014) and formerly, Vice President and Dean of The College of Liberal Arts (1984 to 2009) and Professor of French and Italian (2009 to 2014) at Drew University
Number of portfolios in fund complex overseen by Trustee (including the Fund)		20
Other board memberships held by Trustee during the past five years		None

William R. Hutchinson

Year of birth		1942
Position(s) held with Fund¹		Lead Independent Trustee and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, Class II
Term of office¹and length of time served		Since 2021
Principal occupation(s) during the past five years		President, W.R. Hutchinson & Associates Inc. (consulting) (since 2001)
Number of portfolios in fund complex overseen by Trustee (including the Fund)		20
Other board memberships held by Trustee during the past five years		Director (1994 to 2021) and Non-Executive Chairman of the Board (December 2009 to April 2020), Associated Banc-Corp. (financial services company)

Western Asset Diversified Income Fund


Independent Trustees^†(cont’d)

Eileen A. Kamerick

Year of birth		1958
Position(s) held with Fund¹		Trustee and Member of Nominating, Compensation and Pricing and Valuation Committees, and Chair of Audit Committee, Class II
Term of office¹and length of time served		Since 2021
Principal occupation(s) during the past five years		Chief Executive Officer, The Governance Partners, LLC (consulting firm) (since 2015); National Association of Corporate Directors Board Leadership Fellow (since 2016, with Directorship Certification since 2019) and financial expert; Adjunct Professor, Georgetown University Law Center (since 2021); Adjunct Professor, The University of Chicago Law School (since 2018); Adjunct Professor, Washington University in St. Louis and University of Iowa law schools (since 2007); formerly, Chief Financial Officer, Press Ganey Associates (health care informatics company) (2012 to 2014); Managing Director and Chief Financial Officer, Houlihan Lokey (international investment bank) and President, Houlihan Lokey Foundation (2010 to 2012)
Number of portfolios in fund complex overseen by Trustee (including the Fund)		20
Other board memberships held by Trustee during the past five years		Director of ACV Auctions Inc. (since 2021); Trustee of AIG Funds and Anchor Series Trust (2018 to 2021); Director of Hochschild Mining plc (precious metals company) (since 2016); Director of Associated Banc-Corp (financial services company) (since 2007)

Nisha Kumar

Year of birth		1970
Position(s) held with Fund¹		Trustee and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, and Coordinator of Alternative Investments, Class III
Term of office¹and length of time served		Since 2021
Principal occupation(s) during the past five years		Managing Director and the Chief Financial Officer and Chief Compliance Officer of Greenbriar Equity Group, LP (since 2011); formerly, Chief Financial Officer and Chief Administrative Officer of Rent the Runway, Inc. (2011); Executive Vice President and Chief Financial Officer of AOL LLC, a subsidiary of Time Warner Inc. (2007 to 2009), Member of the Council of Foreign Relations
Number of portfolios in fund complex overseen by Trustee (including the Fund)		20
Other board memberships held by Trustee during the past five years		Director of The India Fund, Inc. (since 2016); formerly, Director of Aberdeen Income Credit Strategies Fund (2017-2018); and Director of The Asia Tigers Fund, Inc. (2016 to 2018)

Western Asset Diversified Income Fund

Additional information (unaudited) (cont’d)

Information about Trustees and Officers


Interested Trustee and Officer

Jane Trust, CFA²

Year of birth		1962
Position(s) held with Fund¹		Trustee, Chairman, President and Chief Executive Officer, Class III
Term of office¹and length of time served		Since 2021
Principal occupation(s) during the past five years		Senior Vice President, Fund Board Management, Franklin Templeton (since 2020); Officer and/or Trustee/Director of 131 funds associated with LMPFA or its affiliates (since 2015); President and Chief Executive Officer of LMPFA (since 2015); formerly, Senior Managing Director (2018 to 2020) and Managing Director (2016 to 2018) of Legg Mason & Co., LLC (“Legg Mason & Co.”); Senior Vice President of LMPFA (2015)
Number of portfolios in fund complex overseen by Trustee (including the Fund)		129
Other board memberships held by Trustee during the past five years		None

Additional Officers

Fred Jensen Franklin Templeton 620 Eighth Avenue, 47th Floor, New York, NY 10018

Year of birth		1963
Position(s) held with Fund¹		Chief Compliance Officer
Term of office¹and length of time served		Since 2021
Principal occupation(s) during the past five years		Director - Global Compliance of Franklin Templeton (since 2020); Managing Director of Legg Mason & Co. (2006 to 2020); Director of Compliance, Legg Mason Office of the Chief Compliance Officer (2006 to 2020); formerly, Chief Compliance Officer of Legg Mason Global Asset Allocation (prior to 2014); Chief Compliance Officer of Legg Mason Private Portfolio Group (prior to 2013); formerly, Chief Compliance Officer of The Reserve Funds (investment adviser, funds and broker-dealer) (2004) and Ambac Financial Group (investment adviser, funds and broker-dealer) (2000 to 2003)

Jenna Bailey Franklin Templeton 100 First Stamford Place, 5th Floor, Stamford, CT 06902

Year of birth		1978
Position(s) held with Fund¹		Identity Theft Prevention Officer
Term of office¹and length of time served		Since 2021
Principal occupation(s) during the past five years		Senior Compliance Analyst of Franklin Templeton (since 2020); Identity Theft Prevention Officer of certain funds associated with Legg Mason & Co. or its affiliates (since 2015); formerly, Compliance Officer of Legg Mason & Co. (2013 to 2020); Assistant Vice President of Legg Mason & Co. (2011 to 2020)

Western Asset Diversified Income Fund


Additional Officers (cont’d)

George P. Hoyt Franklin Templeton 100 First Stamford Place, 6th Floor, Stamford, CT 06902

Year of birth		1965
Position(s) held with Fund¹		Secretary and Chief Legal Officer
Term of office¹and length of time served		Since 2021
Principal occupation(s) during the past five years		Associate General Counsel of Franklin Templeton (since 2020); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2020); formerly, Managing Director (2016 to 2020) and Associate General Counsel for Legg Mason & Co. and Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (2006 to 2020)

Thomas C. Mandia** Franklin Templeton 100 First Stamford Place, 6th Floor, Stamford, CT 06902

Year of birth		1962
Position(s) held with Fund¹		Senior Vice President
Term of office¹and length of time served		Since 2022
Principal occupation(s) during the past five years		Senior Associate General Counsel of Franklin Templeton (since 2020); Secretary of LMPFA (since 2006); Assistant Secretary of certain funds associated with Legg Mason & Co. or its affiliates (since 2006); Secretary of LM Asset Services, LLC (“LMAS”) (since 2002) and Legg Mason Fund Asset Management, Inc. (“LMFAM”) (since 2013) (formerly registered investment advisers); formerly, Managing Director and Deputy General Counsel of Legg Mason & Co. (2005 to 2020) and Assistant Secretary of certain funds in the fund complex (2006 to 2022)

Christopher Berarducci Franklin Templeton 620 Eighth Avenue, 47th Floor, New York, NY 10018

Year of birth		1974
Position(s) held with Fund¹		Treasurer and Principal Financial Officer
Term of office¹and length of time served		Since 2021
Principal occupation(s) during the past five years		Vice President, Fund Administration and Reporting, Franklin Templeton (since 2020); Treasurer (since 2010) and Principal Financial Officer (since 2019) of certain funds associated with Legg Mason & Co. or its affiliates; formerly, Managing Director (2020), Director (2015 to 2020), and Vice President (2011 to 2015) of Legg Mason & Co.

Western Asset Diversified Income Fund

Additional information (unaudited) (cont’d)

Information about Trustees and Officers


Additional Officers (cont’d)

Jeanne M. Kelly Franklin Templeton 620 Eighth Avenue, 47th Floor, New York, NY 10018

Year of birth		1951
Position(s) held with Fund¹		Senior Vice President
Term of office¹and length of time served		Since 2021
Principal occupation(s) during the past five years		U.S. Fund Board Team Manager, Franklin Templeton (since 2020); Senior Vice President of certain funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006); President and Chief Executive Officer of LMAS and LMFAM (since 2015); formerly, Managing Director of Legg Mason & Co. (2005 to 2020); Senior Vice President of LMFAM (2013 to 2015)

†	Trustees who are not “interested persons” of the Fund within the meaning of Section 2(a)(19) of the Investment Company Act of 1940, as amended (the “1940 Act”).

*	Effective August 16, 2021, Mr. Agdern became a Trustee.

**	Effective February 10, 2022, Mr. Mandia became a Senior Vice President.

The Fund’s Board of Trustees is divided into three classes: Class I, Class II and Class III. The terms of office of the Class I, II and III Trustees expire at the Annual Meetings of Stockholders in the year 2022, year 2023 and year 2024, respectively, or thereafter in each case when their respective successors are duly elected and qualified. The Fund’s executive officers are chosen each year, to hold office until their successors are duly elected and qualified.

²	Ms. Trust is an “interested person” of the Fund as defined in the 1940 Act because Ms. Trust is an officer of LMPFA and certain of its affiliates.

Western Asset Diversified Income Fund

Annual chief executive officer and principal financial officer certifications (unaudited)

The Fund’s Chief Executive Officer (“CEO”) has submitted to the NYSE the required annual certification and the Fund also has included the Certifications of the Fund’s CEO and Principal Financial Officer required by Section 302 of the Sarbanes-Oxley Act in the Fund’s Form N-CSR filed with the SEC for the period of this report.

Western Asset Diversified Income Fund

Other shareholder communications regarding accounting matters (unaudited)

The Fund’s Audit Committee has established guidelines and procedures regarding the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters (collectively, “Accounting Matters”). Persons with complaints or concerns regarding Accounting Matters may submit their complaints to the Chief Compliance Officer (“CCO”). Persons who are uncomfortable submitting complaints to the CCO, including complaints involving the CCO, may submit complaints directly to the Fund’s Audit Committee Chair. Complaints may be submitted on an anonymous basis.

The CCO may be contacted at:

Legg Mason & Co., LLC

Compliance Department

620 Eighth Avenue, 47th Floor

New York, New York 10018

Complaints may also be submitted by telephone at 1-800-742-5274. Complaints submitted through this number will be received by the CCO.

Western Asset Diversified Income Fund

Summary of information regarding the Fund (unaudited)

Investment Objectives

The Fund’s primary investment objective is to seek high current income. As a secondary investment objective, the Fund will seek capital appreciation.

Principal Investment Policies and Strategies

Under normal circumstances, the Fund will invest across fixed income sectors and securities in seeking to deliver a well-diversified portfolio. Western Asset’s investment process utilizes cross-sector correlations designed to seek optimized return potential and diversification benefit within the portfolio. In managing the portfolio, Western Asset will employ its top down macro view to drive decisions on value, credit sectors, credit quality and duration, and its deep research experience and bottom-up analysis to make sector and security selections. Under current market conditions, the Fund anticipates it will initially focus on shorter-duration and floating rate securities, which have lower sensitivity to higher interest rates. The Fund’s duration and mix of fixed and floating rate investments is subject to change over time. As market conditions change, Western Asset will seek to dynamically rotate investments into sectors and securities that it believes to be undervalued from a fundamental perspective with an attractive return profile and away from investments that it believes to be overvalued. The Fund will provide exposure to residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”), both agency and non-agency, consistent with its investment policies.

The Fund may invest in investment grade and below investment grade corporate debt securities (commonly referred to as either “high yield” securities or “junk bonds”), senior loans, agency and non-agency RMBS and CMBS, government (i.e., sovereign) debt (including U.S. government obligations), floating rate securities, bank loans, collateralized loan obligations (“CLOs”), asset-backed securities (whose underlying asset classes include, but are not limited to, equipment leases, solar and student loans), private debt and mortgage whole loans. The Fund may invest up to 15% of its Managed Assets in securities issued by CLOs, including up to 5% of its Managed Assets in equity securities issued by CLOs (i.e., subordinated or residual tranches of CLO securities). Although the Fund does not specifically target covenant lite loans, the Fund may invest in covenant lite loans if market conditions result in loans having fewer covenants.

The Fund may not concentrate its investments in any one industry. For purposes of this fundamental policy, non-agency RMBS and non-agency CMBS are considered to represent separate industries; as such, the Fund may invest up to 25% of its Managed Assets in non-agency RMBS and, separately, up to 25% of its Managed Assets in non-agency CMBS.

The Fund may invest in foreign securities denominated either in U.S. dollars or foreign currencies. Under normal market circumstances, the Fund will invest at least 70% of its Managed Assets in U.S. securities and at least 80% of its Managed Assets in U.S. dollar-denominated investments. Investments in non-U.S. securities may include emerging market

Western Asset Diversified Income Fund

Summary of information regarding the Fund (unaudited) (cont’d)

corporate, government and quasi-sovereign debt. The Fund considers a country to be an emerging market country, if, at the time of investment, it is represented in the J.P. Morgan Emerging Market Bond Index Global or the J.P. Morgan Corporate Emerging Market Bond Index Broad or categorized by the World Bank in its annual categorization as middle- or low-income. Under normal circumstances, the Fund will be invested in at least three countries (one of which may be the United States) and may invest up to 30% of its Managed Assets in foreign securities. The Fund may also invest in issuers with significant exposure to foreign markets.

The Fund may invest in securities of any maturity. The maturity of a fixed income security is a measure of the time remaining until the final payment on the security is due. The Fund may invest in securities of any duration. Duration is a measure the expected sensitivity of a security’s market price to changes in interest rates.

With respect to all of the securities in which the Fund may invest, the Fund may invest in securities rated below investment grade (that is, securities rated below the Baa/BBB categories, or, if unrated, determined to be of comparable credit quality by Western Asset). These below investment grade securities that comprise the Fund’s portfolio are commonly referred to as either “high yield” securities or “junk bonds.” The Fund may invest up to 25% of its Managed Assets in securities, including structured instruments such as mortgage backed securities and commercial mortgage backed securities, rated CCC or below (or, if unrated, determined to be of comparable credit quality by Western Asset) at the time of investment. For this purpose, if a security is rated by multiple nationally recognized statistical rating organizations (“NRSROs”) and receives different ratings, the Fund will treat the security as being rated in the highest rating category received from an NRSRO. If the credit rating on a security is downgraded or the credit quality of an asset or counterparty deteriorates, or if the duration of a security is extended, Western Asset will decide whether to exit the position, including in the event such downgrade of one or more securities held by the Fund causes the Fund to exceed the 25% limit of the Fund’s Managed Assets in securities rated CCC or below (or, if unrated, determined to be of comparable credit quality by Western Asset).

The Fund may engage in a variety of transactions using derivatives, including without limitation futures, options, forwards, interest rate swaps and other swaps (including buying and selling credit default swaps and options on credit default swaps), foreign currency futures, forwards and options, and futures contracts, warrants and other synthetic instruments that are intended to provide economic exposure to particular securities, assets or issuers or to be used as a hedging technique. The Fund may use one or more types of these instruments within the limits prescribed by the 1940 Act and the rules and regulations thereunder. The Fund may also engage in a variety of transactions using derivatives in order

Western Asset Diversified Income Fund

to change the investment characteristics of its portfolio (such as shortening or lengthening duration) and for other purposes.

The Fund will not invest, either directly or indirectly through derivatives, in contingent capital securities (sometimes referred to as “CoCos”).

The Fund may use leverage through borrowings, including loans from certain financial institutions and/or the issuance of debt securities (collectively, “Borrowings”), and through the issuance of preferred shares of beneficial interest (“Preferred Shares”). The Fund may use leverage through Borrowings in an aggregate amount of up to approximately 33 1/3% of the Fund’s total assets less all liabilities and indebtedness not represented by senior securities (for these purposes, “total net assets”) immediately after such Borrowings. Furthermore, the Fund may use leverage through the issuance of Preferred Shares in an aggregate amount of liquidation preference attributable to the Preferred Shares combined with the aggregate amount of any Borrowings of up to approximately 50% of the Fund’s total net assets immediately after such issuance. In addition, the Fund may enter into derivative transactions with a leverage component.

The Fund may enter into reverse repurchase agreements and use similar investment management techniques that may provide leverage, but which are not subject to the foregoing 33 1/3% limitation so long as the Fund has covered its commitment with respect to such techniques by segregating or earmarking liquid assets, entering into offsetting transactions or owning positions covering related obligations.

The Fund may establish a standby credit facility as a temporary measure for purposes of making distributions to shareholders in order to maintain its favorable tax status as a regulated investment company. In addition, the Fund may borrow for temporary, emergency or other purposes as permitted under the 1940 Act. Any such indebtedness would be in addition to the leverage limit on Borrowings of up to 33 1/3% of the Fund’s total net assets.

The Fund may purchase securities under arrangements (called when-issued, delayed delivery, to be announced or forward commitment basis) where the securities will not be delivered or paid for immediately. The Fund will set aside assets to pay for these securities at the time of the agreement.

Principal Risk Factors

There is no assurance that the Fund will meet its investment objectives. You may lose money on your investment in the Fund. The value of the Fund’s shares may go up or down, sometimes rapidly and unpredictably. Market conditions, financial conditions of issuers represented in the Fund’s portfolio, investment strategies, portfolio management, and other factors affect the volatility of the Fund’s shares. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.

Western Asset Diversified Income Fund

Summary of information regarding the Fund (unaudited) (cont’d)

The following section includes a summary of the principal risks of investing in the Fund.

No History of Operations. The Fund is a newly organized, diversified, closed-end management investment company with no operating history. The Fund does not have any historical financial statements or other meaningful operating or financial data on which potential investors may evaluate the Fund and its performance.

Limited Term Risk. Unless the limited term provision of the Fund’s Declaration of Trust is amended by shareholders in accordance with the Declaration of Trust, or unless the Fund completes an Eligible Tender Offer and converts to perpetual existence, the Fund will dissolve on or about the Dissolution Date. The Fund is not a so called “target date” or “life cycle” fund whose asset allocation becomes more conservative over time as its target date, often associated with retirement, approaches. In addition, the Fund is not a “target term” fund and thus does not seek to return its initial public offering price per Common Share upon dissolution.

Investment and Market Risk. An investment in the Fund is subject to investment risk, including the possible loss of the entire amount that you invest. An investment in our Common Shares is not intended to constitute a complete investment program and should not be viewed as such. The value of the Fund’s portfolio securities and other investments may move up or down, sometimes rapidly and unpredictably. At any point in time, your securities may be worth less than your original investment. The Fund is primarily a long-term investment vehicle and should not be used for short-term trading.

Market Price Discount from Net Asset Value Risk. Shares of closed-end investment companies frequently trade at a discount to their net asset value. This characteristic is a risk separate and distinct from the risk that the Fund’s net asset value could decrease as a result of the Fund’s investment activities and may be greater for investors expecting to sell their shares in a relatively short period following completion of any offering under this Prospectus. Although the value of the Fund’s net assets is generally considered by market participants in determining whether to purchase or sell shares, whether investors will realize gains or losses upon the sale of the Common Shares depends upon whether the market price of the Common Shares at the time of sale is above or below the investor’s purchase price for the Common Shares. Because the market price of the Common Shares is affected by factors such as net asset value, dividend or distribution levels (which are dependent, in part, on expenses), supply of and demand for the Common Shares, stability of distributions, trading volume of the Common Shares, general market and economic conditions, and other factors beyond our control, the Fund cannot predict whether the Common Shares will trade at, below or above net asset value or at, below or above the offering price. The Fund is designed primarily for long-term investors and you should not view the Fund as a vehicle for trading purposes.

Western Asset Diversified Income Fund

Portfolio Management Risk. The value of your investment may decrease if Western Asset’s judgment about the quality, relative yield, value or market trends affecting a particular security, asset class, industry, sector or region, or about interest rates, is incorrect or does not produce the desired results, or if there are imperfections, errors or limitations in the models, tools and data used by Western Asset. For example, high yield bonds tend to be more susceptible to credit downgrades and may be difficult to value, and Western Asset’s judgment about the relative yield or value of a high yield security may be incorrect or subject to change. While Western Asset will seek to dynamically allocate the Fund’s portfolio to sectors and investments it considers undervalued and away from sectors and investments that it considers overvalued, there is no assurance that such allocation will produce the desired results. In addition, Western Asset’s allocation process may result in limited allocation between sectors and investments if, in the opinion of Western Asset, any such allocation would not produce the desired results given current market conditions. In addition, the Fund’s investment strategies or policies may change from time to time. Those changes may not lead to the results intended by Western Asset and could have an adverse effect on the value or performance of the Fund.

Market and Interest Rate Risk. The market prices of the Fund’s securities and assets may go up or down, sometimes rapidly or unpredictably. If the market prices of the Fund’s investments fall, the value of your investment in the Fund will decline. The market price of an investment may fall due to general market conditions, such as real or perceived adverse economic or political conditions, tariffs and trade disruptions, inflation, changes in interest or currency rates, lack of liquidity in the bond markets or adverse investor sentiment. The market prices of securities and assets may fluctuate significantly when interest rates change. For example, when interest rates rise, the value of fixed income securities held by the Fund generally goes down, a risk that is particularly relevant given the historically low interest rate levels. Generally, the longer the maturity or duration of a fixed income security, the greater the impact of a rise in interest rates on the security’s market price. Also, when interest rates decline, investments made by the Fund may pay a lower interest rate, which would reduce the income received by the Fund.

Credit Risk. If an issuer or guarantor of a security held by the Fund or a counterparty to a financial contract with the Fund defaults or its credit is downgraded, or is perceived to be less creditworthy, or if the value of the assets underlying a financial contract declines, the value of your investment will typically decline. The Fund could be delayed or hindered in its enforcement of rights against an issuer, guarantor or counterparty. Subordinated securities are more likely to suffer a credit loss than non-subordinated securities of the same issuer and will be disproportionately affected by a default, downgrade or perceived decline in creditworthiness.

Western Asset Diversified Income Fund

Summary of information regarding the Fund (unaudited) (cont’d)

High Yield (“Junk”) Bonds Risk. High yield bonds are generally subject to greater credit risks than higher-grade bonds, including the risk of default on the payment of interest or principal. High yield bonds are considered speculative, typically have lower liquidity and are more difficult to value than higher grade bonds. High yield bonds tend to be volatile and more susceptible to adverse events, credit downgrades and negative sentiments and may be difficult to sell at a desired price, or at all, during periods of uncertainty or market turmoil.

Mortgage-Backed and Asset-Backed Securities Risk. When market interest rates increase, the market values of mortgage-backed securities decline. At the same time, mortgage re-financings and prepayments slow, which lengthens the effective duration of these securities. As a result, the negative effect of the interest rate increase on the market value of mortgage-backed securities is usually more pronounced than it is for other types of fixed income securities, potentially increasing the volatility of the Fund. Conversely, when market interest rates decline, while the value of mortgage-backed securities may increase, the rate of prepayment of the underlying mortgages also tends to increase, which shortens the effective duration of these securities. Mortgage-backed securities are also subject to the risk that underlying borrowers will be unable to meet their obligations and the value of property that secures the mortgage may decline in value and be insufficient, upon foreclosure, to repay the associated loan. Investments in asset-backed securities are subject to similar risks.

Credit Risk Associated with Originators and Servicers of Residential and Commercial Mortgage Loans. A number of originators and servicers of residential and commercial mortgage loans, including some of the largest originators and servicers in the residential and commercial mortgage loan market, have experienced serious financial difficulties, including some that are now subject to federal insolvency proceedings. These difficulties have resulted from many factors, including increased competition among originators for borrowers, decreased originations by such originators of mortgage loans and increased delinquencies and defaults on such mortgage loans, as well as from increases in claims for repurchases of mortgage loans previously sold by them under agreements that require repurchase in the event of breaches of representations regarding loan quality and characteristics. Furthermore, the inability of the originator to repurchase such mortgage loans in the event of loan representation breaches or the servicer to repurchase such mortgage loans upon a breach of its servicing obligations also may affect the performance of related non-agency RMBS. Many of these originators and servicers are very highly leveraged. These difficulties may also increase the chances that these entities may default on their warehousing or other credit lines or become insolvent or bankrupt thereby increasing both the likelihood that repurchase obligations will not be fulfilled and the potential for loss to holders of non-agency RMBS and subordinated security holders.

Western Asset Diversified Income Fund

Subprime Mortgage Market Risk. The residential mortgage market in the United States in the recent past experienced difficulties that, should similar conditions occur in the future, may adversely affect the performance and market value of certain mortgages and mortgage-related securities. Delinquencies and losses on residential mortgage loans (especially subprime and second-line mortgage loans) may increase, and a decline in or flattening of housing values may exacerbate such delinquencies and losses. Borrowers with adjustable rate mortgage loans are more sensitive to changes in interest rates, which affect their monthly mortgage payments, and may be unable to secure replacement mortgages at comparably low interest rates. Any significant reduction in investor demand for mortgage loans and mortgage-related securities or increase in investor yield requirements may cause limited liquidity in the secondary market for mortgage-related securities, which could adversely affect the market value of mortgage-related securities. If the economy of the United States were to deteriorate, the incidence of mortgage foreclosures, especially subprime mortgages, could increase, which may adversely affect the value of any MBS owned by the Fund.

Derivatives Risk. Using derivatives can increase Fund losses and reduce opportunities for gains when market prices, interest rates, currencies, or the derivatives themselves behave in a way not anticipated by the Fund. Using derivatives also can have a leveraging effect and increase Fund volatility. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Derivatives may not be available at the time or price desired, may be difficult to sell, unwind or value, and the counterparty may default on its obligations to the Fund. Derivatives are generally subject to the risks applicable to the assets, rates, indices or other indicators underlying the derivative and the credit risk of the counterparty to the derivative transaction. The value of a derivative may fluctuate more than the underlying assets, rates, indices or other indicators to which it relates. Use of derivatives may have different tax consequences for the Fund than an investment in the underlying asset or index, and those differences may affect the amount, timing and character of income distributed to shareholders. The U.S. government and foreign governments and their respective financial regulators are in the process of adopting and implementing regulations governing derivatives markets, including mandatory clearing of certain derivatives, margin and reporting requirements, among others. The ultimate impact of the regulations remains unclear. Additional regulation of derivatives may make derivatives more costly, limit their availability or utility, otherwise adversely affect their performance or disrupt markets.

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Risks associated with the use of futures contracts include: (a) the imperfect correlation between the change in market value of the instruments held by the Fund and the price of the futures contract; (b) the possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) the inability to replace an expiring futures contract with an equivalent futures contract that

Western Asset Diversified Income Fund

Summary of information regarding the Fund (unaudited) (cont’d)

has a later expiration at the desired time and price; (d) losses caused by unanticipated market movements, which are potentially unlimited; (e) Western Asset’s inability to predict correctly the direction of asset prices, interest rates, currency exchange rates, the levels of indices or other indicators and other economic factors; and (f) the possibility that the counterparty will default in the performance of its obligations.

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When the Fund purchases an option, it may lose the total premium paid for it if the price of the underlying security or other assets decreased, remained the same or failed to increase to a level at or beyond the exercise price (in the case of a call option) or increased, remained the same or failed to decrease to a level at or below the exercise price (in the case of a put option). If a put or call option purchased by the Fund were permitted to expire without being sold or exercised, its premium would represent a loss to the Fund. To the extent that the Fund writes or sells an option, in particular a naked option, if the decline or increase in the underlying asset is significantly below or above the exercise price of the written option, the Fund could experience a substantial loss. For the writer of a naked or uncovered call option, the potential loss is unlimited.

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Successful use of forward currency contracts depends on the portfolio manager’s skill in analyzing and predicting currency values, among other factors. Forward currency contracts may substantially change the Fund’s exposure to changes in currency exchange rates and could result in losses to the Fund if currencies do not perform as the portfolio manager anticipates. There is no assurance that the portfolio manager’s use of forward currency contracts will be advantageous to the Fund or that the portfolio manager will hedge at an appropriate time.

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Warrants are subject similar market risks as stocks, but may be more volatile in price. An investment in warrants may be considered speculative. In addition, the value of a warrant does not necessarily commensurately with the value of the underlying securities and a warrant ceases to have value if it is not exercised prior to its expiration date.

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Swap agreements used for hedging purposes may shift the Fund’s investment exposure from one type of investment to another. For example, if an interest rate swap intended to be used as a hedge negates a favorable interest rate movement, the investment performance of the Fund would be worse than what it would have been if the Fund had not entered into the interest rate swap.

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Swap agreements involve heightened risks and may result in losses to the Fund. Swaps may be illiquid and difficult to value, and may increase the aggregate market and credit risk to the Fund. For example, when the Fund sells credit protection on a debt security via a credit default swap, credit risk increases since the Fund has exposure to the issuer whose credit is the subject of the swap, the counterparty to the swap, and in certain circumstances, the custodian of swap collateral.

Western Asset Diversified Income Fund

The SEC has adopted new Rule 18f-4 under the 1940 Act, which will require a fund that is not a “limited derivatives user” as described in Rule 18f-4(c)(4) to adopt a derivatives risk management program providing for specific items as required by the rule, including compliance with a VaR test. The provisions of Rule 18f-4 will replace the 1940 Act cover requirements for reverse repurchase agreements, similar financing transactions and derivatives transactions discussed in this Prospectus. Under Rule 18f-4(d), a fund may enter into reverse repurchase agreements or similar financing transactions in reliance on the rule if the fund either (i) complies with the asset coverage requirements of Section 18 of the 1940 Act, and combines the aggregate amount of indebtedness associated with all reverse repurchase agreements or similar financing transactions with the aggregate amount of any other senior securities representing indebtedness when calculating its asset coverage ratio; or (ii) treats all reverse repurchase agreements or similar financing transactions as derivatives transactions for all purposes under the rule. Compliance with Rule 18f-4 will be required by August 19, 2022. Following the compliance date, these requirements may limit the ability of the Fund to use derivatives and reverse repurchase agreements and similar financing transactions as part of its investment strategies. These requirements may also increase the cost of the Fund’s investments in derivatives reverse repurchase agreements and similar financing transactions, which could adversely affect the value of your investment.

Investment in Loans Risk. Investments in loans are generally subject to the same risks as investments in other types of debt obligations, including, among others, credit risk and interest rate risk, which are discussed above, and prepayment risk and extension risk, which are discussed below. In addition, in many cases loans are subject to the risks associated with below-investment grade securities. This means loans are often subject to significant credit risks, including a greater possibility that the borrower will be adversely affected by changes in market or economic conditions and may default or enter bankruptcy. This risk of default will increase in the event of an economic downturn or a substantial increase in interest rates (which will increase the cost of the borrower’s debt service). Transactions in loans may settle on a delayed basis. As a result, the proceeds from the sale of a loan may not be available to make additional investments. The Fund considers “junior loans” to be loans that have a junior position in an issuer’s capital structure. Because junior loans are unsecured and subordinated and thus lower in priority of payment to senior loans, they are subject to the additional risk that the cash flow of the borrower and property securing the loan or debt, if any, may be insufficient to meet scheduled payments after giving effect to the senior secured obligations of the borrower. There are no limitations on the Fund’s investments in junior loans. Bank loans may not be considered securities and therefore, the Fund may not have the protections afforded by U.S. federal securities laws with respect to such investments.

Western Asset Diversified Income Fund

Summary of information regarding the Fund (unaudited) (cont’d)

CLOs Risk. CLOs issue securities in tranches with different payment characteristics and different credit ratings. The rated tranches of securities issued by CLOs are generally assigned credit ratings by one or more nationally recognized statistical rating organizations. The subordinated (or residual) tranches do not receive ratings. Below investment grade tranches of CLO securities typically experience a lower recovery rate and greater risk of loss or deferral or non-payment of interest than more senior tranches of the CLO. The riskiest portion of the capital structure of a CLO is the subordinated (or residual) tranche, which bears the bulk of defaults from the loans in the CLO and serves to protect the other, more senior tranches from default in all but the most severe circumstances. Since it is partially protected from defaults, a senior tranche from a CLO typically has higher ratings and lower yields than the underlying securities, and can be rated investment grade. Despite the protection from the subordinated tranche, CLO tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches, market anticipation of defaults and aversion to CLO securities as a class. The risks of an investment in a CLO depend largely on the collateral and the tranche of the CLO in which the Fund invests.

Fixed Income Securities Risk. In addition to the risks described elsewhere with respect to valuations and liquidity, fixed income securities, including high yield securities, are also subject to certain risks, including:

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Issuer Risk—The value of fixed income securities may decline for a number of reasons that directly relate to the issuer, such as management performance, financial leverage and reduced demand for the issuer’s goods and services.

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Reinvestment Risk—Reinvestment risk is the risk that income from the Fund’s portfolio will decline if and when the Fund invests the proceeds from matured, traded or called fixed income securities at market interest rates that are below the portfolio’s current earnings rate. A decline in income could affect the Fund’s Common Share price or its overall return.

Covenant Lite Loans Risk. Covenant lite loans contain fewer maintenance covenants, or no maintenance covenants at all, than traditional loans and may not include terms that allow the lender to monitor the financial performance of the borrower and declare a default if certain criteria are breached. This may expose the Fund to greater credit risk associated with the borrower and reduce the Fund’s ability to restructure a problematic loan and mitigate potential loss. As a result, the Fund’s exposure to losses on such investments may be increased, especially during a downturn in the credit cycle.

Leverage Risk. The Fund’s use of leverage will magnify investment, market and certain other risks. Leverage involves risks and special considerations for holders of the Common Shares including: the likelihood of greater volatility of net asset value and market price of the

Western Asset Diversified Income Fund

Common Shares than a comparable portfolio without leverage; the risk that fluctuations in interest rates on borrowings and short-term debt or in the dividend rates on any Preferred Shares that the Fund may pay will reduce the return to Common Shareholders or will result in fluctuations in the dividends paid on the Common Shares; the effect of leverage in a declining market, which is likely to cause a greater decline in the net asset value of the Common Shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the Common Shares; and when the Fund uses leverage, the investment advisory fee payable by the Fund to LMPFA (and by LMPFA to Western Asset) will be higher than if the Fund did not use leverage.

The use of borrowing, reverse repurchase agreements and derivatives, as well as the issuance of Preferred Shares, creates leverage (i.e., a fund’s investment exposures exceed its net asset value). Leverage increases a fund’s losses when the value of its investments (including derivatives) declines. Because many derivatives have a leverage component (i.e., a notional value in excess of the assets needed to establish or maintain the derivative position), adverse changes in the value or level of the underlying asset, rate, or index may result in a loss substantially greater than the amount required to establish the derivative position.

Illiquidity Risk. Some assets held by the Fund may be impossible or difficult to sell and some assets that the Fund wants to invest in may be impossible or difficult to purchase, particularly during times of market turmoil or due to adverse changes in the conditions of a particular issuer. These illiquid assets may also be difficult to value. Markets may become illiquid when, for instance, there are few, if any, interested buyers or sellers or when dealers are unwilling or unable to make a market for certain securities. As a general matter, dealers recently have been less willing to make markets for fixed income securities.

Foreign Investment and Emerging Markets Risk. The Fund’s investments in securities of foreign issuers or issuers with significant exposure to foreign markets involve additional risk as compared to investments in U.S. securities or issuers with predominantly domestic exposure, such as less liquid, less transparent, less regulated and more volatile markets. The value of the Fund’s investments may decline because of factors affecting the particular issuer as well as foreign markets and issuers generally, such as unfavorable or unsuccessful government actions, reduction of government or central bank support, inadequate accounting standards, lack of information and political, economic, financial or social instability. To the extent the Fund focuses its investments in a single country or only a few countries in a particular geographic region, economic, political, regulatory or other conditions affecting such country or region may have a greater impact on Fund performance relative to a more geographically diversified Fund.

The risks of foreign investments are heightened when investing in issuers in emerging market countries. Emerging market countries tend to have economic, political and legal

Western Asset Diversified Income Fund

Summary of information regarding the Fund (unaudited) (cont’d)

systems that are less developed and are less stable than those of more developed countries. Less developed markets are more likely to experience problems with the clearing and settling of trades and the holding of securities by banks, agents and depositories. Low trading volumes may result in a lack of liquidity and in extreme price volatility

Foreign Currency Risk. The value of investments denominated in foreign currencies increases or decreases as the rates of exchange between those currencies and the U.S. dollar change. Currency conversion costs and currency fluctuations could erase investment gains or add to investment losses. Currency exchange rates can be volatile, and are affected by factors such as general economic conditions, the actions of the U.S. and foreign governments or central banks, the imposition of currency controls and speculation. The Fund may be unable or may choose not to hedge its foreign currency exposure.

Prepayment or Call Risk. Many issuers have a right to prepay their fixed income securities. Issuers may be more likely to prepay their securities if interest rates fall. If this happens, the Fund would not benefit from the rise in the market price of the securities that normally accompanies a decline in interest rates, and would be forced to reinvest prepayment proceeds at a time when yields on securities available in the market are lower than the yield on prepaid securities. The Fund may also lose any premium it paid to purchase the securities.

Extension Risk. When interest rates rise, repayments of fixed income securities, particularly asset- and mortgage- backed securities, may occur more slowly than anticipated, extending the effective duration of these fixed income securities at below market interest rates and causing their market prices to decline more than they would have declined due to the rise in interest rates alone. This may cause the Fund’s share price to be more volatile.

Valuation Risk. The sales price the Fund could receive for any particular portfolio investment may differ from the Fund’s valuation of the investment, particularly for securities that trade in thin or volatile markets or that are valued using a fair value methodology.

The Fund’s ability to value its investments may be impacted by technological issues and/or errors by pricing services or other third party service providers. The valuation of the Fund’s investments involves subjective judgment.

Market Events Risk. The market values of securities or other assets will fluctuate, sometimes sharply and unpredictably, due to changes in general market conditions, overall economic trends or events, governmental actions or intervention, actions taken by the U.S. Federal Reserve or foreign central banks, market disruptions caused by trade disputes or other factors, political developments, investor sentiment, the global and domestic effects of a pandemic, and other factors that may or may not be related to the issuer of the security or other asset. Economies and financial markets throughout the world are increasingly interconnected. Economic, financial or political events, trading and tariff arrangements,

Western Asset Diversified Income Fund

public health events, terrorism, natural disasters and other circumstances in one country or region could have profound impacts on global economies or markets. As a result, whether or not the Fund invests in securities of issuers located in or with significant exposure to the countries directly affected, the value and liquidity of the Fund’s investments may be negatively affected.

The rapid and global spread of a highly contagious novel coronavirus respiratory disease, designated COVID-19, first detected in China in December 2019, has resulted in extreme volatility in the financial markets and severe losses; reduced liquidity of many instruments; restrictions on international and, in some cases, local travel, significant disruptions to business operations (including business closures); strained healthcare systems; disruptions to supply chains, consumer demand and employee availability; and widespread uncertainty regarding the duration and long-term effects of this pandemic. Some sectors of the economy and individual issuers have experienced particularly large losses. In addition, the COVID-19 pandemic may result in a sustained economic downturn or a global recession, domestic and foreign political and social instability, damage to diplomatic and international trade relations and increased volatility and/or decreased liquidity in the securities markets. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, are not known. Certain risks, such as interest rate risk, credit risk, liquidity risk and counterparty risk, may be heightened as a result of such market events. The U.S. government and the Federal Reserve, as well as certain foreign governments and central banks, are taking extraordinary actions to support local and global economies and the financial markets in response to the COVID-19 pandemic, including by pushing interest rates to very low levels. This and other government intervention into the economy and financial markets to address the COVID-19 pandemic may not work as intended, particularly if the efforts are perceived by investors as being unlikely to achieve the desired results. The COVID-19 pandemic could adversely affect the value and liquidity of the Fund’s investments and negatively impact the Fund’s performance. In addition, the outbreak of COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services provided to the Fund by its service providers.

Cybersecurity Risk. Cybersecurity incidents, both intentional and unintentional, may allow an unauthorized party to gain access to Fund assets, Fund or proprietary information, cause the Fund, Western Asset, the Sub-Advisers and/or their service providers to suffer data breaches, data corruption or loss of operational functionality or prevent fund investors from purchasing, redeeming or exchanging shares or receiving distributions. The Fund, Western Asset, and the Sub-Advisers have limited ability to prevent or mitigate cybersecurity incidents affecting third party service providers, and such third party service providers may have limited indemnification obligations to the fund or the manager. Cybersecurity incidents may result in financial losses to the fund and its shareholders, and substantial costs may be incurred in order to prevent any future cybersecurity incidents. Issuers of securities in which

Western Asset Diversified Income Fund

Summary of information regarding the Fund (unaudited) (cont’d)

the fund invests are also subject to cybersecurity risks, and the value of these securities could decline if the issuers experience cybersecurity incidents.

Operational risk. The valuation of the Fund’s investments may be negatively impacted because of the operational risks arising from factors such as processing errors and human errors, inadequate or failed internal or external processes, failures in systems and technology, changes in personnel, and errors caused by third party service providers or trading counterparties. It is not possible to identify all of the operational risks that may affect the Fund or to develop processes and controls that completely eliminate or mitigate the occurrence of such failures. The Fund and its shareholders could be negatively impacted as a result.

Portfolio Turnover Risk. The Fund’s annual portfolio turnover rate may vary greatly from year to year, as well as within a given year. Portfolio turnover rate is not considered a limiting factor in the execution of investment decisions for the Fund. A higher portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional expenses that are borne by the Fund. High portfolio turnover may result in an increased realization of net short-term capital gains by the Fund which, when distributed to Common Shareholders, will be taxable as ordinary income. Additionally, in a declining market, portfolio turnover may create realized capital losses.

Anti-Takeover Provisions Risk. The Fund’s Declaration of Trust and Bylaws includes provisions that are designed to limit the ability of other entities or persons to acquire control of the Fund for short-term objectives, including by converting the Fund to open-end status or changing the composition of the Board, that may be detrimental to the Fund’s ability to achieve its primary investment objective of seeking high current income. The Fund’s Declaration of Trust also contains a provision providing that the Fund is subject to the provisions of the Maryland Control Share Acquisition Act. Such provisions may limit the ability of shareholders to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund. There can be no assurance, however, that such provisions will be sufficient to deter activist investors that seek to cause the Fund to take actions that may not be aligned with the interests of long-term shareholders.

LIBOR Risk. The Fund’s investments, payment obligations, and financing terms may be based on floating rates, such as the London Interbank Offered Rate, or “LIBOR,” which is the offered rate for short-term Eurodollar deposits between major international banks. In 2017, the U.K. Financial Conduct Authority (“FCA”) announced its intention to cease compelling banks to provide the quotations needed to sustain LIBOR after 2021. ICE Benchmark Administration, the administrator of LIBOR, ceased publication of most LIBOR settings on a representative basis at the end of 2021 and is expected to cease publication of a majority of U.S. dollar LIBOR settings on a representative basis after June 30, 2023. In

Western Asset Diversified Income Fund

addition, global regulators have announced that, with limited exceptions, no new LIBOR-based contracts should be entered into after 2021. Actions by regulators have resulted in the establishment of alternative reference rates to LIBOR in most major currencies. Various financial industry groups have been planning for the transition away from LIBOR, but there remains uncertainty regarding the nature of any replacement rate and the impact of the transition from LIBOR on the Fund’s transactions and the financial markets generally. The transition away from LIBOR may lead to increased volatility and illiquidity in markets that rely on LIBOR and may adversely affect the Fund’s performance. The transition may also result in a reduction in the value of certain LIBOR-based investments held by the Fund or reduce the effectiveness of related transactions such as hedges. Any such effects of the transition away from LIBOR, as well as other unforeseen effects, could result in losses for the Fund. Since the usefulness of LIBOR as a benchmark could also deteriorate during the transition period, effects could occur at any time.

More Information

For a complete list of the Fund’s fundamental investment restrictions and more detailed descriptions of the Fund’s investment policies, strategies and risks, see the Fund’s registration statement on Form N-2 that was declared effective by the SEC on June 24, 2021. The Fund’s fundamental investment restrictions may not be changed without the approval of the holders of a majority of the outstanding voting securities, as defined in the 1940 Act.

Western Asset Diversified Income Fund

Dividend reinvestment plan (unaudited)

Unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends and return of capital distributions, on your Common Shares will be automatically reinvested by Computershare Trust Company, N.A., as agent for the shareholders (the “Plan Agent”), in additional Common Shares under the Fund’s Dividend Reinvestment Plan (the “Plan”). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by Computershare Trust Company, N.A., as dividend paying agent.

In the case of a registered shareholder such as a broker, bank or other nominee (together, a “nominee”) that holds Common Shares for others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of Common Shares certified by the nominee/record shareholder as representing the total amount registered in such shareholder’s name and held for the account of beneficial owners who are to participate in the Plan. If your Common Shares are held through a nominee and are not registered with the Plan Agent, neither you nor the nominee will be participants in or have distributions reinvested under the Plan. If you are a beneficial owner of Common Shares and wish to participate in the Plan, and your nominee is unable or unwilling to become a registered shareholder and a Plan participant on your behalf, you may request that your nominee arrange to have all or a portion of your shares re-registered with the Plan Agent in your name so that you may be enrolled as a participant in the Plan. Please contact your nominee for details or for other possible alternatives. Registered shareholders whose shares are registered in the name of one nominee firm may not be able to transfer the shares to another firm and continue to participate in the Plan.

If you participate in the Plan, the number of Common Shares you will receive will be determined as follows:

(1) If the market price of the Common Shares (plus $0.03 per share processing fee which includes any brokerage commission the Plan Agent is required to pay) on the payment date (or, if the payment date is not a NYSE trading day, the immediately preceding trading day) is equal to or exceeds the net asset value per share of the Common Shares at the close of trading on the NYSE on the payment date, the Fund will issue new Common Shares at a price equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the payment date or (b) 95% of the market price per share of the Common Shares on the payment date.

(2) If the net asset value per share of the Common Shares exceeds the market price of the Common Shares (plus $0.03 per share processing fee) at the close of trading on the NYSE on the payment date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Shares in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading day following the payment date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date, or (b) the payment date for the next succeeding dividend or distribution to be made to the shareholders; except when necessary to comply with

Western Asset Diversified Income Fund

applicable provisions of the federal securities laws. If during this period: (i) the market price (plus $0.03 per share processing fee) rises so that it equals or exceeds the net asset value per share of the Common Shares at the close of trading on the NYSE on the payment date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases, the Plan Agent will cease purchasing Common Shares in the open market and the Fund will issue the remaining Common Shares at a price per share equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the day prior to the issuance of shares for reinvestment or (b) 95% of the then current market price per share.

Common Shares in your account will be held by the Plan Agent in non-certificated form. Any proxy you receive will include all Common Shares you have received under the Plan.

You may withdraw from the Plan (i.e., opt-out) by notifying the Plan Agent through the Internet at www.computershare.com/investor, in writing at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151. Such withdrawal will be effective immediately if notice is received by the Plan Agent prior to any dividend or distribution record date; otherwise such withdrawal will be effective as soon as practicable after the Plan Agent’s investment of the most recently declared dividend or distribution on the Common Shares.

Plan participants who sell their shares will be charged a service charge (currently $5.00 per transaction) and the Plan Agent is authorized to deduct per share processing fees actually incurred from the proceeds (currently $0.05 per share, which includes any brokerage commission the Plan Agent is required to pay). There is no service charge for reinvestment of your dividends or distributions in Common Shares. However, all participants will pay per share processing fees (currently $0.03 per share) incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions will be automatically reinvested in additional Common Shares, this allows you to add to your investment through dollar cost averaging, which may lower the average cost of your Common Shares over time. Dollar cost averaging is a technique for lowering the average cost per share over time if the Fund’s net asset value declines. While dollar cost averaging has definite advantages, it cannot assure profit or protect against loss in declining markets.

Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. Investors will be subject to income tax on amounts reinvested under the Plan.

The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of Trustees, the change is warranted. The Plan may be terminated, amended or supplemented by the Fund upon notice in writing mailed to shareholders at least 30 days prior to the record date for the payment of any dividend or distribution by the Fund for which the termination or amendment is to be effective. Upon any termination, you will be sent cash for any fractional share of Common Shares in your account less any applicable fees.

Western Asset Diversified Income Fund

Dividend reinvestment plan (unaudited) (cont’d)

You may elect to notify the Plan Agent in advance of such termination to have the Plan Agent sell part or all of your Common Shares on your behalf. Additional information about the Plan and your account may be obtained from the Plan Agent through the Internet at www.computershare.com/investor, in writing at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151.

Western Asset Diversified Income Fund

Important tax information (unaudited)

By mid-February, tax information related to a shareholder’s proportionate share of distributions paid during the preceding calendar year will be received, if applicable. Please also refer to www.franklintempleton.com for per share tax information related to any distributions paid during the preceding calendar year. Shareholders are advised to consult with their tax advisors for further information on the treatment of these amounts on their tax returns.

The following tax information for the Fund is required to be furnished to shareholders with respect to income earned and distributions paid during its tax period.

The Fund hereby reports the following amounts, or if subsequently determined to be different, the maximum allowable amounts, for the tax period ended December 31, 2021:


	Pursuant to:	Amount Reported
Qualified Net Interest Income (QII)	§871(k)(1)(C)	$	14,123,366
Section 163(j) Interest Earned	§163(j)	$	27,959,640

Western Asset Diversified Income Fund

Western Asset

Diversified Income Fund

Trustees

Robert D. Agdern*

Carol L. Colman

Daniel P. Cronin

Paolo M. Cucchi

William R. Hutchinson

Eileen A. Kamerick

Nisha Kumar

Jane Trust

Chairman

Officers

Jane Trust

President and Chief Executive Officer

Christopher Berarducci

Treasurer and Principal Financial Officer

Fred Jensen

Chief Compliance Officer

Jenna Bailey

Identity Theft Prevention Officer

George P. Hoyt

Secretary and Chief Legal Officer

Thomas C. Mandia**

Senior Vice President

Jeanne M. Kelly

Senior Vice President

*	Effective August 16, 2021, Mr. Agdern became a Trustee.

**	Effective February 10, 2022, Mr. Mandia became a Senior Vice President.

Western Asset Diversified Income Fund

620 Eighth Avenue

47th Floor

New York, NY 10018

Investment manager

Legg Mason Partners Fund Advisor, LLC

Subadviser

Western Asset Management Company, LLC

Western Asset Management Company Limited

Western Asset Management Company Ltd

Western Asset Management Company Pte. Ltd.

Custodian

The Bank of New York Mellon

Transfer agent

Computershare Inc.

462 South 4th Street, Suite 1600

Louisville, KY 40202

Independent registered public accounting firm

PricewaterhouseCoopers LLP

Baltimore, MD

Legal counsel

Simpson Thacher & Bartlett LLP

900 G Street NW

Washington, DC 20001

New York Stock Exchange Symbol

WDI

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, Franklin Distributors, LLC, as well as Legg Mason-sponsored closed-end funds. 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:

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Personal information included on applications or other forms;

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Account balances, transactions, and mutual fund holdings and positions;

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Bank account information, legal documents, and identity verification documentation;

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Online account access user IDs, passwords, security challenge question responses; and

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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:

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Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators;

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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 statistical analysis, market research and marketing services solely for the Funds;

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Permit access to transfer, whether in the United States or countries outside of the United States to such Funds’ employees, agents and affiliates and service providers as required to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators;

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The Funds’ representatives such as legal counsel, accountants and auditors to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators;

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Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.

NOT PART OF THE ANNUAL REPORT

Legg Mason Funds Privacy and Security Notice (cont’d)

Except as otherwise permitted by applicable law, companies acting on the Funds’ behalf, including those outside the United States, 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, if you have questions about the Funds’ privacy practices, or our use of your nonpublic personal information, 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.franklintempleton.com, or contact the Fund at 1-888-777-0102.

Revised April 2018

Legg Mason California Consumer Privacy Act Policy

Although much of the personal information we collect is “nonpublic personal information” subject to federal law, residents of California may, in certain circumstances, have additional rights under the California Consumer Privacy Act (“CCPA”). For example, if you are a broker, dealer, agent, fiduciary, or representative acting by or on behalf of, or for, the account of any other person(s) or household, or a financial advisor, or if you have otherwise provided personal

NOT PART OF THE ANNUAL REPORT

Legg Mason Funds Privacy and Security Notice (cont’d)

information to us separate from the relationship we have with personal investors, the provisions of this Privacy Policy apply to your personal information (as defined by the CCPA).

•

In addition to the provisions of the Legg Mason Funds Security and Privacy Notice, you may have the right to know the categories and specific pieces of personal information we have collected about you.

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You also have the right to request the deletion of the personal information collected or maintained by the Funds.

If you wish to exercise any of the rights you have in respect of your personal information, you should advise the Funds by contacting them as set forth below. The rights noted above are subject to our other legal and regulatory obligations and any exemptions under the CCPA. You may designate an authorized agent to make a rights request on your behalf, subject to the identification process described below. We do not discriminate based on requests for information related to our use of your personal information, and you have the right not to receive discriminatory treatment related to the exercise of your privacy rights.

We may request information from you in order to verify your identity or authority in making such a request. If you have appointed an authorized agent to make a request on your behalf, or you are an authorized agent making such a request (such as a power of attorney or other written permission), this process may include providing a password/passcode, a copy of government issued identification, affidavit or other applicable documentation, i.e. written permission. We may require you to verify your identity directly even when using an authorized agent, unless a power of attorney has been provided. We reserve the right to deny a request submitted by an agent if suitable and appropriate proof is not provided.

For the 12-month period prior to the date of this Privacy Policy, the Legg Mason Funds have not sold any of your personal information; nor do we have any plans to do so in the future.

Contact Information

Address: Data Privacy Officer, 100 International Dr., Baltimore, MD 21202

Email: DataProtectionOfficer@franklintempleton.com

Phone: 1-800-396-4748

Revised October 2020

NOT PART OF THE ANNUAL REPORT

Western Asset Diversified Income Fund

Western Asset Diversified Income Fund

620 Eighth Avenue

47th Floor

New York, NY 10018

Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase, at market prices, shares of its stock.

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 as an exhibit to its reports on Form N-PORT. The Fund’s Forms N-PORT are available on the SEC’s website at www.sec.gov. To obtain information on Form N-PORT, shareholders can call the Fund at 1-888-777-0102.

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 1-888-777-0102, (2) at www.franklintempleton.com and (3) on the SEC’s website at www.sec.gov.

Quarterly performance, semi-annual and annual reports, current net asset value and other information regarding the Fund may be found on Franklin Templeton’s website, which can be accessed at www.franklintempleton.com. Any reference to Franklin Templeton’s website in this report is intended to allow investors public access to information regarding the Fund and does not, and is not intended to, incorporate Franklin Templeton’s website in this report.

This report is transmitted to the shareholders of Western Asset Diversified Income Fund for their information. This is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.

Computershare Inc.

462 South 4th Street, Suite 1600

Louisville, KY 40202

WASX647413 2/22 SR22-4361

ITEM 2.

CODE OF ETHICS.

The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.

ITEM 3.

AUDIT COMMITTEE FINANCIAL EXPERT.

The Board of Directors of the registrant has determined that William R. Hutchinson, Eileen A. Kamerick and Nisha Kumar, are the members of the Board’s Audit Committee, possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert”.

ITEM 4.

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

(a) Audit Fees. The aggregate fees billed in the previous fiscal years ending December 31, 2021 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $74,000 in December 31, 2021.

(b) Audit-Related Fees. The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrant’s financial statements were $0 in December 31, 2021.

(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $10,000 in December 31, 2021. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.

There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee.

(d) All Other Fees. The aggregate fees for other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item for the Western Asset Diversified Income Fund were $0 in December 31, 2021.

All Other Fees. There were no other non-audit services rendered by the Auditor to Legg Mason Partners Fund Advisors, LLC (“LMPFA”), and any entity controlling, controlled by or under common control with LMPFA that provided ongoing services to Western Asset Diversified Income Fund requiring pre-approval by the Audit Committee in the Reporting Period.

(e) Audit Committee’s pre—approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.

(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by LMPFA or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee.

The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.

Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.

(2) For the Western Asset Diversified Income Fund, the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% December 31, 2021; Tax Fees were 100% for December 31, 2021; and Other Fees were 100% for December 31, 2021.

(f) N/A

(g) Non-audit fees billed by the Auditor for services rendered to Western Asset Diversified Income Fund, LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Western Asset Diversified Income Fund during the reporting period were $343,489 in December 31, 2021.

(h) Yes. Western Asset Diversified Income Fund’s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates, which were not pre-approved (not requiring pre-approval), is compatible with maintaining the Accountant’s independence. All services provided by the Auditor to the Western Asset Diversified Income Fund or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.

ITEM 5.

AUDIT COMMITTEE OF LISTED REGISTRANTS.

a) Registrant has a separately-designated standing Audit Committee established in accordance with Section 3(a)58(A) of the Exchange Act. The Audit Committee consists of the following Board members:

Robert D. Agdern*

Carol L. Colman

Daniel P. Cronin

Paolo M. Cucchi

William R. Hutchinson

Eileen A. Kamerick

Nisha Kumar

Effective August 16, 2021, Mr. Agdern became a Trustee.

b) Not applicable

ITEM 6.

SCHEDULE OF INVESTMENTS.

Included herein under Item 1.

ITEM 7.

DISCLOSURE OF PROXY VOTING POLOCIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES

Western Asset Management Company, LLC

Proxy Voting Policies and Procedures

BACKGROUND

An investment adviser is required to adopt and implement policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). The authority to vote the proxies of our clients is established through investment management agreements or comparable documents. In addition to SEC requirements governing advisers, long-standing fiduciary standards and responsibilities have been established for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the investment manager.

POLICY

As a fixed income only manager, the occasion to vote proxies is very rare. However, the Firm has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 206(4)- 6 under the Investment Advisers Act of 1940 (“Advisers Act”). In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.

While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on a case-by-case basis, taking into consideration the Firm’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent the Firm deems appropriate).

In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (other than Western Asset affiliated companies) regarding the voting of any securities owned by its clients.

PROCEDURE

Responsibility and Oversight

The Western Asset Legal and Compliance Department (“Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.

Client Authority

The Investment Management Agreement for each client is reviewed at account start-up for proxy voting instructions. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Legal and Compliance Department maintains a matrix of proxy voting authority.

Proxy Gathering

Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.

Proxy Voting

Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:

Proxies are reviewed to determine accounts impacted.

Impacted accounts are checked to confirm Western Asset voting authority.

Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.)

If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party.

Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into the account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department.

Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials.

Timing

Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering, and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.

Recordkeeping

Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:

A copy of Western Asset’s policies and procedures.

Copies of proxy statements received regarding client securities.

A copy of any document created by Western Asset that was material to making a decision how to vote proxies.

Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests.

A proxy log including:

Issuer name;

Exchange ticker symbol of the issuer’s shares to be voted;

Committee on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted;

A brief identification of the matter voted on;

Whether the matter was proposed by the issuer or by a shareholder of the issuer;

Whether a vote was cast on the matter;

A record of how the vote was cast; and

Whether the vote was cast for or against the recommendation of the issuer’s management team.

Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.

Disclosure

Western Asset’s proxy policies are described in the firm’s Part 2A of Form ADV. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.

Conflicts of Interest

All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest.

Issues to be reviewed include, but are not limited to:

Whether Western (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company;

Whether Western or an officer or director of Western or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and

Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders.

Voting Guidelines

Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.

Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.

Board Approved Proposals

The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:

Matters relating to the Board of Directors

Western Asset votes proxies for the election of the company’s nominees for directors and for board- approved proposals on other matters relating to the board of directors with the following exceptions:

Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors.

Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director.

Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences.

Votes are cast on a case-by-case basis in contested elections of directors.

Matters relating to Executive Compensation

Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:

Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution.

Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options.

Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price.

Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less.

Matters relating to Capitalization

The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.

Western Asset votes for proposals relating to the authorization of additional common stock.

Western Asset votes for proposals to effect stock splits (excluding reverse stock splits).

Western Asset votes for proposals authorizing share repurchase programs.

Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions

Western Asset votes these issues on a case-by-case basis on board-approved transactions.

Matters relating to Anti-Takeover Measures

Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:

Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans.

Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions.

Other Business Matters

Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.

Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or bylaws.

Western Asset votes against authorization to transact other unidentified, substantive business at the meeting.

II.

Shareholder Proposals

SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:

Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans.

Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals.

Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors.

III.

Voting Shares of Investment Companies

Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.

Western Asset votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios.

Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided.

IV.

Voting Shares of Foreign Issuers

In the event Western Asset is required to vote on securities held in non-U.S. issuers – i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.

Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management.

Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees.

Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated.

Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights.

RETIREMENT ACCOUNTS

In order to comply with the DOL’s position, Western Asset will be presumed to have the obligation to vote proxies for its Retirement Accounts unless Western Asset has obtained a specific written instruction indicating that: (a) the right to vote proxies has been reserved to a named fiduciary of the client, and (b) Western Asset is precluded from voting proxies on behalf of the client. If Western Asset does not receive such an instruction, Western Asset will be responsible for voting proxies in the best interests of the Retirement Account client and in accordance with any proxy voting guidelines provided by the client.

Western Asset Management Company Limited

Proxy Voting and Corporate Actions Policy

NOTE: Below policy relating to Proxy Voting and Corporate Actions is a global policy for all Western Asset affiliates. As compliance with the Policy is monitored by Western Asset Pasadena affiliate, the Policy has been adopted from US Compliance Manual and therefore all defined terms are those defined in the US Compliance Manual rather than UK Compliance Manual.

As a fixed income only manager, the occasion to vote proxies is very rare. However, the Firm has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.

RESPONSIBILITY AND OVERSIGHT

CLIENT AUTHORITY

PROXY GATHERING

PROXY VOTING

Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:

•

Proxies are reviewed to determine accounts impacted.

•

Impacted accounts are checked to confirm Western Asset voting authority.

•

Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department.

•

Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials.

TIMING

Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.

RECORDKEEPING

Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:

•

A copy of Western Asset’s policies and procedures.

•

Copies of proxy statements received regarding client securities.

•

A copy of any document created by Western Asset that was material to making a decision how to vote proxies.

•

Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests.

•

A proxy log including:

•

Issuer name;

•

Exchange ticker symbol of the issuer’s shares to be voted;

•

Committee on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted;

•

A brief identification of the matter voted on;

•

Whether the matter was proposed by the issuer or by a shareholder of the issuer;

•

Whether a vote was cast on the matter;

•

A record of how the vote was cast; and

•

Whether the vote was cast for or against the recommendation of the issuer’s management team.

Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.

DISCLOSURE

CONFLICT OF INTEREST

All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:

•

Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders.

VOTING GUIDELINES

BOARD APPROVAL PROPOSALS

Matters relating to the Board of Directors – Western Asset votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:

•

Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director.

•

Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences.

•

Votes are cast on a case-by-case basis in contested elections of directors.

Matters relating to Executive Compensation – Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by- case basis on board-approved proposals relating to executive compensation, except as follows:

•

Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution.

•

Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options.

•

Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price.

•

Matters relating to Capitalization – The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on board- approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.

•

Western Asset votes for proposals relating to the authorization of additional common stock;

•

Western Asset votes for proposals to effect stock splits (excluding reverse stock splits);

•

Western Asset votes for proposals authorizing share repurchase programs;

•

Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions;

•

Western Asset votes these issues on a case-by-case basis on board-approved transactions;

Matters relating to Anti-Takeover Measures – Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:

•

Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans;

•

Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions.

Other Business Matters – Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.

•

Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or bylaws;

•

Western Asset votes against authorization to transact other unidentified, substantive business at the meeting.

SHAREHOLDER PROPOSALS

•

Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans;

•

Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals;

•

Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors.

VOTING SHARES OF INVESTMENT COMPANIES

•

VOTING SHARES OF FOREIGN ISSUERS

•

Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management;

•

Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees;

•

Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated;

•

RETIREMENT ACCOUNTS

Furthermore, unless Western Asset is expressly precluded from voting the proxies, the DOL has determined that the responsibility remains with the investment manager.

CORPORATE ACTIONS

Western Asset must pay strict attention to any corporate actions that are taken with respect to issuers whose securities are held in client accounts. For example, Western Asset must review any tender offers, rights offerings, etc., made in connection with securities owned by clients. Western Asset must also act in a timely manner and in the best interest of each client with respect to any such corporate actions.

Western Asset Management Company Ltd (“WAMJ”) Proxy Voting Policies and Procedures

POLICY

As a fixed income only manager, the occasion to vote proxies for WAMJ is very rare. However, the Firm has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients.

In exercising its voting authority, WAMJ will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (other than Western Asset affiliated companies) regarding the voting of any securities owned by its clients.

PROCEDURE

Responsibility and Oversight

The WAMJ Legal and Compliance Department (“Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Operations (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.

Client Authority

The Investment Management Agreement for each client is reviewed at account start-up for proxy voting instructions. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority, WAMJ will assume responsibility for proxy voting. The Legal and Compliance Department maintains a matrix of proxy voting authority.

Proxy Gathering

Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if WAMJ becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If WAMJ personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.

Proxy Voting

Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:

Proxies are reviewed to determine accounts impacted.

Impacted accounts are checked to confirm WAMJ voting authority.

If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and WAMJ obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle), WAMJ seeks voting instructions from an independent third party.

Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, WAMJ may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department.

Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials.

Timing

WAMJ personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.

Recordkeeping

WAMJ maintains records of proxies. These records include:

A copy of WAMJ’s policies and procedures.

Copies of proxy statements received regarding client securities.

A copy of any document created by WAMJ that was material to making a decision how to vote proxies.

Each written client request for proxy voting records and WAMJ’s written response to both verbal and written client requests.

A proxy log including:

Issuer name;

Exchange ticker symbol of the issuer’s shares to be voted;

Committee on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted;

A brief identification of the matter voted on;

Whether the matter was proposed by the issuer or by a shareholder of the issuer;

Whether a vote was cast on the matter;

A record of how the vote was cast; and

Whether the vote was cast for or against the recommendation of the issuer’s management team.

Records are maintained in an easily accessible place for five years, the first two in WAMJ’s offices.

Disclosure

WAMJ’s proxy policies are described in the firm’s Part 2A of Form ADV. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.

Conflicts of Interest

All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:

Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders.

Voting Guidelines

WAMJ’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.

1b.

Board Approved Proposals

The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, WAMJ generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:

Matters relating to the Board of Directors

WAMJ votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:

Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director.

Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences.

Votes are cast on a case-by-case basis in contested elections of directors.

Matters relating to Executive Compensation

WAMJ generally favors compensation programs that relate executive compensation to a company’s long- term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:

Except where the firm is otherwise withholding votes for the entire board of directors, WAMJ votes for stock option plans that will result in a minimal annual dilution.

WAMJ votes against stock option plans or proposals that permit replacing or repricing of underwater options.

WAMJ votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price.

Except where the firm is otherwise withholding votes for the entire board of directors, WAMJ votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less.

Matters relating to Capitalization

The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, WAMJ votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where WAMJ is otherwise withholding votes for the entire board of directors.

WAMJ votes for proposals relating to the authorization of additional common stock.

WAMJ votes for proposals to effect stock splits (excluding reverse stock splits).

WAMJ votes for proposals authorizing share repurchase programs.

Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions WAMJ votes these issues on a case-by-case basis on board-approved transactions.

Matters relating to Anti-Takeover Measures

WAMJ votes against board-approved proposals to adopt anti-takeover measures except as follows:

WAMJ votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans.

WAMJ votes on a case-by-case basis on proposals to adopt fair price provisions.

Other Business Matters

WAMJ votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.

WAMJ votes on a case-by-case basis on proposals to amend a company’s charter or bylaws.

WAMJ votes against authorization to transact other unidentified, substantive business at the meeting.

2b. Shareholder Proposals

SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. WAMJ votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:

WAMJ votes for shareholder proposals to require shareholder approval of shareholder rights plans.

WAMJ votes for shareholder proposals that are consistent with WAMJ’s proxy voting guidelines for board-approved proposals.

WAMJ votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors.

3b. Voting Shares of Investment Companies

WAMJ may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.

•

WAMJ votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios.

•

WAMJ votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided.

4b. Voting Shares of Foreign Issuers

In the event WAMJ is required to vote on securities held in non-U.S. issuers – i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.

WAMJ votes for shareholder proposals calling for a majority of the directors to be independent of management.

WAMJ votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees.

WAMJ votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated.

WAMJ votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights.

Western Asset Management Company Pte. Ltd. (“WAMS”)

Compliance Policies and Procedures

Proxy Voting

WAMS has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and the applicable laws and regulations. In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts.

In exercising its voting authority, WAMS will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (other than Western Asset affiliated companies) regarding the voting of any securities owned by its clients.

Procedure

Responsibility and Oversight

The Western Asset Legal and Compliance Department is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.

Client Authority

Proxy Gathering

Proxy Voting

Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:

Proxies are reviewed to determine accounts impacted.

Impacted accounts are checked to confirm Western Asset voting authority.

Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. [See conflicts of interest section of these procedures for further information on determining material conflicts of interest.]

If a material conflict of interest exists, (4.1) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (4.2) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party.

Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department.

Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (4) or (5) and returns the voted proxy as indicated in the proxy materials.

Timing

Recordkeeping

Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:

•

A copy of Western Asset’s policies and procedures.

•

Copies of proxy statements received regarding client securities.

•

A copy of any document created by Western Asset that was material to making a decision how to vote proxies.

•

Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests.

•

A proxy log including:

•

Issuer name;

•

Exchange ticker symbol of the issuer’s shares to be voted;

•

Committee on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted;

•

A brief identification of the matter voted on;

•

Whether the matter was proposed by the issuer or by a shareholder of the issuer;

•

Whether a vote was cast on the matter;

•

A record of how the vote was cast; and

•

Whether the vote was cast for or against the recommendation of the issuer’s management team.

Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.

Disclosure

Conflicts of Interest

All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:

•

Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders.

Voting Guidelines

Guidelines are grouped according to the types of proposals generally presented to shareholders. Part 1 deals with proposals which have been approved and are recommended by a company’s board of directors; Part 2 deals with proposals submitted by shareholders for inclusion in proxy statements; Part 3 addresses issues relating to voting shares of investment companies; and Part 4 addresses unique considerations pertaining to foreign issuers

Part 1 - Board Approved Proposals

•

Matters relating to the Board of Directors. Western Asset votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:

•

Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director.

•

Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences.

•

Votes are cast on a case-by-case basis in contested elections of directors.

•

Matters relating to Executive Compensation. Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:

•

Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution.

•

Western Asset votes against stock option plans or proposals that permit replacing or re-pricing of underwater options.

•

Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price.

•

Matters relating to Capitalization. The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.

•

Western Asset votes for proposals relating to the authorization of additional common stock.

•

Western Asset votes for proposals to effect stock splits (excluding reverse stock splits).

•

Western Asset votes for proposals authorizing share repurchase programs.

•

Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions. Western Asset votes these issues on a case-by-case basis on board-approved transactions.

•

Matters relating to Anti-Takeover Measures. Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:

•

Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans.

•

Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions.

•

Other Business Matters. Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.

•

Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or bylaws.

•

Western Asset votes against authorization to transact other unidentified, substantive business at the meeting.

Part 2 – Shareholder Proposals

•

Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans.

•

Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals.

•

Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors.

Part 3 – Voting Shares of Investment Companies

Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts 1 and 2 above are voted in accordance with those guidelines.

•

Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g. proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided.

Part 4 – Voting Shares of Foreign Issuers

•

Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management.

•

Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees.

•

Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have pre-emptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have pre-emptive rights.

Retirement Accounts

For accounts subject to ERISA, as well as other Retirement Accounts, Western Asset is presumed to have the responsibility to vote proxies for the client. The Department of Labor (“DOL”) has issued a bulletin that states that investment managers have the responsibility to vote proxies on behalf of Retirement Accounts unless the authority to vote proxies has been specifically reserved to another named fiduciary. Furthermore, unless Western Asset is expressly precluded from voting the proxies, the DOL has determined that the responsibility remains with the investment manager. In order to comply with the DOL’s position, Western Asset will be presumed to have the obligation to vote proxies for its Retirement Accounts unless Western Asset has obtained a specific written instruction indicating that: (1) the right to vote proxies has been reserved to a named fiduciary of the client, and (2) Western Asset is precluded from voting proxies on behalf of the client. If Western Asset does not receive such an instruction, Western Asset will be responsible for voting proxies in the best interests of the Retirement Account client and in accordance with any proxy voting guidelines provided by the client.

ITEM 8.

INVESTMENT PROFESSIONALS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

(a)(1):


NAME AND ADDRESS	LENGTH OF TIME SERVED	PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
S. Kenneth Leech Western Asset 385 East Colorado Blvd. Pasadena, CA 91101	Since 2021	Responsible for the day-to-day management with other members of the Fund’s portfolio management team; Chief Investment Officer of Western Asset from 1998 to 2008 and since 2014; Senior Advisor/Chief Investment Officer Emeritus of Western Asset from 2008-2013; Co-Chief Investment Officer of Western Asset from 2013-2014.

Michael C. Buchanan Western Asset 385 East Colorado Blvd. Pasadena, CA 91101	Since 2021	Responsible for the day-to-day management with other members of the Fund’s portfolio management team; employed by Western Asset Management as an investment professional for at least the past five years

Greg E. Handler Western Asset 385 East Colorado Blvd. Pasadena, CA 91101	Since 2021	Responsible for the day-to-day management with other members of the Fund’s portfolio management team; research analyst/portfolio manager at Western Asset since 2002.

Christopher Kilpatrick Western Asset 385 East Colorado Blvd. Pasadena, CA 91101	Since 2021	Responsible for the day-to-day management with other members of the Fund’s portfolio management team; employed by Western Asset Management as an investment professional for at least the past five years.

Annabel Rudebeck Western Asset 385 East Colorado Blvd. Pasadena, CA 91101	Since 2021	Responsible for the day-to-day management with other members of the Fund’s portfolio management team; Ms.. Rudebeck joined Western Asset in 2016 as Head of Non-US Credit. Ms. Rudebeck has over 18 years of investment industry experience. Formerly Ms. Rudebeck was a Senior Partner and Head of Global Investment-Grade Credit for Rogge Global Partners and also served as a Credit Research Associate at J.P. Morgan Securities.

(a)(2): DATA TO BE PROVIDED BY FINANCIAL CONTROL

The following tables set forth certain additional information with respect to the fund’s investment professionals for the fund. Unless noted otherwise, all information is provided as of December 31, 2021.

Other Accounts Managed by Investment Professionals

The table below identifies the number of accounts (other than the fund) for which the fund’s investment professionals have day-to-day management responsibilities and the total assets in such accounts, within each of the following categories:

registered investment companies, other pooled investment vehicles, and other accounts. For each category, the number of accounts and total assets in the accounts where fees are based on performance is also indicated.

Name of PM

Type of Account

Number of
Accounts
Managed

Total Assets
Managed

Number of
Accounts Managed
for which
Advisory Fee is
Performance-
Based

Assets Managed
for which
Advisory Fee is
Performance-
Based

S. Kenneth Leech‡

Other Registered Investment Companies

179.22 billion

None

Other Pooled Vehicles

337

87.48 billion

3.00 billion

Other Accounts

584

224.14 billion

16.33 billion

Greg E. Handler ‡

Other Registered Investment Companies

3.17 billion

None

Other Pooled Vehicles

4.85 billion

265 million

Other Accounts

3.69 billion

1.02 billion

Michael C. Buchanan ‡

Other Registered Investment Companies

20.49 billion

None

Other Pooled Vehicles

28.83 billion

1.67 billion

Other Accounts

169

78.96 billion

5.34 billion

Annabel Rudebeck‡

Other Registered Investment Companies

5.96 billion

None

Other Pooled Vehicles

6.37 billion

None

Other Accounts

8.46 billion

1.37 billion

Christopher Kilpatrick ‡

Other Registered Investment Companies

2.80 billion

None

Other Pooled Vehicles

510 million

258 million

Other Accounts

None

‡

The numbers above reflect the overall number of portfolios managed by employees of Western Asset Management Company (“Western Asset”). Mr. Leech is involved in the management of all the Firm’s portfolios, but they are not solely responsible for particular portfolios. Western Asset’s investment discipline emphasizes a team approach that combines the efforts of groups of specialists working in different market sectors. He is responsible for overseeing implementation of Western Asset’s overall investment ideas and coordinating the work of the various sector teams. This structure ensures that client portfolios benefit from a consensus that draws on the expertise of all team members.

(a)(3): Investment Professional Compensation

Conflicts of Interest

The Subadviser has adopted compliance policies and procedures to address a wide range of potential conflicts of interest that could directly impact client portfolios. For example, potential conflicts of interest may arise in connection with the management of multiple portfolios (including portfolios managed in a personal capacity). These could include potential conflicts of interest related to the knowledge and timing of a portfolio’s trades, investment opportunities and broker selection. Portfolio managers are privy to the size, timing, and possible market impact of a portfolio’s trades.

It is possible that an investment opportunity may be suitable for both a portfolio and other accounts managed by a portfolio manager, but may not be available in sufficient quantities for both the portfolio and the other accounts to participate fully. Similarly, there may be limited opportunity to sell an investment held by a portfolio and another account. A conflict may arise where the portfolio manager may have an incentive to treat an account preferentially as compared to a portfolio because the account pays a performance-based fee or the portfolio manager, the Subadviser or an affiliate has an interest in the account. The Subadviser has adopted procedures for allocation of portfolio transactions and investment opportunities across multiple client accounts on a fair and equitable basis over time. Eligible accounts that can participate in a trade generally share the same price on a pro-rata allocation basis, taking into account differences based on factors such as cash availability, investment restrictions and guidelines, and portfolio composition versus strategy.

With respect to securities transactions, the Subadviser determines which broker or dealer to use to execute each order, consistent with their duty to seek best execution of the transaction. However, with respect to certain other accounts (such as pooled investment vehicles that are not registered investment companies and other accounts managed for organizations and individuals), the Subadviser may be limited by the client with respect to the selection of brokers or dealers or may be instructed to direct trades through a particular broker or dealer. In these cases, trades for a portfolio in a particular security may be placed separately from, rather than aggregated with, such other accounts. Having separate transactions with respect to a security may temporarily affect the market price of the security or the execution of the transaction, or both, to the possible detriment of a portfolio or the other account(s) involved. Additionally, the management of multiple portfolios and/or other accounts may result in a portfolio manager devoting unequal time and attention to the management of each portfolio and/or other account. The Subadviser’s team approach to portfolio management and block trading approach seeks to limit this potential risk.

The Subadviser also maintains a gift and entertainment policy to address the potential for a business contact to give gifts or host entertainment events that may influence the business judgment of an employee. Employees are permitted to retain gifts of only a nominal value and are required to make reimbursement for entertainment events above a certain value. All gifts (except those of a de minimis value) and entertainment events that are given or sponsored by a business contact are required to be reported in a gift and entertainment log which is reviewed on a regular basis for possible issues.

Employees of the Subadviser have access to transactions and holdings information regarding client accounts and the Subadviser’s overall trading activities. This information represents a potential conflict of interest because employees may take advantage of this information as they trade in their personal accounts. Accordingly, the Subadviser maintains a Code of Ethics that is compliant with Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Advisers Act to address personal trading. In addition, the Code of Ethics seeks to establish broader principles of good conduct and fiduciary responsibility in all aspects of the Subadviser’s business. The Code of Ethics is administered by the Legal and Compliance Department and monitored through the Subadviser’s compliance monitoring program.

The Subadviser may also face other potential conflicts of interest with respect to managing client assets, and the description above is not a complete description of every conflict of interest that could be deemed to exist. The Subadviser also maintains a compliance monitoring program and engages independent auditors to conduct a SOC1/ISAE 3402 audit on an annual basis. These steps help to ensure that potential conflicts of interest have been addressed.

Investment Professional Compensation

With respect to the compensation of the Fund’s investment professionals, the Subadviser’s compensation system assigns each employee a total compensation range, which is derived from annual market surveys that benchmark each role with its job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market value of their skills, experience and ability to produce desired results. Standard compensation includes competitive base salaries, generous employee benefits and a retirement plan.

In addition, the Subadviser’s employees are eligible for bonuses. These are structured to closely align the interests of employees with those of the Subadviser, and are determined by the professional’s job function and pre-tax performance as measured by a formal review process. All bonuses are completely discretionary. The principal factor considered is an investment professional’s investment performance versus appropriate peer groups and benchmarks (e.g., a securities index and with respect to the Fund, the benchmark set forth in the Fund’s Prospectus to which the Fund’s average annual total returns are compared or, if none, the benchmark set forth in the Fund’s annual report). Performance is reviewed on a 1, 3 and 5 year basis for compensation—with 3 and 5 years having a larger emphasis. The Subadviser may also measure an investment professional’s pre-tax investment performance against other benchmarks, as it determines appropriate. Because investment professionals are generally responsible for multiple accounts (including the Fund) with similar investment strategies, they are generally compensated on the performance of the aggregate group of similar accounts, rather than a specific account. Other factors that may be considered when making bonus decisions include client service, business development, length of service to the Subadviser, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to the Subadviser’s business.

Finally, in order to attract and retain top talent, all investment professionals are eligible for additional incentives in recognition of outstanding performance. These are determined based upon the factors described above and include long-term incentives that vest over a set period of time past the award date.

(a)(4): Investment Professional Securities Ownership

The table below identifies the dollar range of securities beneficially owned by each investment professional as of December 31, 2021.


Portfolio Manager(s)		Dollar Range of Portfolio Securities Beneficially Owned
S. Kenneth Leech		A
Michael C. Buchanan Christopher Kilpatrick		A A
Annabel Rudebeck		A
Greg E. Handler		A

Dollar Range ownership is as follows:

A: none

B: $1 - $10,000

C: 10,001 - $50,000

D: $50,001 - $100,000

E: $100,001 - $500,000 F: $500,001 - $1 million

G: over $1 million

ITEM 9.

PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS

Not applicable.

ITEM 10.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

ITEM 11.

CONTROLS AND PROCEDURES.

(a)

The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934.

(b)

There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting.

ITEM 12.

DISCLOSURE OF SECURITIES LENDING ACTIVITIES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

ITEM 13.

EXHIBITS.

(a) (1) Code of Ethics attached hereto.

Exhibit 99.CODE ETH

(a) (2) Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto.

Exhibit 99.CERT

(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto.

Exhibit 99.906CERT

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.


Western Asset Diversified Income Fund

By:		/s/ Jane Trust

		Jane Trust
		Chief Executive Officer

Date:		February 28, 2022

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


By:		/s/ Jane Trust
		Jane Trust
		Chief Executive Officer

Date:		February 28, 2022

By:		/s/ Christopher Berarducci
		Christopher Berarducci
		Principal Financial Officer

Date:		February 28, 2022

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