As filed with the Securities and Exchange Commission on February 25, 2013
1933 Act Registration No. 33-34929
1940 Act Registration No. 811-06110
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT
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UNDER
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THE SECURITIES ACT OF 1933
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x
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Pre-Effective Amendment No.
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¨
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Post-Effective Amendment No. 63
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x
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REGISTRATION STATEMENT
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UNDER
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THE INVESTMENT COMPANY ACT OF 1940
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Amendment No. 65
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x
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WESTERN ASSET FUNDS, INC.
(Formerly LM Institutional Fund Advisors I, Inc.)
(Exact name of
registrant as specified in charter)
100
International Drive
Baltimore, Maryland 21202
(Address of principal executive offices)
Registrants telephone number, including area code: (410) 539-0000
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Name and address of agent for service:
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Copy to:
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RICHARD M. WACHTERMAN, ESQ.
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BRYAN CHEGWIDDEN, ESQ.
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Legg Mason & Co., LLC
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Ropes & Gray LLP
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100 International Drive
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1211 Avenue of the Americas
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Baltimore, Maryland 21202
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New York, New York 10036
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It is proposed that this filing will become effective:
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Immediately upon filing pursuant to Rule 485(b)
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On February 28, 2013, pursuant to Rule 485(b)
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60 days after filing pursuant to Rule 485 (a)(1)
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On, pursuant to Rule 485 (a)(1)
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75 days after filing pursuant to Rule 485(a)(2)
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On [ ], pursuant to Rule 485(a)(2)
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If appropriate, check the following box:
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This post-effective amendment designates a new effective date for a previously filed post-effective amendment.
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This filing relates solely to Western Asset Asian Opportunities Fund.
March 1, 2013
Prospectus
Western Asset
Asian
Opportunities
Fund
Class : Ticker Symbol
A
: -
C : -
The Securities and Exchange Commission has not approved or disapproved these securities or determined whether this Prospectus is accurate or complete. Any statement to the contrary is a crime.
INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE
VALUE
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2
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Western Asset Asian Opportunities Fund
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Investment objective
Maximize total return, through income and capital appreciation.
Fees and expenses of the fund
The accompanying table describes the fees and expenses that you may pay if you buy and hold shares of the fund.
You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $100,000 in funds sold by Legg Mason Investor Services, LLC (LMIS),
the funds distributor. More information about these and other discounts is available from your financial intermediary, in this Prospectus on page 26 under the heading Sales charges and in the funds statement of additional
information (SAI) on page 60 under the heading Sales Charge Waivers and Reductions.
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Shareholder fees
(paid directly from your investment)
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Class A
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Class C
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Class FI
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Class R
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Class I
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Class IS
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Maximum sales charge (load) imposed on purchases (as a % of offering price) (%)
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4.25
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None
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None
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None
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None
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None
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Maximum deferred sales charge (load) (as a % of the lower of net asset value at purchase or redemption) (may be reduced over time)
(%)
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Generally,
none
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1.00
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None
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None
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None
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None
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Small account fee
1
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$15
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$15
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None
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None
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None
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None
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Annual fund operating expenses
(expenses that you pay each year as a percentage of the
value of
your investment)
(%)
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Class A
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Class C
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Class FI
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Class R
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Class I
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Class IS
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Management fees
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0.60
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0.60
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0.60
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0.60
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0.60
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0.60
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Distribution and/or service (12b-1) fees
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0.25
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1.00
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0.25
2
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0.50
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None
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None
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Other expenses
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0.85
3
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0.85
3
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0.90
3
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0.90
3
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0.80
3
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0.70
3
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Total annual fund operating expenses after waiving fees and/or reimbursing expenses
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1.70
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2.45
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1.75
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2.00
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1.40
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1.30
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Fees waived and/or expenses reimbursed
4
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(0.40)
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(0.40)
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(0.50)
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(0.50)
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(0.50)
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(0.50)
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Total annual fund operating expenses after waiving fees and/or reimbursing expenses
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1.30
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2.05
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1.25
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1.50
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0.90
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0.80
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1
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If your shares are held in a direct account and the value of your account is below $1,000 ($250 for retirement plans that are not
employer-sponsored), the fund may charge you a fee of $3.75 per account that is determined and assessed quarterly (with an annual maximum of $15.00 per account). Direct accounts generally include accounts held in the name of the individual investor
on the funds books and records.
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2
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The 12b-1 fee shown in the table reflects the amount to which the Board of Directors (the Board) has currently limited payments under
the funds Class FI Distribution Plan. Pursuant to the Class FI Distribution Plan, the Board may authorize payment of up to 0.40% of average net assets attributable to the funds Class FI shares without shareholder approval.
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3
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Other expenses are estimated for the current fiscal year. Actual expenses may differ from estimates.
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The manager has agreed to waive fees and/or reimburse operating expenses (other than interest, brokerage commissions, taxes, extraordinary
expenses and deferred organizational expenses) so that total annual operating expenses are not expected to exceed 1.30%, 2.05%, 1.25%, 1.50%, 0.90% and 0.80% for Class A, C, FI, R, I and IS shares, respectively. These arrangements cannot be
terminated prior to December 31, 2014 without the Boards consent. The manager is permitted to recapture amounts waived or reimbursed to a class within two years after the fiscal year in which the 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 manager recapture any amount that would result, on a particular business day of the fund, in the class
total annual expenses exceeding this limit or any other lower limit then in effect.
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Example
This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. The example
assumes:
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You invest $10,000 in the fund for the time periods indicated
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Your investment has a 5% return each year and the funds operating expenses remain the same
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You reinvest all distributions and dividends without a sales charge
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Western Asset Asian Opportunities Fund
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3
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Although your actual costs may be higher or lower, based on these assumptions your costs would be:
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Number of years you own your shares ($)
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1 year
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3 years
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5 years
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10 years
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Class A (with or without redemption at end of period)
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552
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901
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1,273
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2,315
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Class C (with redemption at end of period)
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308
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725
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1,269
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2,756
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Class C (without redemption at end of period)
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208
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725
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1,269
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2,756
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Class FI (with or without redemption at end of period)
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127
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503
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903
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2,023
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Class R (with or without redemption at end of period)
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153
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579
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1,032
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2,287
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Class I (with or without redemption at end of period)
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92
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394
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718
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1,636
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Class IS (with or without redemption at end of period)
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82
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363
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665
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1,525
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Portfolio turnover.
The fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate indicates higher transaction
costs and may result in higher taxes when shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the funds performance. The fund is newly offered; therefore, it
does not have a turnover rate to report for the most recent fiscal year.
Principal investment strategies
The fund invests, under normal circumstances, at least 80% of its net assets in securities issued by Asian issuers and other investments that are
tied economically to Asia, including, among others, derivatives based on financial instruments and interest rates of Asian issuers, and Asian currencies. Additionally, the fund will typically invest at least 70% of its net assets in debt and fixed
income securities and in derivatives on Asian interest rates and currencies. For these purposes, an Asian issuer is a country (and any of its agencies, instrumentalities or political subdivisions) located in Asia, or an issuer that at the time of
investment is organized in Asia, maintains its principal place of business in Asia or is a current or expected to be constituent of the J.P. Morgan Asia Credit Index or the HSBC Asia Local Bond Index. Examples of the types of securities and
instruments in which the fund may invest include (i) debt and fixed income securities issued or guaranteed by national governments located in Asia, including but not limited to, Bangladesh, China, Hong Kong, India, Indonesia, Kazakhstan,
Laos, Macao, Malaysia, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand, Turkey, Vietnam, or as Asia is defined by the United Nations Statistics Division from time to time, their agencies, instrumentalities or political
sub-divisions; (ii) corporate debt and fixed income securities issued by Asian companies, such as, among others, promissory notes, debentures, bonds (including zero coupon bonds), commercial paper, certificates of deposits and bankers
acceptances; (iii) securitized participations in loans; (iv) structured notes whose underlying exposure may be to debt or fixed income securities; and (v) Asian currencies and derivatives on those currencies. The fund may invest a
substantial portion of its assets, without limit, in securities of issuers located in emerging markets countries.
The fund is
non-diversified within the meaning of the Investment Company Act of 1940, as amended. As a result, the value of its shares will be more susceptible to any single economic, political or regulatory event affecting one or a small number of
issuers than shares of a diversified fund. Because the fund may focus a significant portion of its investments in a single country or currency, it will be more susceptible to factors adversely affecting such currency or issuers within that country
than would a more diversified portfolio of securities.
The fund may enter into various derivative transactions for both hedging and
non-hedging purposes, including for purposes of enhancing returns. These derivative transactions may include, but are not limited to, futures, options, swaps, forwards and structured instruments. In particular, the fund may use interest rate swaps,
credit
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4
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Western Asset Asian Opportunities Fund
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Principal investment strategies contd
default swaps (on individual securities and/or baskets of securities) and/or futures contracts and related options to a
significant extent, although the amount invested in these instruments will likely change from time to time. The fund may also use other types of derivatives to a significant extent from time to time.
The fund may invest in debt securities that are not rated in the Baa or BBB categories or above at the time of purchase by one or more Nationally
Recognized Statistical Rating Organizations (NRSROs) or unrated securities of comparable quality at the time of purchase (as determined by the subadvisers). Securities rated Baa or BBB or above by one or more NRSROs and unrated
securities of comparable quality are known as investment grade securities. Securities rated below investment grade and unrated securities of comparable quality are commonly known as junk bonds or high yield
securities and entail special risks.
The fund may invest in securities of all maturities or durations.
Certain risks
Risk is inherent in all investing. There is no assurance that the fund will meet its investment objective. The value of your investment in the fund, as well as the amount of return you receive on
your investment, may fluctuate significantly. You may lose part or all of your investment in the fund or your investment may not perform as well as other similar investments. The following is a summary description of certain risks of investing in
the fund.
Market and interest rate risk.
The market prices of the funds securities may go up or down, sometimes rapidly or unpredictably, due to general market conditions, such as real or perceived adverse economic or political
conditions, inflation, changes in interest rates, lack of liquidity in the bond markets or adverse investor sentiment. When market prices fall, the value of your investment will go down. The value of your investment may also go down when interest
rates rise. A rise in rates tends to have a greater impact on the prices of longer term or duration securities. The financial crisis that began in 2008 has caused a significant decline in the value and liquidity of many securities of issuers
worldwide. In response to the crisis, the U.S. and other governments and the Federal Reserve and certain foreign central banks have taken steps to support financial markets. The withdrawal of this support, failure of efforts in response to the
crisis, or investor perception that these efforts are not succeeding could negatively affect financial markets generally as well as the value and liquidity of certain securities. In addition, policy and legislative changes in the United States and
in other countries are changing many aspects of financial regulation. The impact of these changes on the markets, and the practical implications for market participants, may not be fully known for some time.
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 is downgraded, or is perceived to be less creditworthy, or if the value of the assets underlying a security declines, the
value of your investment will typically decline. Junk bonds are considered speculative, have a higher risk of default, tend to be less liquid and are more difficult to value than higher grade securities. Junk bonds tend to be volatile and more
susceptible to adverse events and negative sentiments. 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.
Investment in Asian issuers
risk.
Because the funds investments are focused on Asian issuers, the funds performance is expected to be closely tied to social, political and economic conditions
within Asia and to be more volatile than the performance of more geographically diversified funds.
Foreign investments and emerging markets risk.
The funds investments in securities of foreign issuers or issuers with
significant exposure to foreign markets involve additional risk. Foreign countries in which the fund may invest may have markets that are less liquid, less regulated and more volatile than U.S. markets. The value of the funds investments may
decline because of factors affecting the particular issuer as well as foreign markets and issuers generally, such as unfavorable government actions, and political or financial instability. Lack of information may also affect the value of these
securities.
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 systems that are less fully developed and are less stable than those of more developed countries. They are often particularly sensitive to market movements because their market
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Western Asset Asian Opportunities Fund
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5
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prices tend to reflect speculative expectations. Low trading volumes may result in a lack of liquidity and in extreme price volatility.
Derivatives risk.
Using derivatives can increase fund losses
and reduce opportunities for gains when market prices, interest rates, currency rates or the derivative instruments themselves behave in a way not anticipated by the fund. Using derivatives also can have a leveraging effect and increase fund
volatility. Derivatives may be difficult to sell, unwind or value, and the counterparty may default on its obligations to the fund. Recent legislation calls for new regulation of the derivatives markets. The extent and impact of the regulations are
not yet fully known and may not be for some time. New regulation of derivatives may make them more costly, may limit their availability, or may otherwise adversely affect their value or performance. Credit default swap contracts involve special
risks and may result in losses to the fund. Credit default swaps may be illiquid and difficult to value, and they increase credit risk since the fund has exposure to both the issuer whose credit is the subject of the swap and the counterparty to the
swap. Swaps may be difficult to unwind or terminate. The swap market could be disrupted or limited as a result of recent legislation, and these changes could adversely affect the fund.
Leveraging risk.
The value of your investment may be more
volatile if the fund borrows or uses derivatives or other investments that have a leveraging effect on the funds portfolio. Other risks also will be compounded. This is because leverage generally magnifies the effect of a change in the value
of an asset and creates a risk of loss of value on a larger pool of assets than the fund would otherwise have had. The fund may also have to sell assets at inopportune times to satisfy its obligations.
Liquidity
risk.
Some securities held by the fund may be difficult to sell, or illiquid, particularly during times of market turmoil. Illiquid securities may also be difficult to value. If the
fund is forced to sell an illiquid asset to meet redemption requests or other cash needs, the fund may be forced to sell at a loss.
Currency
risk.
The value of investments in securities 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.
Sovereign debt risk.
Sovereign government and supranational debt involve many of the risks of foreign and emerging markets
investments as well as the risk of debt moratorium, repudiation or renegotiation and the fund may be unable to enforce its rights against the issuers.
Risk of increase in expenses.
Your actual costs of investing in
the fund may be higher than the expenses shown in Annual fund operating expenses for a variety of reasons. For example, expense ratios may be higher than those shown if any fee limitation is changed or terminated or if average net assets
decrease. Net assets are more likely to decrease and fund expense ratios are more likely to increase when markets are volatile.
Prepayment or call risk.
Many issuers have a right to prepay their securities. If interest rates fall, an issuer may exercise
this right. If this happens, the fund will be forced to reinvest prepayment proceeds at a time when yields on securities available in the market are lower than the yield on the prepaid security. The fund may also lose any premium it paid on the
security.
Extension risk.
If interest rates rise, repayments of fixed income securities may occur more slowly than anticipated by the market. Since changes in interest rates have a greater effect on the prices of
longer-term securities, this extension in the securities effective maturity magnifies the price decline caused by the increase in interest rates.
Non-diversification risk.
The fund is classified as
non-diversified, which means it may invest a larger percentage of its assets in a smaller number of issuers than a diversified fund. To the extent the fund invests its assets in a smaller number of issuers, the fund will be more
susceptible to negative events affecting those issuers than a diversified fund.
Valuation risk.
The sales price the fund could receive for any particular portfolio investment may differ from the funds
valuation of the investment, particularly for securities that trade in thin or volatile markets or that are valued using a fair value methodology. Investors who purchase or redeem fund shares on days when the fund is holding fair-valued securities
may receive fewer or more shares or lower or higher redemption proceeds than they would have received if the fund had not fair-valued the security or had used a different valuation methodology.
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6
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Western Asset Asian Opportunities Fund
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Certain risks contd
Cash
management and defensive investing risk.
Money market instruments or short-term debt securities held by the fund for cash management or defensive investing purposes can fluctuate in
value. Like other fixed income securities, they are subject to risk, including market, interest rate and credit risk. If the fund holds cash uninvested it will be subject to the credit risk of the depository institution holding the cash. In that
case the fund would not earn income on the cash and the funds yield would go down. If a significant amount of the funds assets are used for cash management or defensive investing purposes, it will be more difficult for the fund to
achieve its objective.
Hedging risk.
There can be no assurance that the fund will engage in hedging transactions at any given time, even under volatile market conditions, or that any hedging transactions the fund engages in will be
successful. Hedging transactions involve costs and may reduce gains or result in losses.
Portfolio selection risk.
The value of your investment may decrease if the subadvisers judgment about the quality,
relative yield, value or market trends affecting a particular security, industry, sector, or region, or about interest rates is incorrect.
These and other risks are discussed in more detail later in this Prospectus or in the SAI.
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Western Asset Asian Opportunities Fund
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7
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Performance
The fund commenced operations on November 1, 2012; therefore, it does not have a calendars year worth of
performance to report. Performance information provides some indication of the risks of investing in the fund and compares the funds performance with that of an index or other benchmark. The fund makes updated performance information available
at the funds website, http://www.leggmason.com/ individualinvestors/products/mutualfunds/annualized_performance (select share class), or by calling the fund at 1-877-721-1926.
The funds past performance (before and after taxes) is not necessarily an indication
of how the fund will perform in the future.
Management
Investment manager:
Legg Mason Partners Fund Advisor, LLC
Subadvisers:
Western Asset Management Company, Western Asset Management Company Limited in London, Western Asset Management Company Pte. Ltd. in Singapore and Western Asset Management Company Ltd in Japan
Investment professionals:
Stephen A. Walsh, Keith J. Gardner, Chia-Liang Lian, Robert O. Abad and Desmond Soon. Messrs. Walsh, Gardner, Lian, Abad and Soon have been part of the portfolio management team for the fund since
its inception. These investment professionals work together with a broader investment management team.
Purchase and sale of fund shares
You may purchase, redeem or exchange shares of the fund each day the New York Stock Exchange (NYSE) is open, at the funds net asset value determined after receipt of your request
in good order, subject to any applicable sales charge.
The funds initial and subsequent investment minimums generally are as
follows:
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Investment minimum initial/additional investment ($)
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Class A
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Class C
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Class FI
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Class R
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Class I
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Class IS
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General
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1,000/50
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1,000/50
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N/A
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N/A
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1 million/None*
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N/A
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Uniform Gifts or Transfers to Minor Accounts
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1,000/50
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1,000/50
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N/A
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N/A
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1 million/None*
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N/A
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IRAs
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250/50
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250/50
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N/A
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N/A
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1 million/None*
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N/A
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SIMPLE IRAs
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None/None
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None/None
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N/A
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N/A
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1 million/None*
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N/A
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Systematic Investment Plans
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50/50
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50/50
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N/A
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N/A
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1 million/None*
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N/A
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Clients of Eligible Financial Intermediaries
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None/None
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N/A
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None/None
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N/A
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None/None
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N/A
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Eligible Investment Programs
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None/None
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N/A
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None/None
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None/None
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None/None
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N/A
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Retirement Plans with omnibus accounts held on the books of the fund and certain rollover IRAs
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None/None
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None/None
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None/None
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None/None
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None/None
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None/None
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Other Retirement Plans
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None/None
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None/None
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N/A
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N/A
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1 million/None*
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N/A
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Institutional Investors
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1,000/50
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1,000/50
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N/A
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N/A
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1 million/None
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1 million/None
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*
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Available to investors investing directly with the fund.
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Your financial intermediary may impose different investment minimums.
For more
information about how to purchase, redeem or exchange shares, and to learn which classes of shares are available to you, you should contact your financial intermediary, or, if you hold your shares or plan to purchase shares through the fund, you
should contact the fund by phone at 1-877-721-1926 or by mail at Legg Mason Funds, P.O. Box 55214, Boston, MA 02205-8504.
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8
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Western Asset Asian Opportunities Fund
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Tax information
The funds distributions are generally taxable as ordinary income or capital gain, except where your investment is
through an IRA, 401(k) or other tax-advantaged account.
Payments to broker/dealers and other financial
intermediaries
The funds related companies may pay broker/dealers or other financial intermediaries (such as a bank or an
insurance company) for the sale of fund shares and related services. These payments create a conflict of interest by influencing your broker/dealer or other intermediary or its employees or associated persons to recommend the fund over another
investment. Ask your financial adviser or salesperson or visit your financial intermediarys or salespersons website for more information.
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Western Asset Asian Opportunities Fund
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9
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More on the funds investment strategies, investments and risks
The funds investment strategies may be changed
without shareholder approval. The funds investment objective may be changed by the Board of Directors (the Board) without shareholder approval and on notice to shareholders.
The fund will consider the entity that issues the security backed by the pool of assets supporting a mortgage-backed or asset-backed security to be the issuer for purposes of its
investment limitations set forth above.
Maturity
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.
Credit quality
The continued
holding of a security downgraded below its rating at the time of purchase will be evaluated on a case by case basis.
Derivatives
The fund may engage in a variety of transactions using derivatives, such as futures, options, swaps, warrants, and other derivative
instruments. Derivatives are financial instruments whose value depends upon, or is derived from, the value of something else, such as one or more underlying investments, indexes or currencies. Some derivatives, like swaps, tend to shift the
funds investment exposure from one type of investment to another. For example, the fund could decrease its exposure to U.S. currency and increase its exposure to non-U.S. currency by exchanging (swapping) payments in U.S. dollars
for payments in non-U.S. currency.
Derivatives may be used by the fund for any of the following purposes:
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As a hedging technique in an attempt to manage risk in the funds portfolio
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As a substitute for buying or selling securities
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As a cash flow management technique
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As a means of enhancing returns
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The fund from time to time may sell protection on debt securities by entering into credit default swaps. In these transactions, the fund is generally required to pay the par (or other agreed-upon)
value of a referenced debt security to the counterparty in the event of a default on or downgrade of the debt security and/or a similar credit event. In return, the fund receives from the counterparty a periodic stream of payments over the term of
the contract. If no default occurs, the fund keeps the stream of payments and has no payment obligations. As the seller, the fund would effectively add leverage to its portfolio because, in addition to its net assets, the fund would be subject to
investment exposure on the par (or other agreed-upon) value it had undertaken to pay. Credit default swaps may also be structured based on an index or the debt of a basket of issuers, rather than a single issuer, and may be customized with respect
to the default event that triggers purchase or other factors (for example, a particular number of defaults within a basket, or defaults by a particular combination of issuers within the basket, may trigger a payment obligation).
Using derivatives, especially for non-hedging purposes, may involve greater risks to the fund than investing directly in securities, particularly as
these instruments may be very complex and may not behave in the manner anticipated by the fund. Certain derivative transactions may have a leveraging effect on the fund.
Use of derivatives or similar instruments may have different tax consequences for the fund than an investment in the underlying security, and such differences may affect the amount, timing and
character of income distributed to shareholders.
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When the fund enters into derivative transactions, it may be required
to segregate assets, or enter into offsetting positions, in accordance with applicable regulations. Such segregation will not limit the funds exposure to loss, however, and the fund will have investment risk with respect to both the derivative
itself and the assets that have been segregated to cover the funds derivative exposure. If such segregated assets represent a large portion of the funds portfolio, this may impede portfolio management or the funds ability to meet
redemption requests or other current obligations.
As noted above, instead of investing directly in particular securities, the fund may
use derivatives such as futures contracts, synthetic instruments and other instruments that are intended to provide economic exposure to a security, an issuer, an index or basket of securities, or a market. The fund may use one or more types of
these instruments to the extent consistent with its 80% policy.
The funds subadvisers may choose not to make use of derivatives.
Fixed income securities
Fixed income securities represent obligations of corporations, governments and other entities to repay money borrowed. Fixed income securities are
commonly referred to as debt, debt obligations, bonds or notes. The issuer or borrower of the security usually pays a fixed, variable or floating rate of interest and repays the amount borrowed,
usually at the maturity of the instrument. However, some fixed income securities, such as zero coupon bonds, do not pay current interest but are issued at a discount from their face values. Other debt instruments, such as certain mortgage-backed and
other asset-backed securities, make periodic payments of interest and/or principal. Some debt instruments are partially or fully secured by collateral supporting the payment of interest and principal. The terms fixed income securities,
debt, debt obligations, debt securities, corporate debt and bonds are used in this Prospectus interchangeably, and, where used, are not intended to be limiting.
Foreign and emerging market securities
The fund may invest its assets in securities of foreign issuers, including mortgage-backed securities and asset-backed securities issued by foreign entities. The value of the funds foreign
securities may decline because of unfavorable government actions, political instability or the more limited availability of accurate information about foreign issuers. The fund may invest in foreign securities issued by issuers located in emerging
market countries. To the extent the fund invests in these securities, the risks associated with investment in foreign issuers will generally be more pronounced.
Sovereign debt
The fund may invest in sovereign debt, including emerging market
sovereign debt. Sovereign debt securities may include:
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Fixed income securities issued or guaranteed by governments, governmental agencies or instrumentalities and their political subdivisions
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Fixed income securities issued by government-owned, controlled or sponsored entities
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Interests in entities organized and operated for the purpose of restructuring the investment characteristics of instruments issued by any of the
above issuers
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Brady Bonds, which are debt securities issued under the framework of the Brady Plan as a means for debtor nations to restructure their
outstanding external indebtedness
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Participations in loans between governments and financial institutions
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Fixed income securities issued by supranational entities such as the World Bank or the European Economic Community. A supranational entity is a
bank, commission or company established or financially supported by the national governments of one or more countries to promote reconstruction or development
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Sovereign government and supranational debt involve many of the risks of foreign and emerging markets
investments as well as the risk of debt moratorium, repudiation or renegotiation and the fund may be unable to enforce its rights against the issuers.
Non-U.S. currency transactions
The fund may engage in non-U.S. currency exchange
transactions in an effort to protect against uncertainty in the level of future exchange rates or to enhance returns based on expected changes in exchange rates. Non-U.S. currency exchange transactions may take the form of options, futures, options
on futures, swaps, warrants, structured notes, forwards or spot (cash) transactions. The value of these non-U.S. currency transactions depends on, and will vary based on fluctuations in, the value of the underlying currency relative to the U.S.
dollar.
Variable and floating rate securities
Variable rate securities reset at specified intervals, while floating rate securities reset whenever there is a change in a specified index rate. In most cases, these reset provisions reduce the
impact of changes in market interest rates on the value of the security. However, the value of these securities may decline if their interest rates do not rise as much, or as quickly, as other interest rates. Conversely, floating rate securities
will not generally increase in value if interest rates decline. The fund may also invest in inverse floating rate debt instruments (inverse floaters). An inverse floater may exhibit greater price volatility than a fixed rate obligation
of similar credit quality.
Stripped securities
Certain fixed income securities, called stripped securities, may represent the right to receive either payments of principal (called POs) or payments of interest (called IOs)
on underlying pools of mortgages or on government securities. The value of these types of instruments may change more drastically than debt securities that pay both principal and interest during periods of changing interest rates. Interest-only and
principal-only mortgage-backed securities are especially sensitive to interest rate changes, which can affect not only their prices but can also change the prepayment assumptions about those investments and income flows the fund receives from them.
Corporate debt
The
fund may invest in corporate debt securities which are fixed income securities usually issued by businesses to finance their operations. Notes, bonds, debentures and commercial paper are the most common types of corporate debt securities, with the
primary difference being their maturities and secured or unsecured status. Commercial paper has the shortest term and is usually unsecured. The broad category of corporate debt securities includes debt issued by U.S. or foreign companies of all
kinds, including those with small-, mid- and large capitalizations. Corporate debt may be rated investment-grade or below investment grade and may carry variable or floating rates of interest. All of these types of securities are often generally
referred to as corporate bonds.
Loans
The fund may invest in loans. The primary risk in an investment in loans is that borrowers may be unable to meet their interest and/or principal payment obligations. Loans in which the fund invests
may be made to finance highly leveraged borrowers which may make such loans especially vulnerable to adverse changes in economic or market conditions. Loans in which the fund may invest may be either collateralized or uncollateralized and senior or
subordinate. Investments in uncollateralized and/or subordinate loans entail a greater risk of nonpayment than do investments in loans that hold a more senior position in the borrowers capital structure or are secured with collateral. In
addition, loans are generally subject to liquidity risk. The fund may acquire an interest in loans by purchasing participations in and assignments of portions of loans from third parties or by investing in pools of loans, such as collateralized debt
obligations as further described under Mortgage-backed and asset-backed securities.
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Preferred stock and convertible securities
The fund may invest in preferred stock and convertible securities. Preferred stock represents an interest in a company that generally entitles the
holder to receive, in preference to the holders of common stock, dividends and a fixed share of the proceeds resulting from a liquidation of the company. Preferred stocks may pay fixed or adjustable rates of return. Convertible fixed income
securities convert into shares of common stock of their issuer. Preferred stock and convertible fixed income securities share investment characteristics of both fixed income and equity securities. However, the value of these securities tends to vary
more with fluctuations in the underlying common stock and less with fluctuations in interest rates and tends to exhibit greater volatility.
Equity securities
Although the fund invests principally in fixed income securities
and related investments, the fund may from time to time invest in or receive equity securities and equity-like securities. Equity securities include warrants, rights, exchange traded and over-the-counter common stocks, baskets of equity securities
such as exchange traded funds, depositary receipts, trust certificates, limited partnership interests, and shares of other investment companies and real estate investment trusts.
Equity securities represent an ownership interest in the issuing company. Holders of equity securities are not creditors of the company, and in the event of the liquidation of the company, would be
entitled to their pro rata share of the companys assets, if any, after creditors, including the holders of fixed income securities, and holders of any senior equity securities are paid. Equity securities generally have greater price volatility
than fixed income securities.
Warrants and rights permit, but do not obligate, their holder to subscribe for other securities. Warrants
and rights are subject to the same market risks as stocks, but may be more volatile in price. An investment in warrants or rights may be considered speculative. In addition, the value of a warrant or right does not necessarily change with the value
of the underlying securities and a warrant or right ceases to have value if it is not exercised prior to its expiration date.
Securities of other investment companies
The fund may invest in securities of other investment companies to the extent permitted under the Investment Company Act of 1940, as amended (the 1940 Act). The return on investments in
other registered investment companies will be reduced by the operating expenses, including investment advisory expenses, of such companies, and by any sales loads or other distribution and/or service fees or charges incurred in purchasing or selling
shares of such companies, in addition to the funds own fees and expenses. As such, there is a layering of fees and expenses.
Credit downgrades and other credit events
Credit rating or credit quality of a security is determined at the time of purchase. If, after purchase, the credit rating on a security is downgraded or the credit quality deteriorates, or if the
duration of a security is extended, the funds subadvisers will decide whether the security should be held or sold. Upon the occurrence of certain triggering events or defaults on a security held by the fund, or if an obligor of such a security
has difficulty meeting its obligations, the fund may obtain a new or restructured security or underlying assets. In that case, the fund may become the holder of securities or other assets that it could not purchase or might not otherwise hold (for
example, because they are of lower quality or are subordinated to other obligations of the issuer) at a time when those assets may be difficult to sell or can be sold only at a loss. In addition, the fund may incur expenses to protect the
funds interest in securities experiencing these events.
Zero coupon bonds, pay-in-kind securities and deferred interest
securities
Zero coupon, pay-in-kind and deferred interest securities may be used by issuers to manage cash flow and maintain liquidity.
Zero coupon securities pay no interest during the life of the obligation but are issued at
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prices below their stated maturity value. Because zero coupon securities pay no interest until maturity, their prices may fluctuate more than other types of securities with the same maturity in
the secondary market. However, zero coupon bonds are useful as a tool for managing duration.
Pay-in-kind securities have a stated coupon
but the interest is generally paid in the form of obligations of the same type as the underlying pay-in-kind securities (e.g. bonds) rather than in cash. These securities are more sensitive to the credit quality of the underlying issuer and their
secondary market prices may fluctuate more than other types of securities with the same maturity.
Deferred interest securities are
obligations that generally provide for a period of delay before the regular payment of interest begins and are issued at a significant discount from face value.
Certain zero coupon, pay-in-kind and deferred interest securities are subject to tax rules applicable to debt obligations acquired with original issue discount. The fund would generally
have to accrue income on these securities for federal income tax purposes before it receives corresponding cash payments. Because the fund intends to make sufficient annual distributions of its taxable income, including accrued non-cash income, in
order to maintain its federal income tax status and avoid fund-level income and excise taxes, the fund might be required to liquidate portfolio securities at a disadvantageous time, or borrow cash, to make these distributions.
When-issued securities, delayed delivery and forward commitment transactions
The fund may purchase securities under arrangements (called when-issued, delayed delivery 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. Such transactions involve a risk of loss if the value of the securities declines prior to the settlement date or if the assets set aside to pay for these securities
decline in value prior to the settlement date. Therefore, these transactions may have a leveraging effect on the fund, making the value of an investment in the fund more volatile and increasing the funds overall investment exposure. Typically,
no income accrues on securities the fund has committed to purchase prior to the time delivery of the securities is made, although the fund may earn income on securities it has segregated or earmarked to cover these positions.
Forward roll transactions
The fund
may engage in forward roll transactions (also referred to as mortgage dollar rolls). A forward roll transaction involves a forward commitment by the fund (see When-issued securities, delayed delivery and forward commitment transactions
above). In general, in a forward roll transaction, the fund sells a mortgage security while simultaneously agreeing to repurchase a similar security from the same party (the counterparty) on a specified future date at a lower fixed price. The fund
may enter into a forward roll transaction with the intention of entering into an offsetting transaction whereby, rather than accepting delivery of the security on the specified date, the fund sells the security and agrees to repurchase a similar
security at a later time.
An obligation to repurchase securities on a specified future date involves a risk of loss if the value of the
securities that the fund is obligated to purchase declines below the purchase price prior to the repurchase date. Forward roll transactions may have a leveraging effect on the fund, making the value of an investment in the fund more volatile and
increasing the funds overall investment exposure.
Short-term investments
The fund may invest in cash, money market instruments and short-term securities, including repurchase agreements, U.S. government securities, bank obligations and commercial paper. A repurchase
agreement is a transaction in which the fund purchases a security from a seller, subject to the obligation of the seller to repurchase that security from the fund at a higher price. The repurchase agreement thereby determines the yield during the
funds holding period, while the sellers obligation to repurchase is secured by the value of the underlying security held by the fund.
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Borrowings and reverse repurchase agreements
The fund may enter into borrowing transactions. Borrowing may make the value of an investment in the fund more volatile and increase the funds
overall investment exposure. The fund may be required to liquidate portfolio securities at a time when it would be disadvantageous to do so in order to make payments with respect to any borrowings. Interest on any borrowings will be a fund expense
and will reduce the value of the funds shares.
The fund may enter into reverse repurchase agreements, which have characteristics
like borrowings. In a reverse repurchase agreement, the fund sells securities to a counterparty, in return for cash, and the fund agrees to repurchase the securities at a later date and for a higher price, representing the cost to the fund for the
cash received.
Restricted and illiquid securities
Restricted securities are securities subject to legal or contractual restrictions on their resale. An illiquid security is any security which may not be sold or disposed of in the
ordinary course of business within seven days at approximately the value at which the fund has valued the security. Such conditions might prevent the sale of such securities at a time when the sale would otherwise be desirable. The fund will not
acquire illiquid securities if such acquisition would cause the aggregate value of illiquid securities to exceed 15% of the funds net assets. The fund may determine that some restricted securities can be more readily sold, for
example to qualified institutional buyers pursuant to SEC Rule 144A, and therefore may treat certain such securities as liquid for purposes of limitations on the amount of illiquid securities it may own. Investing in these restricted
securities could have the effect of increasing the funds illiquidity if qualified buyers become, for a time, uninterested in buying these securities. These securities may be difficult to value, and the fund may have difficulty disposing of
such securities promptly. The fund does not consider non-U.S. securities to be restricted if they can be freely sold in the principal markets in which they are traded, even if they are not registered for sale in the United States.
Structured notes and indexed securities
The fund may invest in various types of structured instruments, including securities that have demand, tender or put features, or interest rate reset features. These may include instruments issued
by structured investment or special purpose vehicles or conduits, and may be asset-backed or mortgage-backed securities. Structured instruments may take the form of participation interests or receipts in underlying securities or other assets, and in
some cases are backed by a financial institution serving as a liquidity provider. The interest rate or principal amount payable at maturity on a structured instrument may vary based on changes in one or more specified reference factors, such as
currencies, interest rates, commodities, indices or other financial indicators. Changes in the underlying reference factors may result in disproportionate changes in amounts payable under a structured instrument. Some of these instruments may have
an interest rate swap feature which substitutes a floating or variable interest rate for the fixed interest rate on an underlying security. Structured instruments are a type of derivative instrument and the payment and credit qualities of these
instruments derive from the assets embedded in the structure. For structured securities that have embedded leverage features, small changes in interest or prepayment rates may cause large and sudden price movements. Structured instruments are often
subject to heightened liquidity risk.
Defensive investing
The fund may depart from its principal investment strategies in response to adverse market, economic or political conditions by taking temporary defensive positions and investing in any type of
money market instruments and short-term debt securities or holding cash without regard to any percentage limitations. Although the subadvisers have the ability to take defensive positions, they may choose not to do so for a variety of reasons, even
during volatile market conditions.
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Other investments
The fund may also use other strategies and invest in other securities that are described, along with their risks, in the SAI. However, the fund might not use all of the strategies and techniques or
invest in all of the types of securities described in this Prospectus or in the SAI. New types of mortgage-backed and asset-backed securities, derivative instruments, hedging instruments and other securities or instruments are developed and marketed
from time to time. Consistent with its investment limitations, the fund may invest in new types of securities and instruments.
Percentage and other limitations
The funds compliance with its investment limitations and requirements is usually determined at the time of investment. If a percentage
limitation is complied with at the time of an investment, any subsequent change in percentage resulting from a change in values or assets, or a change in credit quality, will not constitute a violation of that limitation.
More on risks of investing in the fund
Market and interest rate risk.
The market prices of fixed
income and other securities owned by the fund may go up or down, sometimes rapidly or unpredictably. If the market prices of the securities owned by the fund fall, the value of your investment in the fund will decline. The value of a security may
fall due to general market conditions, such as real or perceived adverse economic or political conditions, inflation, changes in interest or currency rates, lack of liquidity in the bond markets or adverse investor sentiment. The equity and debt
capital markets in the United States and internationally have experienced unprecedented volatility. The financial crisis that began in 2008 has caused a significant decline in the value and liquidity of many securities; in particular, the values of
some sovereign debt and of securities of issuers that invest in sovereign debt and related investments have fallen, credit has become more scarce worldwide and there has been significant uncertainty in the markets. This environment could make
identifying investment risks and opportunities especially difficult for the adviser. These market conditions may continue or get worse. In response to the crisis, the U.S. and other governments and the Federal Reserve and certain foreign central
banks have taken steps to support financial markets. The withdrawal of this support, failure of efforts in response to the crisis, or investor perception that such efforts are not succeeding could negatively affect financial markets generally as
well as the value and liquidity of certain securities. In addition, policy and legislative changes in the United States and in other countries are changing many aspects of financial regulation. The impact of these changes on the markets, and the
practical implications for market participants, may not be fully known for some time.
Changes in market conditions will not have the
same impact on all types of securities. The value of a security may also fall due to specific conditions that affect a particular sector of the securities market or a particular issuer.
When interest rates rise, the value of fixed income securities generally falls. A change in interest rates will not have the same impact on all fixed income securities. Generally, the longer the
maturity or duration of a fixed income security, the greater the impact of a rise in interest rates on the securitys value. However, calculations of duration and maturity may be based on estimates and may not reliably predict a
securitys price sensitivity to changes in interest rates. Moreover, securities can change in value in response to other factors, such as credit risk. In addition, different interest rate measures (such as short- and long-term interest
rates and U.S. and foreign interest rates), or interest rates on different types of securities or securities of different issuers, may not necessarily change in the same amount or in the same direction. When interest rates go down, the income
received by the fund, and the funds yield, may decline.
Certain fixed income securities pay interest at variable or floating
rates. Variable rate securities tend to reset at specified intervals, while floating rate securities may reset whenever there is a change in a specified index rate. In most cases, these reset provisions reduce the impact of changes in market
interest rates on the value of the security. However, some securities do not track the underlying index directly, but reset based on formulas that may produce a leveraging effect; others may also provide for interest payments that
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vary inversely with market rates. The market prices of these securities may fluctuate significantly when interest rates change. Rates of interest generated by the fund may decline due to a
decrease in market interest rates.
Credit risk.
If an obligor (such as the issuer itself or a party offering credit enhancement) for a security held by the fund fails to pay, otherwise defaults, is perceived to be less creditworthy, becomes
insolvent or files for bankruptcy, a securitys credit rating is downgraded or the credit quality or value of any underlying assets declines, the value of your investment in the fund could decline. If the fund enters into financial contracts
(such as certain derivatives, repurchase agreements, reverse repurchase agreements, and when-issued, delayed delivery and forward commitment transactions), the fund will be subject to the credit risk presented by the counterparty. In addition, the
fund may incur expenses in an effort to protect the funds interests or to enforce its rights. Credit risk is broadly gauged by the credit ratings of the securities in which the fund invests. However, ratings are only the opinions of the
companies issuing them and are not guarantees as to quality. Securities rated in the lowest category of investment grade (Baa/BBB) may possess certain speculative characteristics.
The fund is subject to greater levels of credit risk to the extent it holds below investment grade debt securities (that is, securities rated below Baa/BBB or unrated securities of comparable
quality), or junk bonds. These securities have a higher risk of issuer default, because, among other reasons, issuers of junk bonds often have more debt in relation to total capitalization than issuers of investment grade securities.
These securities are considered speculative, tend to be less liquid and are more difficult to value than higher rated securities and may involve major risk of exposure to adverse conditions and negative sentiments. These securities may be in default
or in danger of default as to principal and interest. Unrated securities of comparable quality share these risks.
The fund may hold
securities which are subordinated to more senior securities of the issuer, or which represent interests in pools of such subordinated securities. The fund is more likely to suffer a credit loss on subordinated securities than on non-subordinated
securities of the same issuer. If there is a default, bankruptcy or liquidation of the issuer, most subordinated securities are paid only if sufficient assets remain after payment of the issuers non-subordinated securities. In addition, any
recovery of interest or principal may take more time. As a result, even a perceived decline in creditworthiness of the issuer is likely to have a greater impact on subordinated securities.
Investment in Asian issuers risk.
Because the funds
investments are focused on Asian issuers, the funds performance is expected to be closely tied to social, political and economic conditions within Asia and to be more volatile than the performance of more geographically diversified funds. Asia
includes countries in all stages of economic development, from the highly developed economy of Japan to the emerging market economy of China. As export-driven economies, the economies of countries in Asia are affected by developments in the
economies of their principal trading partners. Most Asian economies are characterized by over-extension of credit, frequent currency fluctuations, devaluations, and restrictions, rising unemployment, rapid fluctuation in, among other things,
inflation, reliance on exports, and less efficient and liquid securities markets. Currency devaluations in any one country can have a significant effect on the entire region. Recently, the markets in each Asian country have suffered significant
volatility. Furthermore, increased political and social unrest or governmental action in an Asian country could cause economic and market uncertainty in the entire region and thus could adversely impact the funds holdings even if the fund has
not invested in that country. The legal systems in many Asian countries are still developing, making it more difficult to obtain and/or enforce judgments. The auditing and reporting standards in some Asian countries may not provide the same degree
of shareholder protection or information to investors as those in developed countries. In particular, valuation of assets, depreciation, exchange differences, deferred taxation, contingent liability and consolidation may be treated differently than
under the auditing and reporting standards of developed countries.
Foreign investments and emerging markets risk.
The funds investments in securities of foreign issuers or issuers with significant exposure to foreign markets involve additional risk. Foreign countries in which the fund may invest may have
markets that are less liquid, less regulated and more volatile than U.S. markets.
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The value of the funds investments may decline because of factors affecting the particular issuer as well as foreign markets and issuers generally, such as unfavorable government actions,
and political or financial instability. Lack of information may also affect the value of these securities.
The value of the funds
foreign investments may also be affected by foreign tax laws, special U.S. tax considerations and restrictions on receiving the investment proceeds from a foreign country. Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to non-U.S. withholding taxes.
In some foreign countries, less information is available about issuers and markets because
of less rigorous accounting and regulatory standards than in the United States. It may be difficult for the fund to pursue claims against a foreign issuer in the courts of a foreign country. Some securities issued by non-U.S. governments or their
subdivisions, agencies and instrumentalities may not be backed by the full faith and credit of such governments. Even where a security is backed by the full faith and credit of a government, it may be difficult for the fund to pursue its rights
against the government. Some non-U.S. governments have defaulted on principal and interest payments, and more may do so.
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 systems that are less fully developed and are less stable than those of more developed
countries. They are often particularly sensitive to market movements because their market prices tend to reflect speculative expectations. Low trading volumes may result in a lack of liquidity and in extreme price volatility. Investors should be
able to tolerate sudden, sometimes substantial, fluctuations in the value of their investments. Emerging market countries may have policies that restrict investment by foreigners or that prevent foreign investors from withdrawing their money at
will. An investment in emerging market securities should be considered speculative.
Derivatives risk.
Derivatives involve special risks and costs and may result in losses to the fund. Using derivatives can
increase losses and reduce opportunities for gains when market prices, interest rates or currencies, or the derivative instruments themselves, behave in a way not anticipated by the fund, especially in abnormal market conditions. Using derivatives
also can have a leveraging effect (which may increase investment losses) and increase the funds volatility, which is the degree to which the funds share price may fluctuate within a short time period. The other parties to certain
derivative contracts present the same types of credit risk as issuers of fixed income securities. Derivatives also tend to involve greater liquidity risk as discussed below, which includes the potential inability of the fund to terminate or sell its
derivatives positions. In fact, many over-the-counter derivative instruments will not have liquidity beyond the counterparty to the instrument. The funds use of derivatives may also increase the amount of taxes payable by shareholders. Recent
legislation calls for new regulation of the derivatives markets. The extent and impact of the regulation are not yet fully known and may not be for some time. New regulation of derivatives may make them more costly, may limit their availability, or
may otherwise adversely affect their value or performance.
Investments by the fund in structured securities, a type of derivative
instrument, raise certain tax, legal, regulatory and accounting issues that may not be presented by direct investments in securities. These issues could be resolved in a manner that could hurt the performance of the fund.
Swap agreements tend to shift the funds investment exposure from one type of investment to another. For example, the fund may enter into
interest rate swaps, which involve the exchange of interest payments by the fund with another party, such as an exchange of floating rate payments for fixed interest rate payments with respect to a notional amount of principal. If a subadviser is
incorrect in its interest rate forecasts and/or an interest rate swap used as a hedge negates a favorable interest rate movement, the investment performance of the fund would be less than what it would have been if the fund had not entered into the
interest rate swap.
Credit default swap contracts, a type of derivative instrument, involve special risks and may result in losses to
the fund. Credit default swaps may in some cases be illiquid, and they increase credit risk since the fund has exposure to both the issuer of the referenced obligation and the counterparty to the credit default swap.
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The absence of a central exchange or market for swap transactions may lead, in some instances, to difficulties in trading and valuation, especially in the event of market disruptions. Recent
legislation, noted above, will require most swaps to be executed through a centralized exchange or regulated facility and be cleared through a regulated clearinghouse. The swap market could be disrupted or limited as a result of this legislation,
which could adversely affect the fund. Moreover, the establishment of a centralized exchange or market for swap transactions may not result in swaps being easier to trade or value.
Risks associated with the use of derivatives are magnified to the extent that a large portion of the funds assets are committed to derivatives in general or are invested in just one or a few
types of derivatives.
Leveraging risk.
The fund may take on leveraging risk by, among other things, engaging in borrowing, derivative, when-issued, delayed-delivery, structured note or forward commitment transactions, reverse
repurchase agreements or forward rolls or investing collateral from securities loans. When the fund engages in transactions that have a leveraging effect on the funds portfolio, the value of the fund will be more volatile and all other risks
will tend to be compounded. This is because leverage generally magnifies the effect of any increase or decrease in the value of the funds underlying assets or creates investment risk with respect to a larger pool of assets than the fund would
otherwise have. Engaging in such transactions may cause the fund to liquidate positions when it may not be advantageous to do so to satisfy its obligations or meet segregation requirements.
Liquidity risk.
Liquidity risk exists when particular
investments are difficult to sell. Although most of the funds investments must be liquid at the time of investment, investments may become illiquid after purchase by the fund, particularly during periods of market turmoil. When the fund holds
illiquid investments, the portfolio may be harder to value, especially in changing markets, and if the fund is forced to sell these investments to meet redemption requests or for other cash needs, the fund may suffer a loss. In addition, when there
is illiquidity in the market for certain investments, the fund, due to limitations on illiquid investments, may be unable to achieve its desired level of exposure to a certain sector.
Currency risk.
The value of investments in securities
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.
Hedging risk.
The decision as to whether and to what extent the fund will engage in hedging transactions to hedge against such risks as credit risk, currency risk and interest rate risk will depend on a number of factors, including prevailing market conditions,
the composition of the fund and the availability of suitable transactions. Accordingly, there can be no assurance that the fund will engage in hedging transactions at any given time or from time to time, even under volatile market environments, or
that any such strategies, if used, will be successful. Hedging transactions involve costs and may reduce gains or result in losses.
Risk of increase in expenses.
Your actual costs of investing in the fund may be higher than the expenses shown in Annual fund operating expenses for a variety of reasons. For example, expense ratios may be higher
than those shown if any fee limitation is changed or terminated or if average net assets decrease. Net assets are more likely to decrease and fund expense ratios are more likely to increase when markets are volatile.
Prepayment or call risk.
Many fixed income securities give the issuer the option to repay or call the security prior to its maturity date. Issuers often exercise this right when interest rates fall. Accordingly, if
the fund holds a fixed income security subject to prepayment or call risk, it may not benefit fully from the increase in value that other fixed income securities generally experience when interest rates fall. Upon prepayment of the security, the
fund would also be forced to reinvest the proceeds at then current yields, which would be lower than the yield of the security that was paid off. In addition, if the fund purchases a fixed income security at a premium (at a price that exceeds its
stated par or principal value), the fund may lose the amount of the premium paid in the event of prepayment.
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Western Asset Asian Opportunities Fund
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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. This may cause the funds share price to be more volatile.
Non-diversification risk.
The fund is classified as
non-diversified, which means it may invest a larger percentage of its assets in a smaller number of issuers than a diversified fund. To the extent the fund invests its assets in a smaller number of issuers, the fund will be more
susceptible to negative events affecting those issuers than a diversified fund.
Valuation risk.
Many factors may influence the price at which the fund could sell any particular portfolio investment. The
sales price may well differhigher or lowerfrom the funds last valuation, and such differences could be significant, particularly for illiquid securities and securities that trade in relatively thin markets and/or markets that
experience extreme volatility. If market conditions make it difficult to value some investments, the fund may value these investments using more subjective methods, such as fair value methodologies. Investors who purchase or redeem fund shares on
days when the fund is holding fair-valued securities may receive fewer or more, or lower or higher redemption proceeds, than they would have received if the fund had not fair-valued the security or had used a different valuation methodology. The
value of foreign securities, certain fixed income securities and currencies, as applicable, may be materially affected by events after the close of the market on which they are valued, but before the fund determines its net asset value.
Cash management and defensive investing risk.
The value of the investments held by the fund for cash management or defensive investing purposes can fluctuate. Like other fixed income securities, they are subject to risk, including market,
interest rate and credit risk. If the fund holds cash uninvested it will be subject to the credit risk of the depository institution holding the cash. If the fund holds cash uninvested, the fund will not earn income on the cash and the funds
yield will go down. If a significant amount of the funds assets are used for cash management or defensive investing purposes, it may not achieve its investment objective.
Portfolio selection risk.
The value of your investment may
decrease if the subadvisers judgment about the quality, relative yield, value or market trends affecting a particular security, industry, sector or region, or about interest rates, is incorrect.
* * *
Please note that there are other factors that could adversely affect your investment and that could prevent the fund from achieving its investment objective. More information about risks appears in
the SAI. Before investing, you should carefully consider the risks that you will assume.
Portfolio holdings
A description of the funds policies and procedures with respect to the disclosure of its portfolio holdings is available in the
SAI. The fund posts its complete portfolio holdings at http://www.leggmason.com/individualinvestors/prospectuses (click on the name of the fund) on a quarterly basis. The fund intends to post its complete portfolio holdings 14 calendar days
following the quarter-end. The fund intends to post partial information concerning the funds portfolio holdings (such as top 10 holdings or sector breakdowns, for example) on the Legg Mason funds website on a monthly basis. The fund
intends to post this partial information 10 business days following each month-end. Such information will remain available until the next months or quarters holdings are posted.
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Western Asset Asian Opportunities Fund
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More on fund management
Manager
Legg Mason Partners Fund Advisor, LLC (LMPFA or manager) is the funds investment manager. LMPFA, with offices at 620 Eighth Avenue, New York, New York 10018, also
serves as the investment manager of other Legg Mason-sponsored funds. LMPFA provides administrative and certain oversight services to the fund. As of December 31, 2012, LMPFAs total assets under management were approximately $180.6
billion.
In order to assist in carrying out its investment advisory responsibilities, the manager has retained Western Asset Management
Company (Western Asset), Western Asset Management Company Limited (Western Asset London), Western Asset Management Company Ltd (Western Asset Japan) and Western Asset Management Company Pte. Ltd. (Western
Asset Singapore and collectively with Western Asset, Western Asset London and Western Asset Japan, the subadvisers) to render advisory services to the fund.
To the extent the manager receives a management fee after taking into account its contractual obligation to limit expenses as discussed in Management fee below, the manager will pay the
funds subadvisers the entire management fee it receives from the fund. The manager will pay a management fee to each subadviser based on the respective portion of the funds assets managed by such subadviser.
LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (Legg Mason). Legg Mason, whose principal executive offices
are at 100 International Drive, Baltimore, Maryland 21202, is a global asset management company. As of December 31, 2012, Legg Masons asset management operations, including Western Asset and its supervised affiliates, had aggregate assets
under management of approximately $648.9 billion.
Subadvisers
Western Asset, Western Asset London, Western Asset Japan and Western Asset Singapore. The subadvisers provide the day-to-day portfolio management of the fund.
Western Asset, established in 1971, has offices at 385 East Colorado Boulevard, Pasadena, California 91101 and 620 Eighth Avenue, New York, New
York 10018. Western Asset London was founded in 1984 and has offices at 10 Exchange Square, Primrose Street, London EC2A 2EN. Western Asset Japan was founded in 1991 and has offices at 36F Shin-Marunouchi Building, 5-1 Marunouchi 1-Chome Chiyoda-Ku,
Tokyo 100-6536, Japan. Western Asset Singapore was established in 2000 and has offices at 1 George Street #23-01, Singapore 049145.
Western Asset London, Western Asset Japan and Western Asset Singapore provide certain subadvisory services relating to currency transactions and
investments in non-U.S. dollar-denominated securities and related foreign currency instruments. Western Asset London generally manages global and non-U.S. dollar fixed-income mandates, Western Asset Japan generally manages Japanese fixed-income
mandates and Western Asset Singapore generally manages Asian (other than Japan) fixed-income mandates. Each office provides services relating to relevant portions of Western Assets broader portfolios as appropriate.
Western Asset London, Western Asset Japan and Western Asset Singapore undertake investment-related activities including investment management,
research and analysis, and securities settlement.
Western Asset employs a team approach to investment management that utilizes
relevant staff in multiple offices around the world. Expertise from Western Asset investment professionals in those offices add local sector investment experience as well as the ability to trade in local markets. Although the investment
professionals at Western Asset London, Western Asset Japan, and Western Asset Singapore are responsible for the management of the investments in their local sectors, Western Asset provides overall supervision of their activities for the fund to
maintain a cohesive investment management approach.
Western Asset, Western Asset London, Western Asset Japan and Western Asset
Singapore act as investment advisers to institutional accounts, such as corporate pension plans, mutual funds and endowment funds. As of December 31, 2012, the total assets under management of Western Asset and its supervised affiliates,
including Western Asset London, Western Asset Japan and Western Asset Singapore, were approximately $461.9 billion.
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Western Asset Asian Opportunities Fund
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Investment professionals
The fund is managed by a broad team of investment professionals. The particular mix of investment professionals involved in developing and implementing investment strategies for the fund depends on
the asset classes in which the fund invests. Senior members of the portfolio management team are responsible for the development of investment strategy and oversight for the fund and coordination of other relevant investment team members. They work
together with the broader Western Asset investment management team on portfolio structure, duration weighting and term structure decisions.
The individuals responsible for day-to-day portfolio management, development of investment strategy, oversight and coordination of the fund are Stephen A. Walsh, Keith J. Gardner, Chia-Liang Lian,
Robert O. Abad and Desmond Soon. Messrs. Walsh, Gardner and Abad have been employed by Western Asset as investment professionals for at least the past five years. Mr. Lian has been employed by Western Asset as an investment professional since
2011. Prior to joining Western Asset, Mr. Lian was head of Emerging Asia Portfolio Management at Pacific Investment Management Company from 2005 to 2011. Mr. Soon has been employed by Western Asset since 2012. Prior to joining Western
Asset, Mr. Soon was VP, Portfolio Management at ST Asset Management from 2011 to 2012. Prior to joining ST Asset Management, Mr. Soon was Asia Fixed Income Analyst and Portfolio Manager at AMP Capital Investors beginning in 2011. Prior to
joining AMP Capital Investors, Mr. Soon was Head, Fixed Income & Currency at DBS Asset Management from 2008 to 2010. Prior to joining DBS Asset Management, Mr. Soon was Investment Manager, Pacific Asset Management from 1996 to
2008. Messrs. Walsh, Gardner, Lian, Abad and Soon have been part of the portfolio management team for the fund since its inception in 2012.
The SAI provides information about the investment professionals compensation, other accounts managed by the investment professionals and any fund shares held by the investment professionals.
Management fee
The
fund pays a monthly management fee at an annual rate of 0.60% of the funds average daily net assets.
A discussion regarding the
basis for the Boards 2012 approval of the funds Investment Management Agreement with the manager and Investment Advisory Agreement with each subadviser will be available in the funds Semi-Annual Report for the fiscal period ended
April 30, 2013.
Expense limitations
The manager has agreed to waive fees and/or reimburse operating expenses (other than interest, brokerage commissions, taxes, extraordinary expenses and deferred organizational expenses) so that
total annual operating expenses are not expected to exceed 1.30%, 2.05%, 1.25%, 1.50%, 0.90% and 0.80% for Class A, C, FI, R, I and IS shares, respectively. These arrangements cannot be terminated prior to December 31, 2014 without the
Boards consent. The manager is permitted to recapture amounts waived and/or reimbursed to a class within two years after the fiscal year in which the 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 manager recapture any amount that would result, on any particular business day of the fund, in the class total annual expenses exceeding this limit or any
other lower limit then in effect. The manager may waive additional fees and/or reimburse additional operating expenses to the extent required by applicable law.
Distribution
LMIS, a wholly-owned broker/dealer subsidiary of Legg Mason, serves as
the funds sole and exclusive distributor.
The fund has adopted various distribution plans pursuant to Rule 12b-1 under the 1940
Act. Under the plans, the fund pays distribution and/or service fees based on an annualized percentage of average daily net assets of up to 0.25% for Class A shares, up to 1.00% for Class C shares, up to 0.40% for Class FI shares, and up to
0.50% for Class R shares. Payments by the fund under its plans go to LMIS, financial intermediaries and other parties that provide services in connection with or are otherwise involved in the distribution of its shares or administration of plans or
programs that use its shares as their funding medium, and to
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Western Asset Asian Opportunities Fund
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More on fund management contd
reimburse certain other expenses and payments. Payments by the fund under the plan for Class FI shares are currently limited to 0.25% of average daily assets attributable to Class FI shares.
These fees are an ongoing expense and, over time, will increase the cost of your investment and may cost you more than other types of sales charges. Class I and Class IS shares are not subject to distribution and/or service fees under the plans.
In addition, the distributor, the manager and/or their affiliates make payments for distribution, shareholder servicing, marketing and
promotional activities and related expenses out of their profits and other available sources, including profits from their relationships with the fund. These payments are not reflected as additional expenses in the fee table contained in this
Prospectus. The recipients of these payments may include the funds distributor and affiliates of the manager, as well as non-affiliated broker/dealers, insurance companies, financial institutions and other financial intermediaries through
which investors may purchase shares of the fund, including your financial intermediary. The total amount of these payments is substantial, may be substantial to any given recipient and may exceed the costs and expenses incurred by the recipient for
any fund-related marketing or shareholder servicing activities. The payments described in this paragraph are often referred to as revenue sharing payments. Revenue sharing arrangements are separately negotiated.
Revenue sharing payments create an incentive for an intermediary or its employees or associated persons to recommend or sell shares of the fund to
you. Contact your financial intermediary for details about revenue sharing payments it receives or may receive. Revenue sharing payments, as well as payments under the shareholder services and distribution plan (where applicable), also benefit the
manager, the distributor and their affiliates to the extent the payments result in more assets being invested in the fund on which fees are being charged.
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Western Asset Asian Opportunities Fund
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Choosing a class of shares to buy
Individual investors can generally invest in Class A and Class C
shares. Individual investors who invest directly with the fund and who meet the $1,000,000 minimum initial investment may purchase Class I shares.
Retirement Plan and Institutional Investors and Clients of Eligible Financial Intermediaries should refer to Retirement and Institutional Investors eligible investors below for a
description of the classes available to them. Each class has different sales charges and expenses, allowing you to choose a class that may be appropriate for you.
When choosing which class of shares to buy, you should consider:
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How much you plan to invest
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How long you expect to own the shares
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The expenses paid by each class detailed in the fee table and example at the front of this Prospectus
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Whether you qualify for any reduction or waiver of sales charges
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Availability of share classes
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If you plan to invest a large amount and/or your investment horizon is five years or more, Class C shares might not be as advantageous as
Class A shares, or if you meet the eligibility requirements, Class I shares. The annual distribution and/or service fees on Class C shares may cost you more over the longer term than the front-end sales charge you would have paid for larger
purchases of Class A shares. Class I shares are not subject to a front-end sales charge or distribution or service fees and generally have lower annual expenses than Class A or Class C shares.
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You may buy shares:
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Through banks, brokers, dealers, investment advisers, financial consultants or advisers, mutual fund supermarkets and other financial
intermediaries that have entered into an agreement with the distributor to sell shares of the fund (each called a Service Agent)
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Each class of shares except for Class IS is authorized to pay fees for recordkeeping services to Service Agents. As a result, operating expenses of classes that incur new or additional recordkeeping
fees may increase over time.
Your Service Agent may provide shareholder services that differ from the services provided by other Service
Agents. Services provided by your Service Agent may vary by class. You should ask your Service Agent to explain the shareholder services it provides for each class and the compensation it receives in connection with each class. Remember that your
Service Agent may receive different compensation depending on the share class in which you invest.
Your Service Agent may not offer all
classes of shares. You should contact your Service Agent for further information.
More information about the funds classes of
shares is available through the Legg Mason funds website. Youll find detailed information about sales charges and ways you can qualify for reduced or waived sales charges, including:
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The front-end sales charges that apply to the purchase of Class A shares
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The contingent deferred sales charges that apply to the redemption of Class C shares and certain Class A shares
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Who qualifies for lower sales charges on Class A shares
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Who qualifies for a sales load waiver.
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To visit the website, go to http://www.leggmason.com/individualinvestors/products, and click on the name of the fund in the dropdown menu.
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Western Asset Asian Opportunities Fund
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Comparing the funds classes
The following table compares key features of the funds
classes. You should also review the fee table and example at the front of this Prospectus carefully before choosing your share class. Your Service Agent can help you choose a class that may be appropriate for you. Please contact your Service Agent
regarding the availability of Class FI, Class R, Class I or Class IS shares or, if you plan to purchase shares through the fund, contact the fund. You may be required to provide appropriate documentation confirming your eligibility to invest in
these share classes. Your Service Agent may receive different compensation depending upon which class you choose.
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Key features
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Initial sales charge
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Contingent deferred
sales charge
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Annual distribution and/
or service fees
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Exchange privilege
1
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Class
A
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Initial sales charge
You may qualify for
reduction or waiver of initial sales charge
Generally lower annual expenses than Class C
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Up to 4.25%; reduced or waived for large purchases and certain investors. No charge for purchases of $1 million or
more
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1.00% on purchases of $1 million or more if you redeem within 18 months of purchase; waived for certain investors
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0.25% of average daily net assets
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Class A shares of funds sold by the distributor
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Class
C
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No initial sales charge
Contingent deferred sales charge for only 1 year
Does not convert to Class
A
Generally higher annual
expenses than Class A and Class C1
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None
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1.00% if you redeem within 1 year of purchase; waived for certain investors
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1.00% of average daily net assets
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Class C shares of funds sold by the distributor
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Class
FI
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No initial or contingent deferred sales charge
Only offered to Clients of Eligible Financial Intermediaries and eligible Retirement
Plans
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None
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None
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0.25% of average daily net assets
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Class FI shares of funds sold by the distributor
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Class
R
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No initial or contingent deferred sales charge
Only offered to eligible Retirement Plans with omnibus accounts held on the books of the fund,
Clients of Eligible Financial Intermediaries and Eligible Investment Programs
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None
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None
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0.50% of average daily net assets
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Class R shares of funds sold by the distributor
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Class
I
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No initial or contingent deferred sales charge
Only offered to institutional and other eligible investors
Generally lower annual
expenses than all classes except for Class IS
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None
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None
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None
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Class I shares of funds sold by the distributor
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Western Asset Asian Opportunities Fund
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25
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Key features
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Initial sales charge
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Contingent deferred
sales charge
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Annual distribution and/
or service fees
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Exchange privilege
1
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Class
IS
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No initial or contingent deferred sales charge
Only offered to institutional and other eligible investors
Generally lower annual
expenses than the other classes
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None
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None
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None
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Class IS shares of funds sold by the distributor
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1
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Ask your Service Agent or the fund about the funds available for exchange.
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Western Asset Asian Opportunities Fund
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Sales charges
Class A shares
You buy Class A shares at the offering price, which is the net asset value plus a sales charge. You pay a lower rate if the size of your investment equals or exceeds certain levels called
breakpoints. You do not pay a sales charge on the funds distributions or dividends that you reinvest in additional Class A shares.
The table below shows the rate of sales charge you pay, depending on the amount you purchase. It also shows the amount of broker/dealer compensation that will be paid out of the sales charge if you
buy shares from a Service Agent (broker/dealer commission). For Class A shares sold by the distributor, the distributor will receive the sales charge imposed on purchases of Class A shares (or any contingent deferred sales
charge paid on redemptions) and will retain the full amount of such sales charge. Service Agents will receive a distribution and/or service fee payable on Class A shares at an annual rate of up to 0.25% of the average daily net assets
represented by the Class A shares serviced by them.
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Amount of Investment ($)
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Sales charge
as a % of
offering price
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Sales charge
as a % of net
amount
invested
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Broker/dealer
commission
as a % of
offering price
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Less than 100,000
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4.25
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4.44
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4.00
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100,000 but less than 250,000
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3.50
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3.63
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3.00
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250,000 but less than 500,000
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2.50
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2.56
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2.00
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500,000 but less than 750,000
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2.00
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2.04
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1.60
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750,000 but less than 1 million
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1.50
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1.52
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1.20
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1 million or more
1
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-0-
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-0-
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up to 0.75
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1
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The distributor may pay a commission of up to 0.75% to a Service Agent for purchase amounts of $1 million or more. In such cases, starting in the
thirteenth month after purchase, the Service Agent will also receive an annual service fee of up to 0.25% of the average daily net assets represented by the Class A shares held by its clients. Prior to the thirteenth month, the distributor will
retain this fee. Where the Service Agent does not receive the payment of this commission, the Service Agent will instead receive the annual distribution and/or service fee starting immediately after purchase. Please contact your Service Agent for
more information.
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Investments of $1,000,000 or more
You do not pay an initial sales charge when you buy $1,000,000 or more of Class A shares. However, if you redeem these Class A shares within 18 months of purchase, you will pay a
contingent deferred sales charge of 1.00%.
Qualifying for a reduced Class A sales charge
There are several ways you can combine multiple purchases of Class A shares of funds sold by the distributor to take advantage of the
breakpoints in the sales charge schedule. In order to take advantage of reductions in sales charges that may be available to you when you purchase fund shares, you must inform your Service Agent or the fund if you are eligible for a letter of intent
or a right of accumulation and if you own shares of other funds that are eligible to be aggregated with your purchases. Certain records, such as account statements, may be necessary in order to verify your eligibility for a reduced sales charge.
Accumulation Privilege
allows you to combine the current value of Class A shares of the fund with other shares of
funds sold by the distributor that are owned by:
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your spouse and children under the age of 21
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with the dollar amount of your next purchase of Class A shares for purposes of calculating the initial sales charges.
If you hold fund shares in accounts at two or more Service Agents, please contact your Service Agents to determine which shares may be combined.
For purposes of the accumulation privilege:
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You can combine shares of funds sold by the distributor that are offered with a sales charge, which includes shares of money market funds sold by
the distributor that were acquired by exchange from other funds offered with a sales charge.
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Western Asset Asian Opportunities Fund
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You may generally not combine shares of other funds that are not offered with a sales charge. For example, shares of money market funds sold by
the distributor that were not acquired by exchange from other funds offered with a sales charge may not be combined.
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Certain exceptions may apply. Please contact your Service Agent for additional information.
Certain trustees and fiduciaries may be entitled to combine accounts in determining their sales charge.
Letter of Intent
allows you to purchase Class A shares of funds sold by the distributor over a 13-month period and pay the same sales charge, if any, as if all shares had been
purchased at once. At the time you enter into the letter of intent, you select your asset goal amount. Generally, purchases of shares of funds sold by the distributor that are purchased during the 13-month period by:
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your spouse and children under the age of 21
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are eligible for inclusion under the letter of intent, based on the public offering price at the time of the purchase and any capital appreciation on those shares. In addition, you can include the
current value of any eligible holdings toward your asset goal amount.
If you hold shares of funds sold by the distributor in accounts at
two or more Service Agents, please contact your Service Agents to determine which shares may be credited toward your asset goal amount.
Shares of money market funds sold by the distributor acquired by exchange from other funds offered with a sales charge may be credited toward your
asset goal amount. Please contact your Service Agent for additional information.
If you do not meet your asset goal amount, shares in
the amount of any sales charges due, based on the amount of your actual purchases, will be redeemed from your account.
Waivers for
certain Class A investors
Class A initial sales charges are waived for certain types of investors, including:
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Employees of Service Agents
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Investors who redeemed at least the same amount of Class A shares of a fund sold by the distributor in the past 60 days, if the
investors Service Agent is notified
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Directors and officers of any Legg Mason-sponsored fund
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Employees of Legg Mason and its subsidiaries
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Investors investing through certain retirement plans
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Investors who rollover fund shares from a qualified retirement plan into an individual retirement account administered on the same retirement
plan platform
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If you qualify for a waiver of the Class A initial sales charge, you must notify your Service Agent
or the fund at 1-877-721-1926 at the time of purchase and provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the initial sales charge waiver.
If you want to learn about additional waivers of Class A initial sales charges, contact your Service Agent or the fund, consult the SAI or
visit the Legg Mason funds website, http://www.leggmason.com/individualinvestors/products and click on the name of the fund in the dropdown menu.
Class C shares
You buy Class C shares at net asset value with no initial sales
charge. However, if you redeem your Class C shares within one year of purchase, you will pay a contingent deferred sales charge of 1.00%.
LMIS generally will pay Service Agents selling Class C shares a commission of up to 1.00% of the purchase price of the Class C shares they sell.
LMIS will retain the contingent deferred sales charges and an annual distribution and/or service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced by these Service Agents until the thirteenth month after
purchase. Starting in the thirteenth
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Sales charges contd
month after purchase, these Service Agents will receive an annual distribution and/or service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced by
them.
Class FI shares
You buy Class FI shares at net asset value with no initial sales charge and no contingent deferred sales charge when redeemed.
Service Agents receive an annual distribution and/or service fee of up to 0.25% of the average daily net assets represented by the Class FI shares
serviced by them. The Board may authorize an annual distribution and/or service fee of up to 0.40% of the funds Class FI shares average net assets without shareholder approval.
Class R shares
You buy Class R shares at net asset value with no initial sales charge
and no contingent deferred sales charge when redeemed.
Service Agents receive an annual distribution and/or service fee of up to 0.50%
of the average daily net assets represented by the Class R shares serviced by them.
Class I shares and Class IS shares
You buy Class I shares and Class IS shares at net asset value with no initial sales charge and no contingent deferred sales charge when redeemed.
Class I shares and Class IS shares are not subject to any distribution and/or service fees.
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More about contingent deferred sales charges
The contingent deferred sales charge is based on the net asset value at
the time of purchase or redemption, whichever is less, and therefore you do not pay a sales charge on amounts representing appreciation or depreciation.
In addition, you do not pay a contingent deferred sales charge:
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When you exchange shares for shares of the same share class of another fund sold by the distributor
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On shares representing reinvested distributions and dividends
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On shares no longer subject to the contingent deferred sales charge
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Each time you place a request to redeem shares, the fund will first redeem any shares in your account that are not subject to a contingent deferred sales charge and then redeem the shares in your
account that have been held the longest.
If you redeem shares of a fund sold by the distributor and pay a contingent deferred sales
charge, you may, under certain circumstances, reinvest all or part of the redemption proceeds within 60 days in any other fund sold by the distributor and receive pro rata credit for any contingent deferred sales charge imposed on the prior
redemption. Please contact your Service Agent or the fund for additional information.
The distributor receives contingent deferred sales
charges as partial compensation for its expenses in selling shares, including the payment of compensation to your Service Agent.
Contingent deferred sales charge waivers
The contingent deferred sales charge for each share class will generally be waived:
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On payments made through certain systematic withdrawal plans
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On certain distributions from a Retirement Plan
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For Retirement Plans with omnibus accounts held on the books of the fund
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For involuntary redemptions of small account balances
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For 12 months following the death or disability of a shareholder
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To have your contingent deferred sales charge waived, you or your Service Agent must let the fund know at the time you redeem shares that you qualify for such a waiver.
If you want to learn more about additional waivers of contingent deferred sales charges, contact your Service Agent or the fund, consult the SAI
or visit the Legg Mason funds website, http://www.leggmason.com/individualinvestors/products and click on the name of the fund in the dropdown menu.
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Retirement and Institutional Investors eligible investors
Retirement Plans
Retirement Plans include 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit-sharing plans, non-qualified deferred
compensation plans and other similar employer-sponsored retirement plans. Retirement Plans do not include individual retirement vehicles, such as traditional and Roth individual retirement accounts, Coverdell education savings accounts,
individual 403(b)(7) custodial accounts, Keogh plans, SEPs, SARSEPs, SIMPLE IRAs or similar accounts.
Retirement Plans with omnibus
accounts held on the books of the fund can generally invest in Class A, Class C, Class FI, Class R, Class I and Class IS shares.
Class A shares may be offered through Service Agents for Retirement Plans with omnibus accounts held on the books of the fund.
Investors who rollover fund shares from a Retirement Plan into an individual retirement account administered on the same retirement plan platform
may hold, purchase and exchange shares of the fund to the same extent as the applicable Retirement Plan.
Although Retirement Plans with
omnibus accounts held on the books of the fund are not subject to minimum initial investment requirements for any of these share classes, certain investment minimums may be imposed by a financial intermediary. The distributor may impose certain
additional requirements. Please contact your Service Agent for more information.
Other Retirement Plans
Other Retirement Plans include Retirement Plans investing through brokerage accounts and also include certain Retirement Plans with
direct relationships to the fund that are neither Institutional Investors nor investing through omnibus accounts. Other Retirement Plans and individual retirement vehicles, such as IRAs, are treated like individual investors for purposes of
determining sales charges and any applicable sales charge reductions or waivers.
Other Retirement Plans do not include
arrangements whereby an investor would rollover fund shares from a Retirement Plan into an individual retirement account administered on the same retirement plan platform. Such arrangements are deemed to be Retirement Plans and are
subject to the rights and privileges described under Retirement and Institutional Investors eligible investors Retirement Plans.
Other Retirement Plan investors can generally invest in Class A, Class C and Class I shares. Individual retirement vehicles may also choose between these share classes.
Clients of Eligible Financial Intermediaries
Clients of Eligible Financial Intermediaries are investors who invest in the fund through financial intermediaries that (i) charge such investors an ongoing fee for advisory,
investment, consulting or similar services, or (ii) have entered into an agreement with the distributor to offer Class R or Class I shares through a no-load network or platform (Eligible Investment Programs). Such investors may
include pension and profit sharing plans, other employee benefit trusts, endowments, foundations and corporations. Eligible Investment Programs may also include college savings vehicles such as Section 529 plans and direct retail investment
platforms through mutual fund supermarkets, where the sponsor links its clients account (including IRA accounts on such platforms) to a master account in the sponsors name. The financial intermediary may impose separate
investment minimums.
Clients of Eligible Financial Intermediaries may generally invest in Class A, Class FI, Class R and Class I
shares. Class I shares are available for exchange from Class A or Class C shares of the fund by participants in Eligible Investment Programs.
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Institutional Investors
Institutional Investors may include corporations, banks, trust companies, insurance companies, investment companies, foundations, endowments, defined benefit plans and other similar
entities. The distributor or the financial intermediary may impose additional eligibility requirements or criteria to determine if an investor, including the types of investors listed above, qualifies as an Institutional Investor.
Institutional Investors may invest in Class I or Class IS shares if they meet the $1,000,000 minimum initial investment requirement. Institutional
Investors may also invest in Class A and Class C shares, which have different investment minimums, fees and expenses.
Class A
shares Retirement Plans
Retirement Plans may buy Class A shares . Under certain programs for current and prospective
Retirement Plan investors sponsored by financial intermediaries, the initial sales charge and contingent deferred sales charge for Class A shares are waived where:
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Such Retirement Plans recordkeeper offers only load-waived shares
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Fund shares are held on the books of the fund through an omnibus account, and
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The Retirement Plan has more than 100 participants or has total assets exceeding $1 million
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LMIS does not pay Service Agents selling Class A shares to Retirement Plans with a direct omnibus relationship with the fund a commission on
the purchase price of Class A shares sold by them. However, for certain Retirement Plans that are permitted to purchase shares at net asset value, LMIS may pay Service Agents commissions of up to 0.75% of the purchase price of the Class A
shares that are purchased with regular ongoing plan contributions. Please contact your Service Agent for more information.
Class C
shares Retirement Plans
Retirement Plans with omnibus accounts held on the books of the fund may buy Class C shares at net asset
value without paying a contingent deferred sales charge. LMIS does not pay Service Agents selling Class C shares to Retirement Plans with omnibus accounts held on the books of the fund a commission on the purchase price of Class C shares sold by
them. Instead, immediately after purchase, LMIS may pay these Service Agents an annual distribution and/or service fee of up to 1.00% of the average daily net assets represented by the Class C shares serviced by them.
Class FI shares
Class FI shares
are offered only to Clients of Eligible Financial Intermediaries and Retirement Plans.
Class R shares
Class R shares are offered only to eligible Retirement Plans with omnibus accounts held on the books of the fund (either at the plan level or at the
level of the financial intermediary), to Clients of Eligible Financial Intermediaries and through Eligible Investment Programs.
Class I
shares
Class I shares are offered only to Institutional Investors and individual investors (investing directly with the fund) who meet
the $1,000,000 minimum initial investment requirement, Retirement Plans with omnibus accounts held on the books of the fund and certain rollover IRAs, Clients of Eligible Financial Intermediaries and other investors authorized by LMIS.
Certain waivers of these requirements for individuals associated with the fund, Legg Mason or its affiliates are discussed in the SAI.
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Retirement and Institutional Investors eligible investors contd
Class IS shares
Class IS shares may be purchased only by Retirement Plans with omnibus accounts held on the books of the fund, certain rollover IRAs and
Institutional Investors, and other investors authorized by LMIS. In order to purchase Class IS shares, an investor must hold its shares in one account with the fund, which account is not subject to payment of recordkeeping or similar fees by the
fund to any intermediary.
Other considerations
Plan sponsors, plan fiduciaries and other financial intermediaries may choose to impose qualification requirements that differ from the funds share class eligibility standards. In certain
cases this could result in the selection of a share class with higher distribution and/or service fees than otherwise would have been charged. The fund is not responsible for, and has no control over, the decision of any plan sponsor, plan fiduciary
or financial intermediary to impose such differing requirements. Please consult with your plan sponsor, plan fiduciary or financial intermediary for more information about available share classes.
Your Service Agent may not offer all share classes. Please contact your Service Agent for additional details.
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Buying shares
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Generally
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You may buy shares at their net asset value next determined after receipt by your Service
Agent or the transfer agent of your purchase request in good order, plus any applicable sales charge.
You must provide the following information for your order to be processed:
Name of fund being
bought
Class of shares being bought
Dollar amount or number
of shares being bought
Account number (if existing account)
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Through a
Service Agent
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You should contact your Service Agent to open a brokerage account and make arrangements to
buy shares.
Your Service Agent may charge an annual account
maintenance fee.
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Through the fund
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Investors should contact the fund at 1-877-721-1926 to open an account and make
arrangements to buy shares.
For initial purchases, complete and send
your account application to the fund at the following address:
Legg Mason Funds
P.O. Box
55214
Boston, Massachusetts 02205-8504
Subsequent purchases should be sent to the same address. Enclose a check to pay for the shares.
For more information, please call the fund between 8:00 a.m. and 5:30 p.m.
(Eastern time).
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Through a systematic investment plan
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You may authorize your Service Agent or the transfer agent to transfer funds automatically from (i) a regular bank account, (ii)
cash held in a brokerage account with a Service Agent or (iii) certain money market funds, in order to buy shares on a regular basis.
Amounts transferred must
meet the applicable minimums (see Purchase and sale of fund shares)
Amounts may be transferred monthly, every alternate month, quarterly, semi-annually
or annually
If you do not have sufficient funds in your account on a transfer date, you may be charged a fee
For more information, please contact your Service Agent or the fund or
consult the SAI.
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Exchanging shares
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Generally
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You may exchange shares of the fund for the same class of shares of other funds sold by
the distributor on any day that both the fund and the fund into which you are exchanging are open for business. For investors who qualify as Clients of Eligible Financial Intermediaries and participate in Eligible Investment Programs made available
through their financial intermediaries (such as investors in fee-based advisory or mutual fund wrap programs), an exchange may be made from Class A or Class C shares to Class I shares of the same fund under certain limited circumstances.
Please refer to the section of this prospectus titled Retirement and Institutional Investors eligible investors or contact your financial intermediary for more information.
An exchange of shares of one fund for shares of another fund is considered a
sale and generally results in a capital gain or loss for federal income tax purposes, unless you are investing through an IRA, 401(k) or other tax-advantaged account. An exchange of shares of one class directly for shares of another class of the
same fund normally should not be taxable for federal income tax purposes. You should talk to your tax advisor before making an exchange.
The exchange privilege is not intended as a vehicle for short-term trading. The fund may suspend or terminate your exchange privilege if you engage
in a pattern of excessive exchanges.
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Legg Mason offers a distinctive family of funds tailored to help meet the varying needs of large and small
investors
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You may exchange shares at their net asset value next determined after receipt by your
Service Agent or the transfer agent of your exchange request in good order.
If you bought shares through a Service Agent, contact your Service Agent to learn which funds your
Service Agent makes available to you for exchanges
If you bought shares directly from the fund, contact the fund at 1-877-721-1926 to learn which
funds are available to you for exchanges
Exchanges may be made only between accounts that have identical registrations
Not all funds offer all classes
Some funds are offered
only in a limited number of states. Your Service Agent or the fund will provide information about the funds offered in your state
Always be sure to read the prospectus of the fund into which you are exchanging shares.
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Investment minimums, sales charges and other requirements
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In most instances, your shares will not be subject to an initial sales charge or a contingent deferred sales charge at the time of the exchange
Your contingent deferred sales charge (if any) will continue to be measured from the date of your original purchase of shares subject to a contingent deferred sales charge
and you will be subject to the contingent deferred sales charge of the fund that you originally purchased
You will generally be
required to meet the minimum investment requirement for the class of shares of the fund or share class into which your exchange is made (except in the case of systematic exchange plans)
Your exchange will also be subject to any other requirements of the fund or share class into which you are exchanging shares
The fund may suspend or terminate your exchange privilege if you engage in a pattern of excessive exchanges
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By telephone
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Contact your Service Agent or, if you hold shares directly with the fund, call the fund at 1-877-721-1926 between 8:00 a.m. and 5:30 p.m. (Eastern time) for information.
Exchanges are priced at the net asset value next determined.
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By mail
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Contact your Service Agent or, if you hold shares directly with the fund, write to the
fund at the following address:
Legg Mason Funds
P.O. Box 55214
Boston,
Massachusetts 02205-8504
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Through a systematic exchange plan
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You may be permitted to schedule automatic exchanges of shares of the fund for shares of other funds available for exchange. All
requirements for exchanging shares described above apply to these exchanges. In addition:
Exchanges may be made
monthly, every alternate month, quarterly, semi-annually or annually
Each exchange must meet the applicable investment minimums for systematic investment plans (see
Purchase and sale of fund shares)
For more
information, please contact your Service Agent or the fund or consult the SAI.
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Redeeming shares
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Generally
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You may redeem shares at their net asset value next determined after receipt by your
Service Agent or the transfer agent of your redemption request in good order, less any applicable contingent deferred sales charge.
If the shares are held by a fiduciary or corporation, partnership or similar entity, other documents may be required.
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Redemption proceeds
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Your redemption proceeds normally will be sent within 3 business days after your request
is received in good order, but in any event within 7 days, except that your proceeds may be delayed for up to 10 days if your share purchase was made by check.
Your redemption proceeds may be delayed, or your right to receive redemption proceeds suspended, if the New York Stock Exchange (NYSE)
is closed (other than on weekends or holidays) or trading is restricted, if an emergency exists, or otherwise as permitted by order of the SEC.
If you have a brokerage account with a Service Agent, your redemption proceeds will be sent to your Service Agent. Your redemption proceeds can be
sent by check to your address of record or by wire or electronic transfer (ACH) to a bank account designated by you. To change the bank account designated to receive wire or electronic transfers, you will be required to deliver a new written
authorization and may be asked to provide other documents. You may be charged a fee on a wire or an electronic transfer (ACH).
In other cases, unless you direct otherwise, your proceeds will be paid by check mailed to your address of record.
The fund reserves the right to pay redemption proceeds by giving you
securities. You may pay transaction costs to dispose of the securities, and you may receive less for them than the price at which they were valued for purposes of the redemption.
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By mail
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Contact your Service Agent or, if you hold shares directly with the fund, write to the
fund at the following address:
Legg Mason Funds
P.O. Box 55214
Boston,
Massachusetts 02205-8504
Your written request must
provide the following:
The fund name, the class of shares being redeemed and your account number
The dollar amount or
number of shares being redeemed
Signature of each owner exactly as the account is registered
Signature guarantees, as applicable (see Other things to know about transactions)
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By telephone
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If your account application permits, you may be eligible to redeem shares by telephone. Contact your Service Agent or, if you hold
shares directly with the fund, call the fund at 1-877-721-1926 between 8:00 a.m. and 5:30 p.m. (Eastern time) for more information. Please have the following information ready when you call:
Name of fund being redeemed
Class of shares being
redeemed
Account number
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Automatic cash withdrawal plans
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You may be permitted to schedule automatic redemptions of a portion of your shares. To qualify, you must own shares of the fund
with a value of at least $10,000 ($5,000 for Retirement Plan accounts) and each automatic redemption must be at least $50.
The following conditions apply:
Redemptions may be made monthly, every alternate month, quarterly, semi-annually or
annually
If your shares are subject to a contingent deferred sales charge, the charge will be required to be paid upon redemption. However, the charge will be waived if your
automatic redemptions are equal to or less than 2% per month of your account balance on the date the redemptions commence, up to a maximum of 12% in one year
You must elect to have
all dividends and distributions reinvested
For more information,
please contact your Service Agent or the fund or consult the SAI.
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Other things to know about transactions
When you buy, exchange or redeem shares, your request must be in good
order. This means you have provided the following information, without which your request may not be processed:
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In the case of a purchase (including a purchase as part of an exchange transaction), the class of shares being bought
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In the case of an exchange or redemption, the class of shares being exchanged or redeemed (if you own more than one class)
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Dollar amount or number of shares being bought, exchanged or redeemed plus any applicable service charge
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In certain circumstances, the signature of each owner exactly as the account is registered (see Redeeming shares)
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Fund shares may not be held in, or transferred to, an account with any firm that does not have an agreement with the
distributor or its affiliates.
The fund generally will not permit non-resident aliens with non-U.S. addresses to establish accounts.
U.S. citizens with APO/FPO addresses or addresses in the United States (including its territories) and resident aliens with U.S. addresses are permitted to establish accounts with the fund. Subject to the requirements of local law, U.S. citizens
residing in foreign countries are permitted to establish accounts with the fund.
In certain circumstances, such as during periods of
market volatility, severe weather and emergencies, shareholders may experience difficulties placing exchange or redemption orders by telephone. In that case, shareholders should consider using the funds other exchange and redemption procedures
described under Exchanging shares and Redeeming shares.
The transfer agent or the fund will employ reasonable
procedures to confirm that any telephone, electronic or other exchange or redemption request is genuine, which may include recording calls, asking the caller to provide certain personal identification information, employing identification numbers,
sending you a written confirmation or requiring other confirmation procedures from time to time. If these procedures are followed, neither the fund nor its agents will bear any liability for these transactions.
The fund has the right to:
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Suspend the offering of shares permanently or for a period of time
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Waive or change minimum initial and additional investment amounts
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Reject any purchase or exchange order
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Change, revoke or suspend the exchange privilege
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Suspend telephone transactions
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Suspend or postpone redemptions of shares on any day when trading on the NYSE is restricted or as otherwise permitted by the SEC
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Redeem shares if information provided in the application should prove to be incorrect in any manner judged by the fund to be material (e.g., in a
manner such as to render the shareholder ineligible to purchase shares of that class)
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Delay sending out redemption proceeds for up to seven days if, in the judgment of the adviser, the fund could be adversely affected by immediate
payment. The fund may delay redemptions beyond seven days, or suspend redemptions, only as permitted by the SEC or the Investment Company Act of 1940, as amended
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Close your account after a period of inactivity, as determined by state law, and transfer your shares to the appropriate state
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For your protection, the fund or your Service Agent may request additional information in connection with large
redemptions, unusual activity in your account, or otherwise to ensure your redemption request is in good order. Please contact your Service Agent or the fund for more information.
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Medallion signature guarantees
To be in good order, your redemption request must include a Medallion signature guarantee if you:
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Are redeeming shares and sending the proceeds to an address or bank not currently on file
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Changed your account registration or your address within 30 days
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Want the check paid to someone other than the account owner(s)
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Are transferring the redemption proceeds to an account with a different registration
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A Medallion signature guarantee may also be required if you:
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Are making changes to the account registration after the account has been opened; and
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Are transferring shares to an account in another Legg Mason fund with a different account registration
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When a Medallion signature guarantee is called for, the shareholder should have a Medallion signature guarantee stamped under his or her signature.
You can obtain a signature guarantee from most banks, dealers, brokers, credit unions and federal savings and loan institutions, national securities exchanges, registered securities associations and clearing agencies (each an Eligible
Guarantor Institution), but not from a notary public. The fund and its agents reserve the right to reject any Medallion signature guarantee pursuant to written signature guarantee standards or procedures, which may be revised in the future to
permit them to reject Medallion signature guarantees from Eligible Guarantor Institutions. The fund may change the signature guarantee requirements from time to time without prior notice to shareholders.
Anti-money laundering
Federal
anti-money laundering regulations require all financial institutions to obtain, verify and record information that identifies each person who opens an account. When you sign your account application, you may be asked to provide additional
information in order for the fund to verify your identity in accordance with these regulations. Accounts may be restricted and/or closed, and the monies withheld, pending verification of this information or as otherwise required under these and
other federal regulations.
Small account fees/Mandatory redemptions
Small accounts may be subject to a small account fee or to mandatory redemption, as described below, depending on whether the account is held directly with the fund or through a Service Agent.
Direct accounts
Direct accounts generally include accounts held in the name of the individual investor on the funds books and records. To offset the
relatively higher impact on fund expenses of servicing smaller direct accounts, if your shares are held in a direct account and the value of your account is below $1,000 (if applicable, $250 for retirement plans that are not employer-sponsored) for
any reason (including declines in net asset value), the fund may charge you a fee of $3.75 per account that is determined and assessed quarterly on the last business day of the quarter (with an annual maximum of $15.00 per account). The small
account fee will be charged by redeeming shares in your account. If the value of your account is $3.75 or less, the amount in the account may be exhausted to pay the small account fee. The small account fee will not be assessed on systematic
investment plans until the end of the first quarter after the account has been established for 15 months. Payment of the small account fee through a redemption of fund shares also may result in tax consequences to you (see Taxes for more
information).
The small account fee will not be charged on: (i) Retirement Plans (but will be charged on Other Retirement Plans
that are not employer-sponsored such as traditional and Roth individual retirement accounts, Coverdell education savings accounts, individual 403(b)(7) custodial accounts, Keogh plans, SEPs, SARSEPs, SIMPLE IRAs or similar accounts); (ii) Legg
Mason funds that have been closed to subsequent purchases for all classes; (iii) accounts that do not have a valid address as evidenced by mail being returned to the fund or its agents; and (iv) Class FI, Class R, Class I and Class IS
shares. Please see Retirement and Institutional Investors eligible investors for a further description of Retirement Plans.
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Other things to know about transactions contd
If your share class is no longer offered, you may not be able to bring
your account up to the minimum investment amount (although you may exchange into existing accounts at other Legg Mason funds in which you hold the same share class, to the extent otherwise permitted by those funds and subject to any applicable sales
charges).
Non-direct accounts
Non-direct accounts include omnibus accounts and accounts jointly maintained by the Service Agent and the fund. Such accounts are not subject to the small account fee that may be charged
to direct accounts.
The fund reserves the right to ask you to bring your non-direct account up to a minimum investment amount determined
by your Service Agent if the aggregate value of the fund shares in your account is less than $500 for any reason (including solely due to declines in net asset value and/or failure to invest at least $500 within a reasonable period). You will be
notified in writing and will have 60 days to make an additional investment to bring your account value up to the required level. If you choose not to do so within this 60-day period, the fund may close your account and send you the redemption
proceeds. If your share class is no longer offered, you may not be able to bring your account up to the minimum investment amount. Some shareholders who hold accounts in multiple classes of the same fund may have those accounts aggregated for the
purposes of these calculations. If your account is closed, you will not be eligible to have your account reinstated without imposition of any sales charges that may apply to your new purchase. Please contact your Service Agent for more information.
Any redemption of fund shares may result in tax consequences to you (see Taxes for more information).
All accounts
The fund may, with prior notice, change the minimum size of accounts subject to mandatory redemption, which may vary by class,
implement fees for small non-direct accounts or change the amount of the fee for small direct accounts.
Subject to applicable law, the
fund may, with prior notice, adopt other policies from time to time requiring mandatory redemption of shares in certain circumstances.
For more information, please contact your Service Agent or the fund or consult the SAI.
Frequent trading of fund shares
Frequent purchases and redemptions of fund shares may interfere with the efficient management of the fund, increase fund transaction costs, and have
a negative effect on the funds long-term shareholders. For example, in order to handle large flows of cash into and out of the fund, the adviser or subadvisers may need to allocate more assets to cash or other short-term investments or sell
securities, rather than maintaining full investment in securities selected to achieve the funds investment objective. Frequent trading may cause the fund to sell securities at less favorable prices. Transaction costs, such as brokerage
commissions and market spreads, can detract from the funds performance. In addition, the return received by long-term shareholders may be reduced when trades by other shareholders are made in an effort to take advantage of certain pricing
discrepancies, when, for example, the manager believes that the funds share price, which is determined at the close of the NYSE on each trading day, does not accurately reflect the value of the funds investments. Funds investing in
foreign securities have been particularly susceptible to this form of arbitrage, but other funds could also be affected.
Because of the
potential harm to funds sold by the funds distributor and their long-term shareholders, the Board has approved policies and procedures that are intended to detect and discourage excessive trading and market timing abuses through the use of
various surveillance techniques. Under these policies and procedures, the fund may limit additional exchanges or purchases of fund shares by shareholders who are believed by the manager to be engaged in these abusive trading activities in the fund
or in other funds sold by the distributor. In the event that an exchange or purchase request is rejected, the shareholder may nonetheless redeem its shares. The intent of the policies and procedures is not to inhibit legitimate strategies, such as
asset allocation, dollar cost averaging, or similar activities that may nonetheless result in frequent trading of fund shares.
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Western Asset Asian Opportunities Fund
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Under the funds policies and procedures, the fund reserves the right to restrict or reject
purchases of shares (including exchanges) without prior notice whenever a pattern of excessive trading by a shareholder is detected in funds sold by the distributor. A committee established by the manager administers the policy. The policy provides
that the committee may take action, which may include using its best efforts to restrict a shareholders trading privileges in funds sold by the distributor, if that shareholder has engaged in one or more Round Trips across all
funds sold by the distributor. However, the committee has the discretion to determine that action is not necessary if it is determined that the pattern of trading is not abusive or harmful. In making such a determination, the committee will
consider, among other things, the nature of the shareholders account, the reason for the frequent trading, the amount of trading and the particular funds in which the trading has occurred. Additionally, the committee has the discretion to make
inquiries or to take any action against a shareholder whose trading appears inconsistent with the frequent trading policy, regardless of the number of Round Trips. Examples of the types of actions the committee may take include heightened
surveillance of a shareholder account, providing a written warning letter to an account holder, restricting the shareholder from purchasing additional shares in the fund altogether or imposing other restrictions (such as requiring purchase orders to
be submitted by mail) that would deter the shareholder from trading frequently in the fund. The committee will generally follow a system of progressive deterrence, although it is not required to do so.
A Round Trip is defined as a purchase (including subscriptions and exchanges) into a fund sold by the distributor followed by a sale
(including redemptions and exchanges) of the same or a similar number of shares out of that fund within 30 days of such purchase. Purchases and sales of the funds shares pursuant to an automatic investment plan or similar program for periodic
transactions are not considered in determining Round Trips. These policies and procedures do not apply to money market funds sold by the distributor.
The policies apply to any account, whether a direct account or accounts with financial intermediaries such as investment advisers, broker/dealers or retirement plan administrators, commonly called
omnibus accounts, where the intermediary holds fund shares for a number of its customers in one account. The funds ability to monitor trading in omnibus accounts may, however, be severely limited due to the lack of access to an individual
investors trading activity when orders are placed through these types of accounts. There may also be operational and technological limitations on the ability of the funds service providers to identify or terminate frequent trading
activity within the various types of omnibus accounts. The distributor has entered into agreements with intermediaries requiring the intermediaries to, among other things, help identify frequent trading activity and prohibit further purchases or
exchanges by a shareholder identified as having engaged in frequent trading.
The fund has also adopted policies and procedures to
prevent the selective release of information about the funds holdings, as such information may be used for market-timing and similar abusive practices.
The policies provide for ongoing assessment of the effectiveness of current policies and surveillance tools, and the Board reserves the right to modify these or adopt additional policies and
restrictions in the future. Shareholders should be aware, however, that any surveillance techniques currently employed by the fund or other techniques that may be adopted in the future may not be effective, particularly where the trading takes place
through certain types of omnibus accounts. Furthermore, the fund may not apply its policies consistently or uniformly, resulting in the risk that some shareholders may be able to engage in frequent trading while others will bear the costs and
effects of that trading.
Although the fund will attempt to monitor shareholder transactions for certain patterns of frequent trading
activity, there can be no assurance that all such trading activity can be identified, prevented or terminated. Monitoring of shareholder transactions may only occur for shareholder transactions that exceed a certain transaction amount threshold,
which may change from time to time. The fund reserves the right to refuse any client or reject any purchase order for shares (including exchanges) for any reason.
Record ownership
If you hold shares through a Service Agent, your Service Agent may
establish and maintain your account and be the shareholder of record. In the event that the fund holds a shareholder meeting, your Service
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Western Asset Asian Opportunities Fund
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Other things to know about transactions contd
Agent, as record holder, will be entitled to vote your shares and may seek voting instructions from you. If you do not give your Service Agent voting instructions, your Service Agent, under
certain circumstances, may nonetheless be entitled to vote your shares.
Confirmations and account statements
If you bought shares directly from the fund, you will receive a confirmation from the fund after each transaction (except a
reinvestment of dividends or capital gain distributions, an investment made through the Future First
®
Systematic Investment Plan, exchanges made through a systematic exchange plan and withdrawals made through the Systematic Withdrawal Plan). Shareholders will receive periodic account statements.
To assist you in the management of your account you may direct the funds transfer agent to send copies of your confirmations and/or periodic
statements to another party whom you designate, at no charge.
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Western Asset Asian Opportunities Fund
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Dividends, other distributions and taxes
Dividends and other distributions
The fund generally pays dividends quarterly from its net investment income, if any, and potentially from short-term capital gains. The fund
generally distributes long-term capital gain, if any, once in December and at such other times as are necessary. The fund may pay additional distributions and dividends in order to avoid a federal tax.
Unless you elect to receive dividends and/or other distributions in cash, your dividends and capital gain distributions will be automatically
reinvested in shares of the same class you hold, at the net asset value determined on the reinvestment date. You do not pay a sales charge on reinvested distributions or dividends.
If you hold Class A or Class C shares directly with the fund, you may instruct the fund to have your dividends and/or distributions invested in the corresponding class of shares of another fund
sold by the distributor, subject to the following conditions:
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You have a minimum account balance of $10,000 in the fund and
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The other fund is available for sale in your state.
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To change those instructions, you must notify your Service Agent or the fund at least three days before the next distribution is to be paid.
Please contact your Service Agent or the fund to discuss what options are available to you for receiving your dividends and other distributions.
The Board reserves the right to revise the dividend policy or postpone the payment of dividends if warranted in the Boards judgment due to
unusual circumstances.
Taxes
The following discussion is very general, applies only to shareholders who are U.S. persons, and does not address shareholders subject to special rules, such as those who hold fund shares through an
IRA, 401(k) plan or other tax-advantaged account. Except as specifically noted, the discussion is limited to federal income tax matters, and does not address state, local, foreign or non-income taxes. Further information regarding taxes, including
certain federal income tax considerations relevant to non-U.S. persons, is included in the SAI. Because each shareholders circumstances are different and special tax rules may apply, you should consult your tax adviser about federal, state,
local and/or foreign tax considerations that may be relevant to your particular situation.
In general, redeeming shares, exchanging
shares and receiving dividends and distributions (whether received in cash or reinvested in additional shares or shares of another fund) are all taxable events. An exchange between classes of shares of the same fund normally is not taxable for
federal income tax purposes, whether or not the shares are held in a taxable account.
The following table summarizes the tax status of
certain transactions related to the fund.
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Transaction
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Federal income tax status
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Redemption or exchange of shares
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Usually capital gain or loss; long-term only if shares are owned more than one year
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Dividends of investment income and distributions of net short-term capital gain
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Ordinary income, or in certain cases qualified dividend income
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Distributions of net capital gain (excess of net long-term capital gain over net short-term capital loss)
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Long-term capital gain
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Distributions attributable to short-term capital gains are taxable to you as ordinary income. Distributions
attributable to qualified dividend income received by the fund, if any, may be eligible to be taxed to noncorporate shareholders at the reduced rates applicable to long-term capital gain if certain requirements are satisfied. Distributions of net
capital gain reported by the fund as capital gain dividends are taxable to you as long-term capital gain regardless of how long you have owned your shares. Noncorporate shareholders ordinarily pay tax at reduced rates on long-term capital gain.
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Western Asset Asian Opportunities Fund
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Dividends, other distributions and taxes contd
You may want to avoid buying shares when the fund is about to
declare a dividend or capital gain distribution because it will be taxable to you even though it may economically represent a return of a portion of your investment.
Beginning in 2013, a Medicare contribution tax will be imposed at the rate of 3.8% on net investment income of U.S. individuals with income exceeding specified thresholds, and on undistributed net
investment income of certain estates and trusts. Net investment income generally includes for this purpose dividends and capital gain distributions paid by the fund and gain on the redemption or exchange of fund shares.
A dividend declared by the fund in October, November or December and paid during January of the following year will, in certain circumstances, be
treated as paid in December for tax purposes. If the fund meets certain requirements with respect to its holdings, it may elect to pass through to shareholders foreign taxes that it pays, in which case each shareholder will include the
amount of such taxes in computing gross income, but will be eligible to claim a credit or deduction for such taxes, subject to generally applicable limitations on such deductions and credits. In addition, the funds investment in certain
foreign securities, foreign currencies or foreign currency derivatives may accelerate fund distributions to shareholders and increase the distributions taxed to shareholders as ordinary income.
After the end of each year, your Service Agent or the fund will provide you with information about the distributions and dividends you received and
any redemptions of shares during the previous year. Because each shareholders circumstances are different and special tax rules may apply, you should consult your tax adviser about your investment in the fund.
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Western Asset Asian Opportunities Fund
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Share price
You may buy, exchange or redeem shares at their net asset value next determined after receipt of your request in good
order, adjusted for any applicable sales charge. The funds net asset value per share is the value of its assets minus its liabilities divided by the number of its shares outstanding. Net asset value is calculated separately for each class of
shares.
The fund calculates its net asset value(s) every day the NYSE is open. These calculations are done as of the close of regular
trading on the NYSE (normally 4:00 p.m., Eastern time). If the NYSE closes early, the fund calculates its net asset value(s) as of the actual closing time. The NYSE is closed on certain holidays listed in the SAI.
In order to buy, redeem or exchange shares at a certain days price, you must place your order with your Service Agent or the transfer agent
before the NYSE closes on that day. If the NYSE closes early on that day, you must place your order prior to the actual closing time. It is the responsibility of the Service Agent to transmit all orders to buy, exchange or redeem shares to the
transfer agent on a timely basis.
Valuation of the funds securities and other assets is performed in accordance with procedures
approved by the Board. These procedures delegate most valuation functions to the manager, which, in turn, uses independent third party pricing services approved by the funds Board. Under the procedures, assets are valued as follows:
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The valuations for fixed income 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 fair valuation techniques and methodologies. 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 investments fair value.
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Equity securities and certain derivative instruments that are traded on an exchange are valued at the closing price or, if that price is
unavailable or deemed by the manager not representative of market value, the last sale price. Where a security is traded on more than one exchange (as is often the case overseas), the security is generally valued at the price on the exchange
considered by the manager to be the primary exchange. In the case of securities not traded on an exchange, or if exchange prices are not otherwise available, the prices are typically determined by independent third party pricing services that use a
variety of techniques and methodologies.
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The valuations of securities traded on foreign markets and certain fixed income securities will generally be based on prices determined as of the
earlier closing time of the markets on which they primarily trade, unless a significant event has occurred. 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). Foreign markets are open for trading on weekends and other days when the fund does not price its shares. Therefore, the value of the funds shares may change on days when you will not be able to purchase or
redeem the funds shares.
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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. When such prices or quotations are not available, or when the manager believes that they are unreliable, the manager may
price securities using fair value procedures approved by the Board. These procedures permit, among other things, the use of a matrix, formula or other method that takes into consideration market indices, yield curves and other specific adjustments
to determine fair value. Fair value of a security is the amount, as determined by the manager in good faith, that the fund might reasonably expect to receive upon a current sale of the security. The fund may also use fair value procedures if the
manager determines that a significant event has occurred between the time at which a market price is determined and the time at which the funds net asset value is calculated.
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Many factors may influence the price at which the fund could sell any particular portfolio investment. The sales price may well differhigher
or lowerfrom the funds last valuation, and such differences could be significant, particularly for securities that trade in relatively thin markets and/or markets that experience extreme volatility. Moreover, valuing securities using
fair value methodologies involves greater reliance on judgment than valuing securities based on market quotations. A fund that uses fair value methodologies
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Western Asset Asian Opportunities Fund
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Share price contd
may value those securities higher or lower than another fund using market quotations or its own fair value methodologies to price the same securities. There can be no assurance that the fund
could obtain the value assigned to a security if it were to sell the security at approximately the time at which the fund determines its net asset value. Investors who purchase or redeem fund shares on days when the fund is holding fair-valued
securities may receive a greater or lesser number of shares, or higher or lower redemption proceeds, than they would have received if the fund had not fair-valued the security or had used a different methodology.
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Western Asset Asian Opportunities Fund
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Financial highlights
The fund had not yet begun operations as of the end of the fiscal year,
so it has no financial highlights to report.
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Western Asset Asian Opportunities Fund
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Related performance
Performance of related funds and accounts
The fund commenced operations on November 1, 2012; therefore, it does not have a calendar years worth of performance to report. Western Asset Management Company (Western
Asset) manages another fund with investment objectives, policies and strategies that are similar but not identical to those of the fund (the Other Account); Western Asset anticipates that the fund will be managed in a substantially
similar manner as the Other Account. Information about the prior performance of the Other Account is set forth below. The Other Account is a fully discretionary, fee-paying and actively managed account with a market value of approximately $918
million as of December 31, 2012. Unlike the fund, the Other Account is not subject to certain investment limitations, diversification requirements and other restrictions imposed by the Investment Company Act of 1940 and the Internal Revenue
Code which, if applicable, may have adversely affected the performance results of the Other Account.
The performance of the Other
Account does not represent the past performance of the fund and is not an indication of the future performance of the fund. You should not assume that the fund will have the same performance as the Other Account. The performance of the fund may be
better or worse than the performance of the Other Account due to, among other things, differences in portfolio holdings, sales charges, expenses, asset sizes and cash flows between the fund and the Other Account. The separate accounts in the Other
Account generally have lower expenses and are sold through different distribution channels than the fund. The performance of the Other Account has not been adjusted to reflect the higher fees and expenses of the fund. For example, the fund incurs
the following fees, among others, which are not reflected in the performance of the Other Account: audit fees, legal fees, transfer agent fees, custodian fees and Rule 12-1 fees. If the performance had been so adjusted, returns would have been lower
than those shown.
The following information illustrates the changes in the gross and net performance of the
Other Account from year to year, and compares them to the performance of a market index over various periods of time. Gross performance is calculated after the deduction of trading commissions. Net performance is calculated
from gross returns after quarterly deducting the highest investment advisory fee charged to Other Account (0.40% per annum).
Other
account
Calendar year total returns
this performance is not the past or future performance of the fund
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Average annual total returns (%)
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Best quarter
(ended on 06/30/2009): 8.45 (gross), 8.35 (net)
Worst quarter
(ended on 09/30/2011):
(3.74) (gross), (3.83) (net)
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Annualized total returns
(for periods ended December 31, 2012)
(%)
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Other account*
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1 year
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Since
inception
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Inception
date
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Gross returns before taxes
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12.06
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10.07
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07/01/08
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Net returns before taxes
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11.62
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9.64
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Returns after taxes on distributions
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Returns after taxes on distributions and sale of fund shares
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HSBC Asia Local Bond Index (reflects no deductions for fees, expenses or taxes)
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8.93
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7.77
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JP Morgan Asia Credit Index
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14.27
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10.04
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*
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Performance for the Other Account has been calculated in a manner that differs from the performance calculations the SEC requires for registered funds. The Other
Account is not registered with the SEC.
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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:
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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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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 individuals
total debt, payment history, etc.).
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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 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 marketing services solely for the Funds;
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The Funds representatives such as legal counsel, accountants and auditors; and
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Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.
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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.
Legg Mason Funds Privacy and Security Notice contd
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 877-721-1926.
Revised April 2011
[The privacy notice does not form part of the Prospectus]
Western Asset
Asian Opportunities Fund
You may visit the funds website, http://www.leggmason.com/individualinvestors/prospectuses, for a free copy of a Prospectus, Statement of
Additional Information (SAI) or an Annual or Semi-Annual Report.
Shareholder reports
Additional information about the funds investments is available in the funds Annual and
Semi-Annual Reports to shareholders. In the funds Annual Report, you will find a discussion of the market conditions and investment strategies that significantly affected the funds performance during its last fiscal year. The independent
registered public accounting firms report and financial statements in the funds Annual Report are incorporated by reference into (are legally a part of) this Prospectus.
The fund sends only one report to a household if more than one account has the same last name and same address. Contact your Service Agent or the fund if you do not want this policy to apply to you.
Statement of additional information
The SAI provides more detailed information about the fund and is incorporated by reference into (is legally a part of) this Prospectus.
You can make inquiries about the fund or obtain shareholder reports or the SAI (without charge) by contacting your Service
Agent, by calling the fund at 1-877-721-1926, or by writing to the fund at 100 First Stamford Place, Attn: Shareholder Services 5
th
floor, Stamford, CT 06902.
Information about the fund (including the SAI) can be reviewed and copied at the Securities and Exchange Commissions (the SEC) Public Reference Room in Washington, D.C. Information
on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-551-8090. Reports and other information about the fund are available on the EDGAR Database on the SECs Internet site at
http://www.sec.gov.
Copies of this information may be obtained for a duplicating fee by electronic request at the following
E-mail address:
publicinfo@sec.gov,
or by writing the SECs Public Reference Room, Washington, D.C. 20549.
If someone makes a statement about the fund that is not in this Prospectus, you should not rely upon that information. Neither the fund
nor the distributor is offering to sell shares of the fund to any person to whom the fund may not lawfully sell its shares.
(Investment Company Act
file no.
811-06110)
WASX014362ST 02/13
March 1, 2013
WESTERN ASSET FUNDS, INC.
Western Asset Asian Opportunities Fund
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Class
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Ticker Symbol
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A
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C
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FI
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LWAAX
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R
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I
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LWAOX
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IS
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LWOPX
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100 International Drive
Baltimore, Maryland 21202
1-877-721-1926
Statement of Additional Information
This Statement of Additional Information (the SAI) is not a prospectus and is meant to be read in conjunction with the current Prospectus of Western Asset Asian Opportunities Fund (the
Fund), dated March 1, 2013, as amended or supplemented from time to time, and is incorporated by reference in its entirety into the Prospectus.
The fund is a series of Western Asset Funds, Inc. (the Corporation), a Maryland corporation. The Corporation is an open-end management investment company. The Corporation currently consists of
ten separate professionally managed investment portfolios. This Statement of Additional Information (SAI) relates only to the Fund.
Additional information about the funds investments is available in the funds annual and semi-annual reports to shareholders. The annual report contains financial statements that are
incorporated herein by reference. The funds Prospectus and copies of the annual and semi-annual reports may be obtained free of charge by contacting banks, brokers, dealers, insurance companies, investment advisers, financial consultants or
advisers, mutual fund supermarkets and other financial intermediaries that have entered into an agreement with the funds distributor to sell shares of the fund (each called a Service Agent), by writing the Corporation at 100 First
Stamford Place, Attn: Shareholder Services 5
th
Floor, Stamford, Connecticut 06902, by calling the telephone number set forth above, by sending an e-mail request to prospectus@leggmason.com or by visiting the funds website at http://www.leggmason.com/individualinvestors. Legg Mason Investor
Services, LLC (LMIS or the distributor), a wholly-owned broker/dealer subsidiary of Legg Mason, Inc. (Legg Mason), serves as the funds sole and exclusive distributor.
1
Table of Contents
2
Definitions
Adviser means the investment advisory firm that manages the Funds assets. Western Asset, WAML, Western Singapore and
Western Japan are each Advisers.
Code means the Internal Revenue Code of 1986, as amended.
Corporation means Western Asset Funds, Inc., a Maryland corporation.
Distributor means the party that is responsible for the distribution or sale of the Funds shares. LMIS is the
Funds Distributor.
Exchange means the New York Stock Exchange.
Fundamental Investment Limitation means an investment limitation of the Fund that may be changed only with the affirmative
vote of the lesser of (a) more than 50% of the outstanding shares of the Fund or (b) 67% or more of the shares of the Fund present at a shareholders meeting if more than 50% of the outstanding shares of the Fund are represented at
the meeting in person or by proxy. Only those policies or limitations expressly designated as such are fundamental investment limitations. All other policies and restrictions may be changed without shareholder approval.
Independent Director means a Director of the Corporation who is not an interested person (as defined in the 1940
Act) of the Corporation.
Legg Mason means Legg Mason, Inc.
LMIS means Legg Mason Investor Services, LLC.
Manager means Legg Mason Partners Fund Advisor, LLC, 620 Eighth Avenue, New York, NY 10018.
1940 Act means the Investment Company Act of 1940, as amended.
NRSROs means nationally recognized (or non-U.S.) statistical rating organizations, including Moodys Investors Service,
Inc. (Moodys), Fitch Ratings and Standard & Poors (S&P).
SEC means the Securities and Exchange Commission.
Service Agents means banks, brokers, dealers, insurance companies, investment advisers, financial consultants or advisers, mutual fund supermarkets and other financial intermediaries that have
entered into an agreement with the funds distributor to sell shares of the fund.
12b-1 Director means a
Director of the Corporation who is an Independent Director and who has no direct or indirect financial interest in the operation of the Funds 12b-1 Plans or any agreements related to the 12b-1 Plans (including the Corporations
Underwriting Agreement).
12b-1 Plans means the Funds distribution and shareholder services plan.
WAML means Western Asset Management Company Limited, 10 Exchange Place, London, England.
Western Asset means Western Asset Management Company, 385 East Colorado Boulevard, Pasadena, CA 91101.
Western Singapore means Western Asset Management Company Pte. Ltd. in Singapore, 1 George Street #23-01, Singapore 049145.
3
Western Japan means Western Asset Management Company Ltd in Japan, 36F
Shin-Marunouchi Building, 5-1 Marunouchi 1-Chome Chiyoda-Ku, Tokyo 100-6536, Japan.
Additional Information About Investment Limitations and Policies
The Fund has adopted certain fundamental investment limitations that are set forth below.
The Fund may:
(1) Lend or borrow money or issue senior securities to the fullest extent permitted by the 1940 Act, the rules or regulations thereunder
or applicable orders of the SEC, as such statute, rules, regulations or orders may be amended from time to time.
(2) Not
concentrate investments in a particular industry or group of industries as concentration is defined under the 1940 Act, the rules or regulations thereunder or applicable orders of the SEC, as such statute, rules, regulations or orders may be amended
from time to time. Securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities will not be considered to represent an industry.
(3) Underwrite securities to the fullest extent permitted by the 1940 Act, the rules or regulations thereunder or applicable orders of the SEC, as such statute, rules, regulations or orders may be amended
from time to time.
(4) Purchase or sell commodities, commodities contracts, futures contracts, options, forward contracts or
real estate to the fullest extent permitted by the 1940 Act, the rules or regulations thereunder or applicable orders of the SEC, as such statute, rules, regulations or orders may be amended from time to time.
Additional Information
The
foregoing fundamental limitations of the Fund may be changed only by a vote of a majority of the outstanding voting securities of the Fund, a term defined in the 1940 Act to mean the vote (1) of 67% or more of the shares present at
a shareholders meeting if more than 50% of the outstanding shares are represented at the meeting in person or by proxy, or (2) of more than 50% of the outstanding shares of the Fund, whichever is less. Unless otherwise stated, all
policies and limitations of the Fund other than the foregoing are non-fundamental and can be changed by the Corporations Board of Directors without shareholder approval.
The fundamental investment limitations set forth above limit the Funds ability to engage in certain investment practices and purchase securities or other instruments to the extent permitted by, or
consistent with, the 1940 Act. Relevant limitations of the 1940 Act are described below. These limitations are based either on the 1940 Act itself, the rules or regulations thereunder or applicable orders of the SEC. In addition, interpretations and
guidance provided by the SEC staff may be taken into account, where deemed appropriate by the Fund, to determine if an investment practice or the purchase of securities or other instruments is permitted by the 1940 Act, the rules or regulations
thereunder or applicable orders of the SEC. As such, these limitations of the 1940 Act will change as the statute, rules, regulations or orders (or, if applicable, interpretations) change, and no shareholder vote will be required or sought.
Fundamental Investment Restriction (1). Under the 1940 Act, the Fund may only borrow up to one-third of the value of its
total assets less liabilities (other than liabilities representing senior securities). Borrowing by the Fund allows it to leverage its portfolio, which exposes it to certain risks. Leveraging increases the effect of any increase or decrease in the
value of portfolio securities on the Funds net asset value, and money borrowed will be subject to interest costs (which may include commitment fees and/or the cost of maintaining minimum average balances) which may or may not exceed the return
from the securities purchased with borrowed funds. The Fund may use borrowed money for any purpose permitted by the 1940 Act.
4
The 1940 Act restricts the ability of any mutual fund to lend. Under the 1940 Act, the Fund
may only make loans if expressly permitted to do so by the Funds investment policies, and the Fund may not make loans to persons who control or are under common control with the Fund. Thus, the 1940 Act effectively prohibits the Fund from
making loans to certain persons when conflicts of interest or undue influence are most likely present. The Fund may, however, make other loans which could expose shareholders to additional risks, such as the failure of the other party to repay the
loan. The Fund retains the flexibility to make loans to the extent permitted by its investment policies.
The ability of a
mutual fund to issue senior securities is severely circumscribed by complex regulatory constraints under the 1940 Act that restrict, for instance, the amount, timing, and form of senior securities that may be issued. Certain portfolio management
techniques, such as reverse repurchase agreements, securities loans, credit default swaps, forward roll transactions, futures contracts, the purchase of securities on margin, short sales, or the writing of options on portfolio securities, or certain
other derivatives may be considered senior securities unless appropriate steps are taken to segregate the Funds assets or otherwise cover its obligations. To the extent the Fund covers its commitment under such instruments, including by
segregation of liquid assets, entering into offsetting transactions or owning positions covering its obligations, such instruments will not be considered a senior security by the Fund and therefore will not be subject to the 300% asset
coverage requirement otherwise applicable to borrowings by the Fund. Although this SAI describes certain permitted methods of segregating assets or otherwise covering such transactions for these purposes, such descriptions are not
complete. The Fund may cover such transactions using other methods currently or in the future permitted under the 1940 Act, the rules and regulations thereunder, or orders issued by the SEC thereunder. For these purposes, interpretations and
guidance provided by the SEC staff may be taken into account when deemed appropriate by the Fund.
Under the 1940 Act, a
senior security does not include any promissory note or evidence of indebtedness where such loan is for temporary purposes only and in an amount not exceeding 5% of the value of the total assets of the issuer at the time the loan is
made. A loan is presumed to be for temporary purposes if it is repaid within sixty days and is not extended or renewed.
Fundamental Investment Restriction (2). Concentration is interpreted under the 1940 Act to mean investment of 25% or more of
the Funds total assets in a single industry. If the Fund were to concentrate its investments in a particular industry, investors would be exposed to greater risks because the Funds performance would be largely dependent on
that industrys performance. The Fund has not reserved the right to concentrate in any industry. For purposes of this limitation, the Fund does not consider certificates of deposit or bankers acceptances issued by domestic branches of
U.S. or non-U.S. banks to be in a single industry. If, in the future, these instruments are considered to be in the same industry, the Fund reserves the freedom of action to concentrate in such an industry. The Funds industry concentration
policy does not preclude it from focusing investments in issuers in a group of related industrial sectors (such as different types of technology issuers).
Fundamental Investment Restriction (3). This restriction would permit investment in commodities, commodities contracts (e.g., futures contracts or related options), options, forward contracts or real
estate to the extent permitted under the 1940 Act. However, it is unlikely that the Fund would make such investments, other than the use of futures contracts or related options, options, forward contracts and certain real estate-related instruments
as explained in the Prospectus and this SAI. The Fund, however, may consider using these investment techniques in the future. Commodities, as opposed to commodity futures, represent the actual underlying bulk goods, such as grains, metals and
foodstuffs. Real estate-related instruments include real estate investment trusts, commercial and residential mortgage-backed securities, and real estate financings, and such instruments are generally sensitive to factors such as changes in real
estate values and property taxes, interest rates, cash flow of underlying real estate assets, overbuilding, and the management skill and creditworthiness of the issuer.
Unless otherwise indicated, all limitations applicable to the Funds investments (as stated in the Prospectus or in this SAI) apply only at the time a transaction is entered into. For example, any
subsequent change in a
5
rating assigned by any NRSRO to a security (or, with respect to an unrated security, any subsequent change in an Advisers judgment of such securitys quality), or change in the
percentage of the Funds assets invested in certain securities or other instruments, or change in the average maturity or duration of the Funds investment portfolio, resulting from market fluctuations or other changes in the Funds
total assets, will not require the Fund to dispose of an investment. In the event that NRSROs assign different ratings to the same security, the Adviser will determine which rating it believes best reflects the securitys quality and risk at
that time (which may be the higher of the several assigned ratings), except as described in the Prospectus. The terms debt, bonds and fixed income securities are used in this SAI interchangeably, and, where used,
are not intended to be limiting.
Certain Non-Fundamental Investment Limitations
As a non-fundamental limitation, the Fund invests, under normal circumstances, at least 80% of its net assets in securities issued by
Asian issuers and other investments that are tied economically to Asia, including, among others, derivatives based on financial instruments and interest rates of Asian issuers, and Asian currencies. Additionally, the Fund will typically invest at
least 70% of its net assets in debt and fixed income securities and in derivatives on Asian interest rates and currencies.
To
the extent required by applicable law, the Fund may not change its policy to invest at least 80% of its net assets in the type of securities noted above (Name Investments) unless it provides shareholders with at least 60 days
written notice of such change. For purposes of these limitations only, net assets include the amount of any borrowing for investment purposes. For purposes of the non-fundamental investment restriction set forth above, the Fund will consider an
instrument, including a synthetic instrument, to be a Name Investment if, in the judgment of an Adviser, it has economic characteristics similar to a Name Investment. For example, the Fund will consider an instrument, including a synthetic
instrument, to be a fixed-income security if, in the judgment of an Adviser, it has economic characteristics similar to fixed-income securities. Such instruments would include, but are not limited to, futures contracts and related options,
mortgage-related securities, asset-backed securities, reverse repurchase agreements, forward roll transactions and cash equivalents. In addition, the Fund will consider repurchase agreements secured by obligations of the U.S. Government and its
agencies and instrumentalities to be obligations of the U.S. Government and its agencies and instrumentalities for these purposes. Bank obligations, including but not limited to fixed dollar deposits, certificates of deposit and commercial paper,
regardless of currency denomination, held or issued by Asian banks will be treated as investments that are tied economically to Asia for purposes of the Funds policy to invest at least 80% of its net assets in Name Investments. For this
purpose, the Fund considers Asian branches of non-Asian banks to be Asian banks if the Asian branch of the non-Asian bank is subject to the same regulation as an Asian bank. Likewise, a non-Asian branch of an Asian bank may be considered an Asian
bank if the investment risk associated with investing in instruments issued by the non-Asian bank is the same, in the opinion of the subadviser, as that of investing in instruments issued by the branchs Asian parent.
Additional Information about Securities, Investment Techniques and Related Risks
In addition to the principal investment strategies and the principal risks described in the Prospectus, the Fund may employ other
investment practices and may be subject to other risks, some of which are described below. Unless a strategy or policy described below is specifically prohibited by applicable law or by the investment restrictions explained in the Funds
Prospectus or elsewhere in this SAI, the Fund may engage in each of the practices listed below.
Non-U.S. Securities
Investing in the securities of issuers in any non-U.S. country, or in securities denominated in a non-U.S. currency, involves special
risks and considerations not typically associated with investing in U.S. issuers or U.S. dollar denominated securities. These include risks resulting from differences in accounting, auditing and
6
financial reporting standards; lower liquidity than U.S. securities; the possibility of nationalization, expropriation or confiscatory taxation; adverse changes in investment or exchange control
regulations (which may include suspension of the ability to transfer currency out of a country); and political instability. In many cases, there is less publicly available information concerning non-U.S. issuers than is available concerning U.S.
issuers. Additionally, purchases and sales of non-U.S. securities and dividends and interest payable on those securities may be subject to non-U.S. taxes and tax withholding. Non-U.S. securities generally exhibit greater price volatility and a
greater risk of illiquidity.
To the extent the Fund purchases securities denominated in a non-U.S. currency, a change in the
value of any such currency against the U.S. dollar will result in a change in the U.S. dollar value of the Funds assets and the Funds income available for distribution. In addition, the Fund is required to compute and distribute its
income in U.S. dollars. Therefore, if the exchange rate for a non-U.S. currency declines after the Funds income has been earned and translated into U.S. dollars (but before payment), the Fund could be required to liquidate portfolio securities
to make such distributions. Similarly, if an exchange rate declines between the time the Fund incurs expenses in U.S. dollars and the time such expenses are paid, the amount of such currency required to be converted into U.S. dollars in order to pay
such expenses in U.S. dollars will be greater than the equivalent amount in any such currency of such expenses at the time they were incurred.
The relative performance of various countries securities markets historically has reflected wide variations relating to the unique characteristics of each countrys economy. Individual non-U.S.
economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. Bank deposit insurance, if
any, may be subject to widely varying regulations and limits in non-U.S. countries.
In general, non-U.S. securities purchased
by the Fund may be listed on non-U.S. exchanges, traded over-the-counter or purchased in private transactions. Transactions on non-U.S. exchanges are usually subject to mark-ups or commissions higher than negotiated commissions on U.S. transactions.
There is less government supervision and regulation of exchanges and brokers in many non-U.S. countries than in the United States. Additional costs associated with an investment in non-U.S. securities may include higher custodial fees than apply to
domestic custodial arrangements and transaction costs of non-U.S. currency conversions.
Certain of the foregoing risks may
also apply to some extent to securities of U.S. issuers that are denominated in non-U.S. currencies or that are traded in non-U.S. markets, or to securities of U.S. issuers having significant non-U.S. operations.
Emerging Market Issuers.
The risks of non-U.S. investment, described above, are greater for investments in emerging market
issuers, and such investments should therefore be considered speculative. Debt securities of governmental and other issuers in emerging market countries will typically be rated below investment grade or be of comparable quality. For more information
about lower-rated securities, see Debt and Fixed Income SecuritiesLower-Rated Securities below. Investors are strongly advised to consider carefully the special risks involved in emerging markets, which are in addition to the usual
risks of investing in developed markets around the world. Emerging market countries may experience substantial rates of inflation or deflation. Inflation, deflation and rapid fluctuations in such rates have had, and may continue to have, very
negative effects on the economies and securities markets of certain emerging market countries. While some emerging market countries have sought to develop a number of corrective mechanisms to reduce inflation or deflation or mitigate their effects,
inflation and deflation may continue to have significant effects both on emerging market countries and their securities markets. In addition, many of the currencies of emerging market countries have experienced steady devaluations relative to the
U.S. dollar, and major devaluations have occurred in certain countries.
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 Markets Bond Index Global or categorized by the World Bank in its annual categorization as middle- or low-income.
7
Economies in emerging market countries generally are heavily dependent upon international
trade and, accordingly, have been and may continue to be affected adversely by economic conditions, trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the
countries with which they trade.
Because of the high levels of non-U.S. dollar denominated debt owed by many emerging market
countries, fluctuating exchange rates can significantly affect the debt service obligations of those countries. This could, in turn, affect local interest rates, profit margins and exports, which are a major source of non-U.S. exchange earnings.
Hedging instruments are not typically available with respect to investments in emerging market countries and, to the extent they are available, the ongoing and indeterminate nature of the foregoing risks (and the costs associated with hedging
transactions) would make it virtually impossible to hedge effectively against such risks.
To the extent an emerging market
country faces a liquidity crisis with respect to its non-U.S. exchange reserves, it may increase restrictions on the outflow of any non-U.S. exchange. Repatriation is ultimately dependent on the ability of the Fund to liquidate its investments and
convert the local currency proceeds obtained from such liquidation into U.S. dollars. Where this conversion must be done through official channels (usually the central bank or certain authorized commercial banks), the ability to obtain U.S. dollars
is dependent on the supply of such U.S. dollars through those channels and, if available, upon the willingness of those channels to allocate those U.S. dollars to the Fund. In such a case, the Funds ability to obtain U.S. dollars may be
adversely affected by any increased restrictions imposed on the outflow of non-U.S. exchange. If the Fund is unable to repatriate any amounts due to exchange controls, it may be required to accept an obligation payable at some future date by the
central bank or other governmental entity of the jurisdiction involved. If such conversion can legally be done outside official channels, either directly or indirectly, the Funds ability to obtain U.S. dollars may not be affected as much by
any increased restrictions except to the extent of the price that may be required to be paid for the U.S. dollars.
Many
emerging market countries have little experience with the corporate form of business organization, and may not have well-developed corporation and business laws or concepts of fiduciary duty in the business context. The securities markets of
emerging market countries are substantially smaller, less developed, less liquid and more volatile than the securities markets of the U.S. and other more developed countries. Disclosure and regulatory standards in many respects are less stringent
than in the U.S. and other major markets. There also may be a lower level of monitoring and regulation of an emerging market countrys securities markets and the activities of investors in such markets; enforcement of existing regulations has
been extremely limited. Also, any change in the leadership or politics of emerging market countries, or the countries that exercise a significant influence over those countries, may halt the expansion of or reverse the liberalization of non-U.S.
investment policies now occurring in some emerging market countries and adversely affect existing investment opportunities.
Some emerging markets have different settlement and clearance procedures, which, for example, may not call for delivery of a security to
the Fund until well after the Fund has paid for such security. In certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. The
inability of the Fund to make intended securities purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security caused by settlement problems could result either
in losses to the Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, in possible liability to the purchaser.
The risk also exists that an emergency situation may arise in one or more emerging market countries as a result of which trading of
securities may cease or may be substantially curtailed and prices for the Funds portfolio securities in such markets may not be readily available.
8
Sovereign Debt Securities.
Sovereign debt is subject to risks in addition to
those relating to non-U.S. investments generally. As a sovereign entity, the issuing government may be immune from lawsuits in the event of its failure or refusal to pay the obligations when due. The debtors willingness or ability to repay in
a timely manner may be affected by, among other factors, its cash flow situation, the extent of its non-U.S. reserves, the availability of sufficient non-U.S. exchange on the date a payment is due, the relative size of the debt service burden to the
economy as a whole, the sovereign debtors policy toward principal international lenders and the political constraints to which the sovereign debtor may be subject. Sovereign debtors also may be dependent on disbursements or assistance from
foreign governments or multinational agencies, the countrys access to trade and other international credits, and the countrys balance of trade. Assistance may be dependent on a countrys implementation of austerity measures and
reforms, which measures may limit or be perceived to limit economic growth and recovery. Some sovereign debtors have rescheduled their debt payments, declared moratoria on payments, or restructured their debt to effectively eliminate portions of it,
and similar occurrences may happen in the future. There is no bankruptcy proceeding by which sovereign debt on which governmental entities have defaulted may be collected in whole or in part.
Depositary Receipts.
American Depositary Receipts, or ADRs, are securities issued by a U.S. depositary (usually a
bank) and represent a specified quantity of underlying non-U.S. securities on deposit with a custodian bank as collateral. A non-U.S. issuer of the security underlying an ADR is generally not subject to the same reporting requirements in the United
States as a domestic issuer. Accordingly, the information available to a U.S. investor will be limited to the information the non-U.S. issuer is required to disclose in its own country and the market value of an ADR may not reflect undisclosed
material information concerning the issuer or the underlying security. ADRs may also be subject to exchange rate risks if the underlying securities are denominated in a non-U.S. currency. The Fund may also invest in similar non-U.S. instruments
issued by non-U.S. banks or trust companies such as GDRs and EDRs. EDRs are non-U.S. dollar denominated receipts similar to ADRs, are issued and traded in Europe and are publicly traded on exchanges or over-the-counter in the
United States. GDRs may be offered privately in the United States and also trade in public or private markets in other countries. For purposes of its investment policies, the Fund will treat ADRs and similar instruments as equivalent to investment
in the underlying securities.
Options, Futures and Other Financial Instruments
General.
The Fund may invest in certain options, futures contracts (sometimes referred to as futures), options on
futures contracts, forward contracts, swaps, caps, floors, collars, structured notes, indexed securities and other derivative instruments (collectively, Financial Instruments) to attempt to enhance its return or yield or to attempt to
hedge its investments. Except as otherwise provided in the Prospectus or SAI or by applicable law, the Fund may purchase and sell any type of Financial Instrument.
Hedging strategies can be broadly categorized as short hedges and long hedges. A short hedge is a purchase or sale of a Financial Instrument intended partially or fully to offset
potential declines in the value of one or more investments held in the Funds portfolio. Thus, in a short hedge the Fund takes a position in a Financial Instrument whose price is expected to move in the opposite direction of the price of the
investment being hedged.
Conversely, a long hedge is a purchase or sale of a Financial Instrument intended partially or fully
to offset potential increases in the acquisition cost of one or more investments that the Fund intends to acquire. Thus, in a long hedge, the Fund takes a position in a Financial Instrument whose price is expected to move in the same direction as
the price of the prospective investment being hedged. A long hedge is sometimes referred to as an anticipatory hedge. In an anticipatory hedge transaction, the Fund does not own a corresponding security and, therefore, the transaction does not
relate to a security the Fund owns. Rather, it relates to a security that the Fund intends to acquire. If the Fund does not complete the hedge by purchasing the security it anticipated purchasing, the effect on the Funds portfolio is the same
as if the transaction were entered into for speculative purposes.
9
Financial Instruments on securities generally are used to attempt to hedge against price
movements in one or more particular securities positions that the Fund owns or intends to acquire. Financial Instruments on indices, in contrast, generally are used to attempt to hedge against price movements in market sectors in which the Fund has
invested or expects to invest. Financial Instruments on debt securities generally are used to hedge either individual securities or broad debt market sectors. Except as otherwise provided in the Prospectus or SAI or by applicable law, the Fund may
use Financial Instruments for any purpose, including non-hedging purposes.
The use of Financial Instruments is subject to
applicable regulations of the SEC, the several exchanges upon which they are traded and the Commodity Futures Trading Commission (the CFTC). In addition, the Funds ability to use Financial Instruments may be limited by tax
considerations. See Additional Tax Information.
In addition to the instruments, strategies and risks described
below, the Advisers expect to discover additional opportunities in connection with Financial Instruments and other similar or related techniques. These new opportunities may become available as the Advisers develop new techniques, as regulatory
authorities broaden the range of permitted transactions and as new Financial Instruments or other techniques are developed. The Advisers may utilize these opportunities to the extent that they are consistent with the Funds investment objective
and permitted by its investment limitations and applicable regulatory authorities. The Fund might not use any of these strategies, and there can be no assurance that any strategy used will succeed.
Special Risks.
The use of Financial Instruments involves special considerations and risks, certain of which are described below.
In general, these techniques may increase the volatility of the Fund and may involve a small investment of cash relative to the magnitude of the risk assumed. Risks pertaining to particular Financial Instruments are described in the sections that
follow.
(1) Successful use of most Financial Instruments depends upon an Advisers ability to predict
movements of the overall securities, currency, commodities and interest rate markets, which requires different skills than predicting changes in the prices of individual securities. There can be no assurance that any particular strategy will
succeed, and use of Financial Instruments could result in a loss, regardless of whether the intent was to reduce risk or increase return.
(2) There might be imperfect correlation, or even no correlation, between price movements of a Financial Instrument and price movements of the investments or other economic measures (collectively,
Instruments) being hedged. For example, if the value of a Financial Instrument used in a short hedge increased by less than the decline in value of the hedged Instrument, the hedge would not be fully successful. Such a lack of
correlation might occur due to factors unrelated to the value of the Instrument being hedged, such as speculative or other pressures on the markets in which Financial Instruments are traded. The effectiveness of hedges using Financial Instruments on
indices will depend on the degree of correlation between price movements in the index and price movements in the securities or other assets being hedged.
Because there are a limited number of types of exchange-traded Financial Instruments, it is likely that the standardized contracts available will not match the Funds current or anticipated
investments exactly. The Fund may invest in Financial Instruments based on securities with different issuers, maturities or other characteristics from the securities in which it typically invests, which involves a risk that the position in Financial
Instruments will not track the performance of the Funds other investments.
Prices of Financial
Instruments can also diverge from the prices of their underlying Instruments, even if the underlying Instruments match the Funds investments well. Prices of Financial Instruments are affected by such factors as current and anticipated
short-term interest rates, changes in volatility of the underlying Instrument, and the time remaining until expiration of the contract, which may not affect security prices the same way. Imperfect correlation may also result from differing levels of
demand in the markets for Financial Instruments and the securities markets, from structural differences in how Financial Instruments and securities are traded, or from imposition of daily price fluctuation limits or trading halts. The Fund may
purchase or sell Financial Instruments with a greater or lesser value than the securities it wishes to hedge or
10
intends to purchase in order to attempt to compensate for differences in volatility between the contract and the securities, although this may not be successful in all cases. If price changes in
the Funds positions in Financial Instruments are poorly correlated with its other investments, the positions may fail to produce anticipated gains or result in losses that are not offset by gains in other investments.
(3) If successful, the above-discussed strategies can reduce risk of loss by wholly or partially offsetting the negative
effect of unfavorable price movements. However, such strategies can also reduce opportunity for gain by offsetting the positive effect of favorable price movements. For example, if the Fund entered into a short hedge because its Adviser projected a
decline in the price of a security in the Funds portfolio, and the price of that security increased instead, the gain from that increase might be wholly or partially offset by a decline in the price of the Financial Instrument. Moreover, if
the price of the Financial Instrument declined by more than the increase in the price of the security, the Fund could suffer a loss. In either such case, the Fund would have been in a better position had it not attempted to hedge at all.
(4) As described below, the Fund might be required to maintain assets as cover, maintain segregated accounts
or make margin payments when it takes positions in Financial Instruments involving obligations to third parties (i.e., Financial Instruments other than purchased options). If the Fund were unable to close out its positions in such Financial
Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position expired or matured. These requirements might impair the Funds ability to sell a portfolio security or make an investment
at a time when it would otherwise be favorable to do so, or require that the Fund sell a portfolio security at a disadvantageous time.
(5) The Funds ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the
ability and willingness of the other party to the transaction (the counterparty) to enter into a transaction closing out the position. Therefore, there is no assurance that any position can be closed out at a time and price that is
favorable to the Fund.
(6) Use of Financial Instruments by the Fund could expose the Fund to the effects of
leverage, which could increase the Funds exposure to market conditions and magnify potential losses.
Additional
Risks of Financial Instruments Traded on Non-U.S. Exchanges.
Financial Instruments may be traded on non-U.S. exchanges. Such transactions may not be regulated as effectively as similar transactions in the United States, may not involve a
clearing mechanism and related guarantees and are subject to the risk of governmental actions affecting trading in, or the price of, non-U.S. securities. The value of such positions also could be adversely affected by (1) other complex non-U.S.
political, legal and economic factors, (2) lesser availability than in the United States of data on which to make trading decisions, (3) delays in the Funds ability to act upon economic events occurring in non-U.S. markets during
non-business hours in the United States, (4) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States and (5) lesser trading volume.
Options.
A call option gives the purchaser the right to buy, and obligates the writer to sell, the underlying Instrument at the
agreed-upon price during the option period. A put option gives the purchaser the right to sell, and obligates the writer to buy, the underlying Instrument at the agreed-upon price during the option period. Purchasers of options pay an amount, known
as a premium, to the option writer in exchange for the right under the option contract. The Fund may purchase and sell both put options and call options on a variety of underlying Instruments, including, but not limited to, specific securities,
securities indexes, commodities indexes, futures contracts and foreign currencies.
The Fund can use both European-style or
American-style options. A European-style option is only exercisable immediately prior to its expiration. This is in contrast to American-style options, which are exercisable at any time prior to the expiration date of the option.
The Fund may purchase call options for any purpose. For example, a call option may be purchased by the Fund as a long hedge. Call options
also may be used as a means of participating in an anticipated price increase
11
of an Instrument on a more limited risk basis than would be possible if the Instrument itself were purchased. In the event of a decline in the price of the underlying Instrument, use of this
strategy would serve to limit the Funds potential loss to the option premium paid; conversely, if the market price of the underlying Instrument increases above the exercise price and the Fund either sells or exercises the option, any profit
realized would be reduced by the premium.
The Fund may purchase put options for any purpose. For example, a put option may be
purchased by the Fund as a short hedge. The put option enables the Fund to sell the underlying Instrument at the predetermined exercise price; thus the potential for loss to the Fund below the exercise price is limited to the option premium paid. If
the market price of the underlying Instrument is higher than the exercise price of the put option, any profit the Fund realizes on the sale of the Instrument would be reduced by the premium paid for the put option less any amount for which the put
option may be sold.
Writing put or call options can enable the Fund to enhance income or yield by reason of the premiums paid
by the purchasers of such options. However, the Fund may also suffer a loss as a result of writing options. For example, if the market price of the Instrument underlying a put option declines to less than the exercise price of the option, minus the
premium received, the Fund would suffer a loss.
Writing call options can serve as a limited short hedge, because declines in
the value of the hedged Instrument would be offset to the extent of the premium received for writing the option. However, if the underlying Instrument appreciates to a price higher than the exercise price of the call option, it can be expected that
the option will be exercised and the Fund will be obligated to sell the underlying Instrument at less than its market value.
Writing put options can serve as a limited long hedge because increases in the value of the hedged investment would be offset to the extent of the premium received for writing the option. However, if the
underlying Instrument depreciates to a price lower than the exercise price of the put option, it can be expected that the put option will be exercised and the Fund will be obligated to purchase the underlying Instrument at more than its market
value.
The value of an option position will reflect, among other things, the current market value of the underlying
Instrument, the time remaining until expiration, the relationship of the exercise price to the market price of the underlying Instrument, the historical price volatility of the underlying Instrument and general market conditions.
The Fund may effectively terminate its right or obligation under an option by entering into a closing transaction. For example, the Fund
may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a closing purchase transaction. Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing sale transaction. Closing transactions permit the Fund to realize profits or limit losses on an option position prior to its exercise or expiration.
A type of put that the Fund may purchase is an optional delivery standby commitment, which is entered into by parties selling
debt securities to the Fund. An optional delivery standby commitment gives the Fund the right to sell the security back to the seller on specified terms. This right is provided as an inducement to purchase the security.
Risks of Options.
Options offer large amounts of leverage, which will result in the Funds net asset value being more
sensitive to changes in the value of the related instrument. The Fund may purchase or write both exchange-traded and OTC options. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on
which the option is listed that, in effect, guarantees completion of every exchange-traded option transaction. In contrast, OTC options are contracts between the Fund and its counterparty (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when the Fund
12
purchases an OTC option, it relies on the counterparty from whom it purchased the option to make or take delivery of the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the Fund as well as the loss of any expected benefit of the transaction.
The Funds ability to establish and close out positions in exchange-listed options depends on the existence of a liquid market. However, there can be no assurance that such a market will exist at any
particular time. Closing transactions can be made for OTC options only by negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists. There can be no assurance that the Fund will in fact be able
to close out an OTC option position at a favorable price prior to expiration. In the event of insolvency of the counterparty, the Fund might be unable to close out an OTC option position at any time prior to its expiration, if at all.
If the Fund were unable to effect a closing transaction for an option it had purchased, due to the absence of a secondary market, the
imposition of price limits or otherwise, it would have to exercise the option to realize any profit. The inability to enter into a closing purchase transaction for a covered call option written by the Fund could cause material losses because the
Fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised.
Options have varying expiration dates. The exercise price of the options may be below, equal to or above the current market value of the
underlying Instrument. Options purchased by the Fund that expire unexercised have no value, and the Fund will realize a loss in the amount of the premium paid and any transaction costs. If an option written by the Fund expires unexercised, the Fund
realizes a gain equal to the premium received at the time the option was written. Transaction costs must be included in these calculations.
Options on Indices.
Puts and calls on indices are similar to puts and calls on other investments except that all settlements are in cash and gain or loss depends on changes in the index in question
rather than on price movements in individual securities, futures contracts or other investments. When the Fund writes a call on an index, it receives a premium and agrees that, prior to the expiration date, the purchaser of the call, upon exercise
of the call, will receive from the Fund an amount of cash if the closing level of the index upon which the call is based is greater than the exercise price of the call. The amount of cash is equal to the difference between the closing price of the
index and the exercise price of the call times a specified multiple (multiplier), which determines the total dollar value for each point of such difference. When the Fund buys a call on an index, it pays a premium and has the same rights
as to such call as are indicated above. When the Fund buys a put on an index, it pays a premium and has the right, prior to the expiration date, to require the seller of the put, upon the Funds exercise of the put, to deliver to the Fund an
amount of cash if the closing level of the index upon which the put is based is less than the exercise price of the put, which amount of cash is determined by the multiplier, as described above for calls. When the Fund writes a put on an index, it
receives a premium and the purchaser of the put has the right, prior to the expiration date, to require the Fund to deliver to it an amount of cash equal to the difference between the closing level of the index and exercise price times the
multiplier if the closing level is less than the exercise price.
Risks of Options on Indices.
The risks of investment
in options on indices may be greater than options on securities, commodities, futures contracts or other investments. Because index options are settled in cash, when the Fund writes a call on an index it cannot provide in advance for its potential
settlement obligations by acquiring and holding the underlying Instruments. The Fund can offset some of the risk of writing a call index option by holding a diversified portfolio of Instruments similar to those on which the underlying index is
based. However, the Fund cannot, as a practical matter, acquire and hold a portfolio containing exactly the same Instruments as underlie the index and, as a result, bears a risk that the value of the Instruments held will vary from the value of the
index.
Even if the Fund could assemble a portfolio that exactly reproduced the composition of the underlying index, it still
would not be fully covered from a risk standpoint because of the timing risk inherent in writing index options. When an index option is exercised, the amount of cash that the holder is entitled to receive is
13
determined by the difference between the exercise price and the closing index level on the date when the option is exercised. As with other kinds of options, the Fund as the call writer will not
learn that the Fund has been assigned until the next business day at the earliest. The time lag between exercise and notice of assignment poses no risk for the writer of a covered call on a specific underlying Instrument, such as common stock,
because there the writers obligation is to deliver the underlying Instrument, not to pay its value as of a fixed time in the past. So long as the writer already owns the underlying Instrument, it can satisfy its settlement obligations by
simply delivering it, and the risk that its value may have declined since the exercise date is borne by the exercising holder. In contrast, even if the writer of an index call holds investments that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering those Instruments against payment of the exercise price. Instead, it will be required to pay cash in an amount based on the closing index value on the exercise date. By
the time it learns that it has been assigned, the index may have declined, with a corresponding decline in the value of its portfolio. This timing risk is an inherent limitation on the ability of index call writers to cover their risk
exposure by holding Instrument positions.
If the Fund has purchased an index option and exercises it before the closing index
value for that day is available, it runs the risk that the level of the underlying index may subsequently change. If such a change causes the exercised option to fall out-of-the-money, the Fund will be required to pay the difference between the
closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer.
OTC
Options.
Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC options (options not traded on exchanges) generally are established
through negotiation with the other party to the option contract. While this type of arrangement allows the Fund great flexibility to tailor the option to its needs, OTC options generally involve greater risk than exchange-traded options, which are
guaranteed by the clearing organization of the exchanges where they are traded.
Futures Contracts and Options on
Futures Contracts.
A financial futures contract sale creates an obligation by the seller to deliver the type of Instrument called for in the contract in a specified delivery month for a stated price. A financial futures contract purchase creates
an obligation by the purchaser to take delivery of the type of Instrument called for in the contract in a specified delivery month at a stated price. The Fund may invest in single security futures contracts to the extent permitted by applicable law.
Options on futures give the purchaser the right to assume a position in a futures contract at the specified option exercise price at any time during the period of the option. The purchase of futures or call options on futures can serve as a long
hedge, and the sale of futures or the purchase of put options on futures can serve as a short hedge. Writing call options on futures contracts can serve as a limited short hedge, using a strategy similar to that used for writing call options on
Instruments. Similarly, writing put options on futures contracts can serve as a limited long hedge. Futures contracts and options on futures contracts can also be purchased and sold to attempt to enhance income or yield. To the extent permitted by
applicable law, the Fund may also write call and put options on futures contracts that are not covered. The Fund may invest in futures contracts and options thereon with respect to Instruments including, but not limited to, specific securities,
securities indexes and currencies.
In addition, futures strategies can be used to manage the duration of the Funds
fixed-income portfolio. If an Adviser wishes to shorten the duration of the Funds fixed-income portfolio, the Fund may sell a debt futures contract or a call option thereon, or purchase a put option on that futures contract. If an Adviser
wishes to lengthen the duration of the Funds fixed-income portfolio, the Fund may buy a debt futures contract or a call option thereon, or sell a put option thereon.
Futures contracts may also be used for non-hedging purposes, such as to simulate full investment in underlying Instrument while retaining a cash balance for portfolio management purposes, as a substitute
for direct investment in the underlying Instrument, to facilitate trading, to reduce transaction costs, or to seek higher investment returns when a futures contract or option is priced more attractively than the underlying Instrument.
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No price is paid upon entering into a futures contract. Instead, at the inception of a
futures contract the Fund is required to deposit initial margin. Margin must also be deposited when writing a call or put option on a futures contract, in accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a borrowing, but rather is in the nature of a performance bond or good-faith deposit that is returned to the Fund at the termination of the transaction if all contractual
obligations have been satisfied. Under certain circumstances, such as periods of high volatility, the Fund may be required by an exchange to increase the level of its initial margin payment, and initial margin requirements might be increased
generally in the future by regulatory action.
Subsequent variation margin payments are made to and from the
futures broker daily as the value of the futures position varies, a process known as marking-to-market. Variation margin does not involve borrowing, but rather represents a daily settlement of the Funds obligations to or from a
futures broker. When the Fund purchases an option on a futures contract, the premium paid plus transaction costs is all that is at risk. However, there may be circumstances when the purchase of an option on a futures contract would result in a loss
to the Fund when the use of a futures contract would not, such as when there is no movement in the value of the securities or currencies being hedged. In contrast, when the Fund purchases or sells a futures contract or writes a call or put option
thereon, it is subject to daily variation margin calls that could be substantial in the event of adverse price movements. If the Fund has insufficient cash to meet daily variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Although some futures and options on futures call for making or taking delivery of the
underlying Instrument, generally those contracts are closed out prior to delivery by offsetting purchases or sales of matching futures or options (involving the same Instrument and delivery month). If an offsetting purchase price is less than the
original sale price, the Fund realizes a gain, or if it is more, the Fund realizes a loss. If an offsetting sale price is more than the original purchase price, the Fund realizes a gain, or if it is less, the Fund realizes a loss. The Fund will also
bear transaction costs for each contract, which will be included in these calculations. Positions in futures and options on futures may be closed only on an exchange or board of trade that provides a secondary market. However, there can be no
assurance that a liquid secondary market will exist for a particular contract at a particular time. In such event, it may not be possible to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract or an option
on a futures contract can vary from the previous days settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit. Daily price limits do not limit potential losses because prices could move to the
daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option on a futures position due to the absence of a liquid secondary
market, the imposition of price limits or otherwise, it could incur substantial losses. The Fund would continue to be subject to market risk with respect to the position. In addition, except in the case of purchased options, the Fund would continue
to be required to make daily variation margin payments and might be required to maintain the position being hedged by the future or option or to maintain cash or securities in a segregated account.
The Fund is operated by persons who have claimed an exclusion, granted to operators of registered investment companies like the funds,
from registration as a commodity pool operator with respect to the Fund under the Commodity Exchange Act, and therefore, are not subject to registration or regulation as a commodity pool operator under the Commodity Exchange Act. On
February 9, 2012, the CFTC adopted amendments to its rules that, upon effectiveness, may affect the ability of the Fund to continue to claim this exclusion. The Fund would be limited in its ability to use futures or options on futures or engage
in swaps transactions if it continued to claim the exclusion. If the Fund was no longer able to claim the exclusion, the Funds manager would likely become subject to registration and regulation as a commodity pool operator or the Fund might be
limited in the use of these transactions. The Fund and the manager are continuing to analyze the effect of these rules changes on the Fund.
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Risks of Futures Contracts and Options Thereon
. The ordinary spreads between prices
in the cash and futures markets (including the options on futures market), due to differences in the natures of those markets, are subject to the following factors, which may create distortions. First, all participants in the futures market are
subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions, which could distort the normal relationship between the cash
and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the
futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price distortions. Due to the possibility of distortion, a correct forecast of general interest rate, currency exchange rate or stock market trends by an Adviser may still not
result in a successful transaction. Of course, an Adviser may be incorrect in its expectations as to the extent of various interest rate, currency exchange rate, stock market or other movements or the time span within which the movements take place.
Congress, various exchanges and regulatory and self-regulatory authorities have undertaken reviews of options and futures
trading in light of market volatility. Among the actions that have been taken or proposed to be taken are new limits and reporting requirements for speculative positions, new or more stringent daily price fluctuation limits for futures and options
transactions, and increased margin requirements for various types of futures transactions. Additional measures are under active consideration and as a result there may be further actions that adversely affect the regulation of the instruments in
which the Fund invests.
Index Futures.
The risk of imperfect correlation between movements in the price of index
futures and movements in the price of the Instruments that are the subject of the hedge increases as the composition of the Funds portfolio diverges from the Instruments included in the applicable index. The price of the index futures may move
more than or less than the price of the Instruments being hedged. If the price of the index futures moves less than the price of the Instruments that are the subject of the hedge, the hedge will not be fully effective, but if the price of the
Instruments being hedged has moved in an unfavorable direction, the Fund would be in a better position than if it had not hedged at all. If the price of the Instruments being hedged has moved in a favorable direction, this advantage will be
partially offset by the futures contract. If the price of the futures contract moves more than the price of the Instruments, the Fund will experience either a loss or a gain on the futures contract that will not be completely offset by movements in
the price of the Instruments that are the subject of the hedge. To compensate for the imperfect correlation of movements in the price of the Instruments being hedged and movements in the price of the index futures, the Fund may buy or sell index
futures in a greater dollar amount than the dollar amount of the Instruments being hedged if the historical volatility of the prices of such Instruments being hedged is more than the historical volatility of the prices of the Instruments included in
the index. It is also possible that, where the Fund has sold index futures contracts to hedge against decline in the market, the market may advance and the value of the Instruments held in the Fund may decline. If this occurred, the Fund would lose
money on the futures contract and also experience a decline in value of its portfolio Instruments. However, while this could occur for a very brief period or to a very small degree, over time the value of a diversified portfolio of Instruments will
tend to move in the same direction as the market indices on which the futures contracts are based.
Where index futures are
purchased to hedge against a possible increase in the price of Instruments before the Fund is able to invest in them in an orderly fashion, it is possible that the market may decline instead. If the Fund then concludes not to invest in them at that
time because of concern as to possible further market decline or for other reasons, it will realize a loss on the futures contract that is not offset by a reduction in the price of the Instruments it had anticipated purchasing.
To the extent such instruments are permitted by applicable law, the Fund may invest in security futures. Such investments are expected to
be subject to risks similar to those of index future investing.
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Non-U.S. Currency Hedging StrategiesSpecial Considerations.
The Fund may
engage in a variety of non-U.S. currency exchange transactions to protect against uncertainty in the level of future exchange rates or to earn additional income. The Funds may use options and futures contracts relating to non-U.S. currencies as
described above, and swaps, indexed notes and forward currency contracts, as described below, to attempt to hedge against movements in the values of the non-U.S. currencies in which the Funds securities are denominated or to attempt to enhance
income or yield. Currency hedges can protect against price movements in a security that the Fund owns or intends to acquire that are attributable to changes in the value of the currency in which it is denominated. Such hedges do not, however,
protect against price movements in the securities that are attributable to other causes.
The Fund might seek to hedge
against changes in the value of a particular currency when no Financial Instruments on that currency are available or such Financial Instruments are more expensive than certain other Financial Instruments. In such cases, the Fund may seek to hedge
against price movements in that currency by entering into transactions using Financial Instruments on another currency or a basket of currencies, the value of which the Funds Adviser believes will have a high degree of correlation to the value
of the currency being hedged. The risk that movements in the price of the Financial Instrument will not correlate perfectly with movements in the price of the currency subject to the hedging transaction is magnified when this strategy is used.
The value of Financial Instruments on non-U.S. currencies depends on the value of the underlying currency relative to the
U.S. dollar. Because non-U.S. currency transactions occurring in the interbank market might involve substantially larger amounts than those involved in the use of such Financial Instruments, the Fund could be disadvantaged by having to deal in the
odd lot market (generally consisting of transactions of less than $1 million) for the underlying non-U.S. currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for non-U.S. currencies or any regulatory requirement that quotations available through dealers or other market sources be firm or revised on a
timely basis. Quotation information generally is representative of very large transactions in the interbank market and thus might not reflect odd-lot transactions where rates might be less favorable. The interbank market in non-U.S. currencies is a
global, round-the-clock market. To the extent the U.S. options or futures markets are closed while the markets for the underlying currencies remain open, significant price and rate movements might take place in the underlying markets that cannot be
reflected in the markets for the Financial Instruments until they reopen.
Settlement of hedging transactions involving
non-U.S. currencies might be required to take place within the country issuing the underlying currency. Thus, the Fund might be required to accept or make delivery of the underlying non-U.S. currency in accordance with any U.S. or non-U.S.
regulations regarding the maintenance of non-U.S. banking arrangements by U.S. residents and might be required to pay any fees, taxes and charges associated with such delivery assessed in the issuing country.
Options on non-U.S. currencies also have the other risks of using options inherent in options generally. See Risks of Options
above.
Forward Currency Contracts.
The Fund may enter into forward currency contracts to purchase or sell non-U.S.
currencies for a fixed amount of U.S. dollars or another non-U.S. currency. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days (term) from the date of
the forward currency contract agreed upon by the parties, at a price set at the time of the forward currency contract. These forward currency contracts are traded directly between currency traders (usually large commercial banks) and their
customers. Forward currency contracts may be used to attempt to hedge currency exposure or to enhance return or yield.
Such
transactions may serve as long hedges; for example, the Fund may purchase a forward currency contract to lock in the U.S. dollar price of a security denominated in a non-U.S. currency that the Fund intends to acquire. Forward currency contract
transactions may also serve as short hedges; for example, the Fund may sell a
17
forward currency contract to lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of a security, dividend or interest payment denominated in a non-U.S. currency.
The Fund may also use forward currency contracts to hedge against a decline in the value of existing investments denominated
in non-U.S. currency. For example, if the Fund owned securities denominated in Euros, it could enter into a forward currency contract to sell Euros in return for U.S. dollars to hedge against possible declines in the euros value. Such a hedge,
sometimes referred to as a position hedge, would tend to offset both positive and negative currency fluctuations, but would not offset changes in security values caused by other factors. The Fund could also hedge the position by selling
another currency expected to perform similarly to the euro. This type of hedge, sometimes referred to as a proxy hedge, could offer advantages in terms of cost, yield or efficiency, but generally would not hedge currency exposure as
effectively as a simple hedge into U.S. dollars. Proxy hedges may result in losses if the currency used to hedge does not perform similarly to the currency in which the hedged securities are denominated.
The cost to the Fund of engaging in forward currency contracts varies with factors such as the currency involved, the length of the
contract period and the market conditions then prevailing. Because forward currency contracts are usually entered into on a principal basis, no fees or commissions are involved. When the Fund enters into a forward currency contract, it relies on the
counterparty to make or take delivery of the underlying currency at the maturity of the contract. Failure by the counterparty to do so would result in the loss of any expected benefit of the transaction.
As is the case with futures contracts, parties to forward currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures contracts, by selling or purchasing, respectively, an instrument identical to the instrument purchased or sold. Secondary markets generally do not exist for forward currency contracts, with the result that closing
transactions generally can be made for forward currency contracts only by negotiating directly with the counterparty. Thus, there can be no assurance that the Fund will in fact be able to close out a forward currency contract at a favorable price
prior to maturity. In addition, in the event of insolvency of the counterparty, the Fund might be unable to close out a forward currency contract at any time prior to maturity, if at all. In either event, the Fund would continue to be subject to
market risk with respect to the position, and would continue to be required to maintain the required cover. The precise matching of forward currency contract amounts and the value of the securities involved generally will not be possible because the
value of such securities, measured in the non-U.S. currency, will change after the forward currency contract has been established. Thus, the Fund might need to purchase or sell non-U.S. currencies in the spot (cash) market to the extent such
non-U.S. currencies are not covered by forward currency contracts. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. In addition,
although forward currency contracts limit the risk of loss due to a decline in the value of the hedged currencies, at the same time they limit any potential gain that might result should the value of the currencies increase.
Successful use of forward currency contracts depends on an Advisers skill in analyzing and predicting currency values. Forward
currency contracts may substantially change the Funds exposure to changes in currency exchange rates and could result in losses to the Fund if currencies do not perform as the Funds Advisers anticipate. There is no assurance that an
Advisers use of forward currency contracts will be advantageous to the Fund or that the Adviser will hedge at an appropriate time.
Combined Positions.
The Fund may purchase and write options in combination with each other, or in combination with other Financial Instruments, to adjust the risk and return characteristics of its
overall position. For example, the Fund may purchase a put option and write a call option on the same underlying instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract.
Another possible combined position would involve writing a call option at one strike price and buying a call option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.
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Turnover.
The Funds Financial Instrument activities may affect its turnover
rate and brokerage commission payments. For example, the exercise of calls or puts written by the Fund, and the sale or purchase of futures contracts, may cause it to sell or purchase related investments, thus increasing its turnover rate. Once the
Fund has received an exercise notice on an option it has written, it cannot effect a closing transaction in order to terminate its obligation under the option and must deliver or receive the underlying securities at the exercise price. The exercise
of puts purchased by the Fund may also cause the sale of related investments, also increasing turnover; although such exercise is within the Funds control, holding a protective put might cause it to sell the related investments for reasons
that would not exist in the absence of the put. The Fund will pay a brokerage commission each time it buys or sells a put or call or purchases or sells a futures contract. Such commissions may be higher than those that would apply to direct
purchases or sales.
Swaps, Caps, Floors and Collars.
The Fund may enter into swaps, caps, floors and collars to
preserve a return or a spread on a particular investment or portion of its portfolio, to protect against any increase in the price of securities the Fund anticipates purchasing at a later date or to attempt to enhance yield. A swap involves the
exchange by the Fund with another party of their respective commitments to pay or receive cash flows, e.g., an exchange of floating rate payments for fixed-rate payments. The purchase of a cap entitles the purchaser, to the extent that a specified
index exceeds a predetermined value, to receive payments on a notional principal amount from the party selling the cap. The purchase of a floor entitles the purchaser, to the extent that a specified index falls below a predetermined value, to
receive payments on a notional principal amount from the party selling the floor. A collar combines elements of a cap and a floor. The Fund may engage in swap transactions, including, but not limited to, swap agreements on interest rates, security
indexes, specific securities, credit and event-linked swaps and currency exchange rates. The Fund may also enter into options on swap agreements.
Swap agreements, including caps, floors and collars, can be individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on their
structure, swap agreements may increase or decrease the overall volatility of the Funds investments and its share price and yield because, and to the extent, these agreements affect the Funds exposure to long- or short-term interest
rates (in the United States or abroad), non-U.S. currency values, mortgage-backed security values, corporate borrowing rates or other factors such as security prices, certain specified events, index values or inflation rates.
Swap agreements will tend to shift the Funds investment exposure from one type of investment to another. For example, if the Fund
agrees to exchange payments in U.S. dollars for payments in non-U.S. currency, the swap agreement would tend to decrease the Funds exposure to U.S. interest rates and increase its exposure to non-U.S. currency and interest rates. Caps and
floors have an effect similar to buying or writing options.
If a counterpartys creditworthiness declines, the value of
the agreement would be likely to decline, potentially resulting in losses. If a default occurs by the other party to such transaction, the Fund will have contractual remedies pursuant to the agreements related to the transaction, which may be
limited by applicable law in the case of a counterpartys insolvency.
The Fund may enter into credit default swap
contracts for investment purposes and to add leverage to its investment portfolio. As the seller in a credit default swap contract, the Fund would be required to pay the par (or other agreed-upon) value of a referenced debt obligation to the
counterparty in the event of a default by a third party, such as a U.S. or non-U.S. corporate issuer, on the debt obligation. In return, the Fund would receive from the counterparty a periodic stream of payments over the term of the contract
provided that no event of default has occurred. If no default occurs, the Fund would keep the stream of payments and would have no payment obligations. As the seller, the Fund would effectively add leverage to its portfolio because, in addition to
its net assets, the Fund would be subject to investment exposure on the notional amount of the swap.
The Fund may also
purchase credit default swap contracts in order to hedge against the risk of default of debt securities held in its portfolio, in which case the Fund would function as the counterparty referenced in the preceding paragraph. This would involve the
risk that the investment may expire worthless and would only
19
generate income in the event of an actual default by the issuer of the underlying obligation (or, as applicable, a credit downgrade or other indication of financial instability). It would also
involve credit riskthat the seller may fail to satisfy its payment obligations to the Fund in the event of a default.
The net amount of the excess, if any, of the Funds obligations over its entitlements with respect to each swap will be accrued on a
daily basis, depending on whether a threshold amount (if any) is exceeded, and an amount of cash or liquid assets having an aggregate net asset value approximately equal to the accrued excess will be maintained as collateral.
Cover.
Transactions using Financial Instruments, other than purchased options, and certain other transactions, such as reverse
repurchase agreements and certain forward commitments (e.g., forward roll transactions) expose the Fund to an obligation to another party. The Fund will comply with SEC guidelines regarding cover for these instruments and will, if the guidelines so
require, segregate on its books cash or liquid assets in the prescribed amount as determined daily. In some cases, (e.g., with respect to futures and forwards that are contractually required to cash-settle and most swaps), the Fund is
permitted under relevant guidance from the SEC or SEC staff to set aside assets with respect to an investment transaction in the amount of its net (marked-to-market) obligations thereunder, rather than the full notional amount of the transaction. By
setting aside assets equal only to its net obligations, the Fund will have the ability to engage to a greater extent in transactions in Financial Instruments, which may increase the risks associated with such investments. Although this SAI describes
certain permitted methods of segregating assets or otherwise covering such transactions for these purposes, such descriptions are not intended to be comprehensive. The Fund may cover such transactions using other methods currently or in
the future permitted under the 1940 Act, the rules and regulations thereunder, or orders issued by the SEC thereunder. For these purposes, interpretations and guidance provided by the SEC staff may be taken into account when deemed appropriate by
the Fund.
Assets used as cover cannot be sold while the position in the corresponding Financial Instrument is open, unless
they are replaced with other appropriate assets. As a result, the commitment of a large portion of the Funds assets to cover in accounts could impede portfolio management or the Funds ability to meet redemption requests or other current
obligations.
Preferred Stocks and Convertible Securities
A preferred stock pays dividends at a specified rate and has preference over common stock in the payment of dividends and the liquidation of an issuers assets but is junior to the debt securities of
the issuer in those same respects. The market prices of preferred stocks are subject to changes in interest rates and are more sensitive to changes in an issuers creditworthiness than are the prices of debt securities. Shareholders of
preferred stock may suffer a loss of value if dividends are not paid. Under ordinary circumstances, preferred stock does not carry voting rights.
A convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a prescribed amount of common stock (or another equity security) of the
same or a different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to nonconvertible debt securities in that they ordinarily provide a stream of income with generally higher yields than
those of common stocks of the same or similar issuers.
Convertible securities are usually subordinated to comparable-tier
nonconvertible securities but rank senior to common stock in a corporations capital structure.
The value of a
convertible security is a function of (1) its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege and (2) its worth, at market value, if converted into the
underlying common stock. A convertible security may be subject to redemption at the
20
option of the issuer at a price established in the convertible securitys governing instrument. If a convertible security held by the Fund is called for redemption, the Fund will be required
to (1) permit the issuer to redeem the security, (2) convert it into the underlying common stock or (3) sell it to a third party. Any of these actions could have an adverse effect on the Funds ability to achieve its investment
objective.
Debt and Fixed Income Securities
The Fund may invest in a variety of debt and fixed income securities. These securities share three principal risks: First, the level of interest income generated by the Funds fixed income
investments may decline due to a decrease in market interest rates. Thus, when fixed income securities mature or are sold, they may be replaced by lower-yielding investments. Second, their values fluctuate with changes in interest rates. Thus, a
decrease in interest rates will generally result in an increase in the value of the Funds fixed income investments. Conversely, during periods of rising interest rates, the value of the Funds fixed income investments will generally
decline. The magnitude of these fluctuations will generally be greater when the Funds duration or average maturity is longer. Changes in the value of portfolio securities will not affect interest income from those securities, but will be
reflected in the Funds net asset value. In addition, certain fixed income securities are subject to credit risk, which is the risk that an issuer of securities will be unable to pay principal and interest when due, or that the value of the
security will suffer because investors believe the issuer is unable to pay. The most common types of these instruments, and the associated risks, are described below. Subject to its investment policies and applicable law, the Fund may invest in
these and other instruments.
U.S. Government Obligations.
U.S. Government securities include (1) U.S. Treasury
bills (maturity of one year or less), U.S. Treasury notes (maturity of one to ten years) and U.S. Treasury bonds (maturities generally greater than ten years), (2) obligations issued or guaranteed by U.S. Government agencies or
instrumentalities which are supported by any of the following: (a) the full faith and credit of the U.S. Government (such as GNMA certificates); (b) the right of the issuer to borrow an amount limited to a specific line of credit from the
U.S. Government (such as obligations of the Federal Home Loan Banks); (c) the discretionary authority of the U.S. Government to purchase certain obligations of agencies or instrumentalities (such as securities issued by the Federal National
Mortgage Association (Fannie Mae)); or (d) only the credit of the instrumentality (such as securities issued by the Federal Home Loan Mortgage Corporation (Freddie Mac)) and (3) obligations issued by
non-governmental entities (like financial institutions) that carry direct guarantees from U.S. government agencies as part of government initiatives in response to the market crisis or otherwise). In the case of obligations not backed by the full
faith and credit of the United States, the Fund must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the United States itself in the event
the agency or instrumentality does not meet its commitments. Neither the U.S. Government nor any of its agencies or instrumentalities guarantees the market value of the securities they issue. Therefore, the market value of such securities will
fluctuate in response to changes in interest rates.
Variable and floating rate securities.
Variable and floating rate
securities provide for a periodic adjustment in the interest rate paid on the obligations. The terms of such obligations provide that interest rates are adjusted periodically based upon an interest rate adjustment index as provided in the respective
obligations. The adjustment intervals may be regular, and range from daily up to annually, or may be event based, such as based on a change in the prime rate.
The Fund may invest in floating rate debt instruments (floaters) and engage in credit spread trades. The interest rate on a floater is a variable rate which is tied to another interest rate,
such as a corporate bond index or Treasury bill rate. The interest rate on a floater resets periodically, typically every six months. While, because of the interest rate reset feature, floaters provide the Fund with a certain degree of protection
against rising interest rates, the Fund will participate in any declines in interest rates as well. A credit spread trade is an investment position relating to a difference in the prices or interest rates of two bonds or other securities or
currencies, where the value of the investment position is determined by movements in the difference between the prices or interest rates, as the case may be, of the respective securities or currencies.
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The Fund may also invest in inverse floating rate debt instruments (inverse
floaters). The interest rate on an inverse floater resets in the opposite direction from the market rate of interest to which the inverse floater is indexed. An inverse floating rate security may exhibit greater price volatility than a fixed
rate obligation of similar credit quality.
A floater may be considered to be leveraged to the extent that its interest rate
varies by a magnitude that exceeds the magnitude of the change in the index rate of interest. The higher degree of leverage inherent in some floaters is associated with greater volatility in their market values.
With respect to purchasable variable and floating rate instruments, the Advisers will consider the earning power, cash flows and
liquidity ratios of the issuers and guarantors of such instruments and, if the instruments are subject to a demand feature, will monitor their financial status to meet payment on demand. Such instruments may include variable amount master demand
notes that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate. The absence of an active secondary market with respect to particular variable and floating rate instruments could make it
difficult for the Fund to dispose of a variable or floating rate note if the issuer defaulted on its payment obligation or during periods that the Fund is not entitled to exercise its demand rights, and the Fund could, for these or other reasons,
suffer a loss with respect to such instruments. In determining average-weighted portfolio maturity, an instrument will be deemed to have a maturity equal to either the period remaining until the next interest rate adjustment or the time the Fund
involved can recover payment of principal as specified in the instrument, depending on the type of instrument involved.
Inflation-Indexed Securities.
Inflation indexed bonds are fixed income securities whose principal value or coupon (interest
payment) is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the
index-based accruals as part of a semiannual coupon. The Fund may also invest in inflation-indexed securities with other structures or characteristics as such securities become available in the market. It is currently expected that other types of
inflation-indexed securities would have characteristics similar to those described below.
U.S. Treasury Inflation Protected
Securities (U.S. TIPS) are fixed income securities issued by the U.S. Department of Treasury, the principal amounts of which are adjusted daily based upon changes in the rate of inflation (currently represented by the non-seasonally
adjusted Consumer Price Index for All Urban Consumers (CPI-U), calculated with a three-month lag). The U.S. Department of Treasury issues U.S. TIPS in maturities of five, ten and thirty years. U.S. TIPS pay interest on a semi-annual
basis, equal to a fixed percentage of the inflation-adjusted principal amount. The interest rate on these bonds is fixed at issuance, but over the life of the bond this interest may be paid on an increasing or decreasing principal value that has
been adjusted for inflation.
Repayment of the original bond principal upon maturity (as adjusted for inflation) is
guaranteed for U.S. TIPS, even during a period of deflation. However, because the principal amount of U.S. TIPS would be adjusted downward during a period of deflation, the Fund will be subject to deflation risk with respect to its investments in
these securities. In addition, the current market value of the bonds is not guaranteed, and will fluctuate. If the Fund purchases U.S. TIPS in the secondary market whose principal values have been adjusted upward due to inflation since issuance, the
Fund may experience a loss if there is a subsequent period of deflation. The Fund may also invest in other inflation-related bonds which may or may not provide a guarantee of principal. If a guarantee of principal is not provided, the adjusted
principal value of the bond repaid at maturity may be less than the original principal amount.
The value of
inflation-indexed bonds is expected to fluctuate in response to changes in real interest rates, which are in turn tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if inflation were to rise at a faster
rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise,
leading to a decrease in value of inflation indexed bonds. Although the
22
principal value of these securities declines in periods of deflation, holders at maturity receive no less than par. If inflation is lower than expected during the period the Fund holds the
security, the Fund may earn less on the security than on a conventional bond. Any increase in principal value is taxable in the year the increase occurs, even though holders do not receive cash representing the increase at that time. As a result,
the Fund investing in inflation-indexed securities could be required at times to liquidate other investments, including when it is not advantageous to do so, in order to satisfy its distribution requirements as a regulated investment company and to
eliminate any fund-level income tax liability under the Code.
While these securities are expected to be protected from
long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bonds inflation measure.
The U.S. Treasury
began issuing inflation-indexed bonds in 1997. Certain non-U.S. governments, such as the United Kingdom, Canada and Australia, have a longer history of issuing inflation indexed bonds, and there may be a more liquid market in certain of these
countries for these securities. The Fund may invest in inflation-indexed securities issued in any country.
The periodic
adjustment of U.S. TIPS is currently tied to the CPI-U, which is calculated by the U.S. Department of Treasury. The CPI-U is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy.
Inflation-indexed bonds issued by a non-U.S. government are generally adjusted to reflect a comparable inflation index, calculated by that government. There can no assurance that the CPI-U or any non-U.S. inflation index will accurately measure the
real rate of inflation in the prices of goods and services. In addition, there can be no assurance that the rate of inflation in a non-U.S. country will be correlated to the rate of inflation in the United States. The three-month lag in calculating
the CPI-U for purposes of adjusting the principal value of U.S. TIPS may give rise to risks under certain circumstances.
Mortgage-Related Securities.
Mortgage-related securities represent an interest in a pool of mortgages made by lenders such as
commercial banks, savings and loan institutions, mortgage bankers and others. Mortgage-related securities may be issued by governmental, government-related or non-governmental entities, and provide regular payments which consist of interest and, in
most cases, principal. In contrast, other forms of debt securities normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. In effect, payments on mortgage-related securities are
a pass-through of the payments made by the individual borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments to holders of mortgage-related securities are caused by
repayments resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs that may be incurred.
As prepayment rates of individual pools of mortgage loans vary widely, it is not possible to predict accurately the average life of a particular security. Although mortgage-related securities are issued
with stated maturities of up to forty years, unscheduled or early payments of principal and interest on the underlying mortgages may shorten considerably the securities effective maturities. The volume of prepayments of principal on a pool of
mortgages underlying a particular mortgage-related security will influence the yield of that security, and the principal returned to the Fund may be reinvested in instruments whose yield may be higher or lower than that which might have been
obtained had such prepayments not occurred. When interest rates are declining, such prepayments usually increase, and reinvestments of such principal prepayments will be at a lower rate than that on the original mortgage-related security. An
increase in mortgage prepayments could cause the Fund to incur a loss on a mortgage-related security that was purchased at a premium. On the other hand, a decrease in the rate of prepayments, resulting from an increase in market interest rates or
other causes, may extend the effective maturities of mortgage-related securities, increasing their sensitivity to changes in market interest rates and potentially increasing the volatility of the Funds shares. The rate of prepayment may also
be affected by general economic conditions, the location and age of the mortgages, and other social and demographic conditions. In determining the average maturity or duration of a mortgage-related security, the Funds Advisers must apply
23
certain assumptions and projections about the maturity and prepayment of such security; actual prepayment rates may differ. Because of prepayments, mortgage-related securities may have less
potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities, although they may have a similar risk of decline in market value during periods of rising interest rates.
Pools often consist of whole mortgage loans or participations in loans. The majority of these loans are made to purchasers of one- to
four-family homes. The terms and characteristics of the mortgage instruments are generally uniform within a pool but may vary among pools. For example, in addition to fixed-rate, fixed-term mortgages, the Fund may purchase pools of variable-rate
mortgages, growing-equity mortgages, graduated-payment mortgages and other types.
All poolers apply standards for
qualification to lending institutions that originate mortgages for the pools. Poolers also establish credit standards and underwriting criteria for individual mortgages included in the pools. In addition, many mortgages included in pools are insured
through private mortgage insurance companies.
The average life of mortgage-related securities varies with the maturities and
the nature of the underlying mortgage instruments. For example, securities issued by the Government National Mortgage Association (GNMA) tend to have a longer average life than participation certificates (PCs) issued by the
Federal Home Loan Mortgage Corporation (FHLMC) because there is a tendency for the conventional and privately-insured mortgages underlying FHLMC PCs to repay at faster rates than the Federal Housing Administration and Veterans
Administration loans underlying GNMAs. In addition, the term of a security may be shortened by unscheduled or early payments of principal and interest on the underlying mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the location and age of the mortgage and other social and demographic conditions.
Yields on mortgage-related securities are typically quoted based on the maturity of the underlying instruments and the associated average life assumption. Actual prepayment experience may cause the yield
to differ from the yield expected on the basis of average life. Reinvestment of the prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yield of the Fund. The compounding effect from reinvestments
of monthly payments received by the Fund will increase the yield to shareholders compared to bonds that pay interest semi-annually.
Government Mortgage-Related Securities.
GNMA is the principal federal government guarantor of mortgage-related securities. GNMA is a wholly owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA pass-through securities are considered to have a relatively low risk of default in that (1) the underlying mortgage loan portfolio is comprised entirely of government-backed loans and (2) the timely
payment of both principal and interest on the securities is guaranteed by the full faith and credit of the U.S. Government, regardless of whether they have been collected. GNMA pass-through securities are, however, subject to the same interest rate
risk as comparable debt securities. Therefore, the effective maturity and market value of the Funds GNMA securities can be expected to fluctuate in response to changes in interest rate levels.
Residential mortgage loans are also pooled by Freddie Mac, a corporate instrumentality of the U.S. Government. The mortgage loans in
Freddie Macs portfolio are not government backed; Freddie Mac, not the U.S. Government, guarantees the timely payment of interest and ultimate collection of principal on Freddie Mac securities. Freddie Mac also issues guaranteed mortgage
certificates, on which it guarantees semiannual interest payments and a specified minimum annual payment of principal.
Fannie
Mae is a government-sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. Fannie Mae purchases residential mortgages from a list of approved
seller/servicers, which include savings and loan associations, savings banks, commercial banks, credit unions and mortgage bankers. Pass-through securities issued by Fannie Mae are guaranteed as to timely payment of principal and interest only by
Fannie Mae, not the U.S. Government.
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Privately Issued Mortgage-Related Securities.
Mortgage-related securities offered by
private issuers include pass-through securities comprised of pools of residential mortgage loans; mortgage-backed bonds which are considered to be debt obligations of the institution issuing the bonds and are collateralized by mortgage loans; and
bonds and collateralized mortgage obligations (CMOs) which are collateralized by mortgage-related securities issued by Freddie Mac, Fannie Mae or GNMA or by pools of mortgages.
CMOs are typically structured with classes or series that have different maturities and are generally retired in sequence. Each class of
obligations receives periodic interest payments according to the coupon rate on the obligations. However, all monthly principal payments and any prepayments from the collateral pool are generally paid first to the Class 1 holders.
Thereafter, all payments of principal are generally allocated to the next most senior class of obligations until that class of obligations has been fully repaid. Although full payoff of each class of obligations is contractually required by a
certain date, any or all classes of obligations may be paid off sooner than expected because of an increase in the payoff speed of the pool. Other allocation methods may be used. Payment of interest or principal on some classes or series of a CMO
may be subject to contingencies or some classes or series may bear some or all of the risk of default on the underlying mortgages.
Mortgage-related securities created by non-governmental issuers generally offer a higher rate of interest than government and government-related securities because there are no direct or indirect
government guarantees of payment in the former securities, resulting in higher risks. Where privately issued securities are collateralized by securities issued by Freddie Mac, Fannie Mae or GNMA, the timely payment of interest and principal is
supported by the government-related securities collateralizing such obligations. The market for conventional pools is smaller and less liquid than the market for the government and government-related mortgage pools.
Certain private mortgage pools are organized in such a way that the SEC staff considers them to be closed-end investment companies. The
Funds investment in such pools may be constrained by federal statute, which restricts investments in the shares of other investment companies.
The private mortgage-related securities in which the Fund may invest include non-U.S. mortgage pass-through securities (Non-U.S. Pass-Throughs), which are structurally similar to the
pass-through instruments described above. Such securities are issued by originators of and investors in mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, investment bankers, specialized financial
institutions and special purpose subsidiaries of the foregoing. Non-U.S. Pass-Throughs usually are backed by a pool of fixed rate or adjustable-rate mortgage loans. Certain Non-U.S. Pass-Throughs in which the Fund invests typically are not
guaranteed by an entity having the credit status of GNMA, but generally utilize various types of credit enhancement.
Asset-Backed Securities.
Asset-backed securities refer to securities that directly or indirectly represent a participation in, or
are secured by and payable from, assets such as motor vehicle installment sales, installment loan contracts, leases of various types of real and personal property and receivables from revolving credit (credit card) agreements.
Such assets are generally securitized through the use of trusts or special purpose corporations. Asset-backed securities are backed by a
pool of assets representing the obligations often of a number of different parties. Certain of such securities may be illiquid.
The principal on asset-backed securities, like that on mortgage-backed securities, may be prepaid at any time. As a result, if such
securities are purchased at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower than expected will have the opposite effect. Conversely, if the securities are purchased at a
discount, prepayments faster than expected will increase yield to maturity and prepayments slower than expected will decrease it. Accelerated prepayments also reduce the certainty of the yield because the Fund must reinvest the assets at the
then-current rates. Accelerated prepayments on securities purchased at a premium also impose a risk of loss of principal. On the other hand, a
25
decrease in the rate of prepayments may extend the effective maturities of the securities, increasing their sensitivity to changes in market interest rates and potentially increasing the
volatility of the Funds shares. The rate of prepayment may also be affected by general economic conditions and other social and demographic conditions.
Each type of asset-backed security also entails unique risks depending on the type of assets involved and the legal structure used. For example, credit card receivables are generally unsecured obligations
of the credit card holder and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There have also been proposals to cap the interest rate that a credit card issuer may charge. In some transactions, the value of the asset-backed security is dependent on the performance of a third party acting as credit enhancer or
servicer. Furthermore, in some transactions (such as those involving the securitization of vehicle loans or leases) it may be administratively burdensome to perfect the interest in the underlying collateral, and the underlying collateral may become
damaged or stolen.
Most issuers of automobile receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large
number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. The market experience in asset-backed securities is limited; therefore, the markets
ability to sustain liquidity through all phases of the market cycle is not certain.
Municipal Obligations.
Municipal
obligations include obligations issued to obtain funds for various public purposes, including constructing a wide range of public facilities, such as bridges, highways, housing, hospitals, mass transportation, schools and streets. Other public
purposes for which municipal obligations may be issued include the refunding of outstanding obligations, the obtaining of funds for general operating expenses and the making of loans to other public institutions and facilities. In addition, certain
types of industrial development bonds (IDBs) and private activity bonds (PABs) are issued by or on behalf of public authorities to finance various privately operated facilities, including certain pollution control facilities,
convention or trade show facilities, and airport, mass transit, port or parking facilities.
Municipal obligations also
include short-term tax anticipation notes, bond anticipation notes, revenue anticipation notes and other forms of short-term debt obligations. Such notes may be issued with a short-term maturity in anticipation of the receipt of tax payments, the
proceeds of bond placements or other revenues. Municipal obligations also include municipal lease obligations and certificates of participation. Municipal lease obligations, which are issued by state and local governments to acquire land, equipment
and facilities, typically are not fully backed by the municipalitys credit, and, if funds are not appropriated for the following years lease payments, a lease may terminate, with the possibility of default on the lease obligation and
significant loss to the Fund. Certificates of participation are participations in municipal lease obligations or installment sales contracts. Each certificate represents a proportionate interest in or right to the payments made.
The two principal classifications of municipal obligations are general obligation and revenue bonds.
General obligation bonds are secured by the issuers pledge of its faith, credit and taxing power. Revenue bonds are payable only from the revenues derived from a particular facility or class of facilities or from the
proceeds of a special excise tax or other specific revenue source such as the corporate user of the facility being financed. IDBs and PABs are usually revenue bonds and are not payable from the unrestricted revenues of the issuer. The credit quality
of IDBs and PABs is usually directly related to the credit standing of the corporate user of the facilities.
26
The ability of state, county or local governments to meet their obligations will depend
primarily on the availability of tax and other revenues to those governments and on their fiscal conditions generally. The amounts of tax and other revenues available to governmental issuers may be affected from time to time by economic, political
and demographic conditions within or outside of the particular state. In addition, constitutional or statutory restrictions may limit a governments power to raise revenues or increase taxes.
The availability of federal, state and local aid to issuers of municipal securities may also affect their ability to meet their
obligations. Payments of principal and interest on revenue bonds will depend on the economic condition of the facility or specific revenue source from whose revenues the payments will be made. The facilitys economic status, in turn, could be
affected by economic, political and demographic conditions affecting the particular state.
Collateralized Debt
Obligations.
The Fund may invest in collateralized debt obligations (CDOs), which include collateralized bond obligations (CBOs), collateralized loan obligations (CLOs) and other similarly structured
securities. CDOs are types of asset-backed securities. A CBO is a trust or other special purpose entity (SPE) which is typically backed by a diversified pool of fixed income securities (which may include high risk, below investment grade
securities). A CLO is a trust or other SPE that is typically collateralized by a pool of loans, which may include, among others, domestic and non-U.S. senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans
that may be rated below investment grade or equivalent unrated loans. Although certain CDOs may receive credit enhancement in the form of a senior-subordinate structure, over-collateralization or bond insurance, such enhancement may not always be
present, and may fail to protect the Fund against the risk of loss on default of the collateral. Certain CDOs may use derivatives contracts to create synthetic exposure to assets rather than holding such assets directly, which entails
the risks of derivative instruments described elsewhere in this SAI. CDOs may charge management fees and administrative expenses, which are in addition to those of the Fund.
For both CBOs and CLOs, the cashflows from the SPE are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion is the equity tranche, which bears the
first loss from defaults from the bonds or loans in the SPE and serves to protect the other, more senior tranches from default (though such protection is not complete). Since it is partially protected from defaults, a senior tranche from a CBO or
CLO typically has higher ratings and lower yields than its underlying securities, and may be rated investment grade. Despite the protection from the equity tranche, CBO or 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, as well as investor aversion to CBO or CLO securities as a class. Interest on certain tranches of a CDO may be
paid in kind (paid in the form of obligations of the same type rather than cash), which involves continued exposure to default risk with respect to such payments.
The risks of an investment in a CDO depend largely on the type of the collateral securities and the class of the CDO in which the Fund invests. Normally, CBOs, CLOs and other CDOs are privately offered
and sold, and thus, are not registered under the securities laws. As a result, investments in CDOs may be characterized by the Fund as illiquid securities. However, an active dealer market may exist for CDOs, allowing a CDO to qualify for Rule 144A
transactions. In addition to the normal risks associated with fixed income securities discussed elsewhere in this SAI and the Prospectus (e.g., interest rate risk and credit risk), CDOs carry additional risks including, but not limited to:
(i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or default; (iii) the Fund may invest in tranches of
CDOs that are subordinate to other tranches; (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results; and (v) the CDOs
manager may perform poorly or defalcate.
Corporate Debt Securities.
The Fund may invest in debt securities
(
i.e
., bonds, debentures, notes and other similar debt instruments) of domestic or non-U.S. non-governmental issuers which meet the minimum credit quality criteria, if any, set forth for the Fund. Corporate debt securities may pay fixed or
variable rates of interest,
27
or interest at a rate contingent upon some other factor, such as the price of some commodity. These securities may include warrants, may be convertible into preferred or common equity, or may be
bought as part of a unit containing common stock.
Lower-Rated Securities.
Non-investment grade securities are
described as speculative by Moodys and S&P and may be subject to greater market fluctuations and greater risk of loss of income or principal, including a greater possibility of default or bankruptcy of the issuer of such
securities, than are more highly rated debt securities. Such securities are commonly referred to as junk bonds. The Funds Adviser seeks to minimize the risks of investing in all securities through diversification, in-depth credit
analysis and attention to current developments in interest rates and market conditions and will monitor the ratings of securities held by the Fund and the creditworthiness of their issuers. If the rating of a security in which the Fund has invested
falls below the minimum rating in which the Fund is permitted to invest, the Fund will either dispose of that security within a reasonable time or hold the security for so long as the Funds Adviser determines appropriate, having due regard for
market conditions, tax implications and other applicable factors.
A lower-rated debt security may be callable, i.e., subject
to redemption at the option of the issuer at a price established in the securitys governing instrument. If a debt security held by the Fund is called for redemption, the Fund will be required to permit the issuer to redeem the security or sell
it to a third party. Either of these actions could have an adverse effect on the Funds ability to achieve its investment objective because, for example, the Fund may be able to reinvest the proceeds only in securities with lower yields or may
receive a price upon sale that is lower than it would have received in the absence of the redemption. If the Fund experiences unexpected net redemptions, it may be forced to sell its higher-rated securities, resulting in a decline in the overall
credit quality of the Funds investment portfolio and increasing the exposure of the Fund to the risks of lower-rated securities.
At certain times in the past, the prices of many lower-rated securities declined, indicating concerns that issuers of such securities might experience financial difficulties. At those times, the yields on
lower-rated securities rose dramatically, reflecting the risk that holders of such securities could lose a substantial portion of their value as a result of the issuers financial restructuring or default. There can be no assurance that such
declines will not recur. The ratings of Moodys, S&P or other NRSROs represent the opinions of those agencies as to the quality of the debt securities that they rate. Such ratings are relative and subjective, and are not absolute standards
of quality. Unrated debt securities are not necessarily of lower quality than rated securities, but they may not be attractive to as many buyers. The Funds Advisers will consider a securitys quality and credit rating when determining
whether such security is an appropriate investment. Subject to its investment objective, policies and applicable law, the Fund may purchase a security with the lowest rating.
The market for lower-rated securities may be thinner and less active than that for higher-rated securities, which can adversely affect the prices at which these securities can be sold, and may make it
difficult for the Fund to obtain market quotations daily. If market quotations are not available, these securities will be valued by a method that the Advisers or their affiliates (acting under authority of the Board of Directors) believe accurately
reflects fair market value. Judgment may play a greater role in valuing lower-rated debt securities than is the case with respect to securities for which a broader range of dealer quotations and last-sale information is available. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of lower-rated securities, especially in a thinly traded market.
Although the prices of lower-rated bonds are generally less sensitive to interest rate changes than are higher-rated bonds, the prices of
lower-rated bonds may be more sensitive to adverse economic changes and developments regarding the individual issuer. Although the market for lower-rated debt securities is not new, and the market has previously weathered economic downturns, there
has been in recent years a substantial increase in the use of such securities to fund corporate acquisitions and restructurings. Accordingly, the past performance of the market for such securities may not be an accurate indication of its performance
during future economic downturns or periods of rising interest rates. When economic conditions appear to be deteriorating, medium- to
28
lower-rated securities may decline in value due to heightened concern over credit quality, regardless of the prevailing interest rates. Investors should carefully consider the relative risks of
investing in high yield securities and understand that such securities are not generally meant for short-term investing.
Adverse economic developments can disrupt the market for lower-rated securities and severely affect the ability of issuers, especially
highly leveraged issuers, to service their debt obligations or to repay their obligations upon maturity, which may lead to a higher incidence of default on such securities. Lower-rated securities are especially affected by adverse changes in the
industries in which the issuers are engaged and by changes in the financial condition of the issuers. Highly leveraged issuers may also experience financial stress during periods of rising interest rates. In addition, the secondary market for
lower-rated securities, which is concentrated in relatively few market makers, may not be as liquid as the secondary market for more highly rated securities. As a result, the Fund could find it more difficult to sell these securities or may be able
to sell the securities only at prices lower than if such securities were widely traded.
Stripped Mortgage-Backed
Securities.
Stripped mortgage-backed securities (SMBS) are derivative multi-class mortgage securities. SMBS may be issued by agencies or instrumentalities of the U.S. Government, or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing.
SMBS are created by separating bonds into their principal and interest components and selling each piece separately (commonly referred to as IOs and POs). The yield to maturity on an IO or PO class of
stripped mortgage-backed securities is extremely sensitive not only to changes in prevailing interest rates but also to the rate of principal payments (including prepayments) on the underlying assets. A rapid rate of principal prepayments may have a
measurably adverse effect on the Funds yield to maturity to the extent it invests in IOs. If the assets underlying the IOs experience greater than anticipated prepayments of principal, the Fund may fail to recoup fully its initial investment
in these securities. Conversely, POs tend to increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. The secondary market for stripped securities may be more volatile and less liquid than
that for other securities, potentially limiting the Funds ability to buy or sell those securities at any particular time.
Although SMBS are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers,
these securities were developed fairly recently. As a result, established trading markets have not yet developed and, accordingly, these securities may be deemed illiquid.
Zero Coupon and Pay-In-Kind Securities.
A zero coupon bond is a security that makes no fixed interest payments but instead is sold at a discount from its face value. The bond is redeemed at its
face value on the specified maturity date. Zero coupon bonds may be issued as such, or they may be created by a broker who strips the coupons from a bond and separately sells the rights to receive principal and interest. The prices of zero coupon
bonds tend to fluctuate more in response to changes in market interest rates than do the prices of interest-paying debt securities with similar maturities. The Fund generally accrues income on zero coupon bonds prior to the receipt of cash payments.
Since the Fund must distribute substantially all of its income to shareholders to qualify as a regulated investment company under federal income tax law, to the extent the Fund invests in zero coupon bonds it may have to dispose of other securities,
including at times when it may be disadvantageous to do so, to generate the cash necessary for the distribution of income attributable to its zero coupon bonds. Pay-in-kind securities have characteristics similar to those of zero coupon securities,
but interest on such securities may be paid in the form of obligations of the same type rather than cash.
Commercial Paper and Other
Short-Term Investments
The Fund may invest or hold cash or other short-term investments, including commercial paper.
Commercial paper represents short-term unsecured promissory notes issued in bearer form by banks or bank holding companies, corporations and finance companies. The Fund may purchase commercial paper issued
29
pursuant to the private placement exemption in Section 4(2) of the Securities Act of 1933. Section 4(2) paper is restricted as to disposition under federal securities laws in that any
resale must similarly be made in an exempt transaction. The Fund may or may not regard such securities as illiquid, depending on the circumstances of each case.
The Fund may also invest in obligations (including certificates of deposit, demand and time deposits and bankers acceptances) of banks and savings and loan institutions. While domestic bank deposits
may be insured by an agency of the U.S. Government, the Fund would generally assume positions considerably in excess of the insurance limits.
Loan Participations and Assignments
The purchase of loan participations and assignments entails special risks. The Funds ability to receive payments of principal and interest and other amounts in connection with loan participations
and assignments will depend primarily on the financial condition of the borrower. The failure by the Fund to receive scheduled interest or principal payments on a loan participation or assignment would adversely affect the income of the Fund and
would likely reduce the value of its assets. Because loan participations are not generally rated by independent credit rating agencies, a decision by the Fund to invest in a particular loan participation will depend almost exclusively on the
Advisers credit analysis of the borrower and lender. In addition to the other risks associated with investments in debt securities, participations and assignments involve the additional risk that the insolvency of any financial institution
interposed between the Fund and the borrower could delay or prevent the flow of payments from the borrower on the underlying loan. The Fund may have limited rights to enforce the terms of the underlying loan, and the liquidity of loan participations
and assignments may be limited.
The Fund will assume the credit risk of both the borrower and the lender that is selling any
participation that the Fund invests in. 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 my not benefit from any set-off between the lender and borrower.
The borrower of a loan in which the Fund holds a participation interest may, either at its own election or pursuant to terms
of the loan documentation, prepay amounts of the loan from time to time. There is no assurance that the Fund will be able to reinvest the proceeds of any loan prepayment at the same interest rate or on the same terms as those of the original loan
participation.
Corporate loans in which the Fund may purchase a loan participation or assignment are made generally to
finance internal growth, mergers, acquisitions, stock repurchases, leveraged buy-outs, and other corporate activities. The highly leveraged capital structure of the borrowers in certain of these transactions may make such loans especially vulnerable
to adverse changes in economic or market conditions.
Certain of the loan participations or assignments acquired by the Fund
may involve unfunded commitments of the lenders or revolving credit facilities under which a borrower may from time to time borrow and repay amounts up to the maximum amount of the facility. In such cases, the Fund would have an obligation to
advance its portion of such additional borrowings upon the terms specified in the loan documentation.
Indexed Securities and Structured
Notes
The values of indexed securities and structured notes are linked to currencies, other securities, interest rates,
commodities, indices or other financial indicators (reference instruments). These instruments differ from other types of debt securities in several respects. The interest rate or principal amount payable at maturity may vary based on
changes in one or more specified reference instruments, such as a floating interest rate compared with a fixed interest rate or the currency exchange rates between two currencies (neither of which need be the currency in which the instrument is
denominated). An indexed security or structured note may be positively or negatively indexed; that is, its value or interest rate may increase or decrease if the value of the reference instrument
30
increases. Further, the change in the principal amount payable with respect to, or the interest rate of, an indexed security or structured note may be a multiple of the percentage change
(positive or negative) in the value of the underlying reference instrument(s).
Investment in indexed securities and
structured notes involves certain risks, including the credit risk of the issuer and the normal risks of price changes in response to changes in interest rates. Further, in the case of certain indexed securities or structured notes, a decline in the
reference instrument may cause the interest rate to be reduced to zero, and any further declines in the reference instrument may then reduce the principal amount payable on maturity. Finally, these securities may be less liquid than other types of
securities, and may be more volatile than their underlying reference instruments.
Forward Commitments
The Fund may enter into commitments to purchase securities on a forward commitment basis, including purchases on a
when-issued basis or a to be announced basis. When such transactions are negotiated, certain terms may be fixed at the time the commitment is made, but delivery and payment for the securities takes place at a later date. Such
securities are often the most efficiently priced and have the best liquidity in the bond market. During the period between a commitment and settlement, no payment is made by the purchaser for the securities purchased and, thus, no interest accrues
to the purchaser from the transaction. In a to be announced transaction, the Fund commits to purchase securities for which all specific information is not yet known at the time of the trade, particularly the exact face amount in forward
commitment mortgage-backed securities transactions.
The Fund may sell the securities subject to a forward commitment
purchase, which may result in a gain or loss. When the Fund purchases securities on a forward commitment basis, it assumes the risks of ownership, including the risk of price fluctuation, at the time of purchase, not at the time of receipt.
Purchases of forward commitment securities also involve a risk of loss if the seller fails to deliver after the value of the securities has risen. Depending on market conditions, the Funds forward commitment purchases could cause its net asset
value to be more volatile.
The Fund may also enter into a forward commitment to sell securities it owns. The use of forward
commitments enables the Fund to hedge against anticipated changes in interest rates and prices. In a forward sale, the Fund does not participate in gains or losses on the security occurring after the commitment date. Forward commitments to sell
securities also involve a risk of loss if the seller fails to take delivery after the value of the securities has declined.
Forward commitment transactions involve additional risks similar to those associated with investments in options and futures contracts.
See Risks of Futures Contracts and Options Thereon.
Restricted and Illiquid Securities
Restricted securities are securities subject to legal or contractual restrictions on their resale, such as private placements. Such
restrictions might prevent the sale of restricted securities at a time when the sale would otherwise be desirable. To the extent required by applicable law and SEC guidance, no securities for which there is not a readily available market
(illiquid securities) will be acquired by the Fund if such acquisition would cause the aggregate value of illiquid securities to exceed 15% of the Funds net assets. An illiquid security is any security which may not be sold or
disposed of in the ordinary course of business within seven days at approximately the value at which the fund has valued the security.
Under SEC regulations, certain securities acquired through private placements can be traded freely among qualified purchasers. The SEC has stated that an investment companys board of directors, or
its investment adviser acting under authority delegated by the board, may determine that a security eligible for trading under this rule is liquid. The Fund intends to rely on this rule, to the extent appropriate, to deem specific
securities
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acquired through private placement as liquid. The Board has delegated to the Funds Advisers the responsibility for determining whether a particular security eligible for trading
under this rule is liquid. Investing in these restricted securities could have the effect of increasing the Funds illiquidity if qualified purchasers become, for a time, uninterested in buying these securities.
Restricted securities may be sold only (1) pursuant to SEC Rule 144A or another exemption, (2) in privately negotiated
transactions or (3) in public offerings with respect to which a registration statement is in effect under the Securities Act of 1933, as amended. Rule 144A securities, although not registered in the U.S., may be sold to qualified institutional
buyers in accordance with Rule 144A under the Securities Act of 1933, as amended. As noted above, the Advisers, acting pursuant to guidelines established by the Board of Directors, may determine that some Rule 144A securities are liquid for purposes
of limitations on the amount of illiquid investments the Fund may own. Where registration is required, the Fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to
sell and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Fund might obtain a less favorable price than prevailed when it
decided to sell.
Illiquid securities may be difficult to value, and the Fund may have difficulty disposing of such securities
promptly. The Fund does not consider non-U.S. securities to be restricted if they can be freely sold in the principal markets in which they are traded, even if they are not registered for sale in the U.S.
Equity Securities
The
Fund may directly or indirectly invest its assets in equity securities. Among other risks, prices of equity securities generally fluctuate more than those of other securities. The Fund may experience a substantial or complete loss on an individual
stock. These risks may affect a single issuer, industry, or section of the economy or may affect the market as a whole.
Securities of
Other Investment Companies
Investments in other investment companies may involve the payment of substantial premiums above
the net asset value of such issuers portfolio securities, and the total return on such investments will be reduced by the operating expenses and fees of such investment companies, including advisory fees. These fees would be in addition to any
fees paid by the Fund. The Fund may invest in both closed-end and open-end investment companies.
Reverse Repurchase Agreements and Forward
Roll Transactions
A reverse repurchase agreement is a portfolio management technique in which the Fund temporarily
transfers possession of a portfolio instrument to another person, such as a financial institution or broker-dealer, in return for cash. At the same time, the Fund agrees to repurchase the instrument at an agreed upon time (normally within seven
days) and price, including an interest payment. While engaging in reverse repurchase agreements, the Fund will cover its commitment under these instruments by the segregation of liquid assets or by entering into offsetting transactions or owning
positions covering its obligations. Reverse repurchase agreements may expose the Fund to greater fluctuations in the value of its assets and render the segregated assets unavailable for sale or other disposition. Reverse repurchase agreements have
characteristics like borrowings.
The Fund may also enter into forward roll transactions in which the Fund sells a fixed
income security for delivery in the current month and simultaneously contracts to purchase substantially similar (same type, coupon and maturity) securities at an agreed upon future time. By engaging in the forward roll transaction the Fund forgoes
principal and interest paid on the security that is sold, but receives the difference between the current sales price and the forward price for the future purchase. The Fund would also be able to earn interest on the income that is received from the
initial sale.
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The obligation to purchase securities on a specified future date involves the risk that the
market value of the securities that the Fund is obligated to purchase may decline below the purchase price. In addition, in the event the other party to the transaction files for bankruptcy, becomes insolvent or defaults on its obligation, the Fund
may be adversely affected.
Borrowing
The Fund may use borrowed money for any purpose permitted by the 1940 Act. Borrowing by the Fund allows it to leverage its portfolio, which exposes it to certain risks. The value of an investment in the
Fund will be more volatile and all other risks will tend to be compounded.
The 1940 Act requires the Fund to maintain
continuous asset coverage (that is, total assets less liabilities other than the borrowing and other senior securities) of at least 300% of the amount borrowed. If the asset coverage should decline below 300% as a result of market fluctuations or
for other reasons, the Fund may be required to sell some of its holdings within three days to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time.
Borrowing may increase the effect on net asset value of any increase or decrease in the market value of the Fund. See Additional Information on page 2 for circumstances under which certain investment transactions will not be deemed to be
borrowings.
Money borrowed will be subject to interest costs, which may or may not be recovered by appreciation of the
securities purchased. The Fund also may be required to maintain minimum average balances in connection with such borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate. The Fund may enter into reverse repurchase agreements and forward roll transactions as a method of borrowing.
Recent Market Events
The fixed-income markets are experiencing a period of
extreme volatility which has negatively impacted market liquidity conditions. Initially, the concerns on the part of market participants were focused on the sub-prime segment of the mortgage-backed securities market. However, these concerns have
since expanded to include a broad range of mortgage-and asset-backed and other fixed income securities (including those rated investment grade), the U.S. and international credit and interbank money markets generally, and a wide range of financial
institutions and markets, asset classes and sectors. As a result, fixed income instruments are experiencing liquidity issues, increased price volatility, credit downgrades, and increased credit spreads and risk of default. Securities that are less
liquid are more difficult to value and may be hard to dispose of. Domestic and international equity markets have also been experiencing heightened volatility and turmoil, with issuers that have exposure to the real estate, mortgage and credit
markets particularly affected. During times of market turmoil, investors tend to look to the safety of securities issued or backed by the U.S. Treasury, causing the prices of these securities to rise, and the yield to decline. These events and the
continuing market upheavals may have an adverse effect on the Fund.
Loans of Portfolio Securities
The Fund may lend its portfolio securities, provided that cash or equivalent collateral, equal to at least 100% of the market value of
such securities, is continuously maintained by the other party with the Fund. During the pendency of the transaction, the other party will pay the Fund an amount equivalent to any dividends or interest paid on such securities, and the Fund may
invest the cash collateral and earn additional income, or it may receive an agreed upon amount of interest income from the other party who has delivered equivalent collateral. These transactions are subject to termination at the option of the Fund
or the other party. The Fund may pay administrative and custodial fees in connection with these transactions and may pay a negotiated portion of the interest earned on the cash or equivalent collateral to the other party or placing agent or broker.
Although voting rights or rights to consent with respect to the relevant securities generally pass to the other party, the Fund will
33
make arrangements to vote or consent with respect to a material event affecting such securities. SEC guidance currently states that the Fund may loan securities equal in value to no more than one
third of its total asset value, including collateral received in connection with such transactions (at market value computed at the time of the transaction). The risks in lending portfolio securities include possible delay in recovery of the
securities or possible loss of rights in the collateral should the borrower fail financially. The Fund runs the risk that the counterparty to a loan transaction will default on its obligation and that the value of the collateral received may decline
before the Fund can dispose of it. Subject to the foregoing, loans of fund securities are effectively borrowings by the Fund and have economic characteristics similar to reverse repurchase agreements.
Duration
For the
simplest fixed income securities, duration indicates the average time at which the securitys cash flows are to be received. For simple fixed income securities with interest payments occurring prior to the payment of principal,
duration is always less than maturity. For example, a current coupon bullet bond with a maturity of 3.5 years (
i.e
., a bond that pays interest at regular intervals and that will have a single principal payment of the entire
principal amount in 3.5 years) might have a duration of approximately three years. In general, the lower the stated or coupon rate of interest of a fixed income security, the closer its duration will be to its final maturity; conversely, the higher
the stated or coupon rate of interest of a fixed income security, the shorter its duration will be compared to its final maturity.
Determining duration becomes more complex when fixed income security features like floating or adjustable coupon payments, optionality (for example, the right of the issuer to prepay or call the
security), and structuring (for example, the right of the holders of certain securities to receive priority as to the issuers cash flows) are considered. The calculation of effective duration attempts to take into account
optionality and other complex features. Generally, the longer the effective duration of a security, the greater will be the expected change in the percentage price of the security with respect to a change in the securitys own yield. By way of
illustration, a security with an effective duration of 3.5 years might normally be expected to go down in price by 35 basis points (bps; 100 basis points = 1%) if its yield goes up by 10 bps, while another security with an effective
duration of 4.0 years might normally be expected to go down in price by 40 bps if its yield goes up by 10 bps.
The
assumptions that are made about a securitys features and options when calculating effective duration may prove to be incorrect. For example, many mortgage pass-through securities may have stated final maturities of 30 years, but current
prepayment rates, which can vary widely under different economic conditions, may have a large influence on the pass-through securitys response to changes in yield. In these situations, a subadviser may consider other analytical techniques that
seek to incorporate the securitys additional features into the determination of its response to changes in its yield.
A
security may change in price for a variety of reasons. For example, floating rate securities may have final maturities of ten or more years, but their effective durations will tend to be very short. If there is an adverse credit event, or a
perceived change in the issuers creditworthiness, these securities could experience a far greater negative price movement than would be predicted by the change in the securitys yield in relation to its effective duration.
As a result, investors should be aware that effective duration is not an exact measurement and may not reliably predict a securitys
price sensitivity to changes in yield or interest rates.
Diversification
The Fund does not intend to remain diversified, as diversified is defined under the 1940 Act. The value of the shares of the
Fund will be more susceptible to any single economic, political or regulatory event affecting one or a small number of issuers than shares of a diversified fund.
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Portfolio Turnover
The length of time the Fund has held a particular security is not generally a consideration in investment decisions. A change in the securities held by the Fund is known as portfolio turnover.
As a result of the Funds investment policies, under certain market conditions the Funds portfolio turnover rate may be higher than that of other mutual funds. Portfolio turnover generally involves some expense to the Fund, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestment in other securities. These transactions may result in realization of taxable capital gains. Higher portfolio turnover rates, such as
those above 100%, are likely to result in higher brokerage commissions or other transactions costs and could give rise to a greater amount of taxable capital gains.
Alternative Investment Strategies
At times the Funds Advisers may
judge that conditions in the securities markets make pursuing the Funds typical investment strategy inconsistent with the best interests of its shareholders. At such times, the Adviser may temporarily use alternative strategies, primarily
designed to reduce fluctuations in the value of the Funds assets. In implementing these defensive strategies, the Fund may invest without limit in securities that the Adviser believes present less risk to the Fund, including equity securities,
debt and fixed income securities, preferred stocks, U.S. Government and agency obligations, cash or money market instruments, or in other securities the Adviser considers consistent with such defensive strategies, such as, but not limited to,
options, futures, warrants or swaps. As a result of these strategies, the Fund may invest up to 100% of its assets in securities of U.S. issuers. During periods on which such strategies are used, the duration of the Fund may diverge from the
duration range for that Fund disclosed in the Prospectus. It is impossible to predict when, or for how long, the Fund will use these alternative strategies. As a result of using these alternative strategies, the Fund may not achieve its investment
objective.
New Investment Products
New types of mortgage-backed and asset-backed securities, derivative instruments, hedging instruments and other securities or instruments are developed and marketed from time to time. Consistent with its
investment limitations, the Fund expects to invest in those new types of securities and instruments that its Adviser believes may assist the Fund in achieving its investment objective.
Generally, the foregoing is not intended to limit the Funds investment flexibility, unless such a limitation is expressly stated,
and therefore will be construed by the Fund as broadly as possible. Statements concerning what the Fund may do are not intended to limit other any activity. The Fund maintains the flexibility to use the investments described above for any purpose
consistent with applicable law and any express limitations in the SAI or the Prospectus.
Investment Policies
Except for investment policies designated as fundamental in the Prospectus or this SAI, the investment policies described in the
Prospectus and in this SAI are not fundamental policies. Changes to fundamental investment policies require shareholder approval; the Directors may change any non-fundamental investment policy without shareholder approval.
Ratings of Debt Obligations
Moodys, S&P and other NRSROs are private organizations that provide ratings of the credit quality of debt obligations. The Fund may consider these ratings in determining whether to purchase,
sell or hold a security. Ratings are not absolute assurances of quality. Consequently, securities with the same maturity, interest rate and rating may have different market prices. Credit rating agencies attempt to evaluate the safety of principal
and
35
interest payments and do not evaluate the risks of fluctuations in market value. Also, rating agencies may fail to make timely changes in credit ratings in response to subsequent events, so that
an issuers current financial condition may be better or worse than the rating indicates. Credit rating agencies receive fees from rated issuers in connection with the issuance of ratings.
Fund of Funds Investments, Other Significant Investors
Certain investment companies may invest in the Fund and may at times have substantial investments in the Fund. These investment companies are referred to as funds of funds because they invest
primarily in other investment companies.
From time to time, the Fund may experience relatively large redemptions or
investments due to transactions in Fund shares by a fund of funds or other significant investor, including rebalancings of the assets of a fund of funds invested in the Fund. The effects of these transactions could adversely affect the Funds
performance. In the event of such redemptions or investments, the Fund could be required to sell securities or to invest cash at a time when it is not advantageous to do so. Such transactions may increase brokerage and/or other transaction costs of
the Fund. In addition, when a fund of funds or other investor owns a substantial portion of the shares of the Fund, a large redemption by the fund of funds could cause the Funds expenses to increase and could result in the Fund becoming too
small to be economically viable. Redemptions of Fund shares could also accelerate the realization of taxable capital gains in the Fund if sales of securities result in capital gains. The impact of these transactions is likely to be greater when a
fund of funds or other significant investor purchases, redeems, or owns a substantial portion of the Funds shares.
The
Manager and each Adviser may be subject to potential conflicts of interest in connection with fund of funds investments in the Fund due to their affiliation with the fund of funds investment adviser. For example, the Manager or an Adviser
could have the incentive to permit a fund of funds to become a more significant shareholder (with the potential to cause greater disruption) than would be permitted for an unaffiliated investor. Investments by affiliated fund of funds may also give
rise to conflicts in connection with the voting of Fund shares. The Manager, an Adviser and/or its advisory affiliates intend to seek to address these potential conflicts of interest in the best interests of the Funds shareholders, although
there can be no assurance that such efforts will be successful. The Manager and each Adviser will consider how to minimize potential adverse impacts of fund of funds investments, and may take such actions as each deems appropriate to address
potential adverse impacts, including redemption of shares in-kind, rather than in cash. Additionally, the Corporations Board of Directors receives regular reports regarding fund of fund investments in the Fund.
Foreign Securities
Economic, Political and Social Factors.
Certain non-U.S. countries, including emerging markets, may be subject to a greater degree
of economic, political and social instability. Such instability may result from, among other things: (i) authoritarian governments or military involvement in political and economic decision making; (ii) popular unrest associated with
demands for improved economic, political and social conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic, religious and racial disaffection and conflict. Such economic, political
and social instability could significantly disrupt the financial markets in such countries and the ability of the issuers in such countries to repay their obligations. In addition, it may be difficult for the Fund to pursue claims against a foreign
issuer in the courts of a foreign country. Investing in emerging countries also involves the risk of expropriation, nationalization, confiscation of assets and property or the imposition of restrictions on foreign investments and on repatriation of
capital invested. In the event of such expropriation, nationalization or other confiscation in any emerging country, the Fund could lose its entire investment in that country. Certain emerging market countries restrict or control foreign investment
in their securities markets to varying degrees. These restrictions may limit the Funds investment in those markets and may increase the expenses of the Fund. In addition, the repatriation of both investment income and capital from certain
markets in the region is subject to restrictions such as the need for certain governmental consents. Even
36
where there is no outright restriction on repatriation of capital, the mechanics of repatriation may affect certain aspects of the Funds operation. Economies in individual non-U.S.
countries may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rates of inflation, currency valuation, capital reinvestment, resource self-sufficiency and balance of payments positions. Many
non-U.S. countries have experienced substantial, and in some cases extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, very negative effects on the economies and
securities markets of certain emerging countries. Economies in emerging countries generally are dependent heavily upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls,
managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been, and may continue to be, affected adversely and significantly by economic
conditions in the countries with which they trade.
Sovereign Government and Supranational Debt.
The Fund may invest in
all types of debt securities of governmental issuers in all countries, including emerging markets. These sovereign debt securities may include: debt securities issued or guaranteed by governments, governmental agencies or instrumentalities and
political subdivisions located in emerging market countries; debt securities issued by government owned, controlled or sponsored entities located in emerging market countries; interests in entities organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by any of the above issuers; Brady Bonds, which are debt securities issued under the framework of the Brady Plan as a means for debtor nations to restructure their outstanding
external indebtedness; participations in loans between emerging market governments and financial institutions; or debt securities issued by supranational entities such as the World Bank or the European Economic Community. A supranational entity is a
bank, commission or company established or financially supported by the national governments of one or more countries to promote reconstruction or development.
Sovereign debt is subject to risks in addition to those relating to non-U.S. investments generally. As a sovereign entity, the issuing government may be immune from lawsuits in the event of its failure or
refusal to pay the obligations when due. The debtors willingness or ability to repay in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its non-U.S. reserves, the availability of sufficient
non-U.S. exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtors policy toward principal international lenders and the political constraints to which the sovereign
debtor may be subject. Sovereign debtors may also be dependent on disbursements or assistance from foreign governments or multinational agencies, the countrys access to trade and other international credits, and the countrys balance of
trade. Assistance may be dependent on a countrys implementation of austerity measures and reforms, which measures may limit or be perceived to limit economic growth and recovery. Some sovereign debtors have rescheduled their debt payments,
declared moratoria on payments or restructured their debt to effectively eliminate portions of it, and similar occurrences may happen in the future. There is no bankruptcy proceeding by which sovereign debt on which governmental entities have
defaulted may be collected in whole or in part.
EuropeRecent Events.
A number of countries in Europe have
experienced severe economic and financial difficulties. Many non-governmental issuers, and even certain governments, have defaulted on, or been forced to restructure, their debts; many other issuers have faced difficulties obtaining credit or
refinancing existing obligations; financial institutions have in many cases required government or central bank support, have needed to raise capital, and/or have been impaired in their ability to extend credit; and financial markets in Europe and
elsewhere have experienced extreme volatility and declines in asset values and liquidity. These difficulties may continue, worsen or spread within and without Europe. Responses to the financial problems by European governments, central banks and
others, including austerity measures and reforms, may not work, may result in social unrest and may limit future growth and economic recovery or have other unintended consequences. Further defaults or restructurings by governments and others of
their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may
37
abandon the euro, the common currency of the European Union, and/or withdraw from the European Union. The impact of these actions, especially if they occur in a disorderly fashion, is not clear
but could be significant and far-reaching. Whether or not the Fund invests in securities of issuers located in Europe or with significant exposure to European issuers or countries, these events could negatively affect the value and liquidity of the
Funds investments.
Valuation of Fund Shares
As described in the Prospectus, the net asset value of a Fund share is determined daily for each class as of the close of regular trading
on the Exchange, on every day the Exchange is open, by dividing the value of the total assets attributable to that class, less liabilities attributable to that class, by the number of shares of that class outstanding. Pricing will not be done on
days when the Exchange is closed. The Exchange currently observes the following holidays: New Years Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas
Day. Because of the differences in distribution fees and class-specific expenses, the per share net asset value of each class will differ. Please see the Prospectus for a description of the procedures used by the Fund in valuing its assets.
Disclosure of Portfolio Holdings
The Board has adopted policies and procedures developed by the manager with respect to the disclosure of the funds portfolio
securities and any ongoing arrangements to make available information about the funds portfolio securities. The policy requires that consideration always be given as to whether disclosure of information about the funds portfolio holdings
is in the best interests of the funds shareholders. As a consequence, any conflicts of interest between the interests of the funds shareholders and those of the manager, the distributor or their affiliates in connection with the
disclosure of portfolio holdings information would be addressed in a manner that places the interests of fund shareholders first.
The policy provides that information regarding the funds portfolio holdings may be shared with the funds manager, adviser and other affiliated parties involved in the management,
administration or operations of the fund (referred to as fund-affiliated personnel).
Under the policy, the funds
complete list of holdings (including the size of each position) may be made available to investors, potential investors, third parties and Legg Mason personnel that are not fund-affiliated personnel: (i) upon the filing of Form N-Q or Form
N-CSR in accordance with SEC rules, provided that such filings are not made until 15 calendar days following the end of the period covered by the Form N-Q or Form N-CSR or (ii) no sooner than 15 days after month end, provided that such
information has been made available through public disclosure at least one day previously. Typically, public disclosure is achieved by required filings with the SEC and/or posting the information to Legg Masons or the funds Internet site
that is accessible by the public, or through public release by a third party vendor.
The policy also permits the release
of limited portfolio holdings information to investors, potential investors, third parties and Legg Mason personnel that are not fund-affiliated personnel in other circumstances, including:
|
1.
|
The funds top ten securities, current as of month-end, and the individual size of each such security position may be released at any time following month-end with
simultaneous public disclosure.
|
|
2.
|
The funds top ten securities positions (including the aggregate but not individual size of such positions) may be released at any time with simultaneous public
disclosure.
|
|
3.
|
A list of securities (that may include fund holdings together with other securities) followed by a portfolio manager (without position sizes or identification of
particular funds) may be disclosed to sell-side brokers at any time for the purpose of obtaining research and/or market information from such brokers.
|
38
|
4.
|
A trade in process may be discussed only with counterparties, potential counterparties and others involved in the transaction (i.e., brokers and custodians).
|
|
5.
|
The funds sector weightings, yield and duration (if applicable), performance attribution (
e.g
., analysis of the funds out-performance or
underperformance of its benchmark based on its portfolio holdings) and other summary and statistical information that does not include identification of specific portfolio holdings may be released, even if non-public, if such release is otherwise in
accordance with the policys general principles.
|
|
6.
|
A small number of the funds portfolio holdings (including information that the fund no longer holds a particular holding) may be released, but only if the release
of the information could not reasonably be seen to interfere with current or future purchase or sales activities of the fund and is not contrary to law.
|
|
7.
|
The funds portfolio holdings may be released on an as-needed basis to its legal counsel, counsel to its independent trustees and its independent public accounting
firm, in required regulatory filings or otherwise to governmental agencies and authorities.
|
Under the policy,
the fund may release portfolio holdings information on a regular basis to a custodian, sub-custodian, fund accounting agent, proxy voting provider, rating agency or other vendor or service provider for a legitimate business purpose, where the party
receiving the information is under a duty of confidentiality, including a duty to prohibit the sharing of non-public information with unauthorized sources and trading upon non-public information. The fund may enter into other ongoing arrangements
for the release of portfolio holdings information for a legitimate business purpose with a party who is subject to a confidentiality agreement and restrictions on trading upon non-public information. None of the fund, Legg Mason or any other
affiliated party may receive compensation or any other consideration in connection with such arrangements. Ongoing arrangements to make available information about the funds portfolio securities will be reviewed at least annually by the Board.
The approval of the funds Chief Compliance Officer, or designee, must be obtained before entering into any new ongoing
arrangement or altering any existing ongoing arrangement to make available portfolio holdings information, or with respect to any exceptions from the policy. Any exceptions from the policy must be consistent with the purposes of the policy.
Exceptions are considered on a case-by-case basis and are granted only after a thorough examination and consultation with the managers legal department, as necessary. Exceptions from the policy are reported annually to the funds board.
The fund intends to disclose its complete portfolio holdings 14 calendar days after quarter-end on Legg Masons website:
http://www.leggmason.com/individualinvestors/prospectuses (click on the name of the fund).
Set forth below is a list, as of
December 31, 2012, of those parties who are authorized to have ongoing arrangements with the fund that include the release of portfolio holdings information in accordance with the policy, as well as the frequency of the release under such
arrangements, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed. The parties identified below as recipients are service providers, fund rating agencies, consultants and
analysts.
|
|
|
|
|
Recipient
|
|
Frequency
|
|
Delay before dissemination
|
State Street Bank and Trust Company (Fund Custodian and Accounting Agent)
|
|
Daily
|
|
None
|
A.S.A.P. Advisor Services, Inc.
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Bloomberg L.P.
|
|
Quarterly
|
|
Sent 6 Business Days after Quarter-End
|
Lipper Analytical Services Corp.
|
|
Quarterly
|
|
Sent 6 Business Days after Quarter-End
|
Morningstar
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
39
|
|
|
|
|
Recipient
|
|
Frequency
|
|
Delay before dissemination
|
Thomson/Vestek
|
|
Daily
|
|
None
|
FactSet
|
|
Daily
|
|
None
|
The Bank of New York Mellon
|
|
Daily
|
|
None
|
Thomson
|
|
Semi-annually
|
|
None
|
SunGard/Protegent (formerly Dataware)
|
|
Daily
|
|
None
|
ITG
|
|
Daily
|
|
None
|
Investment Company Institute
|
|
Monthly
|
|
Sent 5 Days after Month End
|
Institutional Shareholder Services, Inc. (Proxy Voting Services)
|
|
As necessary
|
|
None
|
The Northern Trust Company
|
|
As necessary
|
|
None
|
Middle Office Solutions, LLC
|
|
Daily
|
|
None
|
NaviSite, Inc.
|
|
Daily
|
|
None
|
Portfolio holdings information for the fund may also be released from time to time pursuant to
ongoing arrangements with the following parties:
|
|
|
|
|
Recipient
|
|
Frequency
|
|
Delay before dissemination
|
Baseline
|
|
Daily
|
|
None
|
Frank Russell
|
|
Monthly
|
|
1 Day
|
Callan Associates, Inc.
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Mercer LLC
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
eVestment Alliance
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Rogerscasey
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Cambridge Associates LLC
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Wilshire Associates Inc.
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Informa Investment Solutions
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Prima Capital
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Investor Tools
|
|
Daily
|
|
None
|
Advent
|
|
Daily
|
|
None
|
BARRA
|
|
Daily
|
|
None
|
Plexus
|
|
Quarterly (Calendar)
|
|
Sent 1-3 Business Days after Quarter-End
|
Elkins/McSherry
|
|
Quarterly (Calendar)
|
|
Sent 1-3 Business Days after Quarter-End
|
Quantitative Services Group
|
|
Daily
|
|
None
|
Deutsche Bank
|
|
Monthly
|
|
6-8 Business Days
|
Fitch
|
|
Monthly
|
|
6-8 Business Days
|
Liberty Hampshire
|
|
Weekly and Month-End
|
|
None
|
SunTrust
|
|
Weekly and Month-End
|
|
None
|
S&P (Rating Agency)
|
|
Weekly Tuesday Night
|
|
1 Business Day
|
Moodys (Rating Agency)
|
|
Monthly
|
|
6-8 Business Days
|
Electra Information Systems
|
|
Daily
|
|
None
|
Cabot Research
|
|
Weekly
|
|
None
|
Goldman Sachs
|
|
Daily
|
|
None
|
Chicago Mercantile Exchange
|
|
Daily
|
|
None
|
Canterbury Consulting
|
|
Quarterly
|
|
Sent 8-10 Days after Quarter-End
|
Broadridge
|
|
Daily
|
|
None
|
DST Global Solutions Limited
|
|
Monthly
|
|
Sent 6 Business Days after Month-End
|
Interactive Data Corp.
|
|
Daily
|
|
None
|
Citigroup Global Markets Inc.
|
|
Daily
|
|
None
|
40
|
|
|
|
|
Recipient
|
|
Frequency
|
|
Delay before dissemination
|
Glass Lewis & Co.
|
|
Daily
|
|
None
|
Fidelity
|
|
Quarterly
|
|
5 Business Days
|
The funds portfolio holdings policy is designed to prevent sharing of portfolio information
with third parties that have no legitimate business purpose for accessing the information. The policy may not be effective to limit access to portfolio holdings information in all circumstances, however. For example, the funds manager or
adviser may manage accounts other than the fund that have investment objectives and strategies similar to those of the fund. Because these accounts, including the fund, may be similarly managed, portfolio holdings may be similar across the accounts.
In that case, an investor in another account managed by the funds manager or adviser may be able to infer the portfolio holdings of the fund from the portfolio holdings in that investors account.
Release of limited portfolio holdings information
In addition to the ongoing arrangements described above, a funds complete or partial list of holdings (including size of positions) may be released to another party on a one-time basis, provided the
party receiving the information has executed a non-disclosure and confidentiality agreement and provided that the specific release of information has been approved by the funds Chief Compliance Officer or designee as consistent with the
policy. By way of illustration and not of limitation, release of non-public information about a funds portfolio holdings may be made (i) to a proposed or potential adviser or subadviser or other investment manager asked to provide
investment management services to the fund, or (ii) to a third party in connection with a program or similar trade.
In
addition, the policy permits the release to investors, potential investors, third parties and Legg Mason personnel that are not fund-affiliated personnel of limited portfolio holdings information in other circumstances, including:
|
1.
|
A funds top ten securities, current as of month-end, and the individual size of each such security position may be released at any time following month-end with
simultaneous public disclosure.
|
|
2.
|
A funds top ten securities positions (including the aggregate but not individual size of such positions) may be released at any time with simultaneous public
disclosure.
|
|
3.
|
A list of securities (that may include fund holdings together with other securities) followed by an investment professional (without position sizes or identification of
particular funds) may be disclosed to sell-side brokers at any time for the purpose of obtaining research and/or market information from such brokers.
|
41
Management of the Fund
The business of the Fund is managed under the general direction of the Corporations Board of Directors. Subject to the general
supervision of the Board of Directors, the Manager is responsible for managing, either directly or through others hired for these purposes, the investment activities of the Fund and the Funds business affairs and other administrative matters.
The table below provides information about each of the Corporations Directors and officers, including biographical information about their business experience and information about their relationships with Legg Mason, Inc. and its affiliates.
The mailing address of each Director and officer is 100 International Drive, Baltimore, MD 21202, unless otherwise indicated.
|
|
|
|
|
|
|
|
|
Name, Year of Birth and
Position with Corporation
|
|
Term of
Office and
Length
of
Time Served
(1)
|
|
Principal Occupations
During the Past 5
Years
|
|
Number of
Funds
in Fund
Complex
Overseen
(2)
|
|
Other
Directorships
Held
|
Independent Directors
|
|
|
|
|
|
|
|
|
Ronald J. Arnault
(1943)
Director
|
|
Served since 1997
|
|
Retired.
|
|
12
|
|
None
|
|
|
|
|
|
Anita L. DeFrantz
(1953)
Director
|
|
Served since 1998
|
|
President (1987-present) and Director (1990-present) of LA84 (formerly Amateur Athletic Foundation of Los Angeles); President and Director of Kids in Sports (1994-present); Vice
President, International Rowing Federation (1986-present); Member of the International Olympic Committee (1986-present).
|
|
12
|
|
OBN Holdings, Inc. (film, television and media company)
|
|
|
|
|
|
Avedick B. Poladian
(1951)
Director
|
|
Served since 2007
|
|
Executive Vice President and Chief Operating Officer of Lowe Enterprises, Inc. (real estate and hospitality firm) (2002-present); Partner, Arthur Andersen, LLP
(1974-2002).
|
|
12
|
|
Occidental Petroleum Corporation and Public Storage
|
|
|
|
|
|
William E. B. Siart
(1946)
Director and Chairman
|
|
Served since 1997
|
|
Trustee of The Getty Trust (2005-present); Chairman of Walt Disney Concert Hall, Inc. (1998-2006); Chairman of Excellent Education Development (2000-present).
|
|
12
|
|
None
|
42
|
|
|
|
|
|
|
|
|
Name, Year of Birth and
Position with Corporation
|
|
Term of
Office and
Length
of
Time Served
(1)
|
|
Principal Occupations
During the Past 5
Years
|
|
Number of
Funds
in Fund
Complex
Overseen
(2)
|
|
Other
Directorships
Held
|
Jaynie Miller Studenmund
(1954)
Director
|
|
Served since 2004
|
|
Director of Orbitz Worldwide, Inc. (2007-present) (online travel company); Director of Pinnacle Entertainment, Inc. (2012-present) (gaming and hospitality company); Director of
Core Logic, Inc. (2012-present) (information, analytics and business services). Formerly: Director of MarketTools, Inc. (2010-2012) (market research software provider); Director of eHarmony, Inc. (2005-2011) (online dating company).
|
|
12
|
|
Orbitz Worldwide (global on-line travel company); Pinnacle Entertainment, Inc. (gaming and hospitality company); Core Logic, Inc. (information, analytics and business
services)
|
|
|
|
|
|
Interested Directors
|
|
|
|
|
|
|
|
|
R. Jay Gerken
(1951)
Director and President
|
|
Served as a Director since 2006 and as President since
2007
(3)
|
|
Managing Director of Legg Mason & Co., LLC (Legg Mason & Co.) (since 2005); Officer and Trustee/Director of 161 funds associated with Legg Mason Partners Fund
Advisors, LLC (LMPFA) or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); President and Chief Executive Officer of LMPFA (since 2006); President and Chief Executive Officer of Smith Barney Fund
Management LLC (formerly a registered investment adviser) (since 2002).
|
|
161
|
|
N/A
|
43
|
|
|
|
|
|
|
|
|
Name, Year of Birth and
Position with Corporation
|
|
Term of
Office and
Length of
Time Served
(1)
|
|
Principal Occupations
During the Past 5
Years
|
|
Number of
Funds
in Fund
Complex
Overseen
(2)
|
|
Other
Directorships
Held
|
Ronald L. Olson
(1941)
Director
|
|
Served since 2005
(4)
|
|
Senior Partner of Munger, Tolles & Olson LLP (a law partnership) (1968-present).
|
|
12
|
|
Edison International, City National Corporation (financial services company), The Washington Post Company, and Berkshire Hathaway, Inc.
|
|
|
|
|
|
Officers
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard F. Sennett
(1970)
Principal Financial Officer
|
|
Serviced since 2011
|
|
Principal Financial Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); Managing Director of Legg Mason & Co. and Senior
Manager of the Treasury Policy group for Legg Mason & Co.s Global Fiduciary Platform (since 2011); formerly, Chief Accountant within the SECs Division of Investment Management (2007-2011); formerly, Assistant Chief Accountant within
the SECs Division of Investment Management (2002-2007).
|
|
N/A
|
|
N/A
|
|
|
|
|
|
Erin K. Morris
(1966)
Treasurer
|
|
Served since 2006
|
|
Vice President of Legg Mason & Co., LLC (since 2005); Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since
2006); formerly Assistant Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2009).
|
|
N/A
|
|
N/A
|
44
|
|
|
|
|
|
|
|
|
Name, Year of Birth and
Position with Corporation
|
|
Term of
Office and
Length
of
Time Served
(1)
|
|
Principal Occupations
During the Past 5
Years
|
|
Number of
Funds
in Fund
Complex
Overseen
(2)
|
|
Other
Directorships
Held
|
Todd F. Kuehl
(1969)
Chief Compliance Officer
|
|
Served since 2007
|
|
Managing Director, Legg Mason & Co. (2006-present); Chief Compliance Officer of Legg Mason Private Portfolio Group (2009-2010); Chief Compliance Officer
of Western Asset/Claymore Inflation-Linked Securities & Income Fund, Western Asset/Claymore Inflation-Linked Opportunities & Income Fund, Western Asset Income Fund, Western Asset Premier Bond Fund (2007-present) and Barrett Growth Fund and
Barrett Opportunity Fund (2006-2008); Branch Chief, Division of Investment Management, U.S. Securities and Exchange Commission (2002-2006).
|
|
N/A
|
|
N/A
|
|
|
|
|
|
Robert I. Frenkel
(1954)
Secretary and Chief Legal Officer
100 First Stamford
Place
Stamford, CT 06902
|
|
Served since 2009
|
|
Vice President and Deputy General Counsel of Legg Mason, Inc. (since 2006); Managing Director and General Counsel U.S. Mutual Funds for Legg Mason & Co. (since 2006) and Legg
Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006).
|
|
N/A
|
|
N/A
|
(1)
|
Each officer holds office until his or her respective successor is chosen and qualified, or in each case until he or she sooner dies, resigns, is removed with or
without cause or becomes disqualified. Each of the Directors of the Corporation holds office until his or her successor shall have been duly elected and shall qualify, subject to prior death, resignation, retirement, disqualification or removal from
office and applicable law.
|
(2)
|
In addition to overseeing the ten funds of the Corporation, each Director also serves as a Director of Western Asset Income Fund and a Trustee of Western Asset Premier
Bond Fund (closed-end investment companies), which are considered part of the same Fund Complex as the Corporation. In addition, Mr. Gerken serves as Director/Trustee to 149 other portfolios associated with Legg Mason & Co., LLC or its
affiliates. Legg Mason & Co., LLC is an affiliate of LMPFA and Western Asset.
|
(3)
|
Mr. Gerken is an interested person (as defined in section 2(a)(19) of the Investment Company Act of 1940, as amended (the 1940 Act)) of
each fund because of his positions with subsidiaries of, and ownership of shares of common stock of, Legg Mason, Inc., the parent company of Western Asset.
|
45
(4)
|
Mr. Olson is an interested person (as defined above) of each fund because his law firm has provided legal services to Western Asset.
|
(5)
|
Each officer of the Corporation is an interested person (as defined above) of the Corporation.
|
The Board believes that each Directors experience, qualifications, attributes or skills on an individual basis and in combination
with those of the other Directors lead to the conclusion that the Board possesses the requisite skills and attributes. The Board believes that the Directors ability to review, critically evaluate, question and discuss information provided to
them, to interact effectively with the Manager, the Advisers, other service providers, counsel and independent auditors, and to exercise effective business judgment in the performance of their duties, support this conclusion. The Board also has
considered the following experience, qualifications, attributes and/or skills, among others, of its members in reaching its conclusion: his or her character and integrity; such persons length of service as a board member of the Corporation;
such persons willingness to serve and willingness and ability to commit the time necessary to perform the duties of a Director; as to each Director other than Mr. Gerken and Mr. Olson, his or her status as not being an
interested person (as defined in the 1940 Act) of the funds; and, as to Mr. Gerken, his status as a representative of Legg Mason. In addition, the following specific experience, qualifications, attributes and/or skills apply as to
each Director: Mr. Arnault, business, accounting and finance expertise and experience as a chief financial officer, board member and/or executive officer of various businesses; Ms. DeFrantz, business expertise and experience as a
president, board member and/or executive officer of various businesses and non-profit and other organizations; Mr. Poladian, business, finance and accounting expertise and experience as a board member of various businesses and/or as a partner
of a multi-national accounting firm; Mr. Siart, business and finance expertise and experience as a president, chairman, chief executive officer and/or board member of various businesses and non-profit and other organizations;
Ms. Studenmund, business and finance expertise and experience as a president, board member and/or chief operating officer of various businesses; Mr. Olson, business and legal expertise and experience as a senior partner of a law firm
and/or board member of various businesses and non-profit and other organizations; and Mr. Gerken, investment management experience as an executive and portfolio manager and leadership roles within Legg Mason and affiliated entities. References
to the qualifications, attributes and skills of Directors are pursuant to requirements of the Securities and Exchange Commission, do not constitute holding out of the Board or any Director as having any special expertise or experience, and shall not
impose any greater responsibility or liability on any such person or on the Board by reason thereof.
The Board is responsible
for overseeing the management and operations of the Fund. William E.B. Siart serves as Chairman of the Board. Mr. Siart is not an interested person of the Fund. Independent Directors constitute more than 70% of the Board.
The Board has three standing committees: the Audit Committee, the Executive and Contracts Committee and the Governance and Nominating
Committee. Each of the Audit, Governance and Nominating and Executive and Contracts Committees is chaired by an Independent Director and is composed entirely of Independent Directors. Where deemed appropriate, the Board constitutes ad hoc
committees.
The Executive and Contracts Committee, which consists of Messrs. Siart, Arnault and Poladian and Mses. DeFrantz
and Studenmund, may meet from time to time between Board meetings in order to consider appropriate matters and to review the various contractual arrangements between the Corporation and its affiliated persons.
The Audit Committee, which consists of Messrs. Arnault, Poladian and Siart and Mses. DeFrantz and Studenmund provides oversight with
respect to the accounting and financial reporting and compliance policies and practices of the Fund and, among other things, considers the selection of an independent registered public accounting firm for the Fund and the scope of the audit and
approves all services proposed to be performed by the independent registered public accounting firm on behalf of the Fund and, under certain circumstances, the Advisers and certain affiliates.
46
The Governance and Nominating Committee, which consists of Messrs. Siart, Arnault and
Poladian and Mses. DeFrantz and Studenmund, meets to select nominees for election as Directors of the Corporation and consider other matters of Board policy, including to review and make recommendations to the Board with respect to the compensation
of the Independent Directors. It is the policy of the Governance and Nominating Committee to consider nominees recommended by shareholders. The procedures by which shareholders can submit nominee recommendations to the Governance and Nominating
Committee are set forth in Appendix C to this SAI.
During the fiscal year ended October 31, 2012, the Board of
Directors met six times, the Executive and Contracts Committee met two times, the Governance and Nominating Committee met two times and the Audit Committee met four times.
The Board has determined that its leadership structure is appropriate given the business and nature of the Fund. In connection with its
determination, the Board considered that the Chairman of the Board is an Independent Director. The Chairman of the Board can play an important role in setting the agenda of the Board and also serves as a key point person for dealings between
management and the other Independent Directors. The Independent Directors believe that the Chairmans independence facilitates meaningful dialogue between Fund management and the Independent Directors. The Board also considered that the
chairperson of each Board committee is an Independent Director, which yields similar benefits with respect to the functions and activities of the various Board committees (e.g., each committees chairperson works with the Manager and other
service providers to set agendas for the meetings of the applicable Board committees). As noted above, through the committees the Independent Directors consider and address important matters involving the Fund, including those presenting conflicts
or potential conflicts of interest for management. The Independent Directors also regularly meet outside the presence of management and are advised by independent legal counsel. The Board has determined that its committees help ensure that the Fund
has effective and independent governance and oversight. The Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the Independent Directors from management, including the Advisers. The Board
reviews its structure on an annual basis.
As an integral part of its responsibility for oversight of the Fund in the
interests of shareholders, the Board oversees risk management of the Funds investment program and business affairs. The function of the Board with respect to risk management is one of oversight not active involvement in, or coordination of,
day-to-day risk management activities for the Fund. The Board has emphasized to the Manager and Advisers the importance of maintaining vigorous risk management. The Board exercises oversight of the risk management process primarily through the Audit
Committee and Executive and Contracts Committee, and through oversight by the Board itself.
The Fund faces a number of risks,
such as investment risk, counterparty risk, valuation risk, reputational risk, risk of operational failure or lack of business continuity, and legal, compliance and regulatory risk. Risk management seeks to identify and address risks, i.e., events
or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the Fund. Under the overall supervision of the Board or the applicable Committee, the Fund, the
Manager, the Advisers, and the affiliates of the Manager and the Advisers, or other service providers to the funds employ a variety of processes, procedures and controls to identify various of those possible events or circumstances, to lessen the
probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Different processes, procedures and controls are employed with respect to different types of risks. Various personnel, including the
Funds and the Managers CCO and the Managers chief risk officer, as well as various personnel of the Advisers and other service providers such as the Funds independent accountants, report to the Audit Committee, Executive and
Contracts Committee and/or to the Board with respect to various aspects of risk management, as well as events and circumstances that have arisen and responses thereto. These reports and other similar reports received by the Directors as to risk
management matters are typically summaries of the relevant information. The Board recognizes that not all risks that may affect the Fund can be identified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that
it may be necessary to bear certain risks (such as investment-related risks) to achieve the funds goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness.
47
As of December 31, 2012, no Director who is an Independent Director of the
Corporation, and no such Directors family members, had beneficial or record ownership in securities of an investment adviser or principal underwriter of the Corporation, or an entity (other than a registered investment company) directly or
indirectly controlling, controlled by, or under common control with an investment adviser or principal underwriter of the Corporation.
The following table states the dollar range of equity securities beneficially owned as of December 31, 2012 by each Director of the Corporation in the Fund and, on an aggregate basis, in any
registered investment companies overseen or to be overseen by the Director in the same family of investment companies.
|
|
|
|
|
Name of Director
|
|
Dollar Range of Equity
Securities in the
Corporation ($)
|
|
Aggregate Dollar Range
of Equity Securities in
All Registered Investment
Companies
Overseen
by Nominee in Family of
Investment Companies ($)
|
Independent Directors
|
|
|
|
|
Ronald J. Arnault
|
|
0
|
|
10,001 - 50,000
|
Anita L. DeFrantz
|
|
0
|
|
10,001 - 50,000
|
Avedick B. Poladian
|
|
0
|
|
0
|
William E. B. Siart
|
|
0
|
|
0
|
Jaynie Miller Studenmund
|
|
0
|
|
0
|
|
|
|
Interested Directors
|
|
|
|
|
R. Jay Gerken
|
|
Over 100,000*
|
|
Over 100,000
|
Ronald L. Olson
|
|
0
|
|
Over 100,000
|
*
|
Represents beneficial ownership of equity securities in Western Asset Core Plus Bond Fund only.
|
Each Director of the Corporation who is not an interested person (as defined in the 1940 Act) of the Corporation, the Manager
or an Adviser receives an aggregate fee of $75,000 annually for serving on the combined Board of Directors/Trustees of the Corporation, Western Asset Income Fund and Western Asset Premier Bond Fund. Each Director also receives a fee of $7,500 and
related expenses for each meeting of the Board or of a committee attended in-person and a fee of $2,500 for participating in each telephonic meeting. The Chairman of the Board receives an additional $30,000 per year for serving in such capacity and
the Chairman of the Audit Committee receives an additional $25,000 per year for serving in such capacity. Each member of the Audit Committee receives a fee of $6,000 for serving as a member of the Audit Committee. Other committee members receive
$3,000 for serving as a member of each committee upon which they serve. Committee members also receive a fee of $2,500 for participating in each telephonic committee meeting. All such fees are allocated among the Corporation, Western Asset Income
Fund and Western Asset Premier Bond Fund according to each such investment companys average annual net assets. Mr. Olson receives from Western Asset an aggregate fee of $75,000 annually for serving on the combined Board of
Directors/Trustees of the Corporation, Western Asset Income Fund and Western Asset Premier Bond Fund, as well as a fee of $7,500 and related expenses for each meeting of the Board attended in-person and a fee of $2,500 for participating in each
telephonic meeting.
The following table provides certain information relating to the compensation of the Corporations
Directors. The Corporation does not have a pension or retirement plan for its Directors.
|
|
|
|
|
|
|
|
|
Name of Person and Position
|
|
Aggregate Compensation
From the Corporation ($)*
|
|
|
Total Compensation from
the Corporation and
Fund
Complex
Paid to Directors ($)**
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
Ronald J. ArnaultDirector
|
|
|
156,250
|
|
|
|
159,500
|
|
Anita L. DeFrantzDirector
|
|
|
131,785
|
|
|
|
134,500
|
|
48
|
|
|
|
|
Name of Person and Position
|
|
Aggregate Compensation
From the Corporation ($)*
|
|
Total Compensation from
the Corporation and
Fund
Complex
Paid to Directors ($)**
|
Avedick B. PoladianDirector
|
|
131,785
|
|
134,500
|
William E.B. SiartChairman and Director
|
|
161,144
|
|
164,500
|
Jaynie Miller StudenmundDirector
|
|
131,785
|
|
134,500
|
|
|
|
Interested Directors
|
|
|
|
|
R. Jay GerkenDirector and President
|
|
None
|
|
None
|
Ronald L. OlsonDirector
|
|
None
|
|
None
|
*
|
Represents compensation paid to the Directors for the calendar year ended December 31, 2012.
|
**
|
Represents aggregate compensation paid to each Director during the calendar year ended December 31, 2012 for serving as a Director of the Corporation and as a
Director of Western Asset Income Fund and as a Trustee of Western Asset Premier Bond Fund, both closed-end investment companies advised by Western Asset.
|
The Corporation has no employees. Its officers are compensated by an Adviser or LMIS or one of their affiliates.
On January 31, 2013 the Directors and officers of the Corporation beneficially owned in the aggregate less than 1% of any class of the Funds outstanding shares.
On January 31, 2013, the following shareholders owned of record or beneficially 5% or more of a class of the outstanding shares of the
Fund. Unless otherwise indicated, each of the shareholders listed below may be contacted c/o Legg Mason Funds at 100 International Drive, 7th Floor, Baltimore, Maryland 21202, Attn: Fund Secretary.
|
|
|
|
|
|
|
NAME AND ADDRESS
|
|
CLASS
|
|
% OF CLASS HELD
|
|
Legg Mason, Inc.
100 International Drive, 10
th
Floor
Baltimore, MD 21202
|
|
Class FI
|
|
|
100
|
|
|
|
|
Andrew B. Peake and Kuei-Ying Peake
|
|
Class I
|
|
|
96.14
|
|
|
|
|
Legg Mason, Inc.
100 International Drive, 10
th
Floor
Baltimore, MD 21202
|
|
Class IS
|
|
|
100
|
|
It may not be possible for matters subject to a vote of a majority of the outstanding voting
securities of the Fund to be approved without the affirmative vote of such controlling shareholders, and it may be possible for such matters to be approved by such shareholders without the affirmative vote of any other shareholders.
Manager
The
Manager, a wholly owned subsidiary of Legg Mason, Inc., a financial services holding company, serves as investment manager to the Fund pursuant to an Investment Management Agreement dated April 9, 2012 between the Manager and the Corporation
(the Management Agreement).
Legg Mason Partners Fund Advisor, LLC (LMPFA) is a Delaware limited
liability company formed on April 6, 2006. LMPFAs address is 620 Eighth Avenue, New York, NY 10018.
Under the
Management Agreement, the Manager is responsible, subject to the general supervision of the Corporations Board of Directors, for the management of the Corporations assets, including the responsibility
49
for making decisions and placing orders to buy, sell or hold a particular security, consistent with the investment objectives and policies described in the Prospectus and this SAI. As indicated
below, certain of these responsibilities have been delegated to Western Asset and the other Advisers. The Manager also is responsible for the compensation of Directors and officers of the Corporation who are employees of the Manager or its
affiliates. The Manager receives for its services a fee as described in the Prospectus. As noted below, the Manager has delegated responsibility for the selection of the Corporations investments to the Advisers.
The Fund pays all of its other expenses that are not assumed by the Manager. These expenses include, among others, expenses of preparing
and printing prospectuses, statements of additional information, proxy statements and reports and of distributing them to existing shareholders, custodian charges, transfer agency fees, organizational expenses, compensation of the Independent
Directors, legal and audit expenses, insurance expenses, expenses of registering and qualifying shares of the Fund for sale under federal and state law, Rule 12b-1 fees, governmental fees, expenses incurred in connection with membership in
investment company organizations, interest expense, taxes expenses relating to the issuance and redemption or repurchase of the Funds shares and servicing shareholder accounts and the cost (including brokerage commissions, transaction fees or
charges, if any) in connection with the purchase or sale of the Funds securities and other investments and any losses in connection therewith. The Fund also is liable for such nonrecurring expenses as may arise, including litigation to which
the Fund or the Corporation may be a party. The Corporation may also have an obligation to indemnify its Directors and officers with respect to litigation.
The Manager may agree to implement an expense cap, waive fees and/or reimburse operating expenses for one or more classes of shares. Any such waived fees and/or reimbursed expenses are described in the
Funds Prospectus. The expense caps and waived fees and/or reimbursed expenses do not cover extraordinary expenses, such as (a) any expenses or charges related to litigation, derivative actions, demand related to litigation, regulatory or
other government investigations and proceedings, for cause regulatory inspections and indemnification or advancement of related expenses or costs, to the extent any such expenses are considered extraordinary expenses for the purposes of
fee disclosure in Form N-1A as the same may be amended from time to time; (b) transaction costs (such as brokerage commissions and dealer and underwriter spreads) and taxes; and (c) other extraordinary expenses as determined for the
purposes of fee disclosure in Form N-1A, as the same may be amended from time to time. Without limiting the foregoing, extraordinary expenses are generally those that are unusual or expected to recur only infrequently, and may include such expenses,
by way of illustration, as (i) expenses of the reorganization, restructuring, redomiciling or merger of the Fund or class or the acquisition of all or substantially all of the assets of another fund or class; (ii) expenses of holding, and
soliciting proxies for, a meeting of shareholders of the funds or class (except to the extent relating to routine items such as the election of Directors or the approval of the independent registered public accounting firm); and (iii) expenses
of converting to a new custodian, transfer agent or other service provider, in each case to the extent any such expenses are considered extraordinary expenses for the purposes of fee disclosure in Form N-1A as the same may be amended from time to
time.
In order to implement an expense cap, the Manager will, as necessary, waive management fees or reimburse operating
expenses. However, the Manager is permitted to recapture amounts previously waived or reimbursed by the Manager to the fund within two years after the fiscal year in which the 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 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 lower limit then in effect.
Under the Management Agreement, the Manager will not be liable
for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the performance of the Management Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations or duties thereunder.
50
The Management Agreement terminates automatically upon assignment and is terminable with
respect to the Fund at any time without penalty by vote of the Corporations Board of Directors, by vote of a majority of the Funds outstanding voting securities, or by the Manager, on not less than 60 days written notice to the
Corporation and may be terminated immediately upon the mutual written consent of the Manager and the Corporation.
Advisers
Western Asset
. Western Asset, a wholly owned subsidiary of Legg Mason, Inc., serves as Adviser to the Fund pursuant to an
Investment Advisory Agreement between Western Asset and the Manager (the Western Asset Advisory Agreement).
Under
the Western Asset Advisory Agreement, Western Asset is responsible, subject to the general supervision of the Corporations Board of Directors and the Manager, for the actual management of the Funds assets, including the responsibility
for making decisions and placing orders to buy, sell or hold a particular security, consistent with the investment objectives and policies described in the Prospectus and this Statement of Additional Information. Western Asset receives from the
Manager for its services an advisory fee as described in the Prospectus.
Under the Western Asset Advisory Agreement, Western
Asset will not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the performance of the Western Asset Advisory Agreement, except a loss resulting from willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations or duties thereunder.
The Western Asset Advisory Agreement terminates automatically upon assignment and is terminable with respect to the Fund at any time without penalty by vote of the Corporations Board of Directors,
by vote of a majority of the Funds outstanding voting securities, or by Western Asset, on not more than 60 days notice, and may be terminated immediately upon the mutual written consent of the parties.
WAML.
WAML, a wholly owned subsidiary of Legg Mason, Inc., serves as Adviser to the Fund pursuant to an Investment Advisory
Agreement between the Manager and WAML (the WAML Advisory Agreement).
Under the WAML Advisory Agreement, WAML
shall as requested by the Manager regularly provide the Fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the Fund, consistent with the investment objectives, restrictions and
policies described in the Prospectus and this Statement of Additional Information. WAML receives from the Manager for its services to the Fund an advisory fee as described in the Prospectus.
Under the WAML Advisory Agreement, WAML will not be liable for any error of judgment or mistake of law or for any loss suffered by the
Fund in connection with the performance of the WAML Advisory Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations
or duties thereunder.
The WAML Advisory Agreement terminates automatically upon assignment and is terminable at any time
without penalty by vote of the Corporations Board of Directors, by vote of a majority of the Funds outstanding voting securities, or by WAML, on not less than 60 days written notice, and may be terminated immediately upon the
mutual written consent of the parties.
Western Singapore.
Western Singapore, a wholly owned subsidiary of Legg Mason,
Inc., serves as Adviser to the Fund pursuant to an Investment Advisory Agreement between the Manager and Western Singapore (the Western Singapore Advisory Agreement).
51
Under the Western Singapore Advisory Agreement, Western Singapore shall as requested by the
Manager regularly provide the Fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the Fund consistent with the investment objectives, restrictions and policies described in the
Prospectus and this Statement of Additional Information. Western Singapore receives from the Manager for its services to the fund an advisory fee as described in the Prospectus.
Under the Western Singapore Advisory Agreement, Western Singapore will not be liable for any error of judgment or mistake of law or for
any loss suffered by the Fund in connection with the performance of the Western Singapore Advisory Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations or duties thereunder.
The Western Singapore Advisory Agreement terminates
automatically upon assignment and is terminable at any time without penalty by vote of the Corporations Board of Directors, by vote of a majority of the funds outstanding voting securities by not more than 60 days written notice,
or by Western Singapore, on not less than 60 days notice, and may be terminated immediately upon the mutual written consent of the parties.
Western Japan.
Western Japan, a wholly owned subsidiary of Legg Mason, Inc., serves as Adviser to the Fund pursuant to an Investment Advisory Agreement between the Manager and Western Japan (the
Western Japan Advisory Agreement).
Under the Western Japan Advisory Agreement, Western Japan shall as requested
by the Manager regularly provide the Fund with investment research, advice, management and supervision and shall furnish a continuous investment program for the Fund consistent with the investment objectives, restrictions and policies described in
the Prospectus and this Statement of Additional Information. Western Japan receives from the Manager for its services to the Fund an advisory fee as described in the Prospectus.
Under the Western Japan Advisory Agreement, Western Japan will not be liable for any error of judgment or mistake of law or for any loss
suffered by a fund in connection with the performance of the Western Japan Advisory Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by
it of its obligations or duties thereunder.
The Western Japan Advisory Agreement terminates automatically upon assignment
and is terminable at any time without penalty by vote of the Corporations Board of Directors, by vote of a majority of the funds outstanding voting securities by not more than 60 days written notice, or by Western Japan, on not
less than 60 days written notice, and may be terminated immediately upon the mutual written consent of the parties.
Western Asset London, Western Asset Japan and Western Asset Singapore provide certain subadvisory services relating to currency
transactions and investments in non-U.S. dollar-denominated securities and related foreign currency instruments. Western Asset London generally manages global and non-U.S. dollar fixed-income mandates, Western Asset Japan generally manages Japanese
fixed-income mandates and Western Asset Singapore generally manages Asian (other than Japan) fixed-income mandates. Each office provides services relating to relevant portions of Western Assets broader portfolios as appropriate.
Western Asset, Western Asset Japan and Western Asset Singapore undertake investment-related activities including investment management,
research and analysis, and securities settlement.
Other Accounts Managed By Portfolio Managers
(as of December 31, 2012)
The table below identifies, for each named portfolio manager, the number of accounts (other than the fund with
respect to which information is provided) for which the portfolio manager has day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered
52
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 are also
indicated.
Data for other investment companies is shown based on the specific portfolio managers that are named in the
disclosure documents for other investment companies. Data for private pooled investment vehicles and other separate accounts is reported based on Western Assets practice of naming a particular individual to maintain oversight responsibility
for each account. Where the named individual has been assigned primary responsibility for oversight of a private pooled investment vehicle or separate account, that account has been allocated to that individual for disclosure purposes, but not other
portfolio managers that may be involved in managing that account.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 ($)
|
|
Stephen A. Walsh
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered Investment Companies
|
|
|
98
|
|
|
|
191,664,202,424
|
|
|
|
0
|
|
|
|
0
|
|
Other pooled investment vehicle
|
|
|
229
|
|
|
|
99,190,004,600
|
|
|
|
5
|
|
|
|
813,278,845
|
|
Other accounts
|
|
|
718
|
|
|
|
171,016,293,229
|
|
|
|
67
|
|
|
|
16,449,710,556
|
|
|
|
|
|
|
Keith J. Gardner
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered Investment Companies
|
|
|
30
|
|
|
|
26,297,444,663
|
|
|
|
0
|
|
|
|
0
|
|
Other pooled investment vehicle
|
|
|
27
|
|
|
|
15,105,007,965
|
|
|
|
1
|
|
|
|
141,004,272
|
|
Other accounts
|
|
|
170
|
|
|
|
41,460,743,659
|
|
|
|
21
|
|
|
|
7,081,752,757
|
|
|
|
|
|
|
Chia-Liang Lian
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered Investment Companies
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other pooled investment vehicle
|
|
|
8
|
|
|
|
1,554,352,669
|
|
|
|
0
|
|
|
|
0
|
|
Other accounts
|
|
|
17
|
|
|
|
2,184,853,382
|
|
|
|
5
|
|
|
|
754,402,586
|
|
|
|
|
|
|
Desmond Soon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered Investment Companies
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other pooled investment vehicle
|
|
|
8
|
|
|
|
1,554,352,669
|
|
|
|
0
|
|
|
|
0
|
|
Other accounts
|
|
|
17
|
|
|
|
2,184,853,382
|
|
|
|
5
|
|
|
|
754,402,586
|
|
|
|
|
|
|
Robert O. Abad
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered Investment Companies
|
|
|
1
|
|
|
|
578,176,746
|
|
|
|
0
|
|
|
|
0
|
|
Other pooled investment vehicle
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other accounts
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Potential Conflicts of Interest
Potential conflicts of interest may arise in connection with the management of multiple accounts (including accounts managed in a personal capacity). These could include potential conflicts of interest
related to the knowledge and timing of the Funds trades, investment opportunities and broker selection. Portfolio managers may be privy to the size, timing and possible market impact of the Funds trades.
It is possible that an investment opportunity may be suitable for both the Fund and other accounts managed by a portfolio manager, but
may not be available in sufficient quantities for both the Fund and the other accounts to participate fully. Similarly, there may be limited opportunity to sell an investment held by the Fund and another account. A conflict may arise where the
portfolio manager may have an incentive to treat an account preferentially as compared to the Fund because the account pays a performance-based fee or the or the portfolio manager, the Advisers or an affiliate has an interest in the account. The
Advisers have adopted procedures for allocation of portfolio transactions and investment opportunities across multiple client accounts on a fair and equitable basis over time. All eligible accounts that can participate in a trade share the same
price on a pro-rata
53
allocation basis in an attempt to mitigate any conflict of interest. Trades are allocated among similarly managed accounts to maintain consistency of portfolio strategy, taking into account cash
availability, investment restrictions and guidelines, and portfolio composition versus strategy.
With respect to securities
transactions for the Fund, the Advisers determine 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 Advisers 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 the Fund 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 the Fund 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 the Fund and/or other account.
It is
theoretically possible that portfolio managers could use information to the advantage of other accounts they manage and to the possible detriment of the Fund. For example, a portfolio manager could short sell a security for an account immediately
prior to the Funds sale of that security. To address this conflict, the Advisers have adopted procedures for reviewing and comparing selected trades of alternative investment accounts (which may make directional trades such as short sales)
with long only accounts (which includes the Fund) for timing and pattern related issues. Trading decisions for alternative investment and long only accounts may not be identical even though the same Portfolio Manager may manage both types of
accounts. Whether the Adviser allocates a particular investment opportunity to only alternative investment accounts or to alternative investment and long only accounts will depend on the investment strategy being implemented. If, under the
circumstances, an investment opportunity is appropriate for both its alternative investment and long only accounts, then it will be allocated to both on a pro-rata basis.
A portfolio manager may also face other potential conflicts of interest in managing the Fund, and the description above is not a complete description of every conflict of interest that could be deemed to
exist in managing both the Fund and the other accounts listed above.
Compensation of Portfolio Managers
With respect to the compensation of portfolio managers, each Advisers 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, each Advisers employees are eligible for bonuses. These are
structured to closely align the interests of employees with those of the Adviser, and are determined by the professionals job function and pre-tax performance as measured by a formal review process. All bonuses are completely discretionary.
The principal factor considered is a portfolio managers 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 Funds Prospectus to which
the Funds average annual total returns are compared or, if none, the benchmark set forth in the Funds annual report). Performance is reviewed on a 1, 3 and 5 year basis for compensationwith 3 and 5 years having a larger emphasis. A
subadviser may also measure a portfolio managers pre-tax investment performance against other benchmarks, as it determines appropriate. Because portfolio managers are generally responsible for multiple accounts (including the Fund) with
similar investment strategies, they are generally
54
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 Adviser, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to the subadvisers business.
Finally, in order to attract and retain top talent, all professionals are eligible for additional incentives in recognition of
outstanding performance. These are determined based upon the factors described above and include Legg Mason stock options and long-term incentives that vest over a set period of time past the award date.
Portfolio Manager Ownership of Fund Securities
None of the portfolio managers named above owned shares of the Fund as of December 31, 2012.
Distributor
LMIS, 100 International Drive, P.O. Box 1476, Baltimore, MD
21203-1476, acts as a distributor of the shares of the Corporation pursuant to a Amended and Restated Distribution Agreement with the Corporation dated February 27, 2012 (the Underwriting Agreement).
LMIS is not obligated to sell any specific number of the Corporations shares and receives no compensation pursuant to the
Underwriting Agreement. Except as noted in the Prospectus, the Corporations shares are distributed in a continuous offering. The Underwriting Agreement is terminable with respect to the Fund without penalty, at any time, by vote of a majority
of the Corporations Independent Directors, or by vote of the holders of a majority of the shares of the Fund, or by LMIS upon 60 days notice to the Corporation.
Shareholder Services and Distribution Plans
12b-1 Plan
. The
Corporation, on behalf of the Fund, has adopted a shareholder services and distribution plan (the 12b-1 Plan) pursuant to Rule 12b-1 under the 1940 Act with respect to its Class A, Class C and Class R shares. Under the 12b-1 Plan,
the Fund pays distribution fees to LMIS for the services it provides and expenses it bears with respect to the distribution of Class C and Class R shares and service fees for Class A, Class C and Class R shares. The distributor will provide the
Board with periodic reports of amounts expended under the 12b-1 Plan and the purposes for which such expenditures were made. The Fund pays service fees, accrued daily and payable monthly, calculated at the annual rate of 0.25% of the value of the
funds average daily net assets attributable to its Class A, Class C and Class R shares. In addition, the Fund pays distribution fees with respect to the Class C shares at the annual rate of 0.75% of the Funds average daily net
assets attributable to such class and with respect to the Class R shares at the annual rate of 0.25% of the Funds average daily net assets attributable to such class.
Fees under the 12b-1 Plan may be used to make payments to the distributor for distribution services, Service Agents and other parties in respect of the sale of shares of each fund, and to make payments
for advertising, marketing or other promotional activity, and payments for preparation, printing and distribution of prospectuses, statements of additional information and reports for recipients other than regulators and existing shareholders. Each
fund may also make payments to the distributor, Service Agents and others for providing personal service or the maintenance of shareholder accounts. The amounts paid to each recipient may vary based upon certain factors, including, among other
things, the levels of sales of fund shares and/or shareholder services provided.
The 12b-1 Plan also provides that the
distributor and Service Agents may receive all or a portion of the sales charges paid by Class A and Class C investors.
55
The 12b-1 Plan permits each fund to pay fees to the distributor, Service Agents and others
as compensation for their services, not as reimbursement for specific expenses incurred. Thus, even if their expenses exceed the fees provided for by the 12b-1 Plan, the Fund will not be obligated to pay more than those fees and, if their expenses
are less than the fees paid to them, they will realize a profit. The Fund may pay the fees to the distributor and others until the 12b-1 Plan or distribution agreement is terminated or not renewed. In that event, the distributors or other
recipients expenses in excess of fees received or accrued through the termination date will be the distributors or other recipients sole responsibility and not obligations of the Fund. In their annual consideration of the
continuation of the 12b-1 Plan for the Fund, the Directors will review the 12b-1 Plan and the expenses for each class within the Fund separately.
The 12b-1 Plan also recognizes that various service providers to the Fund, such as the Manager, may make payments for distribution-related expenses out of their own resources, including past profits, or
payments received from the Fund for other purposes, such as management fees, and that the Funds distributor or Service Agents may from time to time use their own resources for distribution-related services, in addition to the fees paid under
the 12b-1 Plan. The 12b-1 Plan specifically provides that, to the extent that such payments might be deemed to be indirect financing of any activity primarily intended to result in the sale of shares of the Fund within the context of Rule 12b-1,
then the payments are deemed to be authorized by the 12b-1 Plan, if permitted under applicable law.
The 12b-1 Plan continues
in effect if such continuance is specifically approved at least annually by a vote of both a majority of the Directors and a majority of the Independent Directors of the Corporation who have no direct or indirect financial interest in the operation
of the 12b-1 Plan or in any agreement related to the 12b-1 Plan (Qualified Directors). The Qualified Directors, in the exercise of their business judgment in the best interests of the shareholders of the Fund and each class, have
approved the continuation of the 12b-1 Plan. The 12b-1 Plan requires that the Fund and distributor provide to the Board and the Board review, at least quarterly, a written report of the amounts expended (and the purposes therefor) under the 12b-1
Plan. The 12b-1 Plan further provides that the selection and nomination of the Qualified Directors is committed to the discretion of the Qualified Directors then in office. The 12b-1 Plan may be terminated with respect to any class of the Fund at
any time by a vote of a majority of the Funds Qualified Directors or by a vote of a majority of the outstanding voting securities of that class. The 12b-1 Plan may not be amended to increase materially the amount of permitted expenses of the
class thereunder without the approval of a majority of the outstanding securities of that class and may not be materially amended in any case without a vote of a majority of both the Directors and Qualified Directors. The Fund will preserve copies
of any plan, agreement or report made pursuant to the 12b-1 Plan for a period of not less than six years, and for the first two years the Fund will preserve such copies in an easily accessible place.
As contemplated by the 12b-1 Plan, the distributor acts as an agent of the Fund in connection with the offering of shares of the fund
pursuant to the distribution agreement. Dealer reallowances, if any, are described in the Funds Prospectus.
FI
Share 12b-1 Plan.
The Corporation, on behalf of the Fund, has adopted an amended distribution plan (the FI Share 12b-1 Plan, and, collectively with the 12b-1 Plan, the 12b-1 Plans) pursuant to Rule 12b-1 under the 1940
Act with respect to its Class FI shares, which among other things, permits the Corporation to pay LMIS fees for its services related to sales and distribution of Class FI shares and the provision of ongoing services to Class FI shareholders by
LMIS or other parties. Payments are made only from assets attributable to Class FI shares. Under the FI Share 12b-1 Plan, the aggregate fees may not exceed an annual rate of 0.40% (currently limited to 0.25%) of the Funds average daily net
assets attributable to Class FI shares. Distribution activities for which such payments may be made include, but are not limited to, compensation to persons who engage in or support distribution and redemption of shares, printing of prospectuses and
reports for persons other than existing shareholders, advertising, preparation and distribution of sales literature, overhead, travel and telephone expenses, all with respect to Class FI shares only. LMIS may pay all or a portion of the fee to its
investment executives.
56
The FI Share 12b-1 Plan will continue in effect only so long as it is approved at least
annually by the vote of a majority of the Board of Directors, including a majority of the Qualified Directors, cast in person at a meeting called for the purpose of voting on the FI Share 12b-1 Plan. The FI Share 12b-1 Plan may be terminated by a
vote of a majority of the Qualified or by a vote of a majority of the outstanding voting securities of the Class FI of the Fund. Any change in the FI Share 12b-1 Plan that would materially increase the distribution cost to the Fund requires
shareholder approval; otherwise, the FI Share 12b-1 Plan may be amended by the Directors, including a majority of the Qualified Directors, as previously described.
In accordance with Rule 12b-1, the FI Share 12b-1 Plan provides that LMIS will submit to the Corporations Board of Directors, and the Directors will review, at least quarterly, a written report of
any amounts expended pursuant to the FI Share 12b-1 Plan and the purposes for which expenditures were made. In addition, as long as the FI Share 12b-1 Plan is in effect, the selection and nomination of the Independent Directors will be committed to
the discretion of such Independent Directors.
There are certain anticipated benefits to shareholders of the Corporation that
may result from the FI Share 12b-1 Plan. For example, the payment of service fees will provide an incentive to maintain and enhance the level of services provided to the Funds Financial Intermediary shareholders. These efforts, in turn, could
lead to increased sales and reduced redemptions, eventually enabling the Fund to achieve economies of scale and lower per share operating expenses. Any reduction in such expenses would serve to offset, at least in part, the additional expenses
incurred by the Fund in connection with its FI Share 12b-1 Plan. Furthermore, the investment management of the Fund could be enhanced, as net inflows of cash from new sales might enable its Advisers to take advantage of attractive investment
opportunities, and reduced redemptions could eliminate the potential need to liquidate attractive securities positions in order to raise the funds necessary to meet the redemption requests.
Those persons listed in Management of the Fund as holding positions with LMIS may be deemed to have an interest in the
operation of the Plan. No Independent Director of the Corporation has an interest in the operation of the Plan.
LMIS pays
certain expenses in connection with the offering of shares of the Fund, including any compensation to its financial advisors, the printing and distribution of prospectuses, SAIs and periodic reports used in connection with the offering to
prospective investors, and expenses relating to any supplementary sales literature or advertising. The Fund bears the expenses of preparing, setting in type and mailing the prospectuses, SAIs and periodic reports to existing shareholders.
The 12b-1 Plans pay a fixed fee rate to LMIS each month. LMIS, in turn, generally uses the entire amount of this
compensation to pay distribution expenses, including amounts paid to third parties.
Proxy
Voting Policies and Procedures
The Directors of the Corporation have adopted the proxy voting policy of Western Asset
(the Policy) as the Proxy Voting Policies and Procedures of the Fund. The Policy governs in determining how proxies relating to the Funds portfolio securities are voted. A copy of the Policy is attached as Appendix B to this SAI.
Information regarding how the Fund voted proxies (if any) relating to portfolio securities during the period subsequent to the commencement of operations until June 30, 2012 will be available on or before August 31, 2012 without charge
(1) by calling 1-877-721-1926 and (2) on the SECs website at http://www.sec.gov.
57
Purchases of Shares
Investors may purchase shares from a Service Agent. In addition, certain investors, including retirement plans purchasing through certain
Service Agents, may purchase shares directly from the respective fund. When purchasing shares of a fund, investors must specify whether the purchase is for Class A, Class C or Class R. Service Agents may charge their customers an annual account
maintenance fee in connection with a brokerage account through which an investor purchases or holds shares. Accounts held directly at the transfer agent are not subject to a maintenance fee.
For additional information regarding applicable investment minimums and eligibility requirements, please see the Funds Prospectus.
There are minimum investment requirements of $1,000 for initial investments and $50 for subsequent investments for purchases
of Class A shares by: (i) current and retired board members of Legg Mason, (ii) current and retired board members of any fund advised by LMPFA or its affiliates (such board members, together with board members of Legg Mason, are
referred to herein as Board Members), (iii) current employees of Legg Mason and its affiliates, (iv) the immediate families of such persons (immediate families are such persons spouse, including
the surviving spouse of a deceased Board Member, and children under the age of 21) and (v) a pension, profit-sharing or other benefit plan for the benefit of such persons. The funds reserve the right to waive or change minimums, to decline any
order to purchase its shares and to suspend the offering of shares from time to time.
Class I Shares.
The
following persons are eligible to purchase Class I shares: (i) current employees of the funds manager and its affiliates; (ii) current and former board members of investment companies managed by affiliates of Legg Mason;
(iii) current and former board members of Legg Mason; and (iv) the immediate families of such persons. Immediate families are such persons spouse, including the surviving spouse of a deceased board member, and children under the age
of 21. For such investors, the minimum initial investment is $1,000 and the minimum for each purchase of additional shares is $50. Current employees may purchase additional Class I shares through a systematic investment plan.
Class IS Shares.
Class IS shares may be purchased only by Retirement Plans with omnibus accounts held on the books of the fund,
certain rollover IRAs and Institutional Investors, and other investors authorized by LMIS. In order to purchase Class IS shares, an investor must hold its shares in one account with the fund, which account is not subject to payment of recordkeeping
or similar fees by the fund to any intermediary.
Under certain circumstances, an investor who purchases fund shares pursuant
to a fee-based advisory account program of an Eligible Financial Intermediary as authorized by LMIS may be afforded an opportunity to make a conversion between one or more share classes owned by the investor in the same fund to Class I shares of
that fund. Such a conversion in these particular circumstances does not cause the investor to realize taxable gain or loss.
Systematic Investment Plan
. Shareholders may make additions to their accounts at any time by purchasing shares through a service known as the Systematic Investment Plan. Under the Systematic
Investment Plan, the distributor or the transfer agent is authorized through preauthorized transfers of at least $50 on a monthly, quarterly, every alternate month, semi-annual or annual basis to charge the shareholders account held with a
bank or other financial institution as indicated by the shareholder, to provide for systematic additions to the shareholders fund account. A shareholder who has insufficient funds to complete the transfer will be charged a fee of up to $25 by
the distributor or the transfer agent. The Systematic Investment Plan authorizes the distributor to apply cash held in the shareholders brokerage account to make additions to the account. Additional information is available from the Fund or a
Service Agent.
58
Sales Charge Alternatives
The following classes of shares are available for purchase. See the Prospectus for a discussion of who is eligible to purchase certain classes and of factors to consider in selecting which class of shares
to purchase.
Class A Shares
. Class A shares are sold to investors at the public offering price, which is the
NAV plus an initial sales charge, as described in the Funds Prospectus.
Members of the selling group may receive a
portion of the sales charge as described in the Prospectus and may be deemed to be underwriters of the Fund as defined in the 1933 Act. Sales charges are calculated based on the aggregate of purchases of Class A shares of the fund made at one
time by any person, which includes an individual and his or her spouse and children under the age of 21, or a trustee or other fiduciary of a single trust estate or single fiduciary account. For additional information regarding sales
charge reductions, see Sales Charge Waivers and Reductions below.
Purchases of Class A shares of $1,000,000
or more will be made at NAV without any initial sales charge, but will be subject to a contingent deferred sales charge of 1.00% on redemptions made within 18 months of purchase. The contingent deferred sales charge is waived in the same
circumstances in which the contingent deferred sales charge applicable to Class C shares is waived. See Contingent Deferred Sales Charge Provisions and Waivers of Contingent Deferred Sales Charge below.
Class C Shares
. Class C shares are sold without an initial sales charge but are subject to a contingent deferred sales charge
payable upon certain redemptions. See Contingent Deferred Sales Charge Provisions below.
Class R Shares
.
Class R shares are sold at NAV with no initial sales charge and no contingent deferred sales charge upon redemption.
Sales Charge Waivers
and Reductions
Initial Sales Charge Waivers
. Purchases of Class A shares may be made at NAV without an initial
sales charge in the following circumstances:
(a) sales to (i) current and retired Board Members,
(ii) current employees of Legg Mason and its subsidiaries, (iii) the immediate families of such persons (immediate families are such persons spouse, including the surviving spouse of a deceased Board Member,
and children under the age of 21) and (iv) a pension, profit-sharing or other benefit plan for the benefit of such persons;
(b) sales to any employees of Service Agents having dealer, service or other selling agreements with the Funds distributor or otherwise having an arrangement with any such Service Agent with respect
to sales of Fund shares, and by the immediate families of such persons or by a pension, profit-sharing or other benefit plan for the benefit of such persons (providing the purchase is made for investment purposes and such securities will not be
resold except through redemption or repurchase);
(c) offers of Class A shares to any other investment
company to effect the combination of such company with the fund by merger, acquisition of assets or otherwise;
(d) purchases by shareholders who have redeemed Class A shares in the Fund (or Class A shares of another fund
sold by the distributor that is offered with a sales charge) and who wish to reinvest their redemption proceeds in the Fund, provided the reinvestment is made within 60 calendar days of the redemption;
(e) purchases by accounts managed by registered investment advisory subsidiaries of Citigroup Inc.
(Citigroup);
59
(f) purchases by certain separate accounts used to fund unregistered
variable annuity contracts; and
(g) purchases by investors participating in wrap fee or asset
allocation programs or other fee-based arrangements sponsored by broker/dealers and other financial institutions that have entered into agreements with LMIS.
In order to obtain such discounts, the purchaser must provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the elimination of the sales charge.
Accumulation Privilege
Please see the Funds Prospectus for information regarding accumulation privileges.
Letter of Intent
Helps you take advantage of breakpoints in Class A sales charges. You may purchase
Class A shares of funds sold by the distributor over a 13-month period and pay the same sales charge, if any, as if all shares had been purchased at once. You have a choice of five Asset Level Goal amounts, as follows:
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(1) $100,000
(2) $250,000
(3) $500,000
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(4) $750,000
(5) $1,000,000
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Each time you make a Class A purchase under a Letter of Intent, you will be entitled to pay the
sales charge that is applicable to the amount of your Asset Level Goal. For example, if your Asset Level Goal is $100,000, any Class A investments you make under a Letter of Intent would be subject to the sales charge of the specific fund you
are investing in for purchases of $100,000. Sales charges and breakpoints vary among the funds sold by the distributor.
When
you enter into a Letter of Intent, you agree to purchase in Eligible Accounts over a thirteen (13) month period Eligible Fund Purchases in an amount equal to the Asset Level Goal you have selected, less any Eligible Prior Purchases. For this
purpose, shares are valued at the public offering price (including any sales charge paid) calculated as of the date of purchase, plus any appreciation in the value of the shares as of the date of calculation, except for Eligible Prior Purchases,
which are valued at current value as of the date of calculation. Your commitment will be met if at any time during the 13-month period the value, as so determined, of eligible holdings is at least equal to your Asset Level Goal. All reinvested
dividends and distributions on shares acquired under the Letter will be credited towards your Asset Level Goal. You may include any Eligible Fund Purchases towards the Letter, including shares of classes other than Class A shares. However, a
Letter of Intent will not entitle you to a reduction in the sales charge payable on any shares other than Class A shares, and if the shares are subject to a contingent deferred sales charge, you will still be subject to that contingent deferred
sales charge with respect to those shares. You must make reference to the Letter of Intent each time you make a purchase under the Letter.
Eligible Fund Purchases
. Generally, any shares of a fund sold by the distributor may be credited towards your Asset Level Goal. Shares of money market funds sold by the distributor acquired by
exchange from other funds offered with a sales charge may be credited toward your Asset Level Goal.
The eligible funds may
change from time to time. Investors should check with their Service Agent to see which funds may be eligible.
Eligible
Accounts
. Purchases may be made through any account in your name, or in the name of your spouse or your children under the age of 21. You may need to provide certain records, such as account statements, in order to verify your eligibility for
reduced sales charges. Contact your Service Agent to see which accounts may be credited toward your Asset Level Goal.
Eligible Prior Purchases
. You may also credit towards your Asset Level Goal any Eligible Fund Purchases made in Eligible Accounts
at any time prior to entering into the Letter of Intent that have not been sold or redeemed, based on the current price of those shares as of the date of calculation.
60
Increasing the Amount of the Letter of Intent
. You may at any time increase your
Asset Level Goal. You must, however, contact your Service Agent, or if you purchase your shares directly through the transfer agent, contact the transfer agent, prior to making any purchases in an amount in excess of your current Asset Level Goal.
Upon such an increase, you will be credited by way of additional shares at the then-current offering price for the difference between: (a) the aggregate sales charges actually paid for shares already purchased under the Letter of Intent and
(b) the aggregate applicable sales charges for the increased Asset Level Goal. The 13-month period during which the Asset Level Goal must be achieved will remain unchanged.
Sales and Exchanges
. Shares acquired pursuant to a Letter of Intent, other than Escrowed Shares as defined below, may be redeemed
or exchanged at any time, although any shares that are redeemed prior to meeting your Asset Level Goal will no longer count towards meeting your Asset Level Goal. However, complete liquidation of purchases made under a Letter of Intent prior to
meeting the Asset Level Goal will result in the cancellation of the Letter. See Failure to Meet Asset Level Goal below. Exchanges in accordance with the funds Prospectus are permitted, and shares so exchanged will continue to count
towards your Asset Level Goal, as long as the exchange results in an Eligible Fund Purchase.
Cancellation of Letter of
Intent
. You may cancel a Letter of Intent by notifying your Service Agent in writing, or if you purchase your shares directly through the transfer agent, by notifying the transfer agent in writing. The Letter will be automatically cancelled if
all shares are sold or redeemed as set forth above. See Failure to Meet Asset Level Goal below.
Escrowed
Shares
. Shares equal in value to five percent (5%) of your Asset Level Goal as of the date your Letter of Intent (or the date of any increase in the amount of the Letter) is accepted will be held in escrow during the term of your Letter.
The Escrowed Shares will be included in the total shares owned as reflected in your account statement and any dividends and capital gains distributions applicable to the Escrowed Shares will be credited to your account and counted towards your Asset
Level Goal or paid in cash upon request. The Escrowed Shares will be released from escrow if all the terms of your Letter are met.
Failure to Meet Asset Level Goal
. If the total assets under your Letter of Intent within its 13-month term are less than your Asset Level Goal whether because you made insufficient Eligible Fund
Purchases, redeemed all of your holdings or cancelled the Letter before reaching your Asset Level Goal, you will be liable for the difference between: (a) the sales charge actually paid and (b) the sales charge that would have applied if
you had not entered into the Letter. You may, however, be entitled to any breakpoints that would have been available to you under the accumulation privilege. An appropriate number of shares in your account will be redeemed to realize the amount due.
For these purposes, by entering into a Letter of Intent, you irrevocably appoint your Service Agent, or if you purchase your shares directly through the transfer agent, the transfer agent, as your attorney-in-fact for the purposes of holding the
Escrowed Shares and surrendering shares in your account for redemption. If there are insufficient assets in your account, you will be liable for the difference. Any Escrowed Shares remaining after such redemption will be released to your account.
Contingent Deferred Sales Charge Provisions
Contingent deferred sales charge shares are: (a) Class C shares and (b) Class A shares that were purchased without an initial sales charge but are subject to a contingent
deferred sales charge. A contingent deferred sales charge may be imposed on certain redemptions of these shares.
Any
applicable contingent deferred sales charge will be assessed on the NAV at the time of purchase or redemption, whichever is less.
Class A shares that are contingent deferred sales charge shares are subject to a 1.00% contingent deferred sales charge if redeemed within 18 months of purchase. Class C shares that are contingent
deferred sales charge shares are subject to a 1.00% contingent deferred sales charge if redeemed within 12 months of purchase.
61
In determining the applicability of any contingent deferred sales charge, it will be
assumed that a redemption is made first of shares representing capital appreciation, next of shares representing the reinvestment of dividends and capital gain distributions, next of shares that are not subject to the contingent deferred sales
charge and finally of other shares held by the shareholder for the longest period of time. The length of time that contingent deferred sales charge shares acquired through an exchange have been held will be calculated from the date the shares
exchanged were initially acquired in one of the other funds sold by the distributor. For federal income tax purposes, the amount of the contingent deferred sales charge will reduce the gain or increase the loss, as the case may be, on the amount
realized on redemption. The Funds distributor receives contingent deferred sales charges in partial consideration for its expenses in selling shares.
Waivers of Contingent Deferred Sales Charge
The
contingent deferred sales charge will be waived on: (a) exchanges (see Exchange Privilege); (b) automatic cash withdrawals in amounts equal to or less than 2.00% per month of the shareholders account balance at the
time the withdrawals commence, up to a maximum of 12.00% in one year (see Systematic Withdrawal Plan); (c) redemptions of shares within 12 months following the death or disability (as defined in the Code) of the shareholder;
(d) mandatory post-retirement distributions from retirement plans or IRAs commencing on or after attainment of age 70
1
/
2
; (e) involuntary redemptions; (f) redemptions of shares to effect a combination of the Fund with
any investment company by merger, acquisition of assets or otherwise; (g) tax-free returns of an excess contribution to any retirement plan; and (h) certain redemptions of shares of a fund in connection with lump-sum or other distributions
made by eligible retirement plans or redemption of shares by participants in certain wrap fee or asset allocation programs sponsored by broker/dealers and other financial institutions that have entered into agreements with the
distributor or the Manager.
The contingent deferred sales charge is waived on Class C shares purchased by retirement
plan omnibus accounts held on the books of the Fund.
A shareholder who has redeemed shares from other funds sold by the
distributor may, under certain circumstances, reinvest all or part of the redemption proceeds within 60 days and receive pro rata credit for any contingent deferred sales charge imposed on the prior redemption.
Contingent deferred sales charge waivers will be granted subject to confirmation by the distributor or the transfer agent of the
shareholders status or holdings, as the case may be.
Determination of Public Offering Price
The Fund offers its shares on a continuous basis. The public offering price for each class of shares of the Fund is equal to the NAV per
share at the time of purchase, plus for Class A shares an initial sales charge based on the aggregate amount of the investment. The public offering price for Class C, Class FI, Class R, Class I and Class IS shares (and Class A share
purchases, including applicable rights of accumulation, equaling or exceeding $1,000,000) is equal to the NAV per share at the time of purchase and no sales charge is imposed at the time of purchase. A contingent deferred sales charge, however, is
imposed on certain redemptions of Class C shares, and on Class A shares when purchased in amounts equaling or exceeding $1,000,000.
Set forth below is an example of the method of computing the offering price of the Class A shares of the Fund based on the estimated NAV of a share of the Fund.
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Class A (based on an estimated NAV of $10.00 and a maximum initial sales charge of 4.25%)
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$
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10.44
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Other Purchase Information
A purchase order, together with payment in one of the forms described in the following paragraphs, received by Boston Financial Data Services (the Transfer Agent or BFDS) prior to
the close of regular trading on the NYSE (ordinarily 4:00 p.m., Eastern time) (close of the NYSE) will be effected based on that days net asset value. An order received after the close of the NYSE will generally be effected based
on the net asset value determined on the next business day. However, orders received by certain retirement plans and other financial intermediaries by the close of the NYSE and communicated to the Transfer Agent by 9:00 a.m., Eastern time, on the
following business day will be effected based on the net asset value determined on the prior business day.
Purchases of
shares can be made by wiring federal funds to State Street Bank and Trust Company. Before wiring federal funds, the investor must first telephone the fund at 1-877-721-1926 to receive instructions for wire transfer. On the telephone, the following
information will be required: shareholder name; name of the person authorizing the transaction; shareholder account number; name of the fund and class of shares to be purchased; amount being wired; and name of the wiring bank.
The wire should state that the funds are for the purchase of shares of a specific fund and share class and include the account name and
number.
Shares may also be purchased and paid for by the contribution of eligible portfolio securities, subject in each case
to approval by the Manager. Approval will depend on, among other things, the nature and quality of the securities offered and the current needs of the fund. Securities offered in payment for shares will be valued in the same way and at the same time
the fund values its portfolio securities for purposes of determining net asset value. See Share price in the Prospectus. Investors who wish to purchase Fund shares through the contribution of securities should contact the Fund at
1-877-721-1926 for instructions. Investors should also realize that at the time of contribution they may be required to recognize a gain or loss for tax purposes on securities contributed. The fund has full discretion to reject any securities
offered as payment for shares.
Purchases will be made in full and fractional shares.
The Fund and LMIS reserve the right, in their sole discretion, to request additional documents and information from investors in
connection with purchase orders and to redeem shares if information provided in the application should prove to be incorrect or incomplete in any manner judged by the Fund to be material (e.g., in a manner such as to render the shareholder
ineligible to purchase shares of the Fund).
Shares of the Fund may not be qualified or registered for sale in all States.
Prospective investors should inquire as to whether shares of the Fund are available for offer and sale in their State of residence. Shares of the Fund may not be offered or sold in any State unless registered or qualified in that jurisdiction or
unless an exemption from registration or qualification is available.
Redemption of Shares
The right of redemption may be suspended or the date of payment postponed (a) for any period during which the NYSE
is closed (other than for customary weekend and holiday closings), (b) when trading in the markets a fund normally utilizes is restricted, or an emergency exists, as determined by the SEC, so that disposal of the Funds investments or
determination of NAV is not reasonably practicable or (c) for such other periods as the SEC by order may permit for protection of the Funds shareholders. In the case of any such suspension, an investor may either withdraw the request for
redemption or receive payment based upon the net asset value next determined after the suspension is lifted.
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For direct shareholders, fund shares may be redeemed through four methods: (1) by
sending a written request for redemption to Legg Mason funds, P.O. Box 55214, Boston, MA 02205-8504; (2) by faxing a request to the Fund, c/o BFDS, at 1-816-218-0462; (3) by calling the Fund at 1-877-721-1926; or (4) by wire
communication with the Transfer Agent. In each case, the investor should first notify the Fund at 1-877-721-1926 of the intention to redeem. Shareholders who wish to be able to redeem by telephone or wire communication must complete an authorization
form in advance. Redemptions over $10,000,000 may be initiated by telephone, but must be confirmed in writing prior to processing. Other shareholders should contact their Service Agent.
If the shares to be redeemed were issued in certificate form, the certificates must be endorsed for transfer (or be accompanied by an
endorsed stock power) and must be submitted to the transfer agent together with the redemption request.
Redemption proceeds
will be mailed to an investors address of record. The transfer agent may require additional supporting documents for redemptions made by corporations, executors, administrators, trustees or guardians. A redemption request will not be deemed
properly received until the transfer agent receives all required documents in proper form.
If a shareholder holds shares in
more than one class, any request for redemption must specify the class being redeemed. In the event of a failure to specify which class, or if the investor owns fewer shares of the class than specified, the redemption request will be delayed until
the transfer agent receives further instructions. Redemption proceeds for shares purchased by check, other than a certified or official bank check, will be remitted upon clearance of the check, which may take up to ten days. Each Service Agent is
responsible for transmitting promptly orders for its customers.
The Service Agent may charge you a fee for executing your
order. The amount and applicability of such a fee is determined and disclosed to its customers by each Service Agent.
Additional Information Regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for
following instructions communicated by telephone that are reasonably believed to be genuine. The Fund and its agents will employ procedures designed to verify the identity of the caller and legitimacy of instructions (for example, a
shareholders name and account number will be required and phone calls may be recorded). The Fund reserves the right to suspend, modify or discontinue the telephone redemption and exchange program or to impose a charge for this service at any
time following at least seven (7) days prior notice to shareholders.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the Withdrawal Plan) is available to shareholders as described in the Prospectus. To the
extent withdrawals under the Withdrawal Plan exceed dividends, distributions and appreciation of a shareholders investment in the Fund, there will be a reduction in the value of the shareholders investment, and continued withdrawal
payments may reduce the shareholders investment and ultimately exhaust it. Withdrawal payments should not be considered as income from investment in the Fund. The Withdrawal Plan will be carried over on exchanges between funds sold by the
distributor or classes of the fund. All dividends and distributions on shares in the Withdrawal Plan are reinvested automatically at NAV in additional shares of the applicable fund.
For additional information, shareholders should contact their Service Agent. A shareholder who purchases shares directly through the
Transfer Agent may continue to do so and applications for participation in the Withdrawal Plan should be sent to the Transfer Agent. Withdrawals may be scheduled on any day of the month; however, if the shareholder does not specify a day, the
transfer agent will schedule the withdrawal on the 25th day (or the next business day if the 25th day is a weekend or holiday) of the month.
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Distributions in Kind
In consideration of the best interests of the non-redeeming shareholders, the Corporation reserves the right to pay any redemption price in whole or in part by a distribution in kind of readily marketable
securities held by a fund in lieu of cash. If shares are redeemed in kind, however, the redeeming shareholder should expect to incur transaction costs upon the disposition of the securities received in the distribution. In addition, depending upon
the circumstances, a shareholder may incur additional tax liability upon the sale of securities received in a redemption in kind.
Significant Investors
Certain investment companies may invest in the Fund and may at times have substantial investments in the Fund. These investment companies
are referred to as funds of funds because they invest primarily in other investment companies.
From time to time,
the Fund may experience relatively large redemptions or investments due to transactions in fund shares by a fund of funds or other significant investor. The effects of these transactions could adversely affect the Funds performance. In the
event of such redemptions or investments, the Fund could be required to sell securities or to invest cash at a time when it is not advantageous to do so. Such transactions may increase brokerage and/or other transaction costs of the Fund. In
addition, when a fund of funds or other investor owns a substantial portion of the shares of the Fund, a large redemption by the fund of funds or other investor could cause the Funds expenses to increase and could result in the Fund becoming
too small to be economically viable. Redemptions of Fund shares could also accelerate the realization of taxable capital gains in the Fund if sales of securities result in capital gains. The impact of these transactions is likely to be greater when
a fund of funds or other significant investor purchases, redeems, or owns a substantial portion of the Funds shares.
Shareholder Servicing Payments
The Fund may make payments to financial intermediaries that sell shares of the Fund or
to other parties in connection with the sale or servicing of such shares. Such payments may relate to, without limitation, personal services rendered to shareholders of the Fund and the maintenance of shareholder accounts, including compensation to,
and expenses of, financial intermediaries (including retirement plans, their service providers and their sponsors who provide services to plan participants) who aid in the processing of purchase or redemption requests or the processing of dividend
payments, who provide information periodically to shareholders showing their positions in the Funds shares, who forward communications from the Fund to shareholders, who render ongoing advice concerning the suitability of particular investment
opportunities offered by the Corporation in light of the shareholders needs, who respond to inquiries from shareholders relating to such services, or who train personnel in the provision of such services. Salespersons and others entitled to
receive compensation for selling or servicing Fund shares may receive greater compensation with respect to one class of shares than the other.
Exchange Privilege
Shareholders in the Fund
may exchange their shares for shares of the same class of any of the other portfolios of the Corporation, or, if the investor meets the applicable eligibility requirements for making an initial investment in the applicable share class, directly for
shares of a different class of the same fund, provided, in each case, that the shares of that class are being offered at the time of the proposed exchange. Shareholders in the Fund may also exchange their shares for the same class of shares of any
other funds distributed by LMIS so long as the proposed exchange meets the eligibility requirements of the shares of the other fund. Investments by exchange are made at the per share net asset values next determined after the order for exchange is
received in good order.
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When a shareholder decides to exchange shares of the Fund for shares of the same class of
another fund, the Corporations transfer agent will redeem shares of the Fund and invest the proceeds in shares of the portfolio of the Corporation selected. When a shareholder decides to exchange shares of the Fund for shares of a different
class of the Fund, the Corporations transfer agent will simultaneously exchange the shareholders existing shares for shares of the new class. Redemptions and exchanges of shares of the Fund will be made at their net asset value
determined on the same day that the request is received in proper order, if received before the close of regular trading on the Exchange. If the request is received by the transfer agent after such close of regular trading, shares will be redeemed
or exchanged at their net asset value determined as of the close of the Exchange on the next day the Exchange is open. The Fund reserves the right to modify or terminate the exchange privilege at any time. Prior to any exchange, the shareholder
should obtain and review a copy of the current Prospectus of each fund into which an exchange is being considered. Prospectuses may be obtained from a Service Agent. For more information concerning the exchange privilege, or to make an exchange,
please contact Legg Mason Funds.
Class A and Class R Exchanges.
Class A and Class R shareholders who wish to exchange
all or a portion of their shares for shares of the respective class in another fund may do so without imposition of any charge.
Class C Exchanges.
Class C shares may be exchanged for other Class C shares without a contingent deferred sales charge. Upon an
exchange, the new Class C shares will be deemed to have been purchased on the same date as the Class C shares of the fund that have been exchanged.
Additional Information Regarding the Exchange Privilege
The Fund is not
designed to provide investors with a means of speculation on short-term market movements. A pattern of frequent exchanges by investors can be disruptive to efficient portfolio management and, consequently, can be detrimental to the Fund and its
shareholders. See Frequent trading of fund shares in the Funds Prospectus.
During times of drastic economic
or market conditions, the Fund may suspend the exchange privilege temporarily without notice and treat exchange requests based on their separate componentsredemption orders with a simultaneous request to purchase the other funds shares.
In such a case, the redemption request would be processed at the Funds next determined NAV but the purchase order would be effective only at the NAV next determined after the Fund being purchased formally accepts the order, which may result in
the purchase being delayed.
Certain shareholders may be able to exchange shares by telephone. See the Funds Prospectus
for additional information. Redemption procedures discussed above are also applicable for exchanging shares, and exchanges will be made upon receipt of all supporting documents in proper form. If the account registration of the shares of the fund
being acquired is identical to the registration of the shares of the Fund exchanged, no signature guarantee is required.
This
exchange privilege may be modified or terminated at any time, and is available only in those jurisdictions where such exchanges legally may be made. Before making any exchange, shareholders should contact the transfer agent or, if they hold fund
shares through a Service Agent, their Service Agent, to obtain more information and prospectuses of the funds to be acquired through the exchange. An exchange is treated as a sale of the shares exchanged and could result in taxable gain or loss to
the shareholder making the exchange.
Systematic Withdrawal Plan
Shareholders with an initial net asset value of $1,000,000 or more are eligible to participate in the Systematic Withdrawal Plan. The
amounts paid to you each month are obtained by redeeming sufficient shares from your account to provide the withdrawal amount that you have specified. Receipt of payment of proceeds or
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redemptions made through the Systematic Withdrawal Plan will be wired through ACH to your checking or savings accountredemptions of Fund shares may occur on any business day of the month
and the checking or savings account will generally be credited with the proceeds in approximately three business days.
Redemptions will be based on the net asset value per share determined as of the close of regular trading on the Exchange (normally 4:00
p.m., Eastern time) on the day corresponding to the redemption option designated by the investor. If the Exchange is not open for business on that day, the shares will be redeemed based on the per share net asset value determined as of the close of
regular trading on the Exchange on the next day the Exchange is open. If the redemption option designated is the last day of the month and the Exchange is not open for business on that day, the shares will be redeemed based on the per share net
asset value determined as of the previous day the Exchange was open. Requests must be made in writing to Legg Mason Institutional Funds to participate in, change or discontinue the Systematic Withdrawal Plan. You may change the monthly amount to be
paid to you or terminate the Systematic Withdrawal Plan at any time without charge or penalty by notifying Legg Mason Institutional Services. The Fund, its transfer agent, and Legg Mason Funds also reserve the right to modify or terminate the
Systematic Withdrawal Plan at any time.
Withdrawal payments are treated as a sale of shares rather than as a dividend or
other distribution. These payments are taxable to the extent that the total amount of the payments exceeds the tax basis of the shares sold. If the periodic withdrawals exceed reinvested dividends and other distributions, the amount of your original
investment may be correspondingly reduced.
Ordinarily, it may not be in your interest to purchase additional shares of the
Fund if you maintain a Systematic Withdrawal Plan, because there are tax disadvantages associated with such purchases and withdrawals.
Portfolio Transactions and Brokerage
The
portfolio turnover rate is computed by dividing the lesser of purchases or sales of securities for the period by the average value of portfolio securities for that period. Short-term securities are excluded from the calculation.
Based on the Adviser(s) assessment of market conditions, the Adviser(s) may trade the Funds investments more frequently at
some times than at others resulting in a higher portfolio turnover rate. High portfolio turnover rates are likely to result in higher brokerage commissions or other transaction costs and could give rise to a greater amount of taxable capital gains.
Under the Management Agreement and Advisory Agreements, the Manager and the Advisers are responsible for the execution of the
Funds transactions. The Funds Advisers place all orders for the purchase and the sale of portfolio investments with brokers or dealers selected by it in its discretion. Transactions on stock exchanges and other agency transactions
involve the payment by the Fund of brokerage commissions. There is generally no stated commission in the case of securities, such as U.S. Government securities, traded in the over-the-counter markets, but the price paid by the Corporation usually
includes an undisclosed dealer commission or markup. In selecting brokers or dealers, the Advisers must seek the most favorable price (including the applicable dealer spread) and execution for such transactions. The Fund may not always pay the
lowest commission or spread available. Rather, in placing orders on behalf of the Fund, the Advisers will also take into account such factors as size of the order, difficulty of execution, efficiency of the executing brokers or dealers
facilities and any risk assumed by the executing broker or dealer.
It is the current policy of the Advisers not to give
consideration to research, statistical and other non-execution services (except as described below) furnished by brokers or dealers to the Advisers in selecting broker dealers to execute Fund transactions (commonly known as soft dollar
commission arrangements). However, an Adviser may receive research or statistical information from brokers or dealers with whom it executes trades.
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Since its inception, the Fund has not used LMIS or any other affiliated person as a
broker.
The Fund may use LMIS, among others, as broker for agency transactions in listed and over-the-counter securities
at commission rates and under circumstances consistent with the policy of best execution.
Some securities considered by an
Adviser for purchase by the Fund may also be appropriate for other clients served by the Adviser. To the extent the Fund and such other clients purchase the same security, transactions in such security will be allocated among the Fund and such other
clients in a manner considered fair and reasonable by the Adviser.
The Fund may not buy securities from, or sell securities
to, an Adviser or its affiliated persons as principal, except as permitted by the rules and regulations of the SEC or interpretations of the SEC staff. Subject to certain conditions, the Fund may purchase securities that are offered in underwritings
in which an affiliate of an Adviser is a participant, although the Fund may not make such purchases directly from such affiliate.
The Advisers will select brokers to execute portfolio transactions. In the over-the-counter market, the Fund generally will deal with responsible primary market makers unless a more favorable execution
can otherwise be obtained.
Investment decisions for the Fund are made independently from those of other funds and accounts
advised by the Advisers. However, the same security may be held in the portfolios of more than one fund or account. When two or more accounts simultaneously engage in the purchase or sale of the same security, the prices and amounts will be
equitably allocated to each account. In some cases, this procedure may adversely affect the price or quantity of the security available to a particular account. In other cases, however, an accounts ability to participate in larger volume
transactions may produce better executions and prices. Depending on investment objectives, applicable law, governing documents, current holdings, cash availability, and other factors, the Advisers or their affiliates may sell or recommend the sale
of a particular security for certain accounts and buy or recommend the purchase of such security for other accounts, and accordingly, transactions for the Fund may not be consistent with transactions in other accounts or with the Advisers
investment recommendations.
Western Assets Broker Review Committee periodically reviews the Funds approved broker
lists, broker allocation and execution to ensure that they are consistent with the Funds stated policy.
Codes of Ethics
The Corporation, the Manager, LMIS and each Adviser have adopted codes of ethics under Rule 17j-1 of the 1940 Act. These
codes of ethics permit personnel subject to the codes to invest in securities, including securities that may be purchased or held by the Corporation.
Additional Tax Information
The following
discussion of U.S. federal income tax consequences of an investment in the Fund is based on the Code, U.S. Treasury regulations, and other applicable authority, all as of the date of this SAI. These authorities are subject to change by legislative
or administrative action, possibly with retroactive effect. The following discussion is only a summary of some of the important U.S. federal tax considerations generally applicable to investments in the Fund. There may be other tax considerations
applicable to particular shareholders, including tax-advantaged retirement plans and foreign persons (defined below). Shareholders should consult their own tax advisors regarding their particular situations and the possible application of foreign,
state and local tax laws. Special tax rules apply to investments through defined contribution plans and other tax-qualified plans. Shareholders should consult their tax advisers to determine the suitability of shares of the Fund as an investment
through such plans and the precise effect of such an investment in their particular tax situations.
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On October 31, 2012, the Fund had yet to commence operations, and so did not have any
capital loss carryforwards.
Net capital losses incurred in a year may be carried forward without expiration; such loss
carryforwards will retain their character as short-term or long-term. See below for a more detailed discussion of the tax rules applicable to capital loss carryforwards.
General Requirements for Pass-through Treatment
The Fund
intends to elect to be treated and to qualify to be treated each year as a regulated investment company (RIC) under Subchapter M of the Code. In order to qualify for treatment as a RIC, the Fund must, among other things:
(a) derive at least 90% of its gross income for each taxable year from (i) dividends, interest, payments with respect
to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its
business of investing in such stock, securities, or currencies, and (ii) net income derived from interests in qualified publicly traded partnerships (as defined below);
(b) diversify its holdings so that, at the end of each quarter of the Funds taxable year, (i) at least 50% of
the value of the Funds total assets is represented by cash and cash items, U.S. Government securities, securities of other regulated investment companies, and other securities limited in respect of any one issuer to a value not greater than 5%
of the value of the Funds total assets and not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the Funds total assets is invested (x) in the securities (other than
those of the U.S. Government or other regulated investment companies) of any one issuer or of two or more issuers that the Fund controls and that are engaged in the same, similar, or related trades or businesses, or (y) in the securities of one
or more qualified publicly traded partnerships (as defined below); and
(c) distribute with respect to each
taxable year at least 90% of the sum of its investment company taxable income (as that term is defined in the Code without regard to the deduction for dividends paidgenerally, taxable ordinary income and the excess, if any, of net short-term
capital gains over net long-term capital losses) and net tax-exempt interest income, for such year.
In general, for purposes
of the 90% gross income requirement described in paragraph (a) above, income derived from a partnership will be treated as qualifying income only to the extent such income is attributable to items of income of the partnership which would be
qualifying income if realized by the Fund. However, 100% of the net income derived from an interest in a qualified publicly traded partnership (a partnership (x) the interests in which are traded on an established securities market
or are readily tradable on a secondary market or the substantial equivalent thereof, and (y) that derives less than 90% of its income from the qualifying income described in paragraph (a)(i) above) will be treated as qualifying income. In
general, such entities will be treated as partnerships for federal income tax purposes because they meet the passive income requirement under Code section 7704(c)(2). In addition, although in general the passive loss rules of the Code do not apply
to regulated investment companies, such rules do apply to a RIC with respect to items attributable to an interest in a qualified publicly traded partnership.
For purposes of the diversification test in paragraph (b) above, the term outstanding voting securities of such issuer will include the equity securities of a qualified publicly traded
partnership. Also for purposes of the diversification test in paragraph (b) above, identification of the issuer (or, in some cases, issuers) of certain Fund investments will depend on the terms and conditions of the investment. In some cases,
identification of the issuer (or issuers) is uncertain under current law, and an adverse determination or future guidance by the Internal Revenue Service (IRS) with respect to the identity of the issuer for a particular type of
investment may adversely affect the Funds ability to meet the diversification test.
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If the Fund qualifies as a RIC that is accorded special tax treatment, the Fund will
not be subject to federal income tax on income distributed in a timely manner to its shareholders in the form of dividends (including Capital Gain Dividends, as defined below). If the Fund were to fail to meet the income, diversification or
distribution test described above, the Fund could in some cases cure such failure, including by paying a fund-level tax, paying interest, making additional distributions or disposing of certain assets. In particular, to the extent that the Fund does
not satisfy the diversification test as of a particular quarter end, it will have up to 30 days after that quarter end to adjust its holdings in order to comply with the test retrospectively. Portfolio transactions executed by the Fund in order to
comply with the diversification test will increase the Funds portfolio turnover and trading costs and may increase the amount of taxes payable by shareholders to the extent any capital gains are realized as a result of such transactions.
If the Fund fails to distribute in a calendar year at least 98% of its ordinary income for such year and at least 98.2%
of its capital gain net income for the one-year period ending October 31 (or a later date, if the Fund is permitted to so elect and so elects), plus any retained amount from the prior year, the Fund will be subject to a 4% excise tax on the
undistributed amounts. For purposes of the required excise tax distribution, a RICs ordinary gains and losses from the sale, exchange or other taxable disposition of property that would otherwise be taken into account after October 31 of
a calendar year (or a later date, if the Fund makes the election referred to above) generally are treated as arising on January 1 of the following calendar year. Also, for these purposes, the Fund will be treated as having distributed any
amount on which it has been subject to corporate income tax in the taxable year ending with the calendar year. A distribution declared by the Fund in October, November or December of any year and payable to shareholders of record on a date in such
months will be deemed to have been paid by the Fund and received by the shareholders on December 31 of the year in which the distribution is declared if the distribution is paid by the Fund during the following January. Such a distribution,
therefore, will be taxable to shareholders for the year in which that December 31 falls. The Fund intends generally to make distributions sufficient to avoid imposition of the 4% excise tax, although there can be no assurance that it will be
able to do so.
The Fund intends to distribute at least annually to its shareholders all or substantially all of its
investment company taxable income (computed without regard to the dividends-paid deduction) and may distribute its net capital gain. Investment company taxable income that is retained by the Fund will be subject to tax at regular corporate rates.
The Fund may also retain for investment its net capital gain. If the Fund retains any net capital gain, it will be subject to tax at regular corporate rates on the amount retained, but may designate the retained amount as undistributed capital gains
in a notice to its shareholders who (i) will be required to include in income for federal income tax purposes, as long-term capital gain, their respective shares of such undistributed amount, and (ii) will be entitled to credit their
proportionate shares of the tax paid by the Fund on such undistributed amount against their federal income tax liabilities, if any, and to claim refunds to the extent the credit exceeds such liabilities. For federal income tax purposes, the tax
basis of shares owned by a shareholder of the Fund will be increased by an amount equal to the difference between the amount of undistributed capital gains included in the shareholders gross income and the tax deemed paid by the shareholder
under clause (ii) of the preceding sentence.
The Fund may be treated as a personal holding company for federal income
tax purposes. A fund that is a personal holding company would for each taxable year be subject to a 15% personal holding company tax on any undistributed personal holding company income, as defined in Section 545 of the Code. If the Fund were
to be treated as a personal holding company, it would aim to distribute all or substantially all of its personal holding company income with respect to each taxable year. For these purposes, a personal holding company may elect to treat certain
dividends paid before the 15th day of the third month following the close of the taxable year as having been paid during the prior taxable year.
In determining its net capital gain, including in connection with determining the amount available to support a Capital Gain Dividend, its taxable income, and its earnings and profits, a RIC generally is
permitted to elect to treat part or all of any post-October capital loss (defined as the greatest of net capital loss, net long-term capital
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loss, or net short-term capital loss, in each case attributable to the portion of the taxable year after October 31 (or a later date, if the Fund makes the election referred to above)) or
late-year ordinary loss (generally, (i) net ordinary loss from the sale, exchange or other taxable disposition of property, attributable to the portion of the taxable year after October 31 (or a later date, if the Fund makes the election
referred to above), plus (ii) other net ordinary loss attributable to the portion of the taxable year after December 31, if any) as if incurred in the succeeding taxable year. Capital losses in excess of capital gains (net capital
losses) are not permitted to be deducted against the Funds net investment income. Instead, potentially subject to certain limitations, the Fund may carry net capital losses from any taxable year forward to subsequent taxable years to
offset capital gains, if any, realized during such subsequent taxable years. Distributions from capital gains are generally made after applying any available capital loss carryforwards. Capital loss carryforwards are reduced to the extent they
offset current-year net realized capital gains, whether the Fund retains or distributes such gains.
The Fund can carry net
capital losses forward to one or more subsequent taxable years without expiration and such carryforward losses will retain their character as short-term or long-term. The Funds available capital loss carryforwards, if any, will be set forth in
its annual shareholder report for each fiscal year.
Distributions
Distributions are taxable whether shareholders receive them in cash or reinvest them in additional shares. A shareholder whose
distributions are reinvested in shares will be treated as having received a dividend equal to the fair market value of the new shares issued to the shareholder.
Dividends and distributions on the Funds shares are generally subject to federal income tax as described herein to the extent they do not exceed the Funds realized income and gains, even
though such dividends and distributions may economically represent a return of a particular shareholders investment (and thus were included in the price the shareholder paid for his or her shares). Such distributions are likely to occur in
respect of shares purchased at a time when the Funds net asset value reflects either unrealized gains or income and gains that have been realized but not distributed. Realized gains may be required to be distributed even when the Funds
net asset value also reflects unrealized losses.
For federal income tax purposes, distributions of investment income are
generally taxable as ordinary income. Taxes on distributions of capital gains are determined by how long the Fund owned the investments that generated them, rather than how long a shareholder has owned his or her shares. Distributions of net capital
gains from the sale of investments that the Fund owned for more than one year and that are properly designated by the Fund as capital gain dividends (Capital Gain Dividends) will be treated as long-term capital gains includible in and
taxed at the rates applicable to a shareholders net capital gain. Net capital gain is taxed to individuals at reduced rates and to corporations at the same rate as ordinary income. Distributions of gains from the sale of investments that the
Fund owned for one year or less will be taxable as ordinary income.
Distributions reported by the Fund as qualified
dividend income will be taxed to a shareholder taxed as an individual at the rates applicable to net capital gain, provided the Fund and the shareholder meet holding period and other requirements. The Fund does not expect that a significant
portion of its distributions will be derived from qualified dividend income.
In general, dividends of net investment
income received by corporate shareholders of the Fund will qualify for the 70% dividends-received deduction generally available to corporations to the extent of the amount of eligible dividends received by the Fund from domestic corporations for the
taxable year, if the Fund and the shareholder meet holding period and other requirements. The Fund generally does not expect that a significant portion of its distributions will be eligible for the corporate dividends-received deduction.
If the Fund makes a distribution to its shareholders in excess of its current and accumulated earnings and profits in any
taxable year, the excess distribution will be treated as a return of capital to the extent of a
71
shareholders tax basis in his or her shares, and thereafter as capital gain. A return of capital is not taxable, but it reduces a shareholders tax basis in his or her shares, thus
reducing any loss or increasing any gain on a subsequent taxable disposition of shares by such shareholder.
To the extent
distributions consist of interest from securities of the U.S. Government and certain of its agencies and instrumentalities, they may be exempt from state and local income taxes. Interest from obligations that are merely guaranteed by the U.S.
Government or one of its agencies, such as mortgage participation certificates guaranteed by GNMA, generally is not entitled to this exemption. Although there is no assurance that any such state and local exemptions will be available, shareholders
will be advised of the portion of Fund distributions that might qualify for such an exemption.
Federal tax information with
respect to distributions for each calendar year will be furnished to each shareholder early in the succeeding year.
Sale, Redemption or
Exchange of Shares
Upon the disposition of shares of the Fund (whether by redemption, sale or exchange), a shareholder
may realize gain or loss. In general, any gain or loss realized upon a taxable disposition of shares will be treated as long-term capital gain or loss if the shareholder has held the shares for more than 12 months. Otherwise, the gain or loss on the
taxable disposition of Fund shares will generally be treated as short-term capital gain or loss. As noted above, long-term capital gains are included in net capital gain and taxed to individuals at reduced rates. If shares of the Fund are sold at a
loss after being held for six months or less, the loss will be treated as long-term, instead of short-term, capital loss to the extent of any Capital Gain Dividends received on those shares. All or a portion of any loss realized upon a taxable
disposition of Fund shares will be disallowed if substantially identical shares are purchased within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.
Cost Basis Reporting
The fund, or, if you hold your shares through a Service Agent, your Service Agent will report to the IRS the amount of proceeds that a shareholder receives from a redemption or exchange of fund shares.
For redemptions or exchanges of shares acquired on or after January 1, 2012, the fund will also report the shareholders basis in those shares and the character of any gain or loss that the shareholder realizes on the redemption or
exchange (
i.e.
, short-term or long-term), and certain related tax information. If a shareholder has a different basis for different shares of the fund in the same account (
e.g.
, if a shareholder purchased fund shares held in the same
account when the shares were at different prices), the fund will by default report the basis of the shares redeemed or exchanged using the average basis method, under which the basis per share is the average of the bases of all the
shareholders fund shares in the account. (For these purposes, shares acquired prior to January 1, 2012 and shares acquired on or after January 1, 2012 will be treated as held in separate accounts.)
Shareholders may instruct the fund to use a method other than average basis for an account, but that other method will not apply to
shares that have already been redeemed or exchanged. Choosing a method other than average basis after such redemptions or exchanges, rather than before, may affect the basis of the remaining fund shares. For further assistance, shareholders who hold
their shares directly with the fund may call the fund at 1-877-721-1926 Monday through Friday between 8:00 a.m. and 5:30 p.m. (Eastern time). Shareholders who hold shares through a Service Agent should contact the Service Agent for further
assistance or for information regarding the Service Agents default method for calculating basis and procedures for electing to use an alternative method. Shareholders should consult their tax advisers concerning the tax consequences of
applying the average basis method or electing another method of basis calculation.
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Securities Issued or Purchased at a Discount
The Fund may purchase debt securities with original issue discount (OID), market discount or acquisition discount. Some debt
obligations with a fixed maturity date of more than one year from the date of issuance (and all zero-coupon debt obligations with a fixed maturity date of more than one year from the date of issuance) will be treated as debt obligations that are
issued with OID. Generally, the amount of the OID is treated as interest income and is included in taxable income (and accordingly required to be distributed by the Fund) over the term of the debt security, even though payment of that amount is not
received until a later time, usually when the debt security matures. Periodic adjustments for inflation in the principal value of inflation-indexed bonds also may be treated as OID that is includible in the Funds gross income on a current
basis.
Some debt obligations with a fixed maturity date of more than one year from the date of issuance that are acquired by
the Fund in the secondary market may be treated as having market discount. Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt security having market discount is treated as ordinary income to the
extent the gain, or principal payment, does not exceed the accrued market discount on such debt security. Alternatively, the Fund may elect to accrue market discount currently, in which case the Fund will be required to include the
accrued market discount in the Funds income (as ordinary income) and thus distribute it over the term of the debt security, even though payment of that amount is not received until a later time, upon partial or full repayment or disposition of
the debt security. Market discount generally accrues in equal daily installments. The Fund may make one or more of the elections applicable to debt obligations having market discount, which could affect the character and timing of recognition of
income from such debt obligations.
Some debt obligations with a fixed maturity date of more than one year from the date
of issuance that are acquired by the Fund in the secondary market may be treated as having market discount. Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt security having market discount is
treated as ordinary income to the extent the gain, or principal payment, does not exceed the accrued market discount on such debt security. Market discount generally accrues in equal daily installments. The Fund may make one or more of
the elections applicable to debt obligations having market discount, which could affect the character and timing of recognition of income from such debt obligations.
Because the OID, market discount, or acquisition discount earned by the Fund in a taxable year may exceed the total amount of cash interest the Fund receives from the relevant debt obligations, the Fund
may have to dispose of securities, including at a time when it is not advantageous to do so, and use the proceeds thereof to make distributions in amounts necessary to satisfy distribution requirements. The Fund may realize capital gains or losses
from such dispositions, which would increase or decrease the Funds investment company taxable income and/or net capital gain. In the event the Fund realizes net capital gains from such transactions, its shareholders may receive larger Capital
Gain Dividends than they would in the absence of such transactions.
In addition, payment-in-kind securities will give rise to
income which is required to be distributed and is taxable even though the Fund holding the security receives no interest payment in cash on the security during the year.
Securities issued or purchased at a Premium
Very generally, where the Fund
purchases a bond at a price that exceeds the stated principal amount (i.e., a premium), the premium is amortizable over the remaining term of the bond. In the case of a taxable bond, if the Fund makes an election applicable to all such bonds it
purchases, which election is irrevocable, the Fund reduces the current taxable income from the bond by the amortizable premium and reduces its tax basis in the bond by the amount of such offset; upon the disposition or maturity of such bonds
acquired on or after January 4, 2013, the Fund is permitted to deduct, against stated interest from other bonds, any premium not previously deducted. In the case of a tax-exempt bond, tax rules require the Fund to reduce its tax basis by the
amount of amortizable premium.
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Foreign Taxation
Dividends and interest received by the Fund, and gains realized by the Fund on non-U.S. securities, may be subject to income, withholding or other taxes imposed by non-U.S. countries and U.S. possessions
that would reduce the yield on those securities. Tax conventions between certain countries and the United States may reduce or eliminate these non-U.S. taxes.
If at the end of the Funds taxable year securities of non-U.S. corporations represent more than 50% of the value of its total assets, the Fund may make an election to treat any non-U.S. taxes paid
by it as paid by its shareholders. In this case, shareholders who are U.S. citizens, U.S. corporations or, in some cases, U.S. residents generally will be required to include in U.S. taxable income their pro rata share of such taxes, but may then be
entitled to claim a foreign tax credit or deduction (but not both) for their share of such taxes. A shareholders ability to claim a foreign tax credit or deduction in respect of non-U.S. taxes paid by the Fund may be subject to certain
limitations (including a holding period requirement, applicable to both the Fund and its shareholders, imposed by the Code), which may result in the shareholders not receiving a full credit or deduction for the amount of such taxes. Shareholders who
do not itemize on their U.S. federal income tax returns may claim a credit (but not a deduction) for such foreign taxes. Shareholders that are not subject to U.S. federal income tax, and those who invest in the Fund through tax-exempt shareholders
(including those who invest through IRAs or other tax-advantaged retirement plans), generally will receive no benefit from any tax credit or deduction passed through by the Fund. Even if the Fund is eligible to make the election to treat non-U.S.
taxes paid by it as paid by its shareholders, the Fund may choose not to do so.
Foreign Currencies
The Funds transactions in non-U.S. currencies, non-U.S. denominated debt obligations or certain non-U.S. currency options, futures
contracts or forward contracts (or similar instruments) may give rise to ordinary income or loss to the extent such income or loss results from fluctuations in the value of the non-U.S. currency concerned. Any such net losses will generally reduce
and potentially require the recharacterization of prior ordinary income distributions. Such ordinary income treatment may accelerate distributions by the Fund to shareholders and increase the distributions taxed to shareholders as ordinary income.
Any net ordinary losses so created cannot be carried forward by the Fund to offset income or gains earned in subsequent taxable years. Foreign currency gains are generally treated as qualifying income for purposes of the 90% gross income test
described above. There is a remote possibility that the Secretary of the Treasury will issue contrary tax regulations with respect to foreign currency gains that are not directly related to the companys principal business of investing in
stocks or securities (or options or futures with respect to stocks or securities), and such regulations could apply retroactively.
Options, Futures, Forward Contracts, Swap Agreements and Other Financial Instruments
In general, option premiums received by the Fund are not immediately included in the income of the Fund. Instead, the premiums are
recognized when the option contract expires, the option is exercised by the holder, or the Fund transfers or otherwise terminates the option (e.g., through a closing transaction). If a call option written by the Fund is exercised and the Fund sells
or delivers the underlying security, the Fund generally will recognize capital gain or loss equal to (a) sum of the strike price and the option premium received by the Fund minus (b) the Funds basis in the security. Such gain or loss
generally will be short-term or long-term depending upon the holding period of the underlying security. If securities are purchased by the Fund pursuant to the exercise of a put option written by it, the Fund generally will subtract the premium
received for purposes of computing its cost basis in the securities purchased. Gain or loss arising in respect of a termination of the Funds obligation under an option other than through the exercise of the option will be short-term gain or
loss depending on whether the premium income received by the Fund is greater or less than the amount paid by the Fund (if any) in terminating the transaction. Thus, for example, if an option written by the Fund expires unexercised, the Fund
generally will recognize short-term gain equal to the premium received.
74
The tax treatment of certain contracts (including regulated futures contracts) entered into
by the Fund as well as listed non-equity options written or purchased by the Fund on U.S. exchanges (including options on futures contracts, equity indices and debt securities) will be governed by section 1256 of the Code (section 1256
contracts). Gains or losses on section 1256 contracts generally are considered 60% long-term and 40% short-term capital gains or losses (60/40), although certain foreign currency gains and losses from such contracts may be treated
as ordinary in character. Also, section 1256 contracts held by the Fund at the end of each taxable year (and, for purposes of the 4% excise tax, on certain other dates as prescribed under the Code) are marked to market with the result
that unrealized gains or losses are treated as though they were realized and the resulting gain or loss is treated as ordinary or 60/40 gain or loss, as applicable.
In addition to the special rules described above, the Funds transactions in Financial Instruments, as well as any of its other hedging, short sale, securities loan or similar transactions, may be
subject to special tax rules (including mark-to-market, constructive sale, straddle, wash sale and short sale rules), the effect of which may be to accelerate income to the Fund, defer losses to the Fund, cause adjustments in the holding periods of
the Funds securities, convert long-term capital gains into short-term capital gains and convert short-term capital losses into long-term capital losses. These rules could therefore affect the amount, timing and character of distributions to
shareholders.
Because these and other tax rules applicable to these types of transactions are in some cases uncertain under
current law, an adverse determination or future guidance by the IRS with respect to these rules (which determination or guidance could be retroactive) may affect whether the Fund has made sufficient distributions, and otherwise satisfied the
relevant requirements, to maintain its qualification as a RIC and avoid a fund-level tax.
Certain of the Funds
investments in Financial Instruments and foreign currency-denominated instruments, and any of the Funds transactions in foreign currencies and hedging activities are likely to produce a difference between its book income and the sum of its
taxable income and its net tax-exempt income, if any. If the Funds book income is less than the sum of its taxable income and its net tax-exempt income, it could be required to make distributions exceeding book income to qualify as a RIC that
is accorded special tax treatment. If the Funds book income exceeds the sum of its taxable income and its net tax-exempt income, the distribution (if any) of such excess generally will be treated as (i) a dividend to the extent of the
Funds remaining earnings and profits (including earnings and profits arising from tax-exempt income), (ii) thereafter, as a return of capital to the extent of the recipients basis in its shares, and (iii) thereafter, as gain
from the sale or exchange of a capital asset.
The Fund may seek exposure to commodities through a variety of investments,
direct or indirect, which may affect the amount, timing and character of distributions to shareholders. The means by which the Fund seeks exposure to commodities, both directly and indirectly, including through derivatives, is limited by the
Funds intention to qualify as a RIC under the Code. Income and gains from direct commodity investments and certain commodity-linked derivatives does not constitute qualifying income to a RIC for purposes of the 90% gross income test described
above. The tax treatment of certain other commodity-linked derivative instruments in which the Fund might invest is not certain, in particular with respect to whether income or gains from such instruments constitute qualifying income to a RIC. If
the Fund were to treat income or gain from a particular instrument as qualifying income and the income or gain were later determined not to constitute qualifying income and, together with any other nonqualifying income, caused the Funds
nonqualifying income to exceed 10% of its gross income in any taxable year, the Fund would fail to qualify as a RIC unless it is eligible to and does pay a tax at the Fund level.
High Yield Obligations
The Fund may invest to a significant extent in debt
obligations that are in the lowest rating categories or are unrated, including debt obligations of issuers not currently paying interest or that are in default. Investments in
75
debt obligations that are at risk of or in default present special tax issues for the Fund. Tax rules are not entirely clear about issues such as when the Fund may cease to accrue interest, OID
or market discount, when and to what extent deductions may be taken for bad debts or worthless securities and how payments received on obligations in default should be allocated between principal and income. These and other related issues will be
addressed by the Fund when, as and if it invests in such securities, in order to seek to ensure that it distributes sufficient income to preserve its status as a RIC and does not become subject to U.S. federal income or excise tax.
For funds investing in high yield obligations, a portion of the interest paid or accrued on high yield obligations may not (and interest
paid on debt obligations, if any, that are considered for tax purposes to be payable in the equity of the issuer or a related party will not) be deductible to the issuer. If a portion of the interest paid or accrued on certain high yield discount
obligations is not deductible by the issuer, that portion will be treated as a dividend for purposes of the corporate dividends received deduction. In such cases, if the issuer of the high yield discount obligations is a domestic corporation,
dividend payments by the Fund may be eligible for the dividends received deduction to the extent of the deemed dividend portion of such accrued interest.
Mortgage-Related Securities
The Fund may invest directly or indirectly in
residual interests in real estate mortgage investment conduits (REMICs) (including by investing in residual interests in collateralized mortgage obligations (CMOs) with respect to which an election to be treated as a REMIC is
in effect) or equity interests in taxable mortgage pools (TMPs). Under a notice issued by the IRS in October 2006 and Treasury regulations that have yet to be issued but may apply retroactively, a portion of the Funds income
(including income allocated to the Fund from a real estate investment trust or other pass-through entity) that is attributable to a residual interest in a REMIC or an equity interest in a TMP (referred to in the Code as an excess
inclusion) will be subject to U.S. federal income tax in all events. This notice also provides, and the regulations are expected to provide, that excess inclusion income of a RIC will be allocated to shareholders of the RIC in proportion to
the dividends received by such shareholders, with the same consequences as if the shareholders held the related interest directly. As a result, a fund investing in such interests may not be a suitable investment for charitable remainder trusts, as
noted below.
In general, excess inclusion income allocated to shareholders (i) cannot be offset by net operating losses
(subject to a limited exception for certain thrift institutions), (ii) will constitute unrelated business taxable income (UBTI) to entities (including a qualified pension plan, an individual retirement account, a 401(k) plan, a
Keogh plan or other tax-exempt entity) subject to tax on UBTI, thereby potentially requiring such an entity that is allocated excess inclusion income, and otherwise might not be required to file a tax return, to file a tax return and pay tax on such
income, and (iii) in the case of a foreign person, as defined below, will not qualify for any reduction in U.S. federal withholding tax.
Passive Foreign Investment Companies
Equity investments by the Fund in certain passive foreign investment companies (PFICs) could potentially subject the Fund to a U.S. federal income tax or other charges (including
interest charges) on the distributions received from a PFIC or on proceeds received from the disposition of shares in a PFIC. This tax cannot be eliminated by making distributions to Fund shareholders. However, the Fund may make an election to avoid
the imposition of that tax. For example, the Fund may in certain cases elect to treat a PFIC as a qualified electing fund (a QEF election), in which case the Fund will be required to include in its income its share of the
companys income and net capital gains annually, regardless of whether it receives any distribution from the company. The Fund also may make an election to mark the gains (and to a limited extent losses) in a PFIC to the market as
though it had sold and repurchased its holdings in the PFIC on the last day of the Funds taxable year. Such gains and losses are treated as ordinary income and loss. The QEF and mark-to-market elections may accelerate the recognition of income
(without the receipt of cash) and increase the amount required to be distributed by the Fund to avoid taxation. Making either of these elections therefore may require the Fund to liquidate other investments (including when it is not advantageous to
do so) to meet its distribution requirement,
76
which also may accelerate the recognition of gain and affect the Funds total return. Dividends paid by PFICs will not be eligible to be treated as qualified dividend income.
Because it is not always possible to identify a foreign corporation as a PFIC, the Fund may incur the tax and interest
charges described above in some instances.
Tax-Exempt Shareholders
Income of the Fund that would be UBTI if earned directly by a tax-exempt entity will not generally be attributed as UBTI to a tax-exempt
shareholder of the Fund. Notwithstanding this blocking effect, a tax-exempt shareholder could realize UBTI by virtue of its investment in the Fund if its Fund shares constitute debt-financed property in the hands of the tax-exempt
shareholder within the meaning of Code Section 514(b).
A tax-exempt shareholder may also recognize UBTI if the Fund
recognizes excess inclusion income derived from direct or indirect investments in residual interests in REMICs or equity interests in TMPs as described above, if the amount of such income recognized by the Fund exceeds the Funds investment
company taxable income (after taking into account deductions for dividends paid by the Fund). In addition, special tax consequences apply to charitable remainder trusts (CRTs) that invest in regulated investment companies that invest
directly or indirectly in residual interests in REMICs or TMPs. Under legislation enacted in December 2006, a charitable remainder trust, as defined in section 664 of the Code, that realizes UBTI for a taxable year must pay an excise tax annually of
an amount equal to such UBTI. Under IRS guidance issued in October 2006, a CRT will not recognize UBTI as a result of investing in a fund that recognizes excess inclusion income. Rather, if at any time during any taxable year a CRT (or one of
certain other tax-exempt shareholders, such as the United States, a state or political subdivision, or an agency or instrumentality thereof, and certain energy cooperatives) is a record holder of a share in a fund that recognizes excess inclusion
income, then the fund will be subject to a tax on that portion of its excess inclusion income for the taxable year that is allocable to such shareholders at the highest federal corporate income tax rate. The extent to which this IRS
guidance remains applicable in light of the December 2006 legislation is unclear. To the extent permitted under the 1940 Act, the Fund may elect to specially allocate any such tax to the applicable CRT, or other shareholder, and thus reduce such
shareholders distributions for the year by the amount of the tax that relates to such shareholders interest in the Fund. The Fund has not yet determined whether such an election will be made. CRTs are urged to consult their tax advisors
concerning the consequences of investing in the Fund.
Foreign Shareholders
Absent a specific statutory exemption, dividends (other than Capital Gain Dividends) paid to a shareholder that is not a United
States person within the meaning of the Code (such a shareholder, a foreign person) are subject to withholding of U.S. federal income tax at a rate of 30% (or lower applicable treaty rate) even if they are funded by income or gains
(such as portfolio interest, short-term capital gains, or foreign-source dividend and interest income) that, if paid to a foreign shareholder directly, would not be subject to withholding. Distributions properly designated as Capital Gain Dividends
generally are not subject to withholding of U.S. federal income tax.
Effective for taxable years of the Fund beginning
before January 1, 2014, the Fund generally is not required to withhold any amounts with respect to properly designated distributions of (i) U.S.-source interest income that would not be subject to U.S. federal income tax if earned directly
by a foreign person and (ii) net short-term capital gains in excess of net long-term capital losses, in each case to the extent such distributions are properly reported as such by the Fund in a written notice to shareholders. The exemption from
withholding for interest-related dividends and short-term capital gain dividends will expire for distributions with respect to taxable years beginning on or after January 1, 2014, unless Congress enacts legislation providing otherwise.
77
The Fund may, depending on the circumstances, make such designations with respect to all,
some or none of its potentially eligible dividends and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In the case of shares held through an intermediary, the intermediary may withhold even if the
Fund reports all or a portion of a payment as an interest-related or short-term capital gain dividend to shareholders. Foreign persons should contact their intermediaries regarding the application of these rules to their accounts.
A beneficial holder of shares that is a foreign person is not, in general, subject to U.S. federal income tax on gains (and is not
allowed a deduction for losses) realized on the sale of shares of the Fund or on Capital Gain Dividends unless (i) such gain or dividend is effectively connected with the conduct of a trade or business carried on by such holder within the
United States or (ii) in the case of an individual holder, the holder is present in the United States for a period or periods aggregating 183 days or more during the year of the sale or the receipt of the Capital Gain Dividend and certain other
conditions are met.
If a shareholder is eligible for the benefits of a tax treaty, any effectively connected income or gain
will generally be subject to U.S. federal income tax on a net basis only if it is also attributable to a permanent establishment maintained by the shareholder in the United States. Foreign investors in the Fund should consult their tax advisers in
this regard.
In order to qualify for any exemptions from withholding described above or for lower withholding tax rates under
income tax treaties, or to establish an exemption from backup withholding, a foreign person must comply with special certification and filing requirements relating to its non-US status (including, in general, furnishing an IRS Form W-8BEN or
substitute form). Foreign investors in the Fund should consult their tax advisers regarding these certification requirements.
A beneficial holder of shares who is a foreign person may be subject to state and local tax and to the U.S. federal estate tax in
addition to the federal tax on income referred to above.
Backup Withholding
The Fund generally is required to withhold and remit to the U.S. Treasury a percentage of the taxable dividends and other distributions
paid to and proceeds of share sales, exchanges, or redemptions made by any individual shareholder who fails to properly furnish the Fund with a correct taxpayer identification number (TIN), who has under-reported dividends or interest
income, or who fails to certify to the Fund that he or she is not subject to such withholding. The backup withholding tax rate is currently 28%. Corporate shareholders and certain other shareholders specified in the Code generally are exempt from
such backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholders U.S. federal income tax liability, provided the appropriate information is furnished to the IRSs. Foreign
investors in the Fund should consult their tax advisers in this regard.
Tax Shelter Reporting Regulations
Under U.S. Treasury regulations, if a shareholder recognizes a loss with respect to the Funds shares of $2 million or more for an
individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting
requirement, but under current guidance, shareholders of a RIC are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all regulated investment companies. The fact that a loss is
reportable under these regulations does not affect the legal determination of whether the taxpayers treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of
their individual circumstances.
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Shareholder Reporting Obligations With Respect to Foreign Bank and Financial Accounts
Shareholders that are U.S. persons and own, directly or indirectly, more than 50% of the Fund by vote or value could be
required to report annually their financial interest in the Funds foreign financial accounts, if any, on Treasury Department Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).
Shareholders should consult a tax advisor, and persons investing in the Fund through an intermediary should contact their intermediary, regarding the applicability to them of this reporting requirement.
Other Reporting and Withholding Requirements
Rules enacted in March 2010 known as the Foreign Account Tax Compliance Act (FATCA) require the reporting to the IRS of direct and indirect ownership of foreign financial accounts
and foreign entities by U.S. persons. Failure to provide this required information can result in a 30% withholding tax on certain payments of U.S. source income (withholdable payments); this withholding tax will be phased in beginning
with certain withholdable payments made on January 1, 2014. Specifically, withholdable payments subject to this 30% withholding tax include payments of U.S.-source dividends or interest and payments of gross proceeds from the sale or other
disposal of property that can produce U.S.-source dividends or interest.
The IRS has issued preliminary guidance with respect
to these rules; this guidance is potentially subject to material change. Pursuant to this guidance, distributions made by the Fund to a shareholder subject to the phase in noted above, including a distribution in redemption of shares and a
distribution of income or gains otherwise exempt from withholding under the rules applicable to foreign persons described above (e.g., Capital Gain Dividends and short-term capital gain and interest-related dividends, as described above), will be
withholdable payments subject to withholding. Payments to shareholders will generally not be subject to withholding, so long as such shareholders provide the Fund with such certifications, waivers or other documentation as the Fund requires to
comply with these rules, including, to the extent required, with regard to their direct and indirect owners. In general, it is expected that a shareholder that is a U.S. person or non-U.S. individual will be able to avoid being withheld upon by
timely providing the Fund with a valid IRS Form W-9 or W-8, respectively. Subject to any applicable intergovernmental agreement, payments to a shareholder that is a foreign financial institution (as defined under these rules) will
generally be subject to withholding unless such shareholder (i)(a) enters into a valid agreement with the IRS to, among other requirements, report required information about certain direct and indirect U.S. investors or accounts, or
(b) qualifies for an exception from entering into such an agreement and (ii) provides the Fund with appropriate certifications or other documentation concerning its status.
The Fund may disclose the information that it receives from its shareholders to the IRS, non-U.S. taxing authorities or other parties as
necessary to comply with FATCA, including current or future Treasury regulations or IRS guidance issued thereunder, in each case as modified by any applicable intergovernmental agreement between the United States and a non-U.S. government to
implement FATCA and improve international tax compliance.
Each prospective investor is urged to consult its tax adviser
regarding the applicability of FATCA and any other reporting requirements with respect to the prospective investors own situation. Persons investing in the Fund through an intermediary should contact their intermediary regarding the
application of this reporting and withholding regime to their investments in the Fund.
Other Taxation
The foregoing discussion of U.S. federal income tax consequences is based on the Code, existing U.S. Treasury regulations, and other
applicable authority, as of the date of this Statement of Additional Information. These authorities are subject to change by legislative or administrative action, possibly with retroactive effect. The foregoing discussion is only a summary of some
of the important U.S. federal tax considerations generally applicable to investments in the Fund. There may be other tax considerations applicable to particular shareholders. Shareholders should consult their own tax advisers regarding their
particular situations and the possible application of foreign, state and local tax laws.
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Other Information
Western Asset Funds, Inc. was incorporated in Maryland on May 16, 1990. Prior to May 31, 2001, Western Asset Funds, Inc. was
known as LM Institutional Fund Advisors I, Inc. and prior to May 29, 1998, was known as Western Asset Trust, Inc. The Fund is an open-end, non-diversified management investment company. The Directors of Western Asset
Funds, Inc. may, without shareholder approval, create, in addition to the current portfolios of the Corporation, other series of shares representing separate investment portfolios. Any such series may be divided without shareholder approval into two
or more classes of shares having such terms as the Directors may determine. Establishment and offering of additional portfolios or classes of shares of a portfolio will not alter the rights of the Corporations shareholders.
Western Asset Funds, Inc. is authorized to issue a total of 21.15 billion shares of common stock at par value $0.001. Each share has one
vote, with fractional shares voting proportionally. Voting on matters pertinent only to a particular portfolio, such as the adoption of an investment advisory contract for that portfolio, is limited to that portfolios shareholders. Shares of
all classes of a portfolio will vote together as a single class except when otherwise required by law or as determined by the Directors. Shares are freely transferable, are entitled to dividends as declared by the Directors, and, if a portfolio were
liquidated, would receive the net assets of that portfolio. Voting rights are not cumulative, and all shares of the portfolios are fully paid, redeemable and nonassessable and have no conversion rights. Shares do not have preemptive rights or
subscription rights.
Although the Fund does not intend to hold annual shareholder meetings, it will hold a special meeting of
shareholders when the 1940 Act requires a shareholder vote on certain matters (including the election of Directors or approval of an advisory contract) in certain cases.
Custodian, Transfer Agent and Dividend-Disbursing Agent
State Street Bank
and Trust Company (State Street), P.O. Box 1790, Boston, MA 02105, serves as custodian of the Corporations assets. As such, State Street holds in safekeeping certificated securities and cash belonging to the Corporation and, in
such capacity, is the registered owner of securities in book-entry form belonging to the Corporation. Upon instruction, State Street receives and delivers cash and securities of the Corporation in connection with Fund transactions and collects all
dividends and other distributions made with respect to the Funds securities. State Street also maintains certain accounts and records of the Corporation. State Street also calculates the total net asset value, total net income and net asset
value per share of the Fund on a daily basis (and as otherwise may be required by the 1940 Act) and performs certain accounting services for the Fund.
Boston Financial Data Services, Inc., P.O. Box 953, Quincy, MA 02171, serves as transfer and dividend-disbursing agent and administrator of various shareholder services pursuant to a delegation of such
duties from State Street. Shareholders who request a historical transcript of their account will be charged a fee based upon the number of years researched. The Corporation reserves the right, upon 60 days written notice, to make other charges
to investors to cover administrative costs. The Manager is responsible for the payment of any transfer agency fees in excess of 0.25% of the average daily net assets of the Funds class of shares.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP serves as the Funds independent registered public accounting firm. PricewaterhouseCoopers LLP will conduct an annual audit of the Fund, will assist in the preparation of
the Funds federal and state income tax returns and will consult with the Fund as to matters of accounting and federal and state income taxation.
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Financial Statements
As the fund is newly organized, no financial information is available as of the date of this SAI.
Legal Counsel
Ropes & Gray LLP, New York, New York, serves as
legal counsel to the Corporation.
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Appendix A: Ratings of Securities
Description of Moodys Investors Service, Inc. (Moodys) Ratings:
Long-Term Debt Ratings
Aaa
Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.
Aa
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A
Obligations rated A are considered upper-medium grade and are subject to low credit risk.
Baa
Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess
certain speculative characteristics.
Ba
Obligations rated Ba are judged to have speculative elements and are
subject to substantial credit risk.
B
Obligations rated B are considered speculative and are subject to high
credit risk.
Caa
Obligations rated Caa are judged to be of poor standing and are subject to very high credit
risk.
Ca
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect
of recovery of principal and interest.
C
Obligations rated C are the lowest rated class of bonds and are
typically in default, with little prospect for recovery of principal or interest.
Modifiers: Moodys appends numerical
modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of that generic rating category.
Short-Term Debt Ratings
Prime-1
Issuers with a Prime-1 (or supporting institutions) have a superior ability for repayment of short-term debt
obligations.
Prime-2
Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of
short-term debt obligations.
Prime-3
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of short-term obligations.
Not Prime
Issuers (or supporting institutions) rated not prime
do not fall within any of the Prime rating categories.
Description of Standard & Poors (S&P)
Ratings:
Long-Term Issue Credit Ratings
AAA
An obligation rated AAA has the highest rating assigned by S&P. The obligors capacity to meet its financial commitment on the obligation is extremely strong.
AA
An obligation rated AA differs from the highest rated obligations only to a small degree. The obligors capacity to
meet its financial commitment on the obligation is very strong.
A-1
A
An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligors capacity to meet its financial commitment on the obligation is still strong.
BBB
An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB indicates the least degree of
speculation and C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB
An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligors inadequate capacity to meet its financial commitment on the obligation.
B
An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the
capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligors capacity or willingness to meet its financial commitment on the obligation.
CCC
An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the
obligation.
CC
An obligation rated CC is currently highly vulnerable to nonpayment.
C
A C rating is assigned to obligations that are currently highly vulnerable to nonpayment, obligations that have
payment arrearages allowed by the terms of the documents, or obligations of an issuer that is the subject of a bankruptcy petition or similar action which have not experienced a payment default. Among others, the C rating may be assigned
to subordinated debt, preferred stock or other obligations on which cash payments have been suspended in accordance with the instruments terms.
D
An obligation rated D is in payment default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace
period has not expired, unless Standard & Poors believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or minus (-)
The ratings from AA to CCC may be
modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
pr
The letters pr indicates that the rating is provisional. A provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful timely completion of the project. This rating, however, while addressing credit quality subsequent
to completion of the project, makes no comment on the likelihood of or the risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood and risk.
NR
Not rated.
A-2
Commercial Paper
A-1.
A short-term obligation rated A-1 is rated in the highest category by Standard & Poors. The obligors capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligors capacity to meet its financial commitment on these obligations is extremely strong.
A-2.
A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher rating categories. However, the obligors capacity to meet its financial commitment on the obligation is satisfactory.
A-3.
A short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
A-3
Appendix B: Proxy Voting Policy
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 Firms 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 Management Company Limited, Western Asset Management Company Ltd. and Western Asset Management Company Pte. Ltd.) 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:
|
a.
|
Proxies are reviewed to determine accounts impacted.
|
B-1
|
b.
|
Impacted accounts are checked to confirm Western Asset voting authority.
|
|
c.
|
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.)
|
|
d.
|
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 clients 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.
|
|
e.
|
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 analysts or portfolio managers basis for their decision is documented and maintained by the Legal and Compliance Department.
|
|
f.
|
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.
|
A copy of Western Assets policies and procedures.
|
|
b.
|
Copies of proxy statements received regarding client securities.
|
|
c.
|
A copy of any document created by Western Asset that was material to making a decision how to vote proxies.
|
|
d.
|
Each written client request for proxy voting records and Western Assets written response to both verbal and written client requests.
|
|
e.
|
A proxy log including:
|
|
2.
|
Exchange ticker symbol of the issuers shares to be voted;
|
|
3.
|
Council on Uniform Securities Identification Procedures (CUSIP) number for the shares to be voted;
|
|
4.
|
A brief identification of the matter voted on;
|
|
5.
|
Whether the matter was proposed by the issuer or by a shareholder of the issuer;
|
|
6.
|
Whether a vote was cast on the matter;
|
|
7.
|
A record of how the vote was cast; and
|
|
8.
|
Whether the vote was cast for or against the recommendation of the issuers management team.
|
B-2
Records are maintained in an easily accessible place for five years, the first two in
Western Assets offices.
Disclosure
Western Assets proxy policies are described in the firms Part II 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:
|
1.
|
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;
|
|
2.
|
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
|
|
3.
|
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 Assets 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 companys 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.
I. 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:
1. Matters relating to the Board of Directors
Western Asset votes proxies for the
election of the companys nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:
|
a.
|
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.
|
|
b.
|
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.
|
B-3
|
c.
|
Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences.
|
|
d.
|
Votes are cast on a case-by-case basis in contested elections of directors.
|
2. Matters relating to Executive Compensation
Western Asset generally favors
compensation programs that relate executive compensation to a companys long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:
|
a.
|
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.
|
|
b.
|
Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options.
|
|
c.
|
Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stocks current market price.
|
|
d.
|
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.
|
3. Matters relating to Capitalization
The management of a companys 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 companys capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.
|
a.
|
Western Asset votes for proposals relating to the authorization of additional common stock.
|
|
b.
|
Western Asset votes for proposals to effect stock splits (excluding reverse stock splits).
|
|
c.
|
Western Asset votes for proposals authorizing share repurchase programs.
|
4. Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions
Western Asset votes these issues on a case-by-case basis on board-approved transactions.
5. Matters relating to Anti-Takeover Measures
Western Asset votes against
board-approved proposals to adopt anti-takeover measures except as follows:
|
a.
|
Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans.
|
|
b.
|
Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions.
|
6. Other Business Matters
Western Asset votes for board-approved proposals approving such routine business matters such as changing the companys name, ratifying the appointment of auditors and procedural matters relating to
the shareholder meeting.
|
a.
|
Western Asset votes on a case-by-case basis on proposals to amend a companys charter or bylaws.
|
|
b.
|
Western Asset votes against authorization to transact other unidentified, substantive business at the meeting.
|
B-4
II. Shareholder Proposals
SEC regulations permit shareholders to submit proposals for inclusion in a companys proxy statement. These proposals generally seek to change some aspect of a companys corporate governance
structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the companys board of directors on all shareholder proposals, except as follows:
|
1.
|
Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans.
|
|
2.
|
Western Asset votes for shareholder proposals that are consistent with Western Assets proxy voting guidelines for board-approved proposals.
|
|
3.
|
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.
|
1.
|
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.
|
|
2.
|
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. issuersi.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.
|
1.
|
Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management.
|
|
2.
|
Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees.
|
|
3.
|
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.
|
|
4.
|
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 companys outstanding common stock
where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a companys outstanding common stock where shareholders have preemptive rights.
|
B-5
Appendix C: Procedures for Shareholders to Submit Nominee
Candidates
A Western Asset Funds, Inc. (Fund) shareholder must follow the following procedures in order to
properly submit a nominee recommendation for the Governance and Nominating Committees consideration.
|
1.
|
The shareholder must submit any such recommendation (a Shareholder Recommendation) in writing to the Fund, to the attention of the Secretary, at the address
of the principal executive offices of the Fund.
|
|
2.
|
The Shareholder Recommendation must be delivered to or mailed and received at the principal executive offices of the Fund not less than one hundred and twenty (120)
calendar days nor more than one hundred and thirty-five (135) calendar days prior to the date of the Board or shareholder meeting at which the nominee would be elected.
|
|
3.
|
The Shareholder Recommendation must include: (i) a statement in writing setting forth (A) the name, age, date of birth, business address, residence address and
nationality of the person recommended by the shareholder (the candidate); (B) the class or series and number of all shares of the Fund owned of record or beneficially by the candidate, as reported to such shareholder by the candidate;
(C) any other information regarding the candidate called for with respect to director nominees by paragraphs (a), (d), (e) and (f) of Item 401 of Regulation S-K or paragraph (b) of Item 22 of Rule 14a-101 (Schedule 14A) under the Securities Exchange
Act of 1934, as amended (the Exchange Act), adopted by the Securities and Exchange Commission (or the corresponding provisions of any regulation or rule subsequently adopted by the Securities and Exchange Commission or any successor
agency applicable to the Fund); (D) any other information regarding the candidate that would be required to be disclosed if the candidate were a nominee in a proxy statement or other filing required to be made in connection with solicitation of
proxies for election of Trustees or directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder; and (E) whether the recommending shareholder believes that the candidate is or will be an interested
person of the Fund (as defined in the Investment Company Act of 1940, as amended) and, if not an interested person, information regarding the candidate that will be sufficient for the Fund to make such determination; (ii) the
written and signed consent of the candidate to be named as a nominee and to serve as a Trustee if elected; (iii) the recommending shareholders name as it appears on the Funds books; (iv) the class or series and number of all shares of
the Fund owned beneficially and of record by the recommending shareholder; and (v) a description of all arrangements or understandings between the recommending shareholder and the candidate and any other person or persons (including their names)
pursuant to which the recommendation is being made by the recommending shareholder. In addition, the Governance and Nominating Committee may require the candidate to furnish such other information as it may reasonably require or deem necessary to
determine the eligibility of such candidate to serve on the Board.
|
C-1
Western Asset Funds, Inc.
Part C.
|
Other Information
|
|
|
|
|
|
|
|
(a)
|
|
(1)
|
|
|
|
Articles of Amendment and Restatement dated May 28, 1998 (3)
|
|
|
(2)
|
|
|
|
Articles Supplementary dated March 10, 2000 (3)
|
|
|
(3)
|
|
|
|
Articles Supplementary dated June 16, 2000 (4)
|
|
|
(4)
|
|
|
|
Articles of Amendment dated May 21, 2001 (5)
|
|
|
(5)
|
|
|
|
Articles of Amendment dated May 10, 2002 (6)
|
|
|
(6)
|
|
|
|
Articles of Amendment dated July 30, 2003 (8)
|
|
|
(7)
|
|
|
|
Articles Supplementary dated September 23, 2003 (9)
|
|
|
(8)
|
|
|
|
Articles Supplementary dated October 7, 2004 (10)
|
|
|
(9)
|
|
|
|
Articles Supplementary dated March 8, 2005 (10)
|
|
|
(10)
|
|
|
|
Articles Supplementary dated June 26, 2006 (11)
|
|
|
(11)
|
|
|
|
Articles Supplementary dated May 11, 2007 (12)
|
|
|
(12)
|
|
|
|
Articles Supplementary dated July 29, 2008 (14)
|
|
|
(13)
|
|
|
|
Articles of Amendment dated April 23, 2010 (18)
|
|
|
(14)
|
|
|
|
Articles Supplementary dated March 24, 2011 (19)
|
|
|
(15)
|
|
|
|
Articles Supplementary dated September 14, 2011 (21)
|
|
|
(16)
|
|
|
|
Articles of Amendment dated September 14, 2011 (21)
|
|
|
(17)
|
|
|
|
Articles of Amendment dated April 9, 2012 (21)
|
|
|
(18)
|
|
|
|
Articles Supplementary dated April 9, 2012 (21)
|
|
|
(19)
|
|
|
|
Articles Supplementary dated September 18, 2012 (24)
|
|
|
(20)
|
|
|
|
Articles of Amendment dated September 18, 2012 (24)
|
|
|
|
|
(b)
|
|
(1)
|
|
|
|
Bylaws (3)
|
|
|
(2)
|
|
|
|
Amendment to Bylaws dated as of May 29, 2001 (7)
|
|
|
(3)
|
|
|
|
Amended Bylaws dated as of May 10, 2005 (10)
|
|
|
(4)
|
|
|
|
Amended Bylaws dated as of March 24, 2006 (11)
|
|
|
(5)
|
|
|
|
Restated Bylaws dated as of November 6, 2007 (16)
|
|
|
(c)
|
|
Instruments defining the rights of security holders with respect to Western Asset Funds, Inc. are contained in the Articles of Amendment and Restatement (with
subsequent amendments) and Bylaws that are incorporated by reference to Exhibit 23(b) to Post-Effective Amendment No. 21 to the Registration Statement of LM Institutional Fund Advisors I, Inc. (SEC File No.
33-34929) filed May 18,
2000.
|
|
|
|
(d)
|
|
(1)
|
|
Investment Management Agreements
|
|
|
|
|
(a)
|
|
Western Asset Government Money Market Portfolio (6)
|
|
|
|
|
(b)
|
|
Western Asset Money Market Portfolio (6)
|
|
|
|
|
(c)
|
|
Western Asset Core Fund (6)
|
|
|
|
|
(d)
|
|
Western Asset Core Plus Fund (6)
|
|
|
|
|
(e)
|
|
Western Asset Intermediate Fund (6)
|
|
|
|
|
(f)
|
|
Western Asset Intermediate Plus Portfolio (6)
|
|
|
|
|
(g)
|
|
Western Asset High Yield Fund (6)
|
|
|
|
|
(h)
|
|
Western Asset Non-U.S. Fixed Income Fund (6)
|
|
|
|
|
(i)
|
|
Western Asset Global Multi-Sector Fund (6)
|
|
|
|
|
(j)
|
|
Western Asset Enhanced Equity Fund (6)
|
|
|
|
|
(k)
|
|
Western Asset Inflation Indexed Bond Fund (6)
|
|
|
|
|
(l)
|
|
Western Asset Limited Duration Bond Fund (9)
|
|
|
|
|
(m)
|
|
Western Asset Total Return Unconstrained Fund (11)
|
|
|
|
|
(n)
|
|
Western Asset Asian Opportunities Fund (22)
|
-2-
|
|
|
|
|
|
|
|
|
(2)
|
|
Investment Advisory Agreements
|
|
|
|
|
(a)
|
|
Western Asset Government Money Market Portfolio (6)
|
|
|
|
|
(b)
|
|
Western Asset Money Market Portfolio (6)
|
|
|
|
|
(c)
|
|
Western Asset Core Fund (6)
|
|
|
|
|
(d)
|
|
Western Asset Core Plus Fund Western Asset Management Company (WAM) (6)
|
|
|
|
|
(e)
|
|
Western Asset Core Plus Fund Western Asset Management Company Limited (WAMCL) (6)
|
|
|
|
|
(f)
|
|
Western Asset Core Plus Fund Western Asset Management Company Limited (WAML Japan) (16)
|
|
|
|
|
(g)
|
|
Western Asset Core Plus Fund Western Asset Management Company Pte. Ltd. (WAML Singapore) (16)
|
|
|
|
|
(h)
|
|
Western Asset Intermediate Fund (6)
|
|
|
|
|
(i)
|
|
Western Asset Intermediate Plus Portfolio WAM (6)
|
|
|
|
|
(j)
|
|
Western Asset Intermediate Plus Portfolio WAMCL (6)
|
|
|
|
|
(k)
|
|
Western Asset High Yield Fund (6)
|
|
|
|
|
(l)
|
|
Western Asset Non-U.S. Fixed Income Fund (6)
|
|
|
|
|
(m)
|
|
Western Asset Non-U.S. Fixed Income Fund WAML Japan (16)
|
|
|
|
|
(n)
|
|
Western Asset Non-U.S. Fixed Income Fund WAML Singapore (16)
|
|
|
|
|
(o)
|
|
Western Asset Global Multi-Sector Fund WAM (6)
|
|
|
|
|
(p)
|
|
Western Asset Global Multi-Sector Fund WAMCL (6)
|
|
|
|
|
(q)
|
|
Western Asset Enhanced Equity Fund (6)
|
|
|
|
|
(r)
|
|
Western Asset Inflation Indexed Plus Bond Fund WAM (7)
|
|
|
|
|
(s)
|
|
Western Asset Inflation Indexed Plus Bond Fund WAMCL (7)
|
|
|
|
|
(t)
|
|
Western Asset Inflation Indexed Plus Bond Fund WAML Japan (16)
|
|
|
|
|
(u)
|
|
Western Asset Inflation Indexed Plus Bond Fund WAML Singapore (16)
|
|
|
|
|
(v)
|
|
Western Asset Limited Duration Bond Fund WAM (9)
|
|
|
|
|
(w)
|
|
Western Asset Limited Duration Bond Fund WAMCL (9)
|
|
|
|
|
(x)
|
|
Western Asset Total Return Unconstrained Fund WAM (11)
|
|
|
|
|
(y)
|
|
Western Asset Total Return Unconstrained Fund WAMCL (11)
|
|
|
|
|
(z)
|
|
Western Asset Total Return Unconstrained Fund WAML Japan (16)
|
|
|
|
|
(aa)
|
|
Western Asset Total Return Unconstrained Fund WAML Singapore (16)
|
|
|
|
|
(bb)
|
|
Western Asset Asian Opportunities Fund WAM (22)
|
|
|
|
|
(cc)
|
|
Western Asset Asian Opportunities Fund WAMCL (22)
|
|
|
|
|
(dd)
|
|
Western Asset Asian Opportunities Fund WAML Japan (22)
|
|
|
|
|
(ee)
|
|
Western Asset Asian Opportunities Fund WAML Singapore (22)
|
|
|
|
(e)
|
|
(1)
|
|
Distribution Agreement (11)
|
|
|
(2)
|
|
Amendment to Distributor Agreement (11)
|
|
|
(3)
|
|
Broker Agreement (3)
|
|
|
(4)
|
|
Amendment to Broker Agreement (4)
|
|
|
(5)
|
|
Form of Amended and Restated Distribution Agreement (20)
|
|
|
(f)
|
|
Bonus, profit sharing or pension plans none
|
|
|
|
(g)
|
|
(1)
|
|
Custodian Contract (1)
|
|
|
(2)
|
|
Amendment to Custodian Contract (1)
|
|
|
(3)
|
|
Amendment to Custodian Contract (1)
|
|
|
(4)
|
|
Amendment to Custodian Contract (4)
|
|
|
(5)
|
|
Amendment to Custodian Contract (6)
|
|
|
(6)
|
|
Form of Amendment to Custodian Contract (9)
|
|
|
(7)
|
|
Form of Amendment to Custodian Contract (11)
|
|
|
(8)
|
|
Form of Amendment to Custodian Contract (12)
|
|
|
(9)
|
|
Custodian Services Agreement filed herewith
|
|
|
|
(h)
|
|
(1)
|
|
Transfer Agency and Service Agreement (15)
|
-3-
|
|
|
|
|
|
|
|
|
(2)
|
|
Board Resolutions regarding Expense Limitation Arrangements (20)
|
|
|
(3)
|
|
Board Resolutions regarding Expense Limitation Arrangements (21)
|
|
|
(4)
|
|
Fund Accounting Services Agreement filed herewith
|
|
|
(i)
|
|
Opinion of counsel (1), (2), (4), (9), (11), (14) and (22)
|
|
|
(j)
|
|
Consent of Independent Registered Public Accounting Firm filed herewith
|
|
|
(k)
|
|
Financial statements omitted from Item 22 not applicable
|
|
|
(l)
|
|
Agreement for providing initial capital (1)
|
|
|
(m)
|
|
Plan pursuant to Rule 12b-1
|
|
|
(1)
|
|
Western Asset Government Money Market Portfolio (11)
|
|
|
(2)
|
|
Western Asset Money Market Portfolio (11)
|
|
|
(3)
|
|
Western Asset Core Fund (11)
|
|
|
(4)
|
|
Western Asset Core Plus Fund (11)
|
|
|
(5)
|
|
Western Asset Intermediate Fund (11)
|
|
|
(6)
|
|
Western Asset Intermediate Plus Portfolio (11)
|
|
|
(7)
|
|
Western Asset High Yield Fund (11)
|
|
|
(8)
|
|
Western Asset Non-U.S. Fixed Income Fund (11)
|
|
|
(9)
|
|
Western Asset Global Multi-Sector Fund (11)
|
|
|
(10)
|
|
Western Asset Enhanced Equity Fund (11)
|
|
|
(11)
|
|
Western Asset Inflation Indexed Bond Fund (11)
|
|
|
(12)
|
|
Western Asset Limited Duration Bond Fund (11)
|
|
|
(13)
|
|
Western Asset Total Return Unconstrained Fund (11)
|
|
|
(14)
|
|
Western Asset Asian Opportunities Fund Class FI (22)
|
|
|
(15)
|
|
Western Asset Asian Opportunities Fund Classes A, C and R (20)
|
|
|
(16)
|
|
Western Asset Core Bond Fund Classes A, C and R (20)
|
|
|
(17)
|
|
Western Asset Core Plus Bond Fund Classes A, C and R (20)
|
|
|
(18)
|
|
Western Asset Enhanced Equity Fund Classes A, C and R (20)
|
|
|
(19)
|
|
Western Asset Global Multi-Sector Fund Classes A, C and R (20)
|
|
|
(20)
|
|
Western Asset High Yield Fund Classes A, C and R (20)
|
|
|
(21)
|
|
Western Asset Inflation Indexed Plus Bond Fund Classes A, C and R (20)
|
|
|
(22)
|
|
Western Asset Intermediate Bond Fund Classes A, C and R (20)
|
|
|
(23)
|
|
Western Asset Limited Duration Bond Fund Classes A, C and R (20)
|
|
|
(24)
|
|
Western Asset Non-U.S. Opportunity Bond Fund Classes A, C and R (20)
|
|
|
(25)
|
|
Western Asset Total Return Unconstrained Fund Classes A, C and R (20)
|
|
|
(26)
|
|
Western Asset Core Bond Fund Class C1 (23)
|
|
|
(27)
|
|
Western Asset Core Plus Bond Fund Class C1 (23)
|
|
|
(28)
|
|
Western Asset Inflation Indexed Plus Bond Fund Class C1 (23)
|
|
|
|
(n)
|
|
(1)
|
|
Multiple Class Plan pursuant to Rule 18f-3 (4)
|
|
|
(2)
|
|
Amended Multiple Class Plan pursuant to Rule 18f-3 (9)
|
|
|
(3)
|
|
Amended Multiple Class Plan pursuant to Rule 18f-3 (11)
|
|
|
(4)
|
|
Amended and Restated Multiple Class Plan pursuant to Rule 18f-3 (18)
|
|
|
(5)
|
|
Amended and Restated Multiple Class (Rule 18f-3) Plan (20)
|
|
|
(6)
|
|
Amended and Restated Multiple Class (Rule 18f-3) Plan (22)
|
|
|
(7)
|
|
Amended and Restated Multiple Class (Rule 18f-3) Plan (23)
|
|
|
|
(o)
|
|
(1)
|
|
Power of Attorney (12)
|
|
|
(2)
|
|
Power of Attorney (20)
|
|
|
(p)
|
|
Code of Ethics for the Registrant, its investment advisers and principal underwriter
|
|
|
(1)
|
|
Legg Mason Fund Adviser, Inc. and Legg Mason Investor Services, LLC (12)
|
-4-
|
|
|
|
|
|
|
|
|
(2)
|
|
The Registrant (17)
|
|
|
(3)
|
|
WAM, WAMCL and WAML Singapore (17)
|
|
|
(4)
|
|
WAML Japan (17)
|
(1) Incorporated herein by reference to corresponding exhibit of Post-Effective Amendment No. 15 to the Registration
Statement, SEC File No. 33-34929, filed October 30, 1997.
(2) Incorporated herein by reference to corresponding exhibit of
Post-Effective Amendment No. 18 to the Registration Statement, SEC File No. 33-34929, filed May 29, 1998.
(3) Incorporated
herein by reference to corresponding exhibit of Post-Effective Amendment No. 21 to the Registration Statement, SEC File No. 33-34929, filed May 18, 2000.
(4) Incorporated herein by reference to corresponding exhibit of Post-Effective Amendment No. 22 to the Registration Statement, SEC File No. 33-34929, filed August 1, 2000.
(5) Incorporated herein by reference to corresponding exhibit of Post-Effective Amendment No. 23 to the Registration Statement, SEC File
No. 33-34929, filed July 18, 2001.
(6) Incorporated herein by reference to corresponding exhibit of Post-Effective Amendment
No. 24 to the Registration Statement, SEC File No. 33-34929, filed July 19, 2002.
(7) Incorporated herein by reference to
corresponding exhibit of Post-Effective Amendment No. 25 to the Registration Statement, SEC File No. 33-34929, filed on June 2, 2003.
(8) Incorporated herein by reference to corresponding exhibit of Post-Effective Amendment No. 27 to the Registration Statement, SEC File No. 33-34929, filed on July 30, 2003.
(9) Incorporated herein by reference to corresponding exhibit of Post-Effective Amendment No. 27 to the Registration Statement, SEC File
No. 33-34929, filed on October 1, 2003.
(10) Incorporated herein by reference to corresponding exhibit of Post-Effective Amendment
No. 31 to the Registration Statement, SEC File No. 33-34929, filed on July 29, 2005.
(11) Incorporated herein by reference to
corresponding exhibit of Post Effective Amendment No. 33 to the Registration Statement, SEC File No. 33-34929, filed on June 28, 2006.
(12) Incorporated herein by reference to corresponding exhibit of Post Effective Amendment No. 35 to the Registration Statement, SEC File No. 33-34929, filed on July 27, 2007.
(13) Incorporated herein by reference to corresponding exhibit of Post-Effective Amendment No. 36 to the Registration Statement, SEC File
No. 33-34929, filed on June 2, 2008.
(14) Incorporated herein by reference to corresponding exhibit of Post-Effective Amendment
No. 37 to the Registration Statement, SEC File No. 33-34929, filed on July 29, 2008.
(15) Incorporated herein by reference to
corresponding exhibit of Post-Effective Amendment No. 38 to the Registration Statement, SEC File No. 33-34929, filed on April 27, 2009.
(16) Incorporated herein by reference to corresponding exhibit of Post-Effective Amendment No. 39 to the Registration Statement, SEC File No. 33-34929, filed on June 26, 2009.
(17) Incorporated herein by reference to corresponding exhibit of Post-Effective Amendment No. 40 to the Registration Statement, SEC File
No. 33-34929, filed on February 26, 2010.
-5-
(18) Incorporated herein by reference to corresponding exhibit of Post-Effective Amendment No. 41 to
the Registration Statement, SEC File No. 33-34929, filed on April 27, 2010.
(19) Incorporated herein by reference to corresponding
exhibit of Post-Effective Amendment No. 42 to the Registration Statement, SEC File No. 33-34929, filed on April 25, 2011.
(20)
Incorporated herein by reference to corresponding exhibit of Post-Effective Amendment No. 45 to the Registration Statement, SEC File No. 33-34929, filed on February 29, 2012.
(21) Incorporated herein by reference to corresponding exhibit of Post-Effective Amendment No. 48 to the Registration Statement, SEC File No. 33-34929, filed on April 25, 2012.
(22) Incorporated herein by reference to corresponding exhibit of Post-Effective Amendment No. 56 to the Registration Statement, SEC File
No. 33-34929, filed on July 2, 2012.
(23) Incorporated herein by reference to corresponding exhibit of Post-Effective Amendment
No. 58 to the Registration Statement, SEC File No. 33-34929, filed on July 26, 2012.
(24) Incorporated herein by reference to
corresponding exhibit of Post-Effective Amendment No. 59 to the Registration Statement, SEC File No. 33-34929, filed on September 24, 2012.
Item 29.
|
Persons Controlled by or under Common Control with Registrant - None
|
Article VIII of
Registrants Articles of Incorporation provides that to the maximum extent permitted by applicable law (including Maryland law and the 1940 Act) the directors and officers of the Registrant shall not be liable to the Registrant or to any of its
stockholders for monetary damages. Article VIII also provides that no amendment or repeal of Article VIII, and no adoption or amendment of any other provision of the Articles or Bylaws inconsistent with Article VIII, shall apply to or affect the
applicability of Article VIII with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.
Section 9.1 of Article IX of Registrants Articles of Incorporation provides that the Registrant shall indemnify its present and past directors
and persons who are serving or have served at the Registrants request in similar capacities for other entities to the maximum extent permitted by applicable law (including Maryland law and the Investment Company Act of 1940). Section 9.1
further provides that the Registrant shall have the power to indemnify its present and past officers, employees and agents, and persons who are serving or have served at the Registrants request in similar capacities for other entities to the
maximum extent permitted by applicable law (including Maryland law and the Investment Company Act of 1940). Section 2-418(b) of the Maryland Corporations and Associations Code (Maryland Code) permits the Registrant to indemnify its
directors unless it is established that (1) the act or omission of the director was material to the matter giving rise to the proceeding, and the act or omission was committed in bad faith or was the result of active and deliberate dishonesty;
or (2) the director actually received an improper personal benefit in money, property or services; or (3) in the case of a criminal proceeding, the director had reasonable cause to believe the act or omission was unlawful. Indemnification
may be made against judgments, penalties, fines, settlements and reasonable expenses actually incurred in connection with a proceeding, in accordance with the Maryland Code. Pursuant to Section 2-418(j)(2) of the Maryland Code, the Registrant
is permitted to indemnify its officers, employees and agents to the same extent. Maryland law also requires indemnification of directors and officers under certain circumstances. The provisions set forth above apply insofar as consistent with
Section 17(h) of the 1940 Act, which prohibits indemnification of any director or officer of the Registrant against any liability to the Registrant or its shareholders to which such director or officer otherwise would be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.
Section 1 of
Article XII of the Bylaws permits indemnification consistent with the principles described above and sets forth the procedures by which the Registrant will indemnify its directors, officers, employees and agents. Additionally, the Registrant has
entered into an agreement with each of its directors that provides for indemnification consistent with the principles described above and that sets
-6-
forth certain procedural aspects with respect to indemnification, including the advancement of expenses and presumptions relating to the determination of whether the standard of conduct required
for indemnification has been met. The Registrant, at its expense, provides liability insurance for the benefit of its Directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be provided to directors, officers and controlling
persons of the Registrant, pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in connection with
the successful defense of any action, suit or proceeding or payment pursuant to any insurance policy) is asserted against the Registrant by such director, officer or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is prohibited as against public policy as
expressed in the Act and will be governed by the final adjudication of such issue.
Under the Distribution Agreement, the Registrant agrees to
indemnify, defend and hold Legg Mason Investor Services, LLC (the Distributor), its several officers and directors, and any person who controls the Distributor within the meaning of Section 15 of the 1933 Act, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the cost of investigating or defending such claims, demands or liabilities and any counsel fees incurred in connection therewith) which the Distributor, its officers or
directors, or any such controlling person may incur, under the 1933 Act or under common law or otherwise, arising out of or based upon any alleged untrue statement of a material fact contained in the Registrants Registration Statement or
arising out of or based upon any alleged omission to state a material fact required to be stated or necessary to make the Registration Statement not misleading, provided that in no event shall anything contained in the Underwriting Agreement be
construed so as to protect the Distributor against any liability to the Registrant or its stockholders to which the Distributor would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations and duties under the Agreement.
The Registrants Investment Management
Agreements and Investment Advisory Agreements provide that, in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of the obligations and duties under the applicable Agreements, the Adviser or Manager (as
applicable) will not be subject to any liability to the Registrant or any stockholder of the Registrant for any act or omission in the course of, or connected with, rendering services pursuant to the applicable Agreements.
Item 31.
|
Business and Other Connections of Investment Adviser
|
(a) Legg Mason Partners Fund Advisor, LLC (LMPFA) is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. The following is a
list of other substantial business activities in which directors, officers or partners of LMPFA have been engaged as director, officer, employee, partner, or trustee.
|
|
|
Ted P. Becker
|
|
CCO, LMPFA
|
|
|
Vice President, Legg Mason, Inc.
|
|
|
R. Jay Gerken
|
|
Chairman, President and CEO, LMPFA
|
|
|
President and CEO, SBFM
|
|
|
Thomas C. Mandia
|
|
Secretary, LMPFA
|
|
|
Secretary, SBFM
|
-7-
|
|
|
Thomas C. Merchant
|
|
Vice President and Assistant Secretary, LMPFA
|
|
|
Secretary, Brandywine
|
|
|
Secretary, LMCM
|
|
|
Secretary, LMIC
|
|
|
Vice President and Secretary, NS
|
|
|
Vice President and Secretary, Legg Mason, Inc.
|
|
|
Secretary, LeggCo
|
|
|
Secretary, The Baltimore Co.
|
|
|
Assistant Secretary, Bartlett
|
|
|
Secretary, BMML
|
|
|
Secretary, FG
|
|
|
Secretary, GCIM
|
|
|
Secretary, LM Canada Hldg
|
|
|
Secretary, LMCF
|
|
|
Secretary, LMCRES
|
|
|
Secretary, LMIH
|
|
|
Secretary, LMIH II
|
|
|
Secretary, LMIH Chile
|
|
|
Secretary, LM Properties
|
|
|
Secretary, LMPAC
|
|
|
Secretary, LMREC
|
|
|
Secretary, LMREC II
|
|
|
Secretary, LMRESA
|
|
|
Secretary, LMRC
|
|
|
Secretary, LMRG
|
|
|
Secretary, LMRP
|
|
|
Secretary, LMTS
|
|
|
Secretary, LM Tower
|
|
|
Secretary, LMCC
|
|
|
Secretary, LMCS I
|
|
|
Secretary, LMCS II
|
|
|
Secretary, LMCS III
|
|
|
Secretary, LMCS IV
|
|
|
Secretary, LMCS V
|
|
|
Secretary, LMRC II
|
|
|
Secretary, LMRC Properties
|
|
|
Peter H. Nachtwey
|
|
Manager, LMPFA
|
|
|
Director and President, The Baltimore Co.
|
|
|
Director, Batterymarch
|
|
|
Director and President, BMML
|
|
|
Manager, Brandywine
|
|
|
Manager, Clear Adv
|
|
|
Director, Clear Asset
|
|
|
Manager, GCIM
|
|
|
Manager and President, GS
|
|
|
Manager and President, LeggCo
|
|
|
Manager, LMCM
|
|
|
Vice President and Treasurer, LMCF
|
|
|
Director and President, LMCRES
|
|
|
Director, LMFC
|
|
|
Manager, LMGAA
|
|
|
Sr. EVP and CFO, Legg Mason Inc
|
|
|
Chairman, LMPAC
|
|
|
Manager, LMIH
|
|
|
Manager, LMIH Chile
|
|
|
Manager, LMIC
|
-8-
|
|
|
|
|
Manager, LMPPG
|
|
|
Director and President, LMRESA
|
|
|
Director and President, LMRG
|
|
|
Director and President, LMRP
|
|
|
Director and President, LM Tower
|
|
|
Director and President, LM BAM
|
|
|
Manager and President, LMCS V
|
|
|
Director, PCM I
|
|
|
Director, PCM II
|
|
|
Manager, Royce
|
|
|
Manager, SBFM
|
|
|
Robert B. Shepler
|
|
Senior Vice President, LMPFA
|
|
|
Vice President, LeggCo
|
|
|
Senior Vice President, SBFM
|
(b) Western Asset Management Company (WAM) is an investment adviser registered with the Securities and
Exchange Commission under the Investment Advisers Act of 1940. The following is a list of other substantial business activities in which directors, officers or partners of WAM have been engaged as director, officer, employee, partner or trustee.
|
|
|
Ronald Dewhurst
|
|
Director, WAM
|
|
|
Director, Batterymarch
|
|
|
Director, Bartlett
|
|
|
Manager, Brandywine
|
|
|
Manager, Clear Adv
|
|
|
Director, Clear Asset
|
|
|
Manager, Essemplia
|
|
|
Manager, GCIM
|
|
|
Manager, LMCM
|
|
|
Manager, LMGAA
|
|
|
Manager, LMIC
|
|
|
Manager, LMPPG
|
|
|
Sr. EVP and Sr. Managing Director, Legg Mason Inc
|
|
|
Manager, Royce
|
|
|
Jeffrey A. Nattans
|
|
Director, WAM
|
|
|
Manager, LMCM
|
|
|
Manager, Clear Adv
|
|
|
Manager, LMIC
|
|
|
Director, NS
|
|
|
Director, Bartlett
|
|
|
Manager, Clear Asset
|
|
|
Manager, GCIM
|
|
|
Executive Vice President, Legg Mason, Inc.
|
|
|
Vice President and Manager, LMIH
|
|
|
Director, LMREC
|
|
|
Director, LMREC II
|
|
|
Director, PCM I
|
|
|
Director, PCM II
|
|
|
Manager, Royce
|
|
|
Director, WAMCL
|
|
|
Director, WAM Tokyo
|
|
|
Director, WAM Australia
|
|
|
Director, WAM Singapore
|
-9-
(c) Western Asset Management Company Limited in London (WAMCL) is an investment adviser
registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. The following is a list of other substantial business activities in which directors, officers or partners of WAMCL have been engaged as director,
officer, employee, partner or trustee.
|
|
|
Jeffrey A. Nattans
|
|
Director, WAMCL
|
|
|
Manager, LMCM
|
|
|
Manager, Clear Adv
|
|
|
Manager, LMIC
|
|
|
Director, NS
|
|
|
Director, Bartlett
|
|
|
Manager, Clear Asset
|
|
|
Manager, GCIM
|
|
|
Executive Vice President, Legg Mason, Inc.
|
|
|
Vice President and Manager, LMIH
|
|
|
Director, LMREC
|
|
|
Director, LMREC II
|
|
|
Director, PCM I
|
|
|
Director, PCM II
|
|
|
Manager, Royce
|
|
|
Director, WAM
|
|
|
Director, WAM Tokyo
|
|
|
Director, WAM Australia
|
|
|
Director, WAM Singapore
|
(d) Western Asset Management Company Ltd. in Japan (WAM Tokyo) is an investment adviser registered with the
Securities and Exchange Commission under the Investment Advisers Act of 1940. The following is a list of other substantial business activities in which directors, officers or partners of WAM Tokyo have been engaged as director, officer, employee,
partner or trustee.
|
|
|
Jeffrey A. Nattans
|
|
Director, WAM Tokyo
|
|
|
Manager, LMCM
|
|
|
Manager, Clear Adv
|
|
|
Manager, LMIC
|
|
|
Director, NS
|
|
|
Director, Bartlett
|
|
|
Manager, Clear Asset
|
|
|
Manager, GCIM
|
|
|
Executive Vice President, Legg Mason, Inc.
|
|
|
Vice President and Manager, LMIH
|
|
|
Director, LMREC
|
|
|
Director, LMREC II
|
|
|
Director, PCM I
|
|
|
Director, PCM II
|
|
|
Manager, Royce
|
|
|
Director, WAMCL
|
|
|
Director, WAM
|
|
|
Director, WAM Australia
|
|
|
Director, WAM Singapore
|
(e) Western Asset Management Company Pte. Ltd. (WAM Singapore) is an investment adviser registered with the
Securities and Exchange Commission under the Investment Advisers Act of 1940. The following is a list of other substantial business activities in which directors, officers or partners of WAM Singapore have been engaged as director, officer,
employee, partner, or trustee.
-10-
|
|
|
Jeffrey A. Nattans
|
|
Director, WAM Singapore
|
|
|
Director, LMCM
|
|
|
Manager, LMIC
|
|
|
Director, NS
|
|
|
Director, Bartlett
|
|
|
Manager, Clear Adv
|
|
|
Manager, Clear Asset
|
|
|
Manager, GCIM
|
|
|
Executive Vice President, Legg Mason, Inc.
|
|
|
Vice President and Manager, LMIH
|
|
|
Director, LMREC
|
|
|
Director, LMREC II
|
|
|
Director, PCM I
|
|
|
Director, PCM II
|
|
|
Manager, Royce
|
|
|
Director, WAM
|
|
|
Director, WAMCL
|
|
|
Director, WAM Australia
|
|
|
Director, WAM Japan
|
Addresses for Item 26(a), 26(b), 26(c), 26(d) and 26(e):
3040692 Nova Scotia Company (NS)
44 Chipman Hill, 10
th
Floor
St. John, New Brunswick E2L 4S6
Canada
The Baltimore Company (The Baltimore Co)
100 International Drive
Baltimore, MD 21202
Bartlett & Co.
(Bartlett)
36 East Fourth Street
Cincinnati, OH 45202
Batterymarch Financial Management, Inc. (Batterymarch)
200 Clarendon Street
Boston, MA
02116
BMML, Inc. (BMML)
100 International Drive
Baltimore, MD 21202
Brandywine Global Investment Management, LLC (Brandywine)
2929 Arch Street, 8
th
Floor
Philadelphia, PA 19104
Brandywine Global
Investment Management (BGIM)
Level 9, Leaf B, Tower 42
25 Old Broad Street
London, England EC2N 1HQ
Brandywine Global Investment Management (Asia) Pte Ltd. (Brandywine Singapore)
36 Robinson House, #18
City House
Singapore
-11-
BRE Group, Inc. (BRE)
36 East Fourth Street
Cincinnati, OH 45202
Clearbridge Advisors, LLC (Clear Adv)
620 Eighth Avenue
New York, NY 10018
Clearbridge Asset Management, Inc. (Clear Asset)
620 Eighth Avenue
New York, NY 10018
Essemplia Emerging Markets,
LLC (Essemplia)
10 Exchange Square, 9
th
Floor
Primrose Street
London, England EC2A 2EN
Fairfield Group, Inc. (FG)
200 Gibraltor Road
Horsham, PA 19044
Gray Seifert & Co (GS)
100 International Drive
Baltimore, MD 21202
Global Currents Investment
Management, LLC (GCIM)
100 International Drive
Baltimore, MD 21202
Legg Mason Capital Management, LLC (LMCM)
100 International Drive
Baltimore, MD 21202
Legg Mason Canada Holdings Ltd. (LM Canada Hldg)
44 Chipman Hill, 10
th
Floor
St. John, New Brunswick E2L 4S6
Canada
Legg Mason Charitable Foundation, Inc. (LMCF)
100 International Drive
Baltimore, MD 21202
Legg Mason Fund Adviser, Inc. (LMFA)
100 International Drive
Baltimore, MD 21202
Legg Mason Funding, Corp. (LMFC)
100 International Drive
Baltimore, MD 21202
Legg Mason Global Asset Allocation, LLC (LMGAA)
620 8
th
Ave.,
49
th
Floor
New York, NY 10018
-12-
Legg Mason, Inc.
100 International Drive
Baltimore, MD 21202
Legg Mason & Co. LLC (LeggCo)
100 International Drive
Baltimore, MD 21202
Legg Mason International Holdings, LLC (LMIH)
100 International Drive
Baltimore, MD 21202
Legg Mason International Holdings II, LLC (LMIH II)
100 International Drive
Baltimore, MD 21202
Legg Mason International Holdings (Chile), LLC (LMIH Chile)
El Regidor N
o
66
Piso 10
Las Condes, Santiago
Chile
Legg Mason Investment Counsel, LLC (LMIC)
100 International Drive
Baltimore, MD 21202
Legg Mason Investor
Services, LLC (LMIS)
100 International Drive
Baltimore, MD 21202
Legg Mason Marketing Co, LLC (LM Marketing)
100 International Drive
Baltimore, MD 21202
Legg Mason Partners Fund Advisor, LLC (LMPFA)
620 8
th
Ave.,
49
th
Floor
New York, NY 10018
Legg Mason Political Action
Committee (LMPAC)
100 International Drive
Baltimore, MD 21202
Legg Mason Properties, Inc. (LM Properties)
5955 Carnegie Boulevard
Suite 200
Charlotte, NC 28209
Legg Mason Real Estate
Capital, Inc. (LMREC)
10880 Wilshire Blvd., Suite 1750
Los Angeles, CA 90024
Legg Mason Real Estate Capital II, Inc. (LMREC II)
10880 Wilshire Blvd., Suite 1750
Los Angeles,
CA 90024
-13-
Legg Mason Real Estate Investors, Inc. (LMREI)
100 International Drive
Baltimore, MD 21202
Legg Mason Commercial Real Estate Services, Inc. (LMCRES)
100 International Drive
Baltimore, MD 21203
Legg Mason Real Estate Securities Advisors, Inc. (LMRESA)
100 International Drive
Baltimore, MD 21202
Legg Mason Realty Capital, Inc. (LMRC)
100 International Drive
Baltimore, MD 21202
Legg Mason Realty Group, Inc. (LMRG)
100 International Drive
Baltimore, MD 21202
Legg Mason Realty Partners, Inc. (LMRP)
100 International Drive
Baltimore, MD 21202
Legg Mason Technology Services, Inc. (LMTS)
100 International Drive
Baltimore, MD 21202
Legg Mason Tower, Inc. (LM Tower)
100 International Drive
Baltimore, MD 21202
Legg Mason Investment Counsel & Trust Company, N.A. (LMIC)
100 International Drive
Baltimore, MD 21202
LM BAM, Inc. (LM BAM)
46 Public
Square, Suite 700
Wilkes Barre, PA 18701
LM Capital Company (LMCC)
100 International Drive
Baltimore, MD 21202
LM Capital Support I
(LMCS I)
100 International Drive
Baltimore, MD 21202
LM Capital Support II (LMCS II)
100 International Drive
Baltimore, MD 21202
LM Capital Support III (LMCS III)
100 International Drive
Baltimore, MD 21202
-14-
LM Capital Support IV (LMCS IV)
100 International Drive
Baltimore, MD 21202
LM Capital Support V (LMCS V)
100
International Drive
Baltimore, MD 21202
LM Holdings, Limited (LM Holdings)
155 Bishopsgate
London EC2M 3TY
England
LMRC II, Inc. (LMRC II)
100
International Drive
Baltimore, MD 21202
LMRC Properties, Inc. (LMRC Properties)
100 International Drive
Baltimore, MD 21202
LMM LLC (LMM)
100 International Drive
Baltimore,
MD 21202
PCM Holdings I, Inc. (PCM I)
8889 Pelican Bay Boulevard, Suite 500
Naples, FL 34108-7512
PCM Holdings II, LLC (PCM II)
8889
Pelican Bay Boulevard, Suite 500
Naples, FL 34108-7512
Permal Asset Management, Inc. (Permal)
900 Third Ave. 28
th
Floor
New York, NY 10022
Royce & Associates, LLC (Royce)
1414 Avenue of the Americas
New York, NY 10019
Smith Barney Fund Management (SBFM)
100 First Stamford Place
Stamford, CT 06902
Western Asset Management Company (WAM)
385 East Colorado Boulevard
Pasadena, CA 91101
Western Asset Management Company Limited (WAMCL)
10 Exchange Square
Primrose Street
London EC2A 2EN
England
-15-
Western Asset Management Company Ltd (WAM Tokyo)
Ote Center Building
1-1-3 Otemachi Chiyoda-ku
Tokyo 100-0004
Japan
Western Asset Management Company Pty Ltd (WAM Australia)
Level 13
120 Collins Street
GPO Box 507
Melbourne Victoria 3000
Australia
Western Asset Management (UK) Holdings Limited (WAMCO Hldgs Ltd)
10 Exchange Square
Primrose Street
London EC2A 2EN
England
Western Asset Management Company Pte, Ltd (WAM Singapore)
1 George Street, #23-01
Singapore 049145
Item 32.
|
Principal Underwriters
|
(a)
|
Legg Mason Investor Services, LLC (LMIS), the Registrants principal underwriter, also serves as principal underwriter for the following investment
companies registered under the Investment Company Act of 1940, as amended: Legg Mason Global Asset Management Trust; Legg Mason Global Trust, Inc.; Legg Mason Tax-Free Income Fund; Legg Mason Charles Street Trust, Inc.; Legg Mason Investment Trust,
Inc.; Legg Mason Investment Trust; Legg Mason Partners Premium Money Market Trust; Legg Mason Partners Institutional Trust; Legg Mason Partners Money Market Trust; Legg Mason Partners Equity Trust; Legg Mason Partners Variable Equity Trust; Legg
Mason Partners Variable Income Trust; Legg Mason Partners Income Trust.
|
(b)
|
The following table sets forth information concerning each director and officer of the Registrants principal underwriter, Legg Mason Investor Services, LLC
(LMIS).
|
|
|
|
|
|
Name and Principal Business Address*
|
|
Position and Offices with Underwriter
LMIS
|
|
Positions and Offices with Registrant
|
Thomas J. Hirschmann
|
|
Co-Managing Director
|
|
None
|
|
|
|
Joseph A. Sullivan
|
|
Co-Managing Director
|
|
None
|
|
|
|
Jeremy OShea
|
|
Vice President
|
|
None
|
100 First Stamford Pl.
|
|
|
|
|
Stamford, CT 06902-6732
|
|
|
|
|
|
|
|
Matthew Schiffman
|
|
Vice President
|
|
None
|
100 First Stamford Pl.
|
|
|
|
|
Stamford, CT 06902-6732
|
|
|
|
|
-16-
|
|
|
|
|
Jason Bennett
|
|
Chief Financial Officer, Treasurer and Financial Reporting Officer
|
|
None
|
|
|
|
Kenneth D. Cieprisz
|
|
Chief Compliance Officer
|
|
None
|
620 8
th
Avenue, 49
th
Floor
|
|
|
|
|
New York, NY 10018
|
|
|
|
|
|
|
|
Elizabeth F. Craig
|
|
Secretary
|
|
None
|
|
|
|
Vicki Schmelzer
|
|
Assistant Secretary
|
|
None
|
|
|
|
Susan Kerr
|
|
AML Compliance Officer
|
|
None
|
100 First Stamford Pl.
|
|
|
|
|
Stamford, CT 06902
|
|
|
|
|
*
|
All addresses are 100 International Drive, Baltimore, Maryland 21202, unless otherwise indicated.
|
|
(c)
|
The Registrant has no principal underwriter who is not an affiliated person of the Registrant or an affiliated person of such an affiliated person.
|
Item 33.
|
Location of Accounts and Records
|
|
|
|
|
|
|
|
|
|
|
|
State Street Bank and Trust Company
|
|
|
|
|
|
Legg Mason Partners Fund Advisor, LLC
|
|
|
P. O. Box 1713
|
|
and
|
|
|
|
620 Eighth Avenue
|
|
|
Boston, Massachusetts 02105
|
|
|
|
|
|
New York, New York 10018
|
Item 34
|
Management Services - None
|
Item 35.
|
Undertakings - None
|
-17-
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, Western Asset Funds, Inc. certifies that it meets all requirements for effectiveness of this
Post-Effective Amendment No. 63 to its Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment No. 63 to its Registration Statement to be signed on its behalf by the
undersigned, duly authorized, in the City of Baltimore and State of Maryland, on the 25
th
day of February, 2013.
|
|
|
WESTERN ASSET FUNDS, INC.
|
|
|
By:
|
|
/s/ R. Jay Gerken
|
|
|
R. Jay Gerken
|
|
|
President
|
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated:
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
/s/ Ronald J. Arnault*
|
|
Director
|
|
February 25, 2013
|
Ronald J. Arnault
|
|
|
|
|
|
|
|
/s/ Anita L. DeFrantz*
|
|
Director
|
|
February 25, 2013
|
Anita L. DeFrantz
|
|
|
|
|
|
|
|
/s/ R. Jay
Gerken
|
|
Director and President and Chief Executive Officer
|
|
February 25, 2013
|
R. Jay Gerken
|
|
|
|
|
|
|
|
/s/ Ronald L. Olson*
|
|
Director
|
|
February 25, 2013
|
Ronald L. Olson
|
|
|
|
|
|
|
|
/s/ Avedick B. Poladian*
|
|
Director
|
|
February 25, 2013
|
Avedick B. Poladian
|
|
|
|
|
|
|
|
/s/ William E. B. Siart*
|
|
Director
|
|
February 25, 2013
|
William E. B. Siart
|
|
|
|
|
|
|
|
/s/ Jaynie M. Studenmund*
|
|
Director
|
|
February 25, 2013
|
Jaynie M. Studenmund
|
|
|
|
|
|
|
|
/s/ Richard F. Sennett
|
|
Principal Financial Officer
|
|
February 25, 2013
|
Richard F. Sennett
|
|
|
|
|
|
|
|
By:
|
|
/s/ Richard M. Wachterman
|
|
|
Richard M. Wachterman
|
*
|
Attorney-in-Fact pursuant to Powers of Attorney previously filed
|
Date: February 25, 2013
-18-
Exhibit Index
|
|
|
Exhibit No.
|
|
Exhibit
|
|
|
(g)(9)
|
|
Custodian Services Agreement
|
|
|
(h)(4)
|
|
Fund Accounting Services Agreement
|
|
|
(j)
|
|
Consent of Independent Registered Public Accounting Firm
|
-19-
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