At June 30, 2022, the Fund had the following open reverse repurchase agreements:
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
|
|
|
|
17 |
|
Statement of assets and liabilities (unaudited)
June 30, 2022
|
|
|
|
|
|
|
Assets: |
|
|
|
|
Investments in unaffiliated securities, at value (Cost $246,736,400) |
|
$ |
234,143,891 |
|
Investments in affiliated securities, at value (Cost $3,219,210) |
|
|
3,219,210 |
|
Receivable for securities sold |
|
|
6,152,531 |
|
Interest receivable |
|
|
924,039 |
|
Deposits with brokers for open futures contracts |
|
|
556,405 |
|
OTC swaps, at value (premiums paid $39,863) |
|
|
89,996 |
|
Dividends receivable from affiliated investments |
|
|
1,432 |
|
Prepaid expenses |
|
|
260,412 |
|
Total Assets |
|
|
245,347,916 |
|
|
|
Liabilities: |
|
|
|
|
Payable for open reverse repurchase agreements (Note 3) |
|
|
84,310,000 |
|
Payable for securities purchased |
|
|
7,284,339 |
|
Distributions payable |
|
|
1,144,669 |
|
Interest expense payable |
|
|
512,747 |
|
Payable to brokers net variation margin on open futures contracts |
|
|
234,608 |
|
Investment management fee payable |
|
|
186,670 |
|
OTC swaps, at value (premiums received $21,182) |
|
|
86,352 |
|
Payable for Fund shares repurchased |
|
|
43,287 |
|
Directors fees payable |
|
|
6,208 |
|
Accrued expenses |
|
|
149,497 |
|
Total Liabilities |
|
|
93,958,377 |
|
Total Net Assets |
|
$ |
151,389,539 |
|
|
|
Net Assets: |
|
|
|
|
Par value ($0.001 par value; 11,433,869 shares issued and outstanding; 100,000,000 shares
authorized) |
|
$ |
11,434 |
|
Paid-in capital in excess of par value |
|
|
198,273,653 |
|
Total distributable earnings (loss) |
|
|
(46,895,548) |
|
Total Net Assets |
|
$ |
151,389,539 |
|
|
|
Shares Outstanding |
|
|
11,433,869 |
|
|
|
Net Asset Value |
|
$ |
13.24 |
|
See Notes to Financial
Statements.
|
|
|
|
|
18 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
Statement of operations (unaudited)
For the Six Months Ended June 30, 2022
|
|
|
|
|
|
|
Investment Income: |
|
|
|
|
Interest |
|
$ |
7,625,931 |
|
Dividends from affiliated investments |
|
|
3,249 |
|
Total Investment
Income |
|
|
7,629,180 |
|
|
|
Expenses: |
|
|
|
|
Investment management fee (Note 2) |
|
|
1,247,234 |
|
Interest expense (Note 3) |
|
|
969,669 |
|
Transfer agent fees |
|
|
41,077 |
|
Audit and tax fees |
|
|
32,544 |
|
Legal fees |
|
|
29,224 |
|
Directors fees |
|
|
28,076 |
|
Fund accounting fees |
|
|
13,226 |
|
Stock exchange listing fees |
|
|
9,592 |
|
Shareholder reports |
|
|
8,492 |
|
Custody fees |
|
|
599 |
|
Insurance |
|
|
278 |
|
Miscellaneous expenses |
|
|
3,483 |
|
Total Expenses |
|
|
2,383,494 |
|
Less: Fee waivers and/or expense reimbursements (Note 2) |
|
|
(65,194) |
|
Net Expenses |
|
|
2,318,300 |
|
Net Investment Income |
|
|
5,310,880 |
|
|
|
Realized and Unrealized Gain (Loss) on Investments, Futures Contracts, Written Options and Swap Contracts (Notes 1, 3 and 4): |
|
|
|
|
Net Realized Gain (Loss) From: |
|
|
|
|
Investment transactions in unaffiliated securities |
|
|
(4,853,330) |
|
Futures contracts |
|
|
804,162 |
|
Written options |
|
|
158,425 |
|
Swap contracts |
|
|
675,719 |
|
Net Realized Loss |
|
|
(3,215,024) |
|
Change in Net Unrealized Appreciation (Depreciation) From: |
|
|
|
|
Investments in unaffiliated securities |
|
|
(19,671,215) |
|
Futures contracts |
|
|
121,099 |
|
Swap contracts |
|
|
36,187 |
|
Change in Net Unrealized Appreciation
(Depreciation) |
|
|
(19,513,929) |
|
Net Loss on Investments, Futures Contracts, Written Options and Swap Contracts |
|
|
(22,728,953) |
|
Decrease in Net Assets From Operations |
|
$ |
(17,418,073) |
|
See Notes to Financial
Statements.
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
|
|
|
|
19 |
|
Statements of changes in net assets
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2022 (unaudited)
and the Year Ended December 31, 2021 |
|
2022 |
|
|
2021 |
|
|
|
|
Operations: |
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
5,310,880 |
|
|
$ |
9,914,643 |
|
Net realized gain (loss) |
|
|
(3,215,024) |
|
|
|
2,258,835 |
|
Change in net unrealized appreciation (depreciation) |
|
|
(19,513,929) |
|
|
|
7,599,334 |
|
Increase (Decrease) in Net Assets From
Operations |
|
|
(17,418,073) |
|
|
|
19,772,812 |
|
|
|
|
Distributions to Shareholders From (Note 1): |
|
|
|
|
|
|
|
|
Total distributable earnings |
|
|
(7,335,904) |
|
|
|
(13,027,211) |
|
Return of capital |
|
|
|
|
|
|
(2,093,548) |
|
Decrease in Net Assets From Distributions
to Shareholders |
|
|
(7,335,904) |
|
|
|
(15,120,759) |
|
|
|
|
Fund Share Transactions: |
|
|
|
|
|
|
|
|
Net proceeds from sale of shares (0 and 413,153 shares issued, respectively) (Note
7) |
|
|
|
|
|
|
6,459,800 |
, |
Reinvestment of distributions (0 and 24,984 shares issued, respectively) |
|
|
|
|
|
|
382,627 |
|
Cost of shares repurchased (31,382 and 0 shares repurchased, respectively) (Note
6) |
|
|
(366,871) |
|
|
|
|
|
Increase (Decrease) in Net Assets From
Fund Share Transactions |
|
|
(366,871) |
|
|
|
6,842,427 |
|
Increase (Decrease) in Net
Assets |
|
|
(25,120,848) |
|
|
|
11,494,480 |
|
|
|
|
Net Assets: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
176,510,387 |
|
|
|
165,015,907 |
|
End of period |
|
$ |
151,389,539 |
|
|
$ |
176,510,387 |
|
|
Net of shelf registration offering costs of $48,310 (Note 7). |
|
Net of sales charges of $66,933. |
See Notes to Financial Statements.
|
|
|
|
|
20 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
Statement of cash flows (unaudited)
For the Six Months Ended June 30, 2022
|
|
|
|
|
Increase (Decrease) in Cash: |
|
|
|
|
Cash Flows from Operating Activities: |
|
|
|
|
Net decrease in net assets resulting from operations |
|
$ |
(17,418,073) |
|
Adjustments to reconcile net decrease in net assets resulting from operations to net cash
provided (used) by operating activities: |
|
|
|
|
Purchases of portfolio securities |
|
|
(19,551,189) |
|
Sales of portfolio securities |
|
|
19,731,463 |
|
Net purchases, sales and maturities of short-term investments |
|
|
(1,908,443) |
|
Net amortization of premium (accretion of discount) |
|
|
1,179,536 |
|
Increase in receivable for securities sold |
|
|
(6,152,531) |
|
Increase in interest receivable |
|
|
(127,511) |
|
Increase in prepaid expenses |
|
|
(52,562) |
|
Increase in dividends receivable from affiliated investments |
|
|
(1,420) |
|
Decrease in receivable from broker net variation margin on open futures
contracts |
|
|
22,087 |
|
Decrease in net premiums paid for OTC swap contracts |
|
|
207 |
|
Decrease in payable to broker net variation margin on centrally cleared swap
contracts |
|
|
(11,331) |
|
Increase in payable for securities purchased |
|
|
7,191,985 |
|
Increase in investment management fee payable |
|
|
8,509 |
|
Decrease in Directors fees payable |
|
|
(1,423) |
|
Decrease in interest expense payable |
|
|
(330,650) |
|
Increase in accrued expenses |
|
|
48,795 |
|
Increase in payable to broker net variation margin on futures contracts |
|
|
234,608 |
|
Net realized loss on investments |
|
|
4,853,330 |
|
Change in net unrealized appreciation (depreciation) of investments and OTC swap
contracts |
|
|
19,625,102 |
|
Net Cash Provided in Operating
Activities* |
|
|
7,340,489 |
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
Distributions paid on common stock (net of distributions payable) |
|
|
(6,191,235) |
|
Decrease in payable for open reverse repurchase agreements |
|
|
(609,000) |
|
Payment for Fund shares repurchased (net of payable for Fund shares repurchased) |
|
|
(323,584) |
|
Net Cash Used by Financing
Activities |
|
|
(7,123,819) |
|
Net Increase in Cash and Restricted Cash |
|
|
216,670 |
|
Cash and restricted cash at beginning of period |
|
|
339,735 |
|
Cash and restricted cash at end of period |
|
$ |
556,405 |
|
* |
Included in operating expenses is $1,300,319 paid for interest and commitment fees on borrowings. |
See Notes to Financial Statements.
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
|
|
|
|
21 |
|
Statement of cash flows
(unaudited) (contd)
For the Six Months Ended June 30, 2022
|
The following table provides a reconciliation of cash and restricted cash reported within the Statement of Assets and
Liabilities that sums to the total of such amounts shown on the Statement of Cash Flows. |
|
|
|
|
|
|
|
June 30, 2022 |
|
Cash |
|
|
|
|
Restricted cash |
|
|
556,405 |
|
Total cash and restricted cash shown in the Statement of Cash Flows |
|
$ |
556,405 |
|
Restricted cash consists of cash that has been segregated to cover the Funds collateral or margin obligations under derivative
contracts. It is separately reported on the Statement of Assets and Liabilities as Deposits with brokers.
See Notes to Financial Statements.
|
|
|
|
|
22 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
Financial highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of capital stock outstanding throughout each year ended December 31, unless otherwise noted: |
|
|
|
|
|
|
|
|
|
|
20221,2 |
|
|
20211 |
|
|
20201 |
|
|
20191 |
|
|
20181 |
|
|
20171 |
|
|
|
|
|
|
|
|
Net asset value, beginning of period |
|
|
$15.40 |
|
|
|
$14.96 |
|
|
|
$19.48 |
|
|
|
$19.28 |
|
|
|
$21.27 |
|
|
|
$20.70 |
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
0.46 |
|
|
|
0.89 |
|
|
|
1.23 |
|
|
|
1.51 |
|
|
|
1.65 |
|
|
|
1.57 |
|
Net realized and unrealized gain (loss) |
|
|
(1.98) |
|
|
|
0.90 |
|
|
|
(4.20) |
|
|
|
0.65 |
|
|
|
0.22 |
|
|
|
2.28 |
|
Total income (loss) from
operations |
|
|
(1.52) |
|
|
|
1.79 |
|
|
|
(2.97) |
|
|
|
2.16 |
|
|
|
1.87 |
|
|
|
3.85 |
|
|
|
|
|
|
|
|
Less distributions from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
(0.64) |
3 |
|
|
(1.16) |
|
|
|
(1.13) |
|
|
|
(1.45) |
|
|
|
(3.03) |
|
|
|
(2.69) |
|
Net realized gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.83) |
|
|
|
(0.59) |
|
Return of capital |
|
|
|
|
|
|
(0.19) |
|
|
|
(0.42) |
|
|
|
(0.51) |
|
|
|
|
|
|
|
|
|
Total
distributions |
|
|
(0.64) |
|
|
|
(1.35) |
|
|
|
(1.55) |
|
|
|
(1.96) |
|
|
|
(3.86) |
|
|
|
(3.28) |
|
Anti-dilutive impact of repurchase plan |
|
|
0.00 |
4,5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period |
|
|
$13.24 |
|
|
|
$15.40 |
|
|
|
$14.96 |
|
|
|
$19.48 |
|
|
|
$19.28 |
|
|
|
$21.27 |
|
|
|
|
|
|
|
|
Market price, end of period |
|
|
$11.68 |
|
|
|
$15.21 |
|
|
|
$14.18 |
|
|
|
$20.30 |
|
|
|
$20.39 |
|
|
|
$24.67 |
|
Total return, based on NAV6,7 |
|
|
(10.03) |
% |
|
|
12.38 |
% |
|
|
(14.67) |
% |
|
|
11.65 |
% |
|
|
9.26 |
% |
|
|
19.70 |
% |
Total return, based on Market Price8 |
|
|
(19.37) |
% |
|
|
17.24 |
% |
|
|
(22.13) |
% |
|
|
9.71 |
% |
|
|
(1.16) |
% |
|
|
24.20 |
% |
|
|
|
|
|
|
|
Net assets, end of period (millions) |
|
|
$151 |
|
|
|
$177 |
|
|
|
$165 |
|
|
|
$205 |
|
|
|
$202 |
|
|
|
$222 |
|
|
|
|
|
|
|
|
Ratios to average net assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses |
|
|
2.92 |
%9 |
|
|
2.38 |
% |
|
|
2.82 |
% |
|
|
3.56 |
% |
|
|
3.15 |
% |
|
|
2.68 |
% |
Net expenses |
|
|
2.84 |
9,10,11 |
|
|
2.10 |
10,11 |
|
|
2.53 |
11 |
|
|
3.56 |
|
|
|
3.15 |
|
|
|
2.68 |
|
Net investment income |
|
|
6.50 |
9 |
|
|
5.82 |
|
|
|
8.18 |
|
|
|
7.73 |
|
|
|
7.78 |
|
|
|
7.29 |
|
|
|
|
|
|
|
|
Portfolio turnover rate |
|
|
8 |
% |
|
|
14 |
% |
|
|
11 |
% |
|
|
17 |
% |
|
|
33 |
% |
|
|
35 |
% |
Loan Outstanding, End of Period (000s) |
|
|
|
|
|
|
|
|
|
|
$45,000 |
|
|
|
$98,000 |
|
|
|
$99,250 |
|
|
|
$101,750 |
|
Asset Coverage Ratio for Loan Outstanding12
|
|
|
|
|
|
|
|
|
|
|
467 |
% |
|
|
309 |
% |
|
|
303 |
% |
|
|
319 |
% |
Asset Coverage, per $1,000 Principal Amount of Loan Outstanding12 |
|
|
|
|
|
|
|
|
|
|
$4,667 |
|
|
|
$3,089 |
|
|
|
$3,035 |
|
|
|
$3,185 |
|
Weighted Average Loan (000s) |
|
|
|
|
|
|
$45,000 |
|
|
|
$62,369 |
|
|
|
$98,072 |
|
|
|
$101,743 |
|
|
|
$101,750 |
|
Weighted Average Interest Rate on Loan |
|
|
|
|
|
|
1.84 |
% |
|
|
2.14 |
% |
|
|
3.46 |
% |
|
|
3.06 |
% |
|
|
2.06 |
% |
See Notes to Financial
Statements.
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
|
|
|
|
23 |
|
Financial highlights (contd)
1 |
Per share amounts have been calculated using the average shares method. |
2 |
For the six months ended June 30, 2022 (unaudited). |
3 |
The actual source of the Funds current fiscal year distributions may be from net investment income, return of
capital or a combination of both. Shareholders will be informed of the tax characteristics of the distributions after the close of the fiscal year. |
4 |
Amount represents less than $0.005 per share. |
5 |
The repurchase plan was completed at an average repurchase price of $11.69 for 31,382 shares and $366,871 for the period
ended June 30, 2022. |
6 |
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the
absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
7 |
The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future
results. Total returns for periods of less than one year are not annualized. |
8 |
The total return calculation assumes that distributions are reinvested in accordance with the Funds dividend
reinvestment plan. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
10 |
The manager has agreed to waive the Funds management fee to an extent sufficient to offset the net management fee
payable in connection with any investment in an affiliated money market fund. |
11 |
Reflects fee waivers and/or expense reimbursements. |
12 |
Represents value of net assets plus the loan outstanding at the end of the period divided by the loan outstanding at the
end of the period. |
See Notes to
Financial Statements.
|
|
|
|
|
24 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
Notes to financial statements (unaudited)
1. Organization and significant accounting policies
Western Asset Mortgage Opportunity Fund Inc. (the Fund) was incorporated in Maryland on December 11, 2009 and is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the 1940 Act). The Funds primary investment
objective is to provide current income. As a secondary investment objective, the Fund will seek capital appreciation. The Fund seeks to achieve its investment objectives by investing primarily in a diverse portfolio of mortgage-backed securities
(MBS) and mortgage whole loans. Investments in MBS consist primarily of non-agency residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities
(CMBS).
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted
accounting principles (GAAP). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation. The valuations for fixed income securities (which
may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party
pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services typically use inputs that are observable such as issuer details, interest
rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Investments in open-end funds are valued at the closing net asset value per share of each
fund on the day of valuation. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. Equity securities for which market quotations are available are valued at the last
reported sales price or official closing price on the primary market or exchange on which they trade. When the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates
as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the
manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily
available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values
these securities as determined in accordance with procedures approved by the Funds Board of Directors.
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
|
|
|
|
25 |
|
Notes to financial statements
(unaudited) (contd)
The Board of Directors is responsible for the valuation process and has delegated the supervision
of the daily valuation process to the Global Fund Valuation Committee (the Valuation Committee). The Valuation Committee, pursuant to the policies adopted by the Board of Directors, is responsible for making fair value determinations,
evaluating the effectiveness of the Funds pricing policies, and reporting to the Board of Directors. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other
things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation
Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely
traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and
appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuers financial statements; the purchase price of the security; the discount from market value of
unrestricted securities of the same class at the time of purchase; analysts research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals
or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.
For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Directors, the fair value price is compared against the last
available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Directors quarterly.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the
particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash
flows to present value.
|
|
|
|
|
26 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and
liabilities at measurement date. These inputs are summarized in the three broad levels listed below:
|
|
Level 1 quoted prices in active markets for identical investments |
|
|
Level 2 other significant observable inputs (including quoted prices for similar investments, interest rates,
prepayment speeds, credit risk, etc.) |
|
|
Level 3 significant unobservable inputs (including the Funds own assumptions in determining the fair
value of investments) |
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing
in those securities.
The following is a summary of the inputs used in valuing the Funds assets and liabilities carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
Description |
|
Quoted Prices (Level 1) |
|
|
Other Significant Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs
(Level 3) |
|
|
Total |
|
Long-Term Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage-Backed Securities |
|
|
|
|
|
$ |
144,185,844 |
|
|
|
|
|
|
$ |
144,185,844 |
|
Commercial Mortgage-Backed Securities |
|
|
|
|
|
|
70,082,705 |
|
|
$ |
1,499,823 |
|
|
|
71,582,528 |
|
Asset-Backed Securities |
|
|
|
|
|
|
15,428,092 |
|
|
|
|
|
|
|
15,428,092 |
|
Corporate Bonds & Notes |
|
|
|
|
|
|
2,947,427 |
|
|
|
|
|
|
|
2,947,427 |
|
Total Long-Term Investments |
|
|
|
|
|
|
232,644,068 |
|
|
|
1,499,823 |
|
|
|
234,143,891 |
|
Short-Term Investments |
|
$ |
3,219,210 |
|
|
|
|
|
|
|
|
|
|
|
3,219,210 |
|
Total Investments |
|
$ |
3,219,210 |
|
|
$ |
232,644,068 |
|
|
$ |
1,499,823 |
|
|
$ |
237,363,101 |
|
Other Financial Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures Contracts |
|
$ |
264,464 |
|
|
|
|
|
|
|
|
|
|
$ |
264,464 |
|
OTC Credit Default Swaps on Credit Indices Buy Protection |
|
|
|
|
|
$ |
89,996 |
|
|
|
|
|
|
|
89,996 |
|
Total Other Financial Instruments |
|
$ |
264,464 |
|
|
$ |
89,996 |
|
|
|
|
|
|
$ |
354,460 |
|
Total |
|
$ |
3,483,674 |
|
|
$ |
232,734,064 |
|
|
$ |
1,499,823 |
|
|
$ |
237,717,561 |
|
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
|
|
|
|
27 |
|
Notes to financial statements
(unaudited) (contd)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
Description |
|
Quoted Prices (Level 1) |
|
|
Other Significant Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs
(Level 3) |
|
|
Total |
|
Other Financial Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTC Credit Default Swaps on Credit Indices Sell Protection |
|
|
|
|
|
$ |
86,352 |
|
|
|
|
|
|
$ |
86,352 |
|
|
See Schedule of Investments for additional detailed categorizations. |
|
Reflects the unrealized appreciation (depreciation) of the instruments. |
|
Value includes any premium paid or received with respect to swap contracts. |
The following table summarizes the valuation techniques used and unobservable inputs approved by the Valuation Committee to determine the fair value of certain material
Level 3 investments. The table does not include Level 3 investments with values derived utilizing prices from prior transactions or third party pricing information without adjustment (e.g., broker quotes, pricing services, net asset
values).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at 06/30/22 (000s) |
|
|
Valuation Technique(s) |
|
|
Unobservable Input(s) |
|
Value, Range/Weighted Average |
|
Impact to Valuation
from an Increase in
Input* |
Commercial Mortgage- Backed Securities |
|
$ |
1,500 |
|
|
|
Discounted Cash Flow Method |
|
|
Discount Rate |
|
9.33% |
|
Decrease |
* |
This column represents the directional change in the fair value of the Level 3 investments that would result in an
increase from the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect. Significant increases and decreases in these unobservable inputs in isolation could result in significantly higher or lower fair
value measurements. |
(b) Purchased options. When the Fund purchases an option, an
amount equal to the premium paid by the Fund is recorded as an investment on the Statement of Assets and Liabilities, the value of which is marked-to-market to reflect
the current market value of the option purchased. If the purchased option expires, the Fund realizes a loss equal to the amount of premium paid. When an instrument is purchased or sold through the exercise of an option, the related premium paid is
added to the basis of the instrument acquired or deducted from the proceeds of the instrument sold. The risk associated with purchasing put and call options is limited to the premium paid.
(c) Written options. When the Fund writes an option, an amount equal to the
premium received by the Fund is recorded as a liability, the value of which is marked-to-market daily to reflect the current market value of the option written. If the
option expires, the premium received is recorded as a realized gain. When a written call option is exercised, the difference between the premium received plus the option exercise price and the Funds basis in the underlying security (in the
case of a covered written call option), or the cost to
|
|
|
|
|
28 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
purchase the underlying security (in the case of an
uncovered written call option), including brokerage commission, is recognized as a realized gain or loss. When a written put option is exercised, the amount of the premium received is subtracted from the cost of the security purchased by the Fund
from the exercise of the written put option to form the Funds basis in the underlying security purchased. The writer or buyer of an option traded on an exchange can liquidate the position before the exercise of the option by entering into a
closing transaction. The cost of a closing transaction is deducted from the original premium received resulting in a realized gain or loss to the Fund.
The risk in
writing a covered call option is that the Fund may forego the opportunity of profit if the market price of the underlying security increases and the option is exercised. The risk in writing a put option is that the Fund may incur a loss if the
market price of the underlying security decreases and the option is exercised. The risk in writing an uncovered call option is that the Fund is exposed to the risk of loss if the market price of the underlying security increases. In addition, there
is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
(d) Futures contracts. The Fund uses futures contracts generally to gain
exposure to, or hedge against, changes in interest rates or gain exposure to, or hedge against, changes in certain asset classes. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a
specified date.
Upon entering into a futures contract, the Fund is required to deposit cash or securities with a broker in an amount equal to a certain
percentage of the contract amount. This is known as the initial margin and subsequent payments (variation margin) are made or received by the Fund each day, depending on the daily fluctuation in the
value of the contract. For certain futures, including foreign denominated futures, variation margin is not settled daily, but is recorded as a net variation margin payable or receivable. The daily changes in contract value are recorded as unrealized
appreciation or depreciation in the Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.
Futures contracts involve,
to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
(e) Swap agreements. The Fund invests in swaps for the purpose of managing
its exposure to interest rate, credit or market risk, or for other purposes. The use of swaps involves risks that are different from those associated with other portfolio transactions. Swap agreements are privately negotiated in the over-the-counter market and may be entered into as a bilateral contract (OTC Swaps) or centrally cleared (Centrally Cleared Swaps). Unlike Centrally
Cleared Swaps, the Fund has credit exposure to the counterparties of OTC Swaps.
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
|
|
|
|
29 |
|
Notes to financial statements
(unaudited) (contd)
In a Centrally Cleared Swap, immediately following execution of the swap, the swap agreement is
submitted to a clearinghouse or central counterparty (the CCP) and the CCP becomes the ultimate counterparty of the swap agreement. The Fund is required to interface with the CCP through a broker, acting in an agency capacity. All
payments are settled with the CCP through the broker. Upon entering into a Centrally Cleared Swap, the Fund is required to deposit initial margin with the broker in the form of cash or securities.
Swap contracts are marked-to-market daily and changes in value are recorded as unrealized
appreciation (depreciation). The daily change in valuation of Centrally Cleared Swaps, if any, is recorded as a net receivable or payable for variation margin on the Statement of Assets and Liabilities. Gains or losses are realized upon termination
of the swap agreement. Collateral, in the form of restricted cash or securities, may be required to be held in segregated accounts with the Funds custodian in compliance with the terms of the swap contracts. Securities posted as collateral for
swap contracts are identified in the Schedule of Investments and restricted cash, if any, is identified on the Statement of Assets and Liabilities. Risks may exceed amounts recorded in the Statement of Assets and Liabilities. These risks include
changes in the returns of the underlying instruments, failure of the counterparties to perform under the contracts terms, and the possible lack of liquidity with respect to the swap agreements.
OTC Swap payments received or made at the beginning of the measurement period are reflected as a premium or deposit, respectively, on the Statement of Assets and
Liabilities. These upfront payments are amortized over the life of the swap and are recognized as realized gain or loss in the Statement of Operations. Net periodic payments received or paid by the Fund are recognized as a realized gain or loss in
the Statement of Operations.
The Funds maximum exposure in the event of a defined credit event on a credit default swap to sell protection is the notional
amount. As of June 30, 2022, the total notional value of all credit default swaps to sell protection was $500,000. This amount would be offset by the value of the swaps reference entity, upfront premiums received on the swap and any
amounts received from the settlement of a credit default swap where the Fund bought protection for the same referenced security/entity.
For average notional amounts
of swaps held during the six months ended June 30, 2022, see Note 4.
Credit default swaps
The Fund enters into credit default swap (CDS) contracts for investment purposes, to manage its credit risk or to add leverage. CDS agreements involve one
party making a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party, typically corporate or sovereign issuers, on a specified obligation, or in the event of a
write-down, principal shortfall, interest shortfall or default of all or part of the referenced entities comprising a credit index. The Fund may use
|
|
|
|
|
30 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
a CDS to provide protection against defaults of the issuers (i.e., to reduce risk where the Fund has exposure to an issuer)
or to take an active long or short position with respect to the likelihood of a particular issuers default. As a seller of protection, the Fund generally receives an upfront payment or a stream of payments throughout the term of the swap
provided that there is no credit event. If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the maximum potential amount of future payments (undiscounted) that the Fund could
be required to make under a CDS agreement would be an amount equal to the notional amount of the agreement. These amounts of potential payments will be partially offset by any recovery of values from the respective referenced obligations. As a
seller of protection, the Fund effectively adds leverage to its portfolio because, in addition to its total net assets, the Fund is subject to investment exposure on the notional amount of the swap. As a buyer of protection, the Fund generally
receives an amount up to the notional value of the swap if a credit event occurs.
Implied spreads are the theoretical prices a lender receives for credit default
protection. When spreads rise, market perceived credit risk rises and when spreads fall, market perceived credit risk falls. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include
upfront payments required to enter into the agreement. Wider credit spreads and decreasing market values, when compared to the notional amount of the swap, represent a deterioration of the referenced entitys credit soundness and a greater
likelihood or risk of default or other credit event occurring as defined under the terms of the agreement. Credit spreads utilized in determining the period end market value of CDS agreements on corporate or sovereign issues are disclosed in the
Schedule of Investments and serve as an indicator of the current status of the payment/ performance risk and represent the likelihood or risk of default for credit derivatives. For CDS agreements on asset-backed securities and credit indices, the
quoted market prices and resulting values, particularly in relation to the notional amount of the contract as well as the annual payment rate, serve as an indication of the current status of the payment/ performance risk.
The Funds maximum risk of loss from counterparty risk, as the protection buyer, is the fair value of the contract (this risk is mitigated by the posting of
collateral by the counterparty to the Fund to cover the Funds exposure to the counterparty). As the protection seller, the Funds maximum risk is the notional amount of the contract. CDS are considered to have credit risk-related
contingent features since they require payment by the protection seller to the protection buyer upon the occurrence of a defined credit event.
Entering into a CDS
agreement involves, to varying degrees, elements of credit, market and documentation risk in excess of the related amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market
for these agreements, that the counterparty to the agreement may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreement, and that there will be unfavorable changes in net interest rates.
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
|
|
|
|
31 |
|
Notes to financial statements
(unaudited) (contd)
Interest rate swaps
The Fund enters into interest rate swap contracts to manage its exposure to interest rate risk. Interest rate swaps are agreements between two parties to exchange cash
flows based on a notional principal amount. The Fund may elect to pay a fixed rate and receive a floating rate, or receive a fixed rate and pay a floating rate, on a notional principal amount. Interest rate swaps are
marked-to-market daily based upon quotations from market makers and the change, if any, is recorded as an unrealized appreciation or depreciation in the Statement of
Operations. When a swap contract is terminated early, the Fund records a realized gain or loss equal to the difference between the original cost and the settlement amount of the closing transaction.
The risks of interest rate swaps include changes in market conditions that will affect the value of the contract or changes in the present value of the future cash flow
streams and the possible inability of the counterparty to fulfill its obligations under the agreement. The Funds maximum risk of loss from counterparty credit risk is the discounted net value of the cash flows to be received from the
counterparty over the contracts remaining life, to the extent that amount is positive. This risk is mitigated by the posting of collateral by the counterparty to the Fund to cover the Funds exposure to the counterparty.
(f) Stripped securities. The Fund may invest in Stripped
Securities, a term used collectively for components, or strips, of fixed income securities. Stripped Securities can be principal only securities (PO), which are debt obligations that have been stripped of unmatured interest
coupons, or interest only securities (IO), which are unmatured interest coupons that have been stripped from debt obligations. The market value of Stripped Securities will fluctuate in response to changes in economic conditions, rates of
prepayment, interest rates and the markets perception of the securities. However, fluctuations in response to interest rates may be greater in Stripped Securities than for debt obligations of comparable maturities that pay interest currently.
The amount of fluctuation may increase with a longer period of maturity.
The yield to maturity on IOs is sensitive to the rate of principal repayments
(including prepayments) on the related underlying debt obligation and principal payments may have a material effect on yield to maturity. If the underlying debt obligation experiences greater than anticipated prepayments of principal, the Fund may
not fully recoup its initial investment in IOs.
(g) Reverse repurchase agreements. The Fund may enter into reverse repurchase agreements. Under the terms of a typical reverse repurchase agreement, a fund sells a security subject to an obligation to repurchase the security from the buyer at an agreed upon
time and price. In the event the buyer of securities under a reverse repurchase
|
|
|
|
|
32 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
agreement files for bankruptcy or becomes insolvent, the Funds use of the proceeds of the agreement may be restricted
pending a determination by the counterparty, or its trustee or receiver, whether to enforce the Funds obligation to repurchase the securities. In entering into reverse repurchase agreements, the Fund will pledge cash, U.S. government
securities or other liquid debt obligations at least equal in value to its obligations with respect to reverse repurchase agreements or will take other actions permitted by law to cover its obligations. If the market value of the collateral declines
during the period, the Fund may be required to post additional collateral to cover its obligation. Cash collateral that has been pledged to cover obligations of the Fund under reverse repurchase agreements, if any, will be reported separately in the
Statement of Assets and Liabilities. Securities pledged as collateral are noted in the Schedule of Investments. Interest payments made on reverse repurchase agreements are recognized as a component of Interest expense on the Statement of
Operations. In periods of increased demand for the security, the Fund may receive a fee for use of the security by the counterparty, which may result in interest income to the Fund.
(h) Mortgage-backed securities. Mortgage-Backed Securities
(MBS) include CMBS and RMBS. These securities depend on payments (except for rights or other assets designed to assure the servicing or timely distribution of proceeds to holders of such securities) primarily from the cash flow from
secured commercial or residential mortgage loans made to borrowers. Such loans are secured (on a first priority basis or second priority basis, subject to permitted liens, easements and other encumbrances) by commercial or residential real estate,
the proceeds of which are used to purchase and or to construct commercial or residential real estate. The value of some mortgage-backed securities may be particularly sensitive to changes in prevailing interest rates. The value of these securities
may fluctuate in response to the markets perception of the creditworthiness of the issuers. Additionally, although certain mortgage-related securities are supported by some form of government or private guarantee and/or insurance, there is no
assurance that private guarantors or insurers will meet their obligations.
(i) Leverage. The Fund may seek to enhance the level of its current distributions to holders of common stock through the use of leverage. The Fund may use leverage directly at the Fund level through borrowings, including loans from
certain financial institutions or through a qualified government sponsored program, the use of reverse repurchase agreements and/or the issuance of debt securities (collectively, Borrowings), and through the issuance of preferred stock
(Preferred Stock), in an aggregate amount of up to approximately 33 1/3% of the Funds Total Assets immediately after such Borrowings and/or issuances of Preferred Stock. Total Assets for this purpose means the
Funds total assets less all liabilities and indebtedness not represented by senior securities. In addition, the Fund may enter into additional reverse repurchase agreements and/or use similar investment management techniques that may provide
leverage, but which are not subject to the foregoing 33 1/3% limitation so long as the Fund has covered its commitment with respect to such techniques by segregating liquid assets, entering into offsetting transactions or owning positions covering
related obligations.
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
|
|
|
|
33 |
|
Notes to financial statements
(unaudited) (contd)
(j) Cash flow information. The Fund invests in securities and distributes dividends from net investment income and net realized gains, which are paid in cash and may be reinvested at the discretion of shareholders. These activities are reported in
the Statements of Changes in Net Assets and additional information on cash receipts and cash payments is presented in the Statement of Cash Flows.
(k) Credit and market risk. Investments in securities that are collateralized by real estate mortgages are subject to certain credit and liquidity risks. When
market conditions result in an increase in default rates of the underlying mortgages and the foreclosure values of underlying real estate properties are materially below the outstanding amount of these underlying mortgages, collection of the full
amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments and may result in a lack of correlation between their credit ratings and
values.
(l) Foreign investment risks. The Funds
investments in foreign securities may involve risks not present in domestic investments. Since securities may be denominated in foreign currencies, may require settlement in foreign currencies or may pay interest or dividends in foreign currencies,
changes in the relationship of these foreign currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Fund. Foreign investments may also subject the Fund to foreign government exchange restrictions,
expropriation, taxation or other political, social or economic developments, all of which affect the market and/or credit risk of the investments.
(m) Counterparty risk and credit-risk-related contingent features of derivative instruments. The Fund may invest in certain securities or engage in other
transactions where the Fund is exposed to counterparty credit risk in addition to broader market risks. The Fund may invest in securities of issuers, which may also be considered counterparties as trading partners in other transactions. This may
increase the risk of loss in the event of default or bankruptcy by the counterparty or if the counterparty otherwise fails to meet its contractual obligations. The Funds subadviser attempts to mitigate counterparty risk by
(i) periodically assessing the creditworthiness of its trading partners, (ii) monitoring and/or limiting the amount of its net exposure to each individual counterparty based on its assessment and (iii) requiring collateral from the
counterparty for certain transactions. Market events and changes in overall economic conditions may impact the assessment of such counterparty risk by the subadviser. In addition, declines in the values of underlying collateral received may expose
the Fund to increased risk of loss.
With exchange traded and centrally cleared derivatives, there is less counterparty risk to the Fund since the exchange or
clearinghouse, as counterparty to such instruments,
|
|
|
|
|
34 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract;
therefore, the credit risk is limited to failure of the clearinghouse. While offset rights may exist under applicable law, the Fund does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default of
the clearing broker or clearinghouse.
The Fund has entered into master agreements, such as an International Swaps and Derivatives Association, Inc. Master Agreement
(ISDA Master Agreement) or similar agreement, with certain of its derivative counterparties that govern over-the-counter (OTC) derivatives and
provide for general obligations, representations, agreements, collateral posting terms, netting provisions in the event of default or termination and credit related contingent features. The credit related contingent features include, but are not
limited to, a percentage decrease in the Funds net assets or net asset value per share over a specified period of time. If these credit related contingent features were triggered, the derivatives counterparty could terminate the positions and
demand payment or require additional collateral.
Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with the counterparty certain
derivative financial instruments payables and/or receivables with collateral held and/or posted and create one single net payment. However, absent an event of default by the counterparty or a termination of the agreement, the terms of the ISDA
Master Agreements do not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the Fund and the applicable counterparty. The enforceability of the
right to offset may vary by jurisdiction.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange
clearinghouse for exchange traded derivatives while collateral terms are contract specific for OTC traded derivatives. Cash collateral that has been pledged to cover obligations of the Fund under derivative contracts, if any, will be reported
separately in the Statement of Assets and Liabilities. Securities pledged as collateral, if any, for the same purpose are noted in the Schedule of Investments.
As
of June 30, 2022, the Fund held OTC credit default swaps with credit related contingent features which had a liability position of $86,352. If a contingent feature in the master agreements would have been triggered, the Fund would have been
required to pay this amount to its derivatives counterparties.
(n) Security transactions and investment income.
Security transactions are accounted for on a trade date basis. Interest income (including interest income from payment-in-kind
securities), adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. The Fund accretes market discounts and amortizes market premiums on debt securities using the effective yield method. Accretion of market
discounts and
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
|
|
|
|
35 |
|
Notes to financial statements
(unaudited) (contd)
amortization of market premiums requires the application of several assumptions including, but not
limited to, prepayment assumptions and default rate assumptions, which are reevaluated not less than semi-annually and require the use of a significant amount of judgment. Principal write-offs are generally treated as realized losses. The
Funds accretion of discounts and amortization of premiums for U.S. federal and other tax purposes is likely to differ from the financial accounting treatment under GAAP of these items as described above. Dividend income is recorded on the ex-dividend date for dividends received in cash and/or securities. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs
that impacts the issuer, the Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.
(o) Partnership accounting policy. The Fund records its pro rata share of
the income (loss) and capital gains (losses), to the extent of distributions it has received, allocated from the underlying partnerships and accordingly adjusts the cost basis of the underlying partnerships for return of capital. These amounts are
included in the Funds Statement of Operations.
(p) Distributions to shareholders. Distributions from net investment income of the Fund, if any, are declared quarterly and paid on a monthly basis. The actual source of the Funds current fiscal year distributions may be from net investment income,
return of capital or a combination of both. Shareholders will be informed of the tax characteristics of the distributions after the close of the fiscal year. Distributions of net realized gains, if any, are declared at least annually. Distributions
to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(q) Compensating balance arrangements. The Fund has an arrangement with its
custodian bank whereby a portion of the custodians fees is paid indirectly by credits earned on the Funds cash on deposit with the bank.
(r) Federal and other taxes. It is the Funds policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the
Code), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code.
Therefore, no federal or state income tax provision is required in the Funds financial statements.
Management has analyzed the Funds tax
positions taken on income tax returns for all open tax years and has concluded that as of December 31, 2021, no provision for income tax is required in the Funds financial statements. The Funds federal and state income and federal
excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
|
|
|
|
|
36 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
(s) Reclassification. GAAP
requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share.
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners Fund Advisor, LLC (LMPFA) is the Funds investment manager. Western Asset Management Company, LLC (Western Asset) and
Western Asset Management Company Limited (Western Asset Limited) are the Funds subadvisers. LMPFA, Western Asset and Western Asset Limited are indirect, wholly-owned subsidiaries of Franklin Resources, Inc. (Franklin
Resources).
Under the investment management agreement, the Fund pays an investment management fee, calculated daily and paid monthly, at an annual rate of
1.00% of the Funds average daily managed assets. Managed assets are net assets plus the proceeds of any outstanding borrowings used for leverage and assets attributable to preferred stock that may be outstanding.
The manager has agreed to waive the Funds management fee to an extent sufficient to offset the net management fee payable in connection with any investment in an
affiliated money market fund (the affiliated money market fund waiver).
LMPFA provides administrative and certain oversight services to the Fund. LMPFA
delegates to Western Asset the day-to-day portfolio management of the Fund. Western Asset Limited provides certain subadvisory services to the Fund relating to currency
transactions and investments in non-U.S. dollar denominated debt securities. For its services, LMPFA pays Western Asset a fee monthly, at an annual rate equal to 70% of the net management fee it receives from
the Fund. In turn, Western Asset pays Western Asset Limited a monthly subadvisory fee in an amount equal to 100% of the management fee paid to Western Asset on the assets that Western Asset allocates to Western Asset Limited to manage.
During periods in which the Fund utilizes financial leverage, the fees paid to LMPFA will be higher than if the Fund did not utilize leverage because the fees are
calculated as a percentage of the Funds assets, including those investments purchased with leverage.
LMPFA implemented an investment management fee waiver of
0.20% that terminated on January 2, 2022. Effective January 3, 2022, LMPFA implemented an investment management fee waiver of 0.05% that terminates on May 31, 2023.
During the six months ended June 30, 2022, fees waived and/or expenses reimbursed amounted to $65,194, which included an affiliated money market fund waiver of
$684.
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
|
|
|
|
37 |
|
Notes to financial statements
(unaudited) (contd)
All officers and one Director of the Fund are employees of Franklin Resources or its affiliates
and do not receive compensation from the Fund.
3. Investments
During the six months ended June 30, 2022, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) and U.S.
Government & Agency Obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
U.S. Government &
Agency Obligations |
|
Purchases |
|
$ |
17,697,051 |
|
|
$ |
1,854,138 |
|
Sales |
|
|
19,407,774 |
|
|
|
323,689 |
|
At June 30, 2022, the aggregate cost of investments and the aggregate gross unrealized appreciation and depreciation of investments
for federal income tax purposes were substantially as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost/
Premiums Paid (Received) |
|
|
Gross
Unrealized Appreciation |
|
|
Gross
Unrealized Depreciation |
|
|
Net
Unrealized Appreciation (Depreciation) |
|
Securities |
|
$ |
249,955,610 |
|
|
$ |
17,428,625 |
|
|
$ |
(30,021,134) |
|
|
$ |
(12,592,509) |
|
Futures contracts |
|
|
|
|
|
|
264,464 |
|
|
|
|
|
|
|
264,464 |
|
Swap contracts |
|
|
18,681 |
|
|
|
50,133 |
|
|
|
(65,170) |
|
|
|
(15,037) |
|
Transactions in reverse repurchase agreements for the Fund during the six months ended June 30, 2022 were as follows:
|
|
|
|
|
Average Daily
Balance* |
|
Weighted Average
Interest Rate* |
|
Maximum Amount
Outstanding |
$84,768,221 |
|
2.275% |
|
$85,608,000 |
* |
Averages based on the number of days that the Fund had reverse repurchase agreements outstanding. |
Interest rates on reverse repurchase agreements ranged from 1.872% to 2.771% during the six months ended June 30, 2022. Interest expense incurred on reverse
repurchase agreements totaled $969,669.
|
|
|
|
|
38 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
4. Derivative instruments and hedging activities
Below is a table, grouped by derivative type, that provides information about the fair value and the location of derivatives within the Statement of Assets and
Liabilities at June 30, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSET DERIVATIVES1 |
|
|
|
|
|
|
Interest |
|
|
Credit |
|
|
|
|
|
|
|
|
|
Rate Risk |
|
|
Risk |
|
|
Total |
|
Futures contracts2 |
|
|
|
|
|
$ |
264,464 |
|
|
|
|
|
|
$ |
264,464 |
|
OTC swap contracts3 |
|
|
|
|
|
|
|
|
|
$ |
89,996 |
|
|
|
89,996 |
|
Total |
|
|
|
|
|
$ |
264,464 |
|
|
$ |
89,996 |
|
|
$ |
354,460 |
|
|
LIABILITY DERIVATIVES1 |
|
|
|
|
|
|
|
|
|
|
|
|
Credit |
|
|
|
|
|
|
|
|
|
|
|
|
Risk |
|
OTC swap contracts3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
86,352 |
|
1 |
Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation and for liability
derivatives is payables/net unrealized depreciation. |
2 |
Includes cumulative unrealized appreciation (depreciation) of futures contracts as reported in the Schedule of
Investments. Only net variation margin is reported within the receivables and/or payables on the Statement of Assets and Liabilities. |
3 |
Values include premiums paid (received) on swap contracts which are shown separately in the Statement of Assets and
Liabilities. |
The following tables provide information about the effect of derivatives and hedging activities on the Funds Statement of
Operations for the six months ended June 30, 2022. The first table provides additional detail about the amounts and sources of gains (losses) realized on derivatives during the period. The second table provides additional information about the
change in unrealized appreciation (depreciation) resulting from the Funds derivatives and hedging activities during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED |
|
|
|
Interest Rate Risk |
|
|
Credit Risk |
|
|
Total |
|
Purchased options1 |
|
|
|
|
|
$ |
(74,504) |
|
|
$ |
(74,504) |
|
Futures contracts |
|
$ |
804,162 |
|
|
|
|
|
|
|
804,162 |
|
Written options |
|
|
|
|
|
|
158,425 |
|
|
|
158,425 |
|
Swap contracts |
|
|
676,023 |
|
|
|
(304) |
|
|
|
675,719 |
|
Total |
|
$ |
1,480,185 |
|
|
$ |
83,617 |
|
|
$ |
1,563,802 |
|
1 |
Net realized gain (loss) from purchased options is reported in Net Realized Gain (Loss) From Investment transactions in
unaffiliated securities in the Statement of Operations. |
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
|
|
|
|
39 |
|
Notes to financial statements
(unaudited) (contd)
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED |
|
|
|
Interest |
|
|
Credit |
|
|
|
|
|
|
Rate Risk |
|
|
Risk |
|
|
Total |
|
Futures contracts |
|
$ |
121,099 |
|
|
|
|
|
|
$ |
121,099 |
|
Swap contracts |
|
|
(9,926) |
|
|
$ |
46,113 |
|
|
|
36,187 |
|
Total |
|
$ |
111,173 |
|
|
$ |
46,113 |
|
|
$ |
157,286 |
|
During the six months ended June 30, 2022, the volume of derivative activity for the Fund was as follows:
|
|
|
|
|
|
|
Average Market |
|
|
|
Value |
|
Purchased options |
|
$ |
196,865 |
|
Written options |
|
|
77,251 |
|
Futures contracts (to buy) |
|
|
5,704,821 |
|
Futures contracts (to sell) |
|
|
27,813,068 |
|
|
|
|
|
Average Notional |
|
|
|
Balance |
|
Interest rate swap contracts |
|
$ |
3,541,571 |
|
Credit default swap contracts (buy protection) |
|
|
500,000 |
|
Credit default swap contracts (sell protection) |
|
|
500,000 |
|
|
At June 30, 2022, there were no open positions held in this derivative. |
The following table presents the Funds OTC derivative assets and liabilities by counterparty net of amounts available for offset under an ISDA Master Agreement and
net of the related collateral pledged (received) by the Fund as of June 30, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Net Assets |
|
|
|
|
|
|
|
|
|
Gross Assets |
|
|
Liabilities |
|
|
(Liabilities) |
|
|
|
|
|
|
|
|
|
Subject to |
|
|
Subject to |
|
|
Subject to |
|
|
Collateral |
|
|
|
|
|
|
Master |
|
|
Master |
|
|
Master |
|
|
Pledged |
|
|
Net |
|
Counterparty |
|
Agreements1 |
|
|
Agreements1 |
|
|
Agreements |
|
|
(Received) |
|
|
Amount2 |
|
Morgan Stanley & Co. Inc. |
|
$ |
89,996 |
|
|
$ |
(86,352) |
|
|
$ |
3,644 |
|
|
|
|
|
|
$ |
3,644 |
|
1 |
Absent an event of default or early termination, derivative assets and liabilities are presented gross and not offset in
the Statement of Assets and Liabilities. |
2 |
Represents the net amount receivable (payable) from (to) the counterparty in the event of default. |
5. Distributions subsequent to June 30, 2022
The following distributions have been declared by the Funds Board of Directors and are payable subsequent to the period end of this report:
|
|
|
|
|
|
|
|
|
Record Date |
|
Payable Date |
|
|
Amount |
|
6/23/2022 |
|
|
7/1/2022 |
|
|
|
$0.1000 |
|
7/22/2022 |
|
|
8/1/2022 |
|
|
|
$0.1000 |
|
8/24/2022 |
|
|
9/1/2022 |
|
|
|
$0.1000 |
|
9/23/2022 |
|
|
10/3/2022 |
|
|
|
$0.1000 |
|
10/24/2022 |
|
|
11/1/2022 |
|
|
|
$0.1000 |
|
11/22/2022 |
|
|
12/1/2022 |
|
|
|
$0.1000 |
|
|
|
|
|
|
40 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
6. Stock repurchase program
On November 16,
2015, the Fund announced that the Funds Board of Directors (the Board) had authorized the Fund to repurchase in the open market up to approximately 10% of the Funds outstanding common stock when the Funds shares are
trading at a discount to net asset value. The Board has directed management of the Fund to repurchase shares of common stock at such times and in such amounts as management reasonably believes may enhance stockholder value. The Fund is under no
obligation to purchase shares at any specific discount levels or in any specific amounts.
During the six months ended June 30, 2022, the Fund repurchased and
retired 0.27% of its common shares outstanding under the repurchase plan. The weighted average discount per share on these repurchases was 12.46% for the six months ended June 30, 2022. During the year ended December 31, 2021, the Fund did
not repurchase any shares. Shares repurchased and the corresponding dollar amount are included in the Statements of Changes in Net Assets. The anti-dilutive impact of these share repurchases is included in the Financial Highlights.
7. Capital shares
The Fund filed a registration
statement with the Securities and Exchange Commission, effective May 4, 2021, authorizing the Fund to offer and sell shares of common stock having an aggregate offering price of up to $43,283,467. Under the equity shelf offering program, the
Fund, subject to market conditions, may raise additional equity capital from time to time in varying amounts and offering methods at a net price at or above the Funds then-current net asset value per common share. Costs incurred by the Fund in
connection with the shelf offering are recorded as a prepaid expense. These costs are amortized on a pro-rata basis as shares are sold and are presented as a reduction to the Net proceeds from sale of shares
on the Statement of Changes in Net Assets. Any deferred charges remaining at the end of the life of the shelf offering period will be expensed. For the six months ended June 30, 2022, there were no shares sold. For the year ended
December 31, 2021, the Fund sold 413,153 shares of common stock and the proceeds from such sales were $6,459,800, net of offering costs and sales charges of $48,310 and $66,933, respectively.
8. Transactions with affiliated company
As
defined by the 1940 Act, an affiliated company is one in which the Fund owns 5% or more of the outstanding voting securities, or a company which is under common ownership or control with the Fund. The following company was considered an affiliated
company for
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
|
|
|
|
41 |
|
Notes to financial statements
(unaudited) (contd)
all or some portion of the six months ended June 30, 2022. The following transactions were
effected in such company for the six months ended June 30, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Purchased |
|
|
Sold |
|
|
|
2021 |
|
|
Cost |
|
|
Shares |
|
|
Cost |
|
|
Shares |
|
Western Asset Premier Institutional Government Reserves, Premium Shares |
|
$ |
1,385,262 |
|
|
$ |
30,397,077 |
|
|
|
30,397,077 |
|
|
$ |
28,563,129 |
|
|
|
28,563,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(contd) |
|
Realized Gain (Loss) |
|
|
Dividend Income |
|
|
Net Increase (Decrease) in Unrealized Appreciation (Depreciation) |
|
|
Affiliate Value at June 30, 2022 |
|
Western Asset Premier Institutional Government Reserves, Premium Shares |
|
|
|
|
|
$ |
3,249 |
|
|
|
|
|
|
$ |
3,219,210 |
|
9. Deferred capital losses
As of December 31, 2021, the Fund had deferred capital losses of $26,310,098, which have no expiration date, that will be available to offset future taxable capital
gains.
10. Recent accounting pronouncement
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04,
Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In January 2021, the FASB issued ASU No. 2021-01, with further amendments to
Topic 848. The amendments in the ASUs provide optional temporary accounting recognition and financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of the LIBOR and other
interbank-offered based reference rates as of the end of 2021 and 2023. The ASUs are effective for certain reference rate-related contract modifications that occur during the period March 12, 2020 through December 31, 2022. Management has
reviewed the requirements and believes the adoption of these ASUs will not have a material impact on the financial statements.
11. Other
matters
The outbreak of the respiratory illness COVID-19 (commonly referred to as coronavirus) has
continued to rapidly spread around the world, causing considerable uncertainty for the global economy and financial markets. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual
issuers, are not known. The COVID-19 pandemic could adversely affect the value and liquidity of the Funds
|
|
|
|
|
42 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
investments and negatively impact the Funds
performance. In addition, the outbreak of COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services provided to the Fund by its service providers.
***
The Funds investments,
payment obligations, and financing terms may be based on floating rates, such as the London Interbank Offered Rate, or LIBOR, which is the offered rate for short-term Eurodollar deposits between major international banks. On
March 5, 2021, the ICE Benchmark Administration, the administrator of LIBOR, stated that it will cease the publication of the overnight and one-, three-, six- and
twelve-month USD LIBOR settings immediately following the LIBOR publication on Friday, June 30, 2023. All other LIBOR settings, including the one-week and two-month
USD LIBOR settings, have ceased publication as of January 1, 2022. There remains uncertainty regarding the nature of any replacement rate and the impact of the transition from LIBOR on the Funds transactions and the financial markets
generally. As such, the potential effect of a transition away from LIBOR on the Fund or the Funds investments cannot yet be determined.
***
On February 24, 2022, Russia engaged in military actions in the sovereign territory of Ukraine. The current political and financial
uncertainty surrounding Russia and Ukraine may increase market volatility and the economic risk of investing in securities in these countries and may also cause uncertainty for the global economy and broader financial markets. The ultimate fallout
and long-term impact from these events are not known. The Fund will continue to assess the impact on valuations and liquidity and will take any potential actions needed in accordance with procedures approved by the Board of Directors.
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. 2022 Semi-Annual Report |
|
|
|
|
43 |
|
Board approval of management and subadvisory agreements (unaudited)
Background
The Investment Company Act of 1940,
as amended (the 1940 Act), requires that the Board of Directors (the Board) of Western Asset Mortgage Opportunity Fund Inc. (the Fund), including a majority of its members who are not considered to be
interested persons under the 1940 Act (the Independent Directors) voting separately, approve on an annual basis the continuation of the investment management agreement (the Management Agreement) between the Fund
and the Funds manager, Legg Mason Partners Fund Advisor, LLC (the Manager), and the sub-advisory agreements (individually, a Sub-Advisory
Agreement, and collectively, the Sub-Advisory Agreements) with the Managers affiliates, Western Asset Management Company, LLC (Western Asset) and Western Asset Management
Company Limited (Western Asset London, and together with Western Asset, the Sub-Advisers), with respect to the Fund.
At an in-person meeting (the Contract Renewal Meeting) held on May 10-11,
2022, the Board, including the Independent Directors, considered and approved the continuation of each of the Management Agreement and the Sub-Advisory Agreements for an additional one-year period. To assist in its consideration of the renewal of each of the Management Agreement and the Sub-Advisory Agreements, the Board received and considered extensive
information (together with the information provided at the Contract Renewal Meeting, the Contract Renewal Information) about the Manager and the Sub-Advisers, as well as the management and sub-advisory arrangements for the Fund and the other closed-end funds in the same complex under the Boards purview (the Franklin Templeton/Legg Mason Closed-end Funds), certain portions of which are discussed below.
A presentation made by the Manager and the Sub-Advisers to the Board at the Contract Renewal Meeting in connection with the Boards evaluation of each of the Management Agreement and the Sub-Advisory Agreements
encompassed the Fund and other Franklin Templeton/Legg Mason Closed-end Funds. In addition to the Contract Renewal Information, the Board received performance and other information throughout the year related
to the respective services rendered by the Manager and the Sub-Advisers to the Fund. The Boards evaluation took into account the information received throughout the year and also reflected the knowledge
and experience gained as members of the Boards of the Fund and other Franklin Templeton/Legg Mason Closed-end Funds with respect to the services provided to the Fund by the Manager and the Sub-Advisers. The information received and considered by the Board (including its various committees) both in conjunction with the Contract Renewal Meeting and throughout the year was both written and oral. The
contractual arrangements discussed below are the product of multiple years of review and negotiation and information received and considered by the Board during those years.
At a meeting held by videoconference on April 19, 2022, the Independent Directors, in preparation for the Contract Renewal Meeting, met in a private session with
their
|
|
|
|
|
44 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. |
independent legal counsel to review the Contract
Renewal Information regarding the Franklin Templeton/Legg Mason Closed-end Funds, including the Fund, received to date. No representatives of the Manager or the
Sub-Advisers participated in this meeting. Following the April 19, 2022 meeting, the Independent Directors submitted certain questions and requests for additional information to Fund management. The
Independent Directors also met in private sessions with their independent legal counsel to consider the Contract Renewal Information and Fund managements responses to the Independent Directors questions and requests for additional
information in advance of and during the Contract Renewal Meeting. The discussion below reflects all of these reviews.
The Manager provides the Fund with investment
advisory and administrative services pursuant to the Management Agreement and the Sub-Advisers together provide the Fund with investment sub-advisory services pursuant
to the Sub-Advisory Agreements. The discussion below covers both the advisory and administrative functions being rendered by the Manager, each such function being encompassed by the Management Agreement, and
the investment sub-advisory functions being rendered by the Sub-Advisers pursuant to the Sub-Advisory Agreements.
Board Approval of Management Agreement and Sub-Advisory Agreements
The Independent Directors were advised by separate independent legal counsel throughout the process. Prior to voting, the Independent Directors received a memorandum
discussing the legal standards for their consideration of the proposed continuation of the Management Agreement and the Sub-Advisory Agreements. The Independent Directors considered the Management Agreement
and each Sub-Advisory Agreement separately during the course of their review. In doing so, they noted the respective roles of the Manager and the Sub-Advisers in
providing services to the Fund.
In approving the continuation of the Management Agreement and Sub-Advisory Agreements, the
Board, including the Independent Directors, considered a variety of factors, including those factors discussed below. No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the
continuation of the Management Agreement and the Sub-Advisory Agreements. Each Director may have attributed different weight to the various factors in evaluating the Management Agreement and the Sub-Advisory Agreements.
After considering all relevant factors and information, the Board, exercising its reasonable business
judgment, determined that the continuation of the Management Agreement and Sub-Advisory Agreements were in the best interests of the Funds shareholders and approved the continuation of each such
agreement for an additional one-year period.
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. |
|
|
|
|
45 |
|
Board approval of management and subadvisory agreements (unaudited) (contd)
Nature, Extent and Quality of the Services under the Management Agreement and Sub-Advisory Agreements
The Board received and considered Contract Renewal Information regarding the nature, extent, and quality of services provided to the Fund by the Manager
and the Sub-Advisers under the Management Agreement and the Sub-Advisory Agreements, respectively, during the past year. The Board noted information received at regular
meetings throughout the year related to the services provided by the Manager in its management of the Funds affairs and the Managers role in coordinating the activities of the Sub-Advisers and the
Funds other service providers. The Board observed that the scope of services provided by the Manager and the Sub-Advisers, and of the undertakings required of the Manager and Sub-Advisers in connection with those services, including maintaining and monitoring their respective compliance programs as well as the Funds compliance programs, had expanded over time as a result of
regulatory, market and other developments. The Board also noted that on a regular basis it received and reviewed information from the Manager and the Sub-Advisers regarding the Funds compliance policies
and procedures established pursuant to Rule 38a-1 under the 1940 Act. The Board also considered the risks borne by the Manager, the Sub-Advisers and their respective
affiliates on behalf of the Fund, including entrepreneurial, operational, reputational, litigation and regulatory risks, as well as the Managers and the Sub-Advisers risk management processes.
The Board reviewed the qualifications, backgrounds, and responsibilities of the Managers senior personnel and the
Sub-Advisers portfolio management teams primarily responsible for the day-to-day portfolio management of the Fund. The
Board also considered, based on its knowledge of the Manager and its affiliates, the financial resources of Franklin Resources, Inc., the parent organization of the Manager and the Sub-Advisers. The Board
recognized the importance of having a fund manager with significant resources.
The Board considered the division of responsibilities between the Manager and the Sub-Advisers under the Management Agreement and the Sub-Advisory Agreements, respectively, including the Managers coordination and oversight of the services provided to
the Fund by the Sub-Advisers and other fund service providers and Western Assets coordination and oversight of the services provided to the Fund by Western Asset London. The Management Agreement permits
the Manager to delegate certain of its responsibilities, including its investment advisory duties thereunder, provided that the Manager, in each case, will supervise the activities of the delegee.
In reaching its determinations regarding continuation of the Management Agreement and the Sub-Advisory Agreements, the Board took
into account that Fund stockholders, in pursuing their investment goals and objectives, may have purchased their shares of the Fund based upon the reputation and the investment style, philosophy and strategy of the Manager and the Sub-Advisers, as well as the resources available to the Manager and the Sub-Advisers.
|
|
|
|
|
46 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. |
The Board concluded that, overall, the nature,
extent, and quality of the management and other services provided (and expected to be provided) to the Fund, under the Management Agreement and the Sub-Advisory Agreements were satisfactory.
Fund Performance
The Board received and
considered information regarding Fund performance, including information and analyses (the Broadridge Performance Information) for the Fund, as well as for a group of comparable funds (the Performance Universe) selected by
Broadridge Financial Solutions, Inc. (Broadridge), an independent third-party provider of investment company data. The Board was provided with a description of the methodology Broadridge used to determine the similarity of the Fund with
the funds included in the Performance Universe. It was noted that while the Board found the Broadridge Performance Information generally useful, they recognized its limitations, including that the data may vary depending on the end date selected,
and that the results of the performance comparisons may vary depending on the selection of the peer group and its composition over time. The Board also noted that Board members had received and discussed with the Manager and the Sub-Advisers information throughout the year at periodic intervals comparing the Funds performance against its benchmark and against the Funds peers. In addition, the Board considered the Funds
performance in view of overall financial market conditions.
The Broadridge Performance Information comparing the Funds performance to that of its Performance
Universe, consisting of the Fund and all leveraged closed-end U.S. mortgage funds, regardless of asset size, showed, among other data, that based on net asset value per share, the Funds performance was
above the median for the 1-, 5- and 10-year periods ended December 31, 2021, and was below the median for the 3-year period ended December 31, 2021. The Board noted the explanations from the Manager and the Sub-Advisers regarding the Funds relative performance versus the
Performance Universe for the various periods. The Board also noted the limited size of the Performance Universe.
Based on the reviews and discussions of Fund
performance and considering other relevant factors, including an agreement at the Contract Renewal Meeting by the Manager to continue the current voluntary fee waiver of 0.05% through May 31, 2023 (the Fee Waiver) and other factors
noted above, the Board concluded, under the circumstances, that continuation of the Management Agreement and the Sub-Advisory Agreements for an additional one-year
period would be consistent with the interests of the Fund and its stockholders.
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. |
|
|
|
|
47 |
|
Board approval of management and subadvisory agreements (unaudited) (contd)
Management and Sub-Advisory Fees and Expense Ratios
The Board reviewed and considered the contractual management fee (the Contractual Management Fee) and the actual management fee (the Actual Management
Fee) payable by the Fund to the Manager under the Management Agreement and the sub-advisory fees (the Sub-Advisory Fees) payable by the Manager to the Sub-Advisers under the Sub-Advisory Agreements in view of the nature, extent and overall quality of the management, investment advisory and other services provided by the
Manager and the Sub-Advisers, respectively. The Board noted that the Sub-Advisory Fee payable to Western Asset under its
Sub-Advisory Agreement with the Manager is paid by the Manager, not the Fund, and, accordingly, that the retention of Western Asset does not increase the fees or expenses otherwise incurred by the Funds
stockholders. Similarly, the Board noted that the Sub-Advisory Fee payable to Western Asset London under its Sub-Advisory Agreement with Western Asset is paid by Western
Asset, not the Fund, and, accordingly, that the retention of Western Asset London does not increase the fees or expenses otherwise incurred by the Funds stockholders.
In addition, the Board received and considered information and analyses prepared by Broadridge (the Broadridge Expense Information) comparing the Contractual
Management Fee and the Actual Management Fee and the Funds total actual expenses with those of funds in an expense group (the Expense Group), as well as a broader group of funds, each selected and provided by Broadridge. The
comparison was based upon the constituent funds latest fiscal years. It was noted that while the Board found the Broadridge Expense Information generally useful, they recognized its limitations, including that the data may vary depending on
the selection of the peer group.
The Broadridge Expense Information showed that the Funds Contractual Management Fee was above the median. The Broadridge
Expense Information also showed that the Funds Actual Management Fee was above the median compared on the basis of both common share assets and leveraged assets. The Broadridge Expense Information also showed that the Funds actual total
expenses were above the median on the basis of both common share assets and leveraged assets. The Board took into account managements discussion of the Funds expenses and noted the limited size of the Expense Group. The Board also
considered the Managers agreement to continue the Fee Waiver for an additional year.
The Board also reviewed Contract Renewal Information regarding fees
charged by the Manager and/or the Sub-Advisers to other U.S. clients investing primarily in an asset class similar to that of the Fund, including, where applicable, institutional and separate accounts. The
Manager reviewed with the Board the differences in services provided to these different types of accounts, noting that the Fund is provided with certain administrative services, office facilities, and Fund officers, and that the Fund is subject not
only to heightened regulatory requirements relative to institutional clients but also to requirements
|
|
|
|
|
48 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. |
for listing on the New York Stock Exchange, and that
the Manager coordinates and oversees the provision of services to the Fund by other fund service providers. The Board considered the fee comparisons in view of the different services provided in managing these other types of clients and funds.
The Board considered the overall management fee, the fees of the Sub-Advisers and the amount of the management fee retained by
the Manager after payment of the subadvisory fees in each case in view of the services rendered for those amounts. The Board also received an analysis of complex-wide management fees provided by the Manager, which, among other things, set out a
framework of fees based on asset classes.
Taking all of the above into consideration, as well as the factors identified below, the Board determined that the
management fee and the Sub-Advisory Fees were reasonable in view of the nature, extent and overall quality of the management, investment advisory and other services provided by the Manager and the Sub-Advisers to the Fund under the Management Agreement and the Sub-Advisory Agreements, respectively.
Manager Profitability
The Board, as part of the
Contract Renewal Information, received an analysis of the profitability to the Manager and its affiliates in providing services to the Fund for the Managers fiscal years ended September 30, 2021 and September 30, 2020. The Board also
received profitability information with respect to the Franklin Templeton/Legg Mason fund complex as a whole. In addition, the Board received Contract Renewal Information with respect to the Managers revenue and cost allocation methodologies
used in preparing such profitability data. It was noted that the allocation methodologies had been reviewed by an outside consultant. The profitability to each of the Sub-Advisers was not considered to be a
material factor in the Boards considerations since the Sub-Advisory Fee is paid by the Manager in the case of Western Asset and by Western Asset in the case of Western Asset London, not the Fund,
although the Board noted the affiliation of the Manager with the Sub-Advisers. The profitability of the Manager and its affiliates was considered by the Board to be reasonable in view of the nature, extent and
quality of services provided to the Fund.
Economies of Scale
The Board received and discussed Contract Renewal Information concerning whether the Manager realizes economies of scale if the Funds assets grow. The Board noted
that because the Fund is a closed-end fund, it has limited ability to increase its assets. The Board determined that the management fee structure was appropriate under the circumstances. For similar reasons as
stated above with respect to the Sub-Advisers profitability and the costs of the Sub-Advisers provision of services, the Board did not consider the potential
for economies of scale in the Sub-Advisers management of the Fund to be a material factor in the Boards consideration of the Sub-Advisory Agreements.
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. |
|
|
|
|
49 |
|
Board approval of management and subadvisory agreements (unaudited) (contd)
Other Benefits to the Manager and the Sub-Advisers
The Board considered other benefits received by the Manager, the Sub-Advisers and their affiliates as a result of their
relationship with the Fund, including the opportunity to offer additional products and services to the Funds shareholders. In view of the costs of providing investment management and other services to the Fund and the ongoing commitment of the
Manager and the Sub-Advisers to the Fund, the Board considered that the ancillary benefits that the Manager and its affiliates, including the Sub-Advisers, were
reasonable.
|
|
|
|
|
50 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. |
Dividend reinvestment plan (unaudited)
Unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends and return
of capital distributions, on your Common Stock will be automatically reinvested by Computershare Trust Company, N.A., as agent for the stockholders (the Plan Agent), in additional shares of Common Stock under the Funds Dividend
Reinvestment Plan (the Plan). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by Computershare Trust
Company, N.A., as dividend paying agent.
If you participate in the Plan, the number of shares of Common Stock you will receive will be determined as follows:
(1) If the market price of the Common Stock (plus $0.03 per share commission) on the payment date (or, if the payment date is not a NYSE trading day, the
immediately preceding trading day) is equal to or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date, the Fund will issue new Common Stock at a price equal to the greater of (a) the
net asset value per share at the close of trading on the NYSE on the payment date or (b) 95% of the market price per share of the Common Stock on the payment date.
(2) If the net asset value per share of the Common Stock exceeds the market price of the Common Stock (plus $0.03 per share commission) at the close of
trading on the NYSE on the payment date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Stock in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading day
following the payment date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date, or (b) the payment date for the next succeeding dividend or distribution to be made to the stockholders; except
when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price (plus $0.03 per share commission) rises so that it equals or exceeds the net asset value per share of the Common
Stock at the close of trading on the NYSE on the payment date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases, the
Plan Agent will cease purchasing Common Stock in the open market and the Fund shall issue the remaining Common Stock at a price per share equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the day
prior to the issuance of shares for reinvestment or (b) 95% of the then current market price per share.
Common Stock in your account will be held by the Plan Agent
in non-certificated form. Any proxy you receive will include all shares of Common Stock you have received under the Plan. You may withdraw from the Plan (i.e., opt-out)
by notifying the Plan Agent in writing at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at
1-888-888-0151. Such withdrawal will be effective immediately if notice is received by the Plan Agent not less than ten business
days prior to any dividend or distribution record date; otherwise such withdrawal will be effective as soon as practicable after the Plan Agents investment of the most recently declared dividend or distribution on the Common Stock.
|
|
|
|
|
|
|
Western Asset Mortgage Opportunity Fund Inc. |
|
|
|
|
51 |
|
Dividend reinvestment plan
(unaudited) (contd)
Plan participants who sell their shares will be charged a service charge (currently $5.00 per
transaction) and the Plan Agent is authorized to deduct brokerage charges actually incurred from the proceeds (currently $0.05 per share commission). There is no service charge for reinvestment of your dividends or distributions in Common Stock.
However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions will be automatically reinvested in additional shares of Common
Stock, this allows you to add to your investment through dollar cost averaging, which may lower the average cost of your Common Stock over time. Dollar cost averaging is a technique for lowering the average cost per share over time if the
Funds net asset value declines. While dollar cost averaging has definite advantages, it cannot assure profit or protect against loss in declining markets.
Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. Investors
will be subject to income tax on amounts reinvested under the Plan.
The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of
Directors, the change is warranted. The Plan may be terminated, amended or supplemented by the Fund upon notice in writing mailed to stockholders at least 30 days prior to the record date for the payment of any dividend or distribution by the Fund
for which the termination or amendment is to be effective. Upon any termination, you will be sent cash for any fractional share of Common Stock in your account. You may elect to notify the Plan Agent in advance of such termination to have the Plan
Agent sell part or all of your Common Stock on your behalf. Additional information about the Plan and your account may be obtained from the Plan Agent at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151.
|
|
|
|
|
52 |
|
|
|
Western Asset Mortgage Opportunity Fund Inc. |
Western Asset
Mortgage Opportunity Fund Inc.
Directors
Robert D. Agdern
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
William R. Hutchinson
Eileen A. Kamerick
Nisha Kumar
Jane Trust
Chairman
Officers
Jane Trust
President and Chief Executive Officer
Christopher Berarducci
Treasurer and Principal Financial Officer
Fred Jensen
Chief Compliance Officer
George P. Hoyt
Secretary and Chief Legal Officer
Thomas C. Mandia
Senior Vice President
Jeanne M. Kelly
Senior Vice President
Western Asset Mortgage
Opportunity Fund Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Investment manager
Legg Mason Partners Fund Advisor, LLC
Subadvisers
Western Asset Management Company, LLC
Western Asset Management Company Limited
Custodian
The Bank of New York Mellon
Transfer agent
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
Independent registered public
accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
Legal counsel
Simpson Thacher & Bartlett
LLP
900 G Street NW
Washington, DC 20001
New York Stock Exchange Symbol
DMO
Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very
Important to the Legg Mason Funds
This Privacy and Security Notice (the Privacy Notice) addresses the Legg Mason Funds privacy and
data protection practices with respect to nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds distributor, Franklin Distributors, LLC, as well as Legg Mason-sponsored closed-end funds. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited
to:
|
|
Personal information included on applications or other forms; |
|
|
Account balances, transactions, and mutual fund holdings and positions; |
|
|
Bank account information, legal documents, and identity verification documentation; |
|
|
Online account access user IDs, passwords, security challenge question responses; and |
|
|
Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of
an individuals total debt, payment history, etc.). |
How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other
financial institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services
you have authorized or as permitted or required by law.
The Funds may disclose information about you to:
|
|
Employees, agents, and affiliates on a need to know basis to enable the Funds to conduct ordinary business, or
to comply with obligations to government regulators; |
|
|
Service providers, including the Funds affiliates, who assist the Funds as part of the ordinary course of business
(such as printing, mailing services, or processing or servicing your account with us) or otherwise perform services on the Funds behalf, including companies that may perform statistical analysis, market research and marketing services solely
for the Funds; |
|
|
Permit access to transfer, whether in the United States or countries outside of the United States to such Funds
employees, agents and affiliates and service providers as required to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators; |
|
|
The Funds representatives such as legal counsel, accountants and auditors to enable the Funds to conduct ordinary
business, or to comply with obligations to government regulators; |
|
|
Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.
|
|
NOT PART OF THE SEMI-ANNUAL
REPORT |
Legg Mason Funds Privacy and Security Notice (contd)
Except as otherwise permitted by applicable law, companies acting on the Funds behalf,
including those outside the United States, are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to
perform. The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory
request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds
practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.
Keeping You Informed of the Funds Privacy and Security Practices
The Funds will notify you annually of their privacy policy as
required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.
The Funds Security Practices
The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard
your nonpublic personal information. The Funds internal data security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to
them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary, so you can take appropriate protective steps. If you have
consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.
In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is
incomplete, not accurate or not current, if you have questions about the Funds privacy practices, or our use of your nonpublic personal information, write the Funds using the contact information on your account statements, email the Funds by
clicking on the Contact Us section of the Funds website at www.franklintempleton.com, or contact the Fund at
1-888-777-0102.
Revised April 2018
Legg Mason California Consumer Privacy Act Policy
Although much of the personal information we collect is nonpublic personal information subject to federal law, residents of California may, in certain
circumstances, have additional rights under the California Consumer Privacy Act (CCPA). For example, if you are a broker,
|
NOT PART OF THE SEMI-ANNUAL
REPORT |
Legg Mason Funds Privacy and Security Notice (contd)
dealer, agent, fiduciary, or representative acting by or on behalf of, or for, the account of any
other person(s) or household, or a financial advisor, or if you have otherwise provided personal information to us separate from the relationship we have with personal investors, the provisions of this Privacy Policy apply to your personal
information (as defined by the CCPA).
|
|
In addition to the provisions of the Legg Mason Funds Security and Privacy Notice, you may have the right to know the
categories and specific pieces of personal information we have collected about you. |
|
|
You also have the right to request the deletion of the personal information collected or maintained by the Funds.
|
If you wish to exercise any of the rights you have in respect of your personal information, you should advise the Funds by contacting them as set
forth below. The rights noted above are subject to our other legal and regulatory obligations and any exemptions under the CCPA. You may designate an authorized agent to make a rights request on your behalf, subject to the identification process
described below. We do not discriminate based on requests for information related to our use of your personal information, and you have the right not to receive discriminatory treatment related to the exercise of your privacy rights.
We may request information from you in order to verify your identity or authority in making such a request. If you have appointed an authorized agent to make a request
on your behalf, or you are an authorized agent making such a request (such as a power of attorney or other written permission), this process may include providing a password/passcode, a copy of government issued identification, affidavit or other
applicable documentation, i.e. written permission. We may require you to verify your identity directly even when using an authorized agent, unless a power of attorney has been provided. We reserve the right to deny a request submitted by an agent if
suitable and appropriate proof is not provided.
For the 12-month period prior to the date of this Privacy Policy, the Legg
Mason Funds have not sold any of your personal information; nor do we have any plans to do so in the future.
Contact Information
Address: Data Privacy Officer, 100 International Dr., Baltimore, MD 21202
Email: DataProtectionOfficer@franklintempleton.com
Phone: 1-800-396-4748
Revised October 2020
|
NOT PART OF THE SEMI-ANNUAL
REPORT |
Western Asset Mortgage Opportunity Fund Inc.
Western Asset Mortgage Opportunity Fund Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase, at market
prices, shares of its stock.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first
and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Funds Forms N-PORT are available on the SECs website at www.sec.gov.
To obtain information on Form N-PORT, shareholders can call the Fund at 1-888-777-0102.
Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th
of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102, (2) at www.franklintempleton.com and (3) on the SECs website at www.sec.gov.
Quarterly performance, semi-annual and annual reports, current net asset value and other information regarding the Fund may be found on Franklin Templetons website,
which can be accessed at www.franklintempleton.com. Any reference to Franklin Templetons website in this report is intended to allow investors public access to information regarding the Fund and does not, and is not intended to, incorporate
Franklin Templetons website in this report.
This report is transmitted to the shareholders of Western Asset Mortgage Opportunity Fund Inc. for their
information. This is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
WASX012835 8/22 SR22-4481