|
|
|
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
|
25
|
Statements of changes in net assets
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2013 (unaudited)
and the Year Ended December 31, 2012
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
18,272,625
|
|
|
$
|
36,187,449
|
|
|
Net realized gain
|
|
|
9,395,350
|
|
|
|
9,930,387
|
|
|
Change in net unrealized appreciation (depreciation)
|
|
|
(14,727,796)
|
|
|
|
33,914,806
|
|
|
Increase in Net Assets From Operations
|
|
|
12,940,179
|
|
|
|
80,032,642
|
|
|
|
|
|
|
Distributions to
Shareholders From (Notes 1 and 6):
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(17,791,810)
|
|
|
|
(35,611,340)
|
|
|
Decrease in Net Assets From Distributions to
Shareholders
|
|
|
(17,791,810)
|
|
|
|
(35,611,340)
|
|
|
|
|
|
|
Fund Share Transactions
(Note 7):
|
|
|
|
|
|
|
|
|
|
Net proceeds from sale of shares
|
|
|
134,289,312
|
|
|
|
250,964,003
|
|
|
Reinvestment of distributions
|
|
|
17,015,392
|
|
|
|
34,362,585
|
|
|
Cost of shares repurchased
|
|
|
(289,583,845)
|
|
|
|
(248,607,163)
|
|
|
Increase (Decrease) in Net Assets From Fund Share
Transactions
|
|
|
(138,279,141)
|
|
|
|
36,719,425
|
|
|
Increase (Decrease) in Net Assets
|
|
|
(143,130,772)
|
|
|
|
81,140,727
|
|
|
|
|
|
|
Net
Assets:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
526,874,651
|
|
|
|
445,733,924
|
|
|
End of period*
|
|
$
|
383,743,879
|
|
|
$
|
526,874,651
|
|
|
* Includes undistributed net investment income of:
|
|
|
$561,861
|
|
|
|
$81,046
|
|
See Notes to Financial
Statements.
|
|
|
|
|
26
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
Financial highlights
|
|
|
|
|
|
|
|
|
|
For a share of each class of capital
stock outstanding throughout each year ended December 31,
unless otherwise noted:
|
|
|
Class A Shares
1
|
|
2013
2
|
|
|
2012
3
|
|
|
|
|
|
|
Net asset value, beginning
of period
|
|
|
$8.86
|
|
|
|
$8.61
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.29
|
|
|
|
0.40
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.04)
|
|
|
|
0.37
|
|
|
Total income from operations
|
|
|
0.25
|
|
|
|
0.77
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.28)
|
|
|
|
(0.52)
|
|
|
Total distributions
|
|
|
(0.28)
|
|
|
|
(0.52)
|
|
|
|
|
|
|
Net asset value, end of
period
|
|
|
$8.83
|
|
|
|
$8.86
|
|
|
Total return
4
|
|
|
2.76
|
%
|
|
|
9.25
|
%
|
|
|
|
|
|
Net assets, end of period
(000s)
|
|
|
$5,131
|
|
|
|
$406
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
Gross expenses
5
|
|
|
0.92
|
%
6
|
|
|
1.12
|
%
|
|
Net expenses
5,7,8
|
|
|
0.92
|
6
|
|
|
0.93
|
9
|
|
Net investment income
5
|
|
|
6.37
|
|
|
|
6.90
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
53
|
%
|
|
|
86
|
%
|
|
1
|
Per share amounts have been calculated using the average shares method.
|
|
2
|
For the six months ended June 30, 2013 (unaudited).
|
|
3
|
For the period April 30, 2012 (commencement of operations) to December 31, 2012.
|
|
4
|
Performance figures, exclusive of sales charges, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of
compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
6
|
Reflects recapture of expenses waived/reimbursed from prior fiscal years.
|
|
7
|
As a result of an expense limitation arrangement, the ratio of expenses, other than interest, taxes, extraordinary expenses, deferred organizational expenses and
brokerage commissions, to average net assets of Class A shares did not exceed 1.05%. This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Directors’ consent.
|
|
8
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
9
|
Reflects fee waivers and/or expense reimbursements.
|
See Notes to Financial Statements.
|
|
|
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
|
27
|
Financial highlights (cont’d)
|
|
|
|
|
|
|
|
|
|
For a share of each class of capital
stock outstanding throughout each year ended December 31,
unless otherwise noted:
|
|
|
Class C Shares
1
|
|
2013
2
|
|
|
2012
3
|
|
|
|
|
|
|
Net asset value, beginning
of period
|
|
|
$8.85
|
|
|
|
$8.61
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.25
|
|
|
|
0.35
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.12)
|
|
|
|
0.38
|
|
|
Total income from operations
|
|
|
0.13
|
|
|
|
0.73
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.24)
|
|
|
|
(0.49)
|
|
|
Total distributions
|
|
|
(0.24)
|
|
|
|
(0.49)
|
|
|
|
|
|
|
Net asset value, end of
period
|
|
|
$8.74
|
|
|
|
$8.85
|
|
|
Total return
4
|
|
|
1.45
|
%
|
|
|
8.73
|
%
|
|
|
|
|
|
Net assets, end of period
(000s)
|
|
|
$430
|
|
|
|
$159
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
Gross expenses
5
|
|
|
1.88
|
%
6
|
|
|
2.15
|
%
|
|
Net expenses
5,7,8,9
|
|
|
1.80
|
6
|
|
|
1.69
|
|
|
Net investment income
5
|
|
|
5.58
|
|
|
|
6.07
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
53
|
%
|
|
|
86
|
%
|
|
1
|
Per share amounts have been calculated using the average shares method.
|
|
2
|
For the six months ended June 30, 2013 (unaudited).
|
|
3
|
For the period April 30, 2012 (commencement of operations) to December 31, 2012.
|
|
4
|
Performance figures, exclusive of CDSC, may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating
balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
6
|
Reflects recapture of expenses waived/reimbursed from prior fiscal years.
|
|
7
|
As a result of an expense limitation arrangement, the ratio of expenses, other than interest, taxes, extraordinary expenses, deferred organizational expenses and
brokerage commissions, to average net assets of Class C shares did not exceed 1.80%. This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Directors’ consent.
|
|
8
|
Reflects fee waivers and/or expense reimbursements.
|
|
9
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
See Notes to Financial Statements.
|
|
|
|
|
28
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
|
|
|
|
|
|
|
|
|
|
For a share of each class of capital
stock outstanding throughout each year ended December 31,
unless otherwise noted:
|
|
|
Class R Shares
1
|
|
2013
2
|
|
|
2012
3
|
|
|
|
|
|
|
Net asset value, beginning
of period
|
|
|
$8.87
|
|
|
|
$8.61
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.27
|
|
|
|
0.38
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.12)
|
|
|
|
0.37
|
|
|
Total income from operations
|
|
|
0.15
|
|
|
|
0.75
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.27)
|
|
|
|
(0.49)
|
|
|
Total distributions
|
|
|
(0.27)
|
|
|
|
(0.49)
|
|
|
|
|
|
|
Net asset value, end of
period
|
|
|
$8.75
|
|
|
|
$8.87
|
|
|
Total return
4
|
|
|
1.59
|
%
|
|
|
9.05
|
%
|
|
|
|
|
|
Net assets, end of period
(000s)
|
|
|
$33
|
|
|
|
$11
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
Gross expenses
5
|
|
|
1.34
|
%
|
|
|
1.37
|
%
|
|
Net expenses
5,6,7,8
|
|
|
1.30
|
|
|
|
1.30
|
|
|
Net investment income
5
|
|
|
6.06
|
|
|
|
6.59
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
53
|
%
|
|
|
86
|
%
|
|
1
|
Per share amounts have been calculated using the average shares method.
|
|
2
|
For the six months ended June 30, 2013 (unaudited).
|
|
3
|
For the period April 30, 2012 (commencement of operations) to December 31, 2012.
|
|
4
|
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance
arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
6
|
As a result of an expense limitation arrangement, the ratio of expenses, other than interest, taxes, extraordinary expenses, deferred organizational expenses and
brokerage commissions, to average net assets of Class R shares did not exceed 1.30%. This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Directors’ consent.
|
|
7
|
Reflects fee waivers and/or expense reimbursements.
|
|
8
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
See Notes to Financial Statements.
|
|
|
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
|
29
|
Financial highlights (cont’d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of each class of
capital stock outstanding throughout each year ended December 31,
unless otherwise noted:
|
|
|
Class I Shares
1,2
|
|
2013
3
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
4
|
|
|
2008
5
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning
of period
|
|
|
$8.87
|
|
|
|
$8.10
|
|
|
|
$8.71
|
|
|
|
$8.27
|
|
|
|
$5.99
|
|
|
|
$9.30
|
|
|
|
$10.75
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.30
|
|
|
|
0.63
|
|
|
|
0.69
|
|
|
|
0.81
|
|
|
|
0.92
|
|
|
|
0.66
|
|
|
|
0.83
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.13)
|
|
|
|
0.77
|
|
|
|
(0.52)
|
|
|
|
0.48
|
|
|
|
2.32
|
|
|
|
(3.05)
|
|
|
|
(1.41)
|
|
|
Total income (loss) from operations
|
|
|
0.17
|
|
|
|
1.40
|
|
|
|
0.17
|
|
|
|
1.29
|
|
|
|
3.24
|
|
|
|
(2.39)
|
|
|
|
(0.58)
|
|
|
|
|
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.29)
|
|
|
|
(0.63)
|
|
|
|
(0.78)
|
|
|
|
(0.85)
|
|
|
|
(0.96)
|
|
|
|
(0.92)
|
|
|
|
(0.80)
|
|
|
Net realized gains
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.07)
|
|
|
Total distributions
|
|
|
(0.29)
|
|
|
|
(0.63)
|
|
|
|
(0.78)
|
|
|
|
(0.85)
|
|
|
|
(0.96)
|
|
|
|
(0.92)
|
|
|
|
(0.87)
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of
period
|
|
|
$8.75
|
|
|
|
$8.87
|
|
|
|
$8.10
|
|
|
|
$8.71
|
|
|
|
$8.27
|
|
|
|
$5.99
|
|
|
|
$9.30
|
|
|
Total return
6
|
|
|
1.89
|
%
|
|
|
17.76
|
%
|
|
|
1.87
|
%
|
|
|
16.24
|
%
|
|
|
56.73
|
%
|
|
|
(27.19)
|
%
|
|
|
(5.88)
|
%
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period
(000s)
|
|
|
$238,310
|
|
|
|
$385,634
|
|
|
|
$345,686
|
|
|
|
$447,370
|
|
|
|
$511,335
|
|
|
|
$439,446
|
|
|
|
$800,103
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
0.70
|
%
7
|
|
|
0.66
|
%
|
|
|
0.68
|
%
|
|
|
0.65
|
%
|
|
|
0.62
|
%
|
|
|
0.60
|
%
7
|
|
|
0.59
|
%
|
|
Net expenses
|
|
|
0.70
|
7,8
|
|
|
0.66
|
8
|
|
|
0.68
|
8
|
|
|
0.65
|
8
|
|
|
0.62
|
8
|
|
|
0.60
|
7,8
|
|
|
0.58
|
9
|
|
Net investment income
|
|
|
6.65
|
7
|
|
|
7.37
|
|
|
|
7.88
|
|
|
|
9.39
|
|
|
|
12.80
|
|
|
|
10.40
|
7
|
|
|
8.30
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
53
|
%
|
|
|
86
|
%
|
|
|
103
|
%
|
|
|
105
|
%
|
|
|
84
|
%
|
|
|
41
|
%
10
|
|
|
59
|
%
|
|
1
|
In April 2010, Institutional Class shares were renamed Class I shares.
|
|
2
|
Per share amounts have been calculated using the average shares method.
|
|
3
|
For the six months ended June 30, 2013 (unaudited).
|
|
4
|
For the period April 1, 2008 through December 31, 2008.
|
|
5
|
For the year ended March 31.
|
|
6
|
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance
arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
8
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
9
|
The impact of compensating balance arrangements was 0.01%.
|
See Notes to Financial Statements.
|
|
|
|
|
30
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of each class of
capital stock outstanding throughout each year ended December 31,
unless otherwise noted:
|
|
|
Class IS Shares
1,2
|
|
2013
3
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
4
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning
of period
|
|
|
$9.01
|
|
|
|
$8.23
|
|
|
|
$8.84
|
|
|
|
$8.38
|
|
|
|
$6.06
|
|
|
|
$8.86
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.31
|
|
|
|
0.65
|
|
|
|
0.70
|
|
|
|
0.82
|
|
|
|
0.94
|
|
|
|
0.37
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.12)
|
|
|
|
0.76
|
|
|
|
(0.53)
|
|
|
|
0.49
|
|
|
|
2.34
|
|
|
|
(2.77)
|
|
|
Total income (loss) from operations
|
|
|
0.19
|
|
|
|
1.41
|
|
|
|
0.17
|
|
|
|
1.31
|
|
|
|
3.28
|
|
|
|
(2.40)
|
|
|
|
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.30)
|
|
|
|
(0.63)
|
|
|
|
(0.78)
|
|
|
|
(0.85)
|
|
|
|
(0.96)
|
|
|
|
(0.40)
|
|
|
Total distributions
|
|
|
(0.30)
|
|
|
|
(0.63)
|
|
|
|
(0.78)
|
|
|
|
(0.85)
|
|
|
|
(0.96)
|
|
|
|
(0.40)
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of
period
|
|
|
$8.90
|
|
|
|
$9.01
|
|
|
|
$8.23
|
|
|
|
$8.84
|
|
|
|
$8.38
|
|
|
|
$6.06
|
|
|
Total return
5
|
|
|
2.06
|
%
|
|
|
17.67
|
%
|
|
|
1.92
|
%
|
|
|
16.32
|
%
|
|
|
56.74
|
%
|
|
|
(27.16)
|
%
|
|
|
|
|
|
|
|
|
|
Net assets, end of period
(000s)
|
|
|
$139,840
|
|
|
|
$140,665
|
|
|
|
$100,048
|
|
|
|
$108,319
|
|
|
|
$107,301
|
|
|
|
$77,795
|
|
|
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
0.63
|
%
6,7
|
|
|
0.63
|
%
|
|
|
0.61
|
%
|
|
|
0.61
|
%
|
|
|
0.61
|
%
|
|
|
0.60
|
%
6
|
|
Net expenses
8,9
|
|
|
0.63
|
6,7,10
|
|
|
0.63
|
10
|
|
|
0.61
|
|
|
|
0.61
|
|
|
|
0.61
|
|
|
|
0.60
|
6
|
|
Net investment income
|
|
|
6.76
|
6
|
|
|
7.41
|
|
|
|
8.00
|
|
|
|
9.40
|
|
|
|
12.80
|
|
|
|
12.40
|
6
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
53
|
%
|
|
|
86
|
%
|
|
|
103
|
%
|
|
|
105
|
%
|
|
|
84
|
%
|
|
|
41
|
%
11
|
|
1
|
In April 2010, Institutional Select Class shares were renamed Class IS shares.
|
|
2
|
Per share amounts have been calculated using the average shares method.
|
|
3
|
For the six months ended June 30, 2013 (unaudited).
|
|
4
|
For the period August 4, 2008 (commencement of operations) to December 31, 2008.
|
|
5
|
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance
arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
7
|
Reflects recapture of expenses waived/reimbursed from prior fiscal years.
|
|
8
|
As a result of an expense limitation arrangement, the ratio of expenses, other than interest, taxes, extraordinary expenses, deferred organizational expenses and
brokerage commissions, to average net assets of Class IS shares did not exceed 0.65%. This expense limitation arrangement cannot be terminated prior to December 31, 2014 without the Board of Directors’ consent.
|
|
9
|
The impact of compensating balance arrangements, if any, was less than 0.01%.
|
|
10
|
Reflects fee waivers and/or expense reimbursements.
|
See Notes to Financial Statements.
|
|
|
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
|
31
|
Notes to financial statements
(unaudited)
1. Organization and significant accounting policies
Western Asset High Yield Fund (the “Fund”) is a separate diversified investment series of Western Asset Funds, Inc. (the “Corporation”). The Corporation, a Maryland corporation, is registered
under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company.
The following are
significant accounting policies consistently followed by the 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 market prices or
broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit
risks/spreads, default rates and quoted prices for similar securities. Short-term fixed income securities that will mature in 60 days or less are valued at amortized cost, unless it is determined that using this method would not reflect an
investment’s fair value. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. Equity securities for which market quotations are available are valued at the last
reported sales price or official closing price on the primary market or exchange on which they trade. 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 Directors.
The Board of Directors is responsible for
the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North American Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the
Board of Directors, is responsible for making fair value determinations,
|
|
|
|
|
32
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of Directors. When determining the reliability of third party pricing information for investments
owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible
methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or
fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the
issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions;
information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable
companies; and the existence of a shelf registration for restricted securities.
For each portfolio security that has been fair valued pursuant to the
policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are
reported to the Board of Directors quarterly.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach
and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income
approach uses valuation techniques to discount estimated future cash flows to present value.
GAAP establishes a disclosure hierarchy that categorizes
the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:
|
Ÿ
|
|
Level 1 — quoted prices in active markets for identical investments
|
|
Ÿ
|
|
Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)
|
|
Ÿ
|
|
Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)
|
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those
securities.
|
|
|
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
|
33
|
Notes to financial statements
(unaudited)
(cont’d)
The following is a summary of the inputs used in valuing the Fund’s assets and liabilities carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
Description
|
|
Quoted Prices
(Level 1)
|
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Long-term investments†:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds & notes:
|
|
|
—
|
|
|
$
|
333,560,100
|
|
|
$
|
4,404,121
|
|
|
$
|
337,964,221
|
|
|
Collateralized senior loans
|
|
|
—
|
|
|
|
12,597,589
|
|
|
|
—
|
|
|
|
12,597,589
|
|
|
Convertible bonds & notes
|
|
|
—
|
|
|
|
484,100
|
|
|
|
—
|
|
|
|
484,100
|
|
|
Sovereign bonds
|
|
|
—
|
|
|
|
2,468,441
|
|
|
|
—
|
|
|
|
2,468,441
|
|
|
Common stocks
|
|
$
|
6,038,849
|
|
|
|
711,232
|
|
|
|
6,559,614
|
|
|
|
13,309,695
|
|
|
Convertible preferred stocks
|
|
|
197,085
|
|
|
|
—
|
|
|
|
—
|
|
|
|
197,085
|
|
|
Preferred stocks
|
|
|
6,620,583
|
|
|
|
2,137,619
|
|
|
|
—
|
|
|
|
8,758,202
|
|
|
Purchased options
|
|
|
—
|
|
|
|
125,239
|
|
|
|
—
|
|
|
|
125,239
|
|
|
Warrants
|
|
|
—
|
|
|
|
776,901
|
|
|
|
—
|
|
|
|
776,901
|
|
|
Total investments
|
|
$
|
12,856,517
|
|
|
$
|
352,861,221
|
|
|
$
|
10,963,735
|
|
|
$
|
376,681,473
|
|
|
Other financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures contracts
|
|
$
|
40,244
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
40,244
|
|
|
Forward foreign currency contracts
|
|
|
—
|
|
|
$
|
110,796
|
|
|
|
—
|
|
|
|
110,796
|
|
|
Credit default swaps on corporate issues — sell protection‡
|
|
|
—
|
|
|
|
439,182
|
|
|
|
—
|
|
|
|
439,182
|
|
|
Total other financial instruments
|
|
$
|
40,244
|
|
|
$
|
549,978
|
|
|
$
|
—
|
|
|
$
|
590,222
|
|
|
Total
|
|
$
|
12,896,761
|
|
|
$
|
353,411,199
|
|
|
$
|
10,963,735
|
|
|
$
|
377,271,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
Description
|
|
Quoted Prices
(Level 1)
|
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Other financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written options
|
|
|
—
|
|
|
$
|
33,541
|
|
|
|
—
|
|
|
$
|
33,541
|
|
|
Futures contracts
|
|
$
|
38,779
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38,779
|
|
|
Total
|
|
$
|
38,779
|
|
|
$
|
33,541
|
|
|
|
—
|
|
|
$
|
72,320
|
|
|
†
|
See Schedule of Investments for additional detailed categorizations.
|
|
‡
|
Values include any premiums paid or received with respect to swap contracts.
|
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in Securities
|
|
Corporate
Bonds & Notes
|
|
|
Common
Stocks
|
|
|
Total
|
|
|
Balance as of December 31, 2012
|
|
$
|
3,815,832
|
|
|
$
|
12,912,695
|
|
|
$
|
16,728,527
|
|
|
Accrued premiums/discounts
|
|
|
48,882
|
|
|
|
—
|
|
|
|
48,882
|
|
|
Realized gain (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Change in unrealized appreciation (depreciation)
1
|
|
|
510,348
|
|
|
|
(2,443,969)
|
|
|
|
(1,933,621)
|
|
|
Purchases
|
|
|
29,059
|
|
|
|
—
|
|
|
|
29,059
|
|
|
|
|
|
|
34
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in Securities
|
|
Corporate
Bonds & Notes
|
|
|
Common
Stocks
|
|
|
Total
|
|
|
Sales
|
|
|
—
|
|
|
$
|
(3,197,880)
|
|
|
$
|
(3,197,880)
|
|
|
Transfers into Level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Transfers out of Level 3
2
|
|
|
—
|
|
|
|
(711,232)
|
|
|
|
(711,232)
|
|
|
Balance as of June 30, 2013
|
|
$
|
4,404,121
|
|
|
$
|
6,559,614
|
|
|
$
|
10,963,735
|
|
|
Net change in unrealized appreciation (depreciation) for investments in securities still held at June 30, 2013
2
|
|
$
|
510,348
|
|
|
$
|
(937,338)
|
|
|
$
|
(426,990)
|
|
The Fund’s policy is to recognize transfers between levels as of the end of the reporting period.
|
1
|
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.
|
|
2
|
Transferred out of Level 3 as a result of the availability of a quoted price in an
active market for an identical investment or the availability of other significant observable inputs.
|
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 prices
from prior transactions or third party pricing information without adjustment (e.g., broker quotes, pricing services, net asset values).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
6/30/13
(000’s)
|
|
Valuation
Technique(s)
|
|
Unobservable Input(s)
|
|
Weighted
Average
|
|
Impact to
Valuation from
an Increase in
Input*
|
|
Equity Securities
|
|
$3,931
|
|
Market approach
|
|
EBITDA multiple
|
|
6.34x
|
|
Increase
|
|
*
|
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) Repurchase agreements.
The Fund may enter
into repurchase agreements with institutions that its investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, the Fund acquires a debt security subject to
an obligation of the seller to repurchase, and of the Fund to resell, the security at an agreed-upon price and time, thereby determining the yield during the Fund’s holding period. When entering into repurchase agreements, it is the Fund’s
policy that its custodian or a third party custodian, acting on the Fund’s behalf, take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase transaction maturity exceeds one business day, the value of the collateral is marked-to-market and measured against the value of the agreement in an effort to ensure the
adequacy of the collateral. If the counterparty defaults, the Fund generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during the period in which
the Fund seeks to assert its rights or if bankruptcy proceedings are commenced with respect
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Western Asset High Yield Fund 2013 Semi-Annual Report
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35
|
Notes to financial statements
(unaudited)
(cont’d)
to the seller of the security, realization of the collateral by the Fund may be delayed or limited.
(c) Forward foreign currency contracts.
The
Fund enters into a forward foreign currency contract to hedge against foreign currency exchange rate risk on its non-U.S. dollar denominated securities or to facilitate settlement of a foreign currency denominated portfolio transaction. 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.
(d) 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.
|
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36
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Western Asset High Yield Fund 2013 Semi-Annual Report
|
(e) Loan participations.
The Fund may invest in loans arranged through private negotiation between one or more financial institutions. The Fund’s investment in any such loan may be in the form of a participation in or an assignment
of the loan. In connection with purchasing participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement related to the loan, or any rights of off-set against the borrower and the
Fund may not benefit directly from any collateral supporting the loan in which it has purchased the participation.
The Fund assumes the credit risk of
the borrower, the lender that is selling the participation and any other persons interpositioned between the Fund and the borrower. In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor
of the lender and may not benefit from any off-set between the lender and the borrower.
(f) Unfunded loan commitments.
The Fund may
enter into certain credit agreements all or a portion of which 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
June 30, 2013, the Fund had sufficient cash and/or securities to cover these commitments.
(g) Written options.
When the Fund writes an option, an amount equal to the premium received by the Fund is recorded as a liability, the value
of which is marked-to-market daily to reflect the current market value of the option written. If the option expires, the premium received is recorded as a realized gain. When a written call option is exercised, the difference between the premium
received plus the option exercise price and the Fund’s basis in the underlying security (in the case of a covered written call option), or the cost to purchase the underlying security (in the case of an uncovered written call option), including
brokerage commission, is recognized as a realized gain or loss. When a written put option is exercised, the amount of the premium received is subtracted from the cost of the security purchased by the Fund from the exercise of the written put option
to form the Fund’s basis in the underlying security purchased. The writer or buyer of an option traded on an exchange can liquidate the position before the exercise of the option by entering into a closing transaction. The cost of a closing
transaction is deducted from the original premium received resulting in a realized gain or loss to the Fund.
The risk in writing a covered call option
is that the Fund may forego the opportunity of profit if the market price of the underlying security increases and the option is exercised. The risk in writing a put option is that the Fund may incur a loss if the market price of the underlying
security decreases and the option is exercised. The risk in writing an uncovered call option is that the Fund is exposed to the risk of loss if the market price of the underlying security increases. In addition, there is the risk that the Fund may
not be able to enter into a closing transaction because of an illiquid secondary market.
(h) Swaptions.
The Fund purchases and writes
swaption contracts to manage exposure to an underlying instrument. The Fund may also purchase or write options to manage exposure
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Western Asset High Yield Fund 2013 Semi-Annual Report
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37
|
Notes to financial statements
(unaudited)
(cont’d)
to fluctuations in interest rates or to enhance yield. Swaption contracts written by the Fund represent an option that gives the purchaser the right, but not the obligation, to enter into a
previously agreed upon swap contract at a future date. Swaption contracts purchased by the Fund represent an option that gives the Fund the right, but not the obligation, to enter into a previously agreed upon swap contract at a future date.
When the Fund writes a swaption, an amount equal to the premium received by the Fund is recorded as a liability, the value of which is marked-to-market
daily to reflect the current market value of the swaption written. If the swaption expires, the Fund realizes a gain equal to the amount of the premium received.
When the Fund purchases a swaption, an amount equal to the premium paid by the Fund is recorded as an investment on the Statement of Assets and Liabilities, the value of which is marked-to-market daily to reflect
the current market value of the swaption purchased. If the swaption expires, the Fund realizes a loss equal to the amount of the premium paid.
Swaptions
are marked-to-market daily based upon quotations from market makers. Changes in the value of the swaption are reported as unrealized gains or losses in the Statement of Operations.
(i) 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, including to increase the Fund’s return. The use of swaps involves risks that are different from those associated with other portfolio transactions. Swap agreements are privately
negotiated in the over-the-counter market (“OTC Swaps”) or may be executed as a registered exchange (“Centrally Cleared Swaps”). Unlike Centrally Cleared Swaps, the Fund has credit exposure to the counterparties of OTC Swaps.
Swap contracts are marked-to-market daily and changes in value are recorded as unrealized appreciation (depreciation). The daily change in valuation of
centrally cleared swaps, if any, is recorded as a receivable or payable for variation margin on the statement of assets and liabilities. Gains or losses are realized upon termination of the swap agreement. Collateral, in the form of restricted cash
or securities, may be required to be held in segregated accounts with the Fund’s custodian in compliance with the terms of the swap contracts. Securities posted as collateral for swap contracts are identified in the Schedule of Investments and
restricted cash, if any, is identified on the Statement of Assets and Liabilities. Risks may exceed amounts recorded in the Statement of Assets and Liabilities. These risks include changes in the returns of the underlying instruments, failure of the
counterparties to perform under the contracts’ terms, and the possible lack of liquidity with respect to the swap agreements.
OTC swap payments
received or made at the beginning of the measurement period are reflected as a premium or deposit, respectively, on the Statement of Assets and Liabilities. These upfront payments are amortized over the life of the swap and are recognized as
realized gain or loss in the Statement of Operations. Net periodic payments received or paid by the Fund are recognized as a realized gain or loss in the Statement of Operations.
|
|
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38
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Western Asset High Yield Fund 2013 Semi-Annual Report
|
The Fund’s maximum exposure in the event of a defined credit event on a credit default swap to sell protection is
the notional amount. As of June 30, 2013, the total notional value of all credit default swaps to sell protection is $3,430,000. 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 six months ended June 30, 2013, see Note 4.
Credit default swaps
The Fund enters into credit default swap (“CDS”) contracts for investment purposes, to manage its credit risk or to add leverage.
CDS agreements involve one party making a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party, typically corporate or sovereign issuers, on a specified obligation, or
in the event of a write-down, principal shortfall, interest shortfall or default of all or part of the referenced entities comprising a credit index. The Fund may use a CDS to provide protection against defaults of the issuers (i.e., to reduce risk
where the Fund has exposure to an issuer) or to take an active long or short position with respect to the likelihood of a particular issuer’s default. As a seller of protection, the Fund generally receives an upfront payment or a stream of
payments throughout the term of the swap provided that there is no credit event. If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the maximum potential amount of future
payments (undiscounted) that the Fund could be required to make under a credit default swap agreement would be an amount equal to the notional amount of the agreement. These amounts of potential payments will be partially offset by any recovery of
values from the respective referenced obligations. As a seller of protection, the Fund effectively adds leverage to its portfolio because, in addition to its total net assets, the Fund is subject to investment exposure on the notional amount of the
swap. As a buyer of protection, the Fund generally receives an amount up to the notional value of the swap if a credit event occurs.
Implied spreads are
the theoretical prices a lender receives for credit default protection. When spreads rise, market perceived credit risk rises and when spreads fall, market perceived credit risk falls. The implied credit spread of a particular referenced entity
reflects the cost of buying/selling protection and may include upfront payments required to enter into the agreement. Wider credit spreads and decreasing market values, when compared to the notional amount of the swap, represent a deterioration of
the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement. Credit spreads utilized in determining the period end market value of credit
default swap agreements on corporate or sovereign issues are disclosed in the Notes to Financial Statements and serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for credit
derivatives. For credit default swap agreements on asset-backed securities and credit
|
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Western Asset High Yield Fund 2013 Semi-Annual Report
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39
|
Notes to financial statements
(unaudited)
(cont’d)
indices, the quoted market prices and resulting values, particularly in relation to the notional amount of the contract as well as the annual payment rate, serve as an indication of the current
status of the payment/performance risk.
The Fund’s maximum risk of loss from counterparty risk, as the protection buyer, is the fair value of the
contract (this risk is mitigated by the posting of collateral by the counterparty to the Fund to cover the Fund’s exposure to the counterparty). As the protection seller, the Fund’s maximum risk is the notional amount of the contract.
Credit default swaps are considered to have credit risk-related contingent features since they require payment by the protection seller to the protection buyer upon the occurrence of a defined credit event.
Entering into a CDS agreement involves, to varying degrees, elements of credit, market and documentation risk in excess of the related amounts recognized on the
Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreement may default on its obligation to perform or disagree as to the meaning of
the contractual terms in the agreement, and that there will be unfavorable changes in net interest rates.
(j) Credit and market risk.
The Fund invests in high-yield and emerging market instruments that are subject to certain credit and market risks.
The yields of high-yield and emerging market debt 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. The consequences of political, social, economic or
diplomatic changes may have disruptive effects on the market prices of investments held by the Fund. The Fund’s investments in non-U.S. dollar denominated securities may also result in foreign currency losses caused by devaluations and exchange
rate fluctuations.
(k) 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
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.
(l) 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
investment manager attempts to mitigate counterparty
|
|
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|
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40
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Western Asset High Yield Fund 2013 Semi-Annual Report
|
risk by (i) periodically assessing the creditworthiness of its trading partners, (ii) monitoring and/or limiting the amount of its net exposure to each individual counterparty based on
its assessment and (iii) requiring collateral from the counterparty for certain transactions. Market events and changes in overall economic conditions may impact the assessment of such counterparty risk by the investment manager. In addition,
declines in the values of underlying collateral received may expose the Fund to increased risk of loss.
The Fund has entered into master agreements with
certain of its derivative counterparties that provide for general obligations, representations, agreements, collateral, events of default or termination and credit related contingent features. The credit related contingent features include, but are
not limited to, a percentage decrease in the Fund’s net assets or NAV over a specified period of time. If these credit related contingent features were triggered, the derivatives counterparty could terminate the positions and demand payment or
require additional collateral.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange
clearing house for exchange traded derivatives while collateral terms are contract specific for over-the-counter traded derivatives. Cash collateral that has been pledged to cover obligations of the Fund under derivative contracts, if any, will be
reported separately in the Statement of Assets and Liabilities. Securities pledged as collateral, if any, for the same purpose are noted in the Schedule of Investments.
Absent an event of default by the counterparty or a termination of the agreement, the terms of the master agreements do not result in an offset of reported amounts of financial assets and financial liabilities in
the Statement of Assets and Liabilities across transactions between the Fund and the applicable counterparty. The enforceability of the right to offset may vary by jurisdiction.
As of June 30, 2013, the Fund held written options with credit related contingent features which had a liability position of $33,541. If a contingent feature in the master agreements would have been triggered,
the Fund would have been required to pay this amount to its derivatives counterparties. As of June 30, 2013, the Fund had posted with its counterparties cash and/or securities as collateral to cover the net liability of these derivatives
amounting to $145,833, which could be used to reduce the required payment.
(m)
Security transactions and investment income.
Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is
recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Foreign dividend income is recorded on the ex-dividend date or as soon as practicable after the Fund determines the existence of a dividend declaration after
exercising reasonable due diligence. 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.
|
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Western Asset High Yield Fund 2013 Semi-Annual Report
|
|
41
|
Notes to financial statements
(unaudited)
(cont’d)
(n) Distributions to shareholders.
Distributions from net investment income of the Fund are declared each business day to shareholders of record, and are paid monthly. Distributions of net realized gains, if any, are declared at least annually. Distributions to shareholders of the
Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(o) Share class accounting.
Investment income, common expenses and realized/unrealized gains (losses) on investments are allocated to the
various classes of the Fund on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that share class.
(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.
Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of June 30, 2013, no provision for income tax is required in the Fund’s
financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state
departments of revenue.
(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.
2. Investment management agreement and other transactions with affiliates
The Fund has an investment management agreement with Legg Mason Partners Fund Advisor, LLC (“LMPFA”). Western Asset Management Company (“Western
Asset”) is the investment adviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc (“Legg Mason”).
LMPFA
provides the Fund with management and administrative services for which the Fund pays a fee calculated daily and paid monthly, at an annual rate of 0.55% of the Fund’s average daily net assets. The investment manager has agreed to waive and/or
reimburse operating expenses (other than interest, taxes, extraordinary expenses, deferred organizational expenses and brokerage commissions) so that total operating expenses are not expected to exceed 1.05%, 1.80%, 1.30% and 0.65% for Class A,
Class C, Class R and Class IS shares, respectively. These expense limitation arrangements cannot be terminated prior to December 31, 2014 without the Board of Directors’ consent.
|
|
|
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42
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Western Asset High Yield Fund 2013 Semi-Annual Report
|
During the six months ended June 30, 2013, fees waived and/or expense reimbursed amount $286.
The investment manager is permitted to recapture amounts waived and/or reimbursed to a class within two years after the fiscal year in which the investment manager
earned the fee or incurred the expense if the class’ total annual operating expenses have fallen to a level below the limits described above. In no case will the investment manager recapture any amount that would result, on any particular
business day of the Fund, in the class’ total annual operating expenses exceeding this limit or any other lower limit then in effect.
Pursuant to
this arrangement, at June 30, 2013, the Fund had remaining fee waivers and/or expense reimbursements subject to recapture by LMPFA and respective dates of expiration as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class C
|
|
|
Class R
|
|
|
Class I
|
|
|
Class IS
|
|
|
Expires December 31, 2014
|
|
|
—
|
|
|
$
|
218
|
|
|
$
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
Expires December 31, 2015
|
|
|
—
|
|
|
|
99
|
|
|
|
3
|
|
|
|
—
|
|
|
$
|
184
|
|
|
Fee waivers/expense reimbursements subject to recapture
|
|
|
—
|
|
|
$
|
317
|
|
|
$
|
8
|
|
|
|
—
|
|
|
$
|
184
|
|
For the six months ended June 30, 2013, LMPFA recaptured $231, $3 and $1,111 for Class A, C and IS shares, respectively.
Legg Mason Investor Services, LLC (“LMIS”), a wholly-owned broker-dealer subsidiary of Legg Mason, serves as the Fund’s sole and
exclusive distributor.
There is a maximum initial sales charge of 4.25% for Class A shares. There is a contingent deferred sales charge
(“CDSC”) of 1.00% on Class C shares, which applies if redemption occurs within 12 months from purchase payment. In certain cases, Class A shares have a 1.00% CDSC, which applies if redemption occurs within 18 months from purchase
payment. This CDSC only applies to those purchases of Class A shares, which, when combined with current holdings of other shares of funds sold by LMIS, equal or exceed $1,000,000 in the aggregate. These purchases do not incur an initial sales
charge.
For the six months ended June 30, 2013, LMIS and its affiliates retained sales charges of $452 on sales of the Fund’s Class A
shares. In addition, for the six months ended June 30, 2013, there were no CDSCs paid to LMIS and its affiliates.
As of June 30, 2013, Legg
Mason and its affiliates owned 20% of the Fund.
All officers of the Corporation are employees of Legg Mason or its affiliates and do not receive
compensation from the Corporation.
3. Investments
During the six months ended June 30, 2013, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
|
|
|
|
|
|
|
Purchases
|
|
$
|
273,151,834
|
|
|
Sales
|
|
|
395,716,289
|
|
|
|
|
|
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Western Asset High Yield Fund 2013 Semi-Annual Report
|
|
43
|
Notes to financial statements
(unaudited)
(cont’d)
At June 30, 2013, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
$
|
14,475,335
|
|
|
Gross unrealized depreciation
|
|
|
(12,631,359)
|
|
|
Net unrealized appreciation
|
|
$
|
1,843,976
|
|
During the six months ended June 30, 2013, written option transactions for the Fund were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
Amount
|
|
|
Premiums
|
|
|
Written options, outstanding as of December 31, 2012
|
|
$
|
58,800,000
|
|
|
$
|
311,600
|
|
|
Options written
|
|
|
46,500,000
|
|
|
|
302,340
|
|
|
Options closed
|
|
|
—
|
|
|
|
—
|
|
|
Options exercised
|
|
|
(34,800,000)
|
|
|
|
(225,050)
|
|
|
Options expired
|
|
|
(59,300,000)
|
|
|
|
(339,610)
|
|
|
Written options, outstanding as of June 30, 2013
|
|
$
|
11,200,000
|
|
|
$
|
49,280
|
|
At June 30, 2013, the Fund had the following open futures contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Contracts
|
|
|
Expiration
Date
|
|
|
Basis
Value
|
|
|
Market
Value
|
|
|
Unrealized
Gain (Loss)
|
|
|
Contracts to
Buy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury 10-Year Notes
|
|
|
33
|
|
|
|
9/13
|
|
|
$
|
4,215,342
|
|
|
$
|
4,176,563
|
|
|
$
|
(38,779)
|
|
|
|
|
|
|
|
|
|
Contracts to
Sell:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Ultra Long-Term Bonds
|
|
|
9
|
|
|
|
9/13
|
|
|
|
1,262,838
|
|
|
|
1,222,594
|
|
|
$
|
40,244
|
|
|
Net unrealized gain on open futures contracts
|
|
|
|
|
|
|
$
|
1,465
|
|
At June 30, 2013, the Fund had the following open forward foreign currency contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
Counterparty
|
|
Local
Currency
|
|
|
Market
Value
|
|
|
Settlement
Date
|
|
|
Unrealized
Gain
|
|
|
Contracts to
Buy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
Credit Suisse
|
|
|
1,000,000
|
|
|
$
|
1,301,911
|
|
|
|
8/16/13
|
|
|
$
|
2,672
|
|
|
|
|
|
|
|
|
|
Contracts to
Sell:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro
|
|
Credit Suisse
|
|
|
8,240,243
|
|
|
|
10,728,062
|
|
|
|
8/16/13
|
|
|
|
85,000
|
|
|
Euro
|
|
Royal Bank of
Scotland PLC
|
|
|
2,100,000
|
|
|
|
2,734,013
|
|
|
|
8/16/13
|
|
|
|
23,124
|
|
|
Total contracts to sell
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,124
|
|
|
Net unrealized gain on open forward foreign currency contracts
|
|
|
$
|
110,796
|
|
|
|
|
|
|
44
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
At June 30, 2013, the Fund held the following open OTC swap contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CREDIT DEFAULT SWAPS ON CORPORATE ISSUES — SELL PROTECTION
1
|
|
Swap Counterparty
(Reference Entity)
|
|
Notional
Amount
2
|
|
|
Termination
Date
|
|
|
Implied
Credit
Spread At
June 30, 2013
3
|
|
Periodic
Payments
Made By
The Fund‡
|
|
Market
Value
|
|
|
Upfront
Premiums
Paid
(Received)
|
|
|
Unrealized
Depreciation
|
|
|
Deutsche Bank AG (Ally Financial Inc. 7.500% due 9/15/20)
|
|
$
|
3,430,000
|
|
|
|
6/20/20
|
|
|
2.78%
|
|
5.000% quarterly
|
|
$
|
439,182
|
|
|
$
|
612,602
|
|
|
$
|
(173,420)
|
|
|
1
|
If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay
to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or
securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
|
|
2
|
The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event
occurs as defined under the terms of that particular swap agreement.
|
|
3
|
Implied credit spreads, utilized in determining the market value of credit default swap agreements on corporate issues or sovereign issues of an emerging country
as of period end serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of
buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default
or other credit event occurring as defined under the terms of the agreement. A credit spread identified as “Defaulted” indicates a credit event has occurred for the referenced entity or obligation.
|
|
‡
|
Percentage shown is an annual percentage rate.
|
At June 30,
2013, the Fund held collateral received from Deutsche Bank Securities Inc., in the amount of $503,157 on credit default swap contracts valued at $439,182. Net exposure to the counterparty was $(63,975). Net exposure represents the net
receivable/(payable) that would be due from/to the counterparty in the event of default.
4. Derivative instruments and hedging
activities
GAAP requires enhanced disclosure about an entity’s derivative and hedging activities.
Below is a table, grouped by derivative type, that provides information about the fair value and the location of derivatives within the Statement of Assets and
Liabilities at June 30, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSET
DERIVATIVES
1
|
|
|
|
|
Interest
Rate Risk
|
|
|
Foreign
Exchange Risk
|
|
|
Credit Risk
|
|
|
Total
|
|
|
Purchased options
2
|
|
|
—
|
|
|
|
—
|
|
|
$
|
125,239
|
|
|
$
|
125,239
|
|
|
Futures contracts
3
|
|
$
|
40,244
|
|
|
|
—
|
|
|
|
—
|
|
|
|
40,244
|
|
|
OTC swap contracts
4
|
|
|
—
|
|
|
|
—
|
|
|
|
439,182
|
|
|
|
439,182
|
|
|
Forward foreign currency contracts
|
|
|
—
|
|
|
$
|
110,796
|
|
|
|
—
|
|
|
|
110,796
|
|
|
Total
|
|
$
|
40,244
|
|
|
$
|
110,796
|
|
|
$
|
564,421
|
|
|
$
|
715,461
|
|
|
|
|
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
|
45
|
Notes to financial statements
(unaudited)
(cont’d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITY
DERIVATIVES
1
|
|
|
|
|
Interest
Rate Risk
|
|
|
Credit Risk
|
|
|
Total
|
|
|
Written options
|
|
|
—
|
|
|
$
|
33,541
|
|
|
$
|
33,541
|
|
|
Futures contracts
3
|
|
$
|
38,779
|
|
|
|
—
|
|
|
|
38,779
|
|
|
Total
|
|
$
|
38,779
|
|
|
$
|
33,541
|
|
|
$
|
72,320
|
|
|
1
|
Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation (depreciation) and for liability derivatives is
payables/net unrealized appreciation (depreciation).
|
|
2
|
Market value of purchased options is reported in Investments at value in the Statement of Assets and Liabilities.
|
|
3
|
Includes cumulative appreciation (depreciation) of futures contracts as reported in the footnotes. Only variation margin is reported within the receivables
and/or payables on the Statement of Assets and Liabilities.
|
|
4
|
Values include premiums paid (received) on swap contracts which are shown separately in the Statement of Assets and Liabilities.
|
The following tables provide information about the effect of derivatives and hedging activities on the Fund’s Statement of Operations for the six months ended
June 30, 2013. The first table provides additional detail about the amounts and sources of gains (losses) realized on derivatives during the period. The second table provides additional information about the change in unrealized appreciation
(depreciation) resulting from the Fund’s derivatives and hedging activities during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED
|
|
|
|
|
Interest
Rate Risk
|
|
|
Foreign
Exchange Risk
|
|
|
Credit Risk
|
|
|
Total
|
|
|
Purchased options
1
|
|
|
|
|
|
|
—
|
|
|
$
|
(559,370)
|
|
|
$
|
(559,370)
|
|
|
Written options
|
|
|
—
|
|
|
|
—
|
|
|
|
339,610
|
|
|
|
339,610
|
|
|
Futures contracts
|
|
$
|
20,219
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,219
|
|
|
Swap contracts
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,740,409)
|
|
|
|
(3,740,409)
|
|
|
Forward foreign currency contracts
|
|
|
—
|
|
|
$
|
(128,583)
|
|
|
|
—
|
|
|
|
(128,583)
|
|
|
Total
|
|
$
|
20,219
|
|
|
$
|
(128,583)
|
|
|
$
|
(3,960,169)
|
|
|
$
|
(4,068,533)
|
|
|
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 options
1
|
|
|
—
|
|
|
|
—
|
|
|
$
|
(206,921)
|
|
|
$
|
(206,921)
|
|
|
Written options
|
|
|
—
|
|
|
|
—
|
|
|
|
180,113
|
|
|
|
180,113
|
|
|
Futures contracts
|
|
$
|
1,465
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,465
|
|
|
Swap contracts
|
|
|
—
|
|
|
|
—
|
|
|
|
582,954
|
|
|
|
582,954
|
|
|
Forward foreign currency contracts
|
|
|
—
|
|
|
$
|
322,215
|
|
|
|
—
|
|
|
|
322,215
|
|
|
Total
|
|
$
|
1,465
|
|
|
$
|
322,215
|
|
|
$
|
556,146
|
|
|
$
|
879,826
|
|
|
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.
|
|
|
|
|
|
46
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
During the six months ended June 30, 2013, the volume of derivative activity for the Fund was as follows:
|
|
|
|
|
|
|
|
|
Average market
value
|
|
|
Purchased options
|
|
$
|
141,399
|
|
|
Written options
|
|
|
245,803
|
|
|
Futures contracts (to buy)
|
|
|
596,652
|
|
|
Futures contracts (to sell)
|
|
|
1,101,268
|
|
|
Forward foreign currency contracts (to buy)
|
|
|
371,751
|
|
|
Forward foreign currency contracts (to sell)
|
|
|
11,541,905
|
|
|
|
|
|
|
|
Average notional
balance
|
|
|
Credit default swap contracts (to buy protection)†
|
|
$
|
24,136,571
|
|
|
Credit default swap contracts (to sell protection)
|
|
|
980,000
|
|
|
†
|
At June 30, 2013, there were no open positions held in this derivative.
|
The following table presents by financial instrument, the Fund’s derivative assets net of the related collateral held by the Fund at June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amount of Derivative
Assets in the Statement of
Assets and Liabilities
1
|
|
|
Collateral
Received
3,4
|
|
|
Net Amount
|
|
|
Purchased options
2
|
|
$
|
125,239
|
|
|
|
—
|
|
|
$
|
125,239
|
|
|
OTC swap contracts
|
|
|
439,182
|
|
|
$
|
(439,182)
|
|
|
|
—
|
|
|
Forward foreign currency contracts
|
|
|
110,796
|
|
|
|
—
|
|
|
|
110,796
|
|
|
Total
|
|
$
|
675,217
|
|
|
$
|
(439,182)
|
|
|
$
|
236,035
|
|
The following table presents by financial instrument, the Fund’s derivative liabilities net of the related collateral pledged
by the Fund at June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amount of Derivative
Liabilities in the Statement
of Assets and Liabilities
1
|
|
|
Collateral
Pledged
3,4
|
|
|
Net Amount
|
|
|
Written options
|
|
$
|
33,541
|
|
|
|
—
|
|
|
$
|
33,541
|
|
|
Futures contracts
5
|
|
|
4,828
|
|
|
$
|
(4,828)
|
|
|
|
—
|
|
|
Total
|
|
$
|
38,369
|
|
|
$
|
(4,828)
|
|
|
$
|
33,541
|
|
|
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
|
Market value of purchased options is reported in Investments at value in the Statement of Assets and Liabilities.
|
|
3
|
Gross amounts not offset in the Statement of Assets and Liabilities.
|
|
4
|
In some instances, the actual collateral received and/or pledged may be more than the amount shown here due to overcollateralization.
|
|
5
|
Amount represents the current day’s variation margin as reported in the Statement of Assets and Liabilities. It differs from the cumulative
appreciation (depreciation) presented in the previous table.
|
5. Class specific expenses, waivers and/or expense
reimbursements
The Fund has adopted a Rule 12b-1 distribution plan and under that plan the Fund pays a service and/or distribution fee with respect
to its Class A, Class C and Class R shares calculated at the annual rate of 0.25%, 1.00% and 0.50% of the average daily net assets of each class, respectively. Service and distribution fees are accrued and paid monthly.
|
|
|
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
|
47
|
Notes to financial statements
(unaudited)
(cont’d)
For the six months ended June 30, 2013, class specific expenses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and/or
Distribution Fees
|
|
|
Transfer Agent
Fees
|
|
|
Class A
|
|
$
|
5,125
|
|
|
$
|
718
|
|
|
Class C
|
|
|
1,199
|
|
|
|
306
|
|
|
Class R
|
|
|
35
|
|
|
|
16
|
|
|
Class I
|
|
|
—
|
|
|
|
157,731
|
|
|
Class IS
|
|
|
—
|
|
|
|
3,180
|
|
|
Total
|
|
$
|
6,359
|
|
|
$
|
161,951
|
|
For the six months ended June 30, 2013, waivers and/or expense reimbursements by class were as follows:
|
|
|
|
|
|
|
|
|
Waivers/Expense
Reimbursements
|
|
|
Class A
|
|
|
—
|
|
|
Class C
|
|
$
|
99
|
|
|
Class R
|
|
|
3
|
|
|
Class I
|
|
|
—
|
|
|
Class IS
|
|
|
184
|
|
|
Total
|
|
$
|
286
|
|
6. Distributions to shareholders by class
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2013
|
|
|
Year Ended
December 31, 2012
|
|
|
Net Investment
Income:
|
|
|
|
|
|
|
|
|
|
Class A
|
|
$
|
123,413
|
|
|
$
|
14,164
|
†
|
|
Class C
|
|
|
6,476
|
|
|
|
4,366
|
†
|
|
Class R
|
|
|
416
|
|
|
|
585
|
†
|
|
Class I
|
|
|
13,049,383
|
|
|
|
27,480,396
|
|
|
Class IS
|
|
|
4,612,122
|
|
|
|
8,111,829
|
|
|
Total
|
|
$
|
17,791,810
|
|
|
$
|
35,611,340
|
|
|
†
|
For the period April 30, 2012 (commencement of operations) to December 31, 2012.
|
7. Capital shares
At June 30, 2013, the Corporation had 37.5 billion shares of capital
stock authorized with a par value of $0.001 per share. Transactions in shares of each class were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2013
|
|
|
Year Ended
December 31, 2012
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Class
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares sold
|
|
|
3,285,921
|
|
|
$
|
29,997,100
|
|
|
|
45,418
|
†
|
|
$
|
398,504
|
†
|
|
Shares issued on reinvestment
|
|
|
13,210
|
|
|
|
120,569
|
|
|
|
1,620
|
†
|
|
|
14,137
|
†
|
|
Shares repurchased
|
|
|
(2,763,543)
|
|
|
|
(25,096,288)
|
|
|
|
(1,270)
|
†
|
|
|
(11,102)
|
†
|
|
Net increase
|
|
|
535,588
|
|
|
$
|
5,021,381
|
|
|
|
45,768
|
†
|
|
$
|
401,539
|
†
|
|
|
|
|
|
48
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2013
|
|
|
Year Ended
December 31, 2012
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Class
C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares sold
|
|
|
34,134
|
|
|
$
|
305,502
|
|
|
|
18,879
|
†
|
|
$
|
164,488
|
†
|
|
Shares issued on reinvestment
|
|
|
722
|
|
|
|
6,476
|
|
|
|
498
|
†
|
|
|
4,341
|
†
|
|
Shares repurchased
|
|
|
(3,623)
|
|
|
|
(31,664)
|
|
|
|
(1,439)
|
†
|
|
|
(12,579)
|
†
|
|
Net increase
|
|
|
31,233
|
|
|
$
|
280,314
|
|
|
|
17,938
|
†
|
|
$
|
156,250
|
†
|
|
|
|
|
|
|
|
Class
R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares sold
|
|
|
2,680
|
|
|
$
|
24,030
|
|
|
|
1,161
|
†
|
|
$
|
10,000
|
†
|
|
Shares issued on reinvestment
|
|
|
43
|
|
|
|
385
|
|
|
|
68
|
†
|
|
|
585
|
†
|
|
Shares repurchased
|
|
|
(161)
|
|
|
|
(1,464)
|
|
|
|
—
|
|
|
|
—
|
|
|
Net increase
|
|
|
2,562
|
|
|
$
|
22,951
|
|
|
|
1,229
|
†
|
|
$
|
10,585
|
†
|
|
|
|
|
|
|
|
Class
I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares sold
|
|
|
10,843,837
|
|
|
$
|
97,753,675
|
|
|
|
24,871,827
|
|
|
$
|
213,205,093
|
|
|
Shares issued on reinvestment
|
|
|
1,445,132
|
|
|
|
13,022,482
|
|
|
|
3,091,497
|
|
|
|
26,558,559
|
|
|
Shares repurchased
|
|
|
(28,548,516)
|
|
|
|
(255,443,887)
|
|
|
|
(27,165,220)
|
|
|
|
(234,134,521)
|
|
|
Net increase (decrease)
|
|
|
(16,259,547)
|
|
|
$
|
(144,667,730)
|
|
|
|
798,104
|
|
|
$
|
5,629,131
|
|
|
|
|
|
|
|
|
Class
IS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares sold
|
|
|
674,357
|
|
|
$
|
6,209,005
|
|
|
|
4,204,414
|
|
|
$
|
37,185,918
|
|
|
Shares issued on reinvestment
|
|
|
422,610
|
|
|
|
3,865,480
|
|
|
|
891,706
|
|
|
|
7,784,963
|
|
|
Shares repurchased
|
|
|
(982,884)
|
|
|
|
(9,010,542)
|
|
|
|
(1,654,872)
|
|
|
|
(14,448,961)
|
|
|
Net increase
|
|
|
114,083
|
|
|
$
|
1,063,943
|
|
|
|
3,441,248
|
|
|
$
|
30,521,920
|
|
|
†
|
For the period April 30, 2012 (commencement of operations) to December 31, 2012.
|
8. Capital loss carryforwards
As of December 31, 2012, the Fund had the following net
capital loss carryforwards remaining:
|
|
|
|
|
|
|
Year of Expiration
|
|
Amount
|
|
|
12/31/2016
|
|
$
|
(32,093,148)
|
|
|
12/31/2017
|
|
|
(83,418,268)
|
|
|
|
|
$
|
(115,511,416)
|
|
These amounts will be available to offset any future taxable capital gains.
9. Recent accounting pronouncement
The Fund has adopted the disclosure provisions of Financial
Accounting Standards Board (“FASB”) Accounting Standards Update 2011-11 (“ASU 2011-11”),
Balance Sheet (Topic 210) — Disclosures about Offsetting Assets and Liabilities
along with the related scope clarification
provisions of FASB Accounting Standards Update 2013-01 (“ASU 2013-01”) entitled
Balance Sheet (Topic 210) — Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities
. ASU 2011-11 is intended to enhance
disclosures on the offsetting of financial assets and liabilities by requiring entities to disclose both gross and net information about financial instruments and transactions that are either offset in the
|
|
|
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
|
49
|
Notes to financial statements (cont’d)
statement of assets and liabilities or subject to a master netting agreement or similar arrangement. ASU 2013-01 limits the scope of ASU 2011-11’s disclosure requirements on offsetting to
financial assets and financial liabilities related to derivatives, repurchase and reverse repurchase agreements, and securities lending and securities borrowing transactions.
|
|
|
|
|
50
|
|
Western Asset High Yield Fund 2013 Semi-Annual Report
|
Western Asset
High Yield Fund
Directors
William E. B. Siart,
Chairman
Robert Abeles*
Ronald J. Arnault
Anita L. DeFrantz
Ronald L. Olson
Avedick B. Poladian
Jaynie M. Studenmund
Investment manager
Legg Mason Partners Fund Advisor, LLC
Investment adviser
Western Asset Management
Company
Transfer agent
Boston Financial Data Services, Inc.
2000 Crown Colony Drive
Quincy, MA 02169
Custodian
State Street Bank and Trust Company
Independent registered public accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
Legal counsel
Ropes & Gray LLP
1211 Avenue of the Americas
New York, NY 10036
|
*
|
Effective May 22, 2013, Mr. Abeles became a Director.
|
Western Asset High Yield Fund
The Fund is a
separate investment series of Western Asset Funds, Inc.
Western Asset High Yield Fund
Legg Mason Funds
620 Eighth Avenue, 49
th
Floor
New York, NY 10018
The Fund files its complete schedule of portfolio holdings with the Securities and
Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms
N-Q
are available on the SEC’s website at www.sec.gov. The Fund’s Forms
N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
To obtain information on Form N-Q, shareholders can call the Fund at
1-877-721-1926.
Information on how the Fund voted proxies relating to portfolio securities during the prior
12-month
period ended June 30th
of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling the Fund at
1-877-721-1926,
(2) on the Fund’s website at www.leggmason.com/individualinvestors and (3) on the SEC’s website at www.sec.gov.
This report is submitted for the general information of the shareholders of Western
Asset High Yield Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by a current prospectus.
Investors should consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the Fund. Please read
the prospectus carefully before investing.
www.leggmason.com/individualinvestors
© 2013 Legg Mason Investor Services, LLC
Member FINRA, SIPC
Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds
This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to
nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsored closed-end funds and certain closed-end funds managed or
sub-advised by Legg Mason or its affiliates. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:
|
Ÿ
|
|
Personal information included on applications or other forms;
|
|
Ÿ
|
|
Account balances, transactions, and mutual fund holdings and positions;
|
|
Ÿ
|
|
Online account access user IDs, passwords, security challenge question responses; and
|
|
Ÿ
|
|
Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt,
payment history, etc.).
|
How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial
institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have
authorized or as permitted or required by law. The Funds may disclose information about you to:
|
Ÿ
|
|
Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business or comply with obligations to government
regulators;
|
|
Ÿ
|
|
Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or
processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform marketing services solely for the Funds;
|
|
Ÿ
|
|
The Funds’ representatives such as legal counsel, accountants and auditors; and
|
|
Ÿ
|
|
Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.
|
|
|
|
NOT PART OF THE SEMI-ANNUAL REPORT
|
Legg Mason Funds Privacy and Security Notice (cont’d)
Except as otherwise permitted by applicable law, companies acting on the Funds’
behalf are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to perform.
The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by
applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your
nonpublic personal information to third parties. While it is the Funds’ practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.
Keeping You Informed of the Funds’ Privacy and Security Practices
The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy
changes.
The Funds’ Security Practices
The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data security policies restrict access to your nonpublic
personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive
to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your
nonpublic personal information, the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify
you under such circumstances using the most current email address you have on record with them.
In order for the Funds to provide effective service to
you, keeping your account information accurate is very important. If you believe that your account information is incomplete, not accurate or not current, or if you have questions about the Funds’ privacy practices, write the Funds using the
contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at www.leggmason.com, or contact the Fund at 1-877-721-1926.
Revised April 2011
|
|
|
NOT PART OF THE SEMI-ANNUAL REPORT
|
Western Asset Management Company
Legg Mason, Inc. Subsidiaries
www.leggmason.com/individualinvestors
©2013 Legg Mason Investor Services, LLC Member FINRA, SIPC
WASX012828 8/13 SR13-2006
