UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-22265
Western Asset Municipal Defined Opportunity Trust Inc.
(Exact name of registrant as specified in charter)
620 Eighth Avenue, 49th Floor, New York, NY 10018
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Legg Mason & Co., LLC
100 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant’s telephone number, including area code: (888) 777-0102
Date of fiscal year end: November 30
Date of reporting period: November 30, 2014
| ITEM 1. | REPORT TO STOCKHOLDERS. |
The Annual Report to Stockholders is filed herewith.
| Annual Report | November 30, 2014 |
WESTERN ASSET
MUNICIPAL DEFINED OPPORTUNITY TRUST INC. (MTT)
| INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE |
Fund objectives
The Fund’s primary investment objective is to provide high current income exempt from federal income tax* and then to liquidate on or about April 30, 2021 and distribute all of the Fund’s net assets to shareholders. As a secondary investment objective, the Fund will seek total return. There can be no assurance the Fund’s investment objectives will be achieved.
| * | Certain investors may be subject to the federal alternative minimum tax (“AMT”), and state and local taxes will apply. Capital gains, if any, are fully taxable. Please consult your personal tax or legal adviser. |
Dear Shareholder,
We are pleased to provide the annual report of Western Asset Municipal Defined Opportunity Trust Inc. for the twelve-month reporting period ended November 30, 2014. Please read on for a detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund performance.
As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our website, www.lmcef.com. Here you can gain immediate access to market and investment information, including:
| Ÿ | Fund prices and performance, |
| Ÿ | Market insights and commentaries from our portfolio managers, and |
| Ÿ | A host of educational resources. |
We look forward to helping you meet your financial goals.
Sincerely,
Kenneth D. Fuller
Chairman, President and Chief Executive Officer
December 26, 2014
| II | Western Asset Municipal Defined Opportunity Trust Inc. |
Economic review
Despite weakness in early 2014, the U.S. economy expanded at a strong pace during the twelve months ended November 30, 2014 (the “reporting period”). The U.S. Department of Commerce reported that in the fourth quarter of 2013, U.S. gross domestic product (“GDP”)i growth was 3.5%. Severe winter weather then played a key role in a sharp reversal in the economy, a 2.1% contraction during the first quarter of 2014; this was the first negative GDP report in three years. Negative contributions were widespread: private inventory investment, exports, state and local government spending and nonresidential and residential fixed investment. Thankfully, this setback was very brief, as second quarter GDP growth was 4.6%. The rebound in GDP growth was driven by several factors, including an acceleration in personal consumption expenditures (“PCE”), increased private inventory investment and exports, as well as an upturn in state and local government spending. After the reporting period ended, the Department of Commerce reported that third quarter GDP growth was 5.0%, driven by contributions from PCE, exports, nonresidential fixed investment and government spending and the strongest reading for GDP growth since the third quarter of 2003.
The U.S. manufacturing sector was another tailwind for the economy. Based on figures for the Institute for Supply Management’s Purchasing Managers’ Index (“PMI”)ii, U.S. manufacturing expanded during all twelve months of the reporting period (a reading below 50 indicates a contraction, whereas a reading above 50 indicates an expansion). After a reading of 56.5 in December 2013, the PMI fell to 51.3 in January 2014, but generally rose over the next several months, reaching a high of 59.0 in August, its best reading since March 2011. While PMI dipped to 56.6 in September, it rose back to 59.0 in October and was 58.7 in November.
The improving U.S. job market was one of the factors supporting the overall economy during the reporting period. When the period began, unemployment, as reported by the U.S. Department of Labor, was 6.7%. Unemployment generally declined throughout the reporting period and reached a low of 5.8% in October and November 2014, the lowest level since July 2008.
The Federal Reserve Board (“Fed”)iii took a number of actions as it sought to meet its dual mandate of fostering maximum employment and price stability. As it has since December 2008, the Fed kept the federal funds rateiv at a historically low range between zero and 0.25%. The Fed also ended its asset purchase program that was announced in December 2012. At that time, the Fed said it would continue purchasing $40 billion per month of agency mortgage-backed securities (“MBS”), as well as $45 billion per month of longer-term Treasuries. Following the meeting that concluded on December 18, 2013, the Fed announced that it would begin reducing its monthly asset purchases, saying “Beginning in January 2014, the Committee will add to its holdings of agency MBS at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.” At each of the Fed’s next six meetings (January, March, April, June, July and September 2014), it announced further $10 billion tapering of its asset purchases. At its meeting that ended on October 29, 2014, the Fed announced that its asset
| Western Asset Municipal Defined Opportunity Trust Inc. | III |
Investment commentary (cont’d)
purchase program had concluded. Finally, on December 17, 2014, after the reporting period ended, the Fed said that “Based on its current assessment, the Committee judges that it can be patient... to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time...”
As always, thank you for your confidence in our stewardship of your assets.
Sincerely,
Kenneth D. Fuller
Chairman, President and
Chief Executive Officer
December 26, 2014
All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results.
| i | Gross domestic product (“GDP”) is the market value of all final goods and services produced within a country in a given period of time. |
| ii | The Institute for Supply Management’s PMI is based on a survey of purchasing executives who buy the raw materials for manufacturing at more than 350 companies. It offers an early reading on the health of the U.S. manufacturing sector. |
| iii | The Federal Reserve Board (“Fed”) is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments. |
| iv | The federal funds rate is the rate charged by one depository institution on an overnight sale of immediately available funds (balances at the Federal Reserve) to another depository institution; the rate may vary from depository institution to depository institution and from day to day. |
| IV | Western Asset Municipal Defined Opportunity Trust Inc. |
Q. What is the Fund’s investment strategy?
A. The Fund’s primary investment objective is to provide high current income exempt from federal income tax and then to liquidate on or about April 30, 2021 and distribute all of the Fund’s net assets to shareholders. As a secondary investment objective, the Fund will seek total return. There can be no assurance the Fund’s investment objectives will be achieved.
As a fundamental policy, the Fund seeks to achieve its primary investment objective by investing, under normal market conditions, at least 80% of its net assets in investment grade municipal securities, the interest on which is exempt from federal income tax. The Fund may invest up to 20% of its net assets in municipal securities rated below investment grade at the time of purchase by at least one nationally recognized statistical rating organization or which, if unrated, are deemed to be of comparable quality. The Fund may also invest up to 20% of its net assets in investments that generate income that is subject to federal income tax and in municipal securities, the interest on which is subject to the federal alternative minimum tax (“AMT”), and as a result, a portion of the Fund’s distributions may be taxable to common shareholders. The Fund may use a variety of derivative instruments as part of its investment strategies or for hedging and/or risk management purposes.
In purchasing securities and other investments for the Fund, we may take full advantage of the entire range of maturities and durationsi offered by municipal securities and may adjust the average maturity or duration of the Fund’s portfolio from time to time, depending on our assessment of the relative yields available on securities of different maturities and durations and our expectations of future changes in interest rates.
As a fundamental policy, the Fund will not leverage its capital structure by issuing senior securities such as preferred shares or debt instruments. However, the Fund may lend portfolio securities, invest in certain instruments, including inverse floating rate securities, participate in the creation of tender option bonds and enter into transactions such as short sales, that have the economic effect of financial leverage (“effective leverage”), provided that the Fund will not make such investments if, upon completion of the investment, the effective leverage of the Fund would be greater than 10% of the Fund’s total assets.
At Western Asset Management Company (“Western Asset”), the Fund’s subadviser, we utilize a fixed-income team approach, with decisions derived from interaction among various investment management sector specialists. The sector teams are comprised of Western Asset’s senior portfolio management personnel, research analysts and an in-house economist. Under this team approach, management of client fixed-income portfolios will reflect a consensus of interdisciplinary views within the Western Asset organization. The individuals responsible for development of investment strategy, day-to-day portfolio management, oversight and coordination of the Fund are S. Kenneth Leech, Robert E. Amodeo, David T. Fare, and Dennis J. McNamara. Effective on March 31, 2014, Mr. Leech joined the Fund’s portfolio management team. Mr. Leech has been employed by Western Asset as an investment professional for more than 20 years.
| Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report | 1 |
Fund overview (cont’d)
Q. What were the overall market conditions during the Fund’s reporting period?
A. The spread sectors (non-Treasuries) generated positive results and largely outperformed equal-duration Treasuries over the twelve months ended November 30, 2014. Risk aversion was prevalent at times given mixed economic data, questions surrounding the outlook for global growth, changing monetary policy by the Federal Reserve Board (“Fed”)ii, and numerous geopolitical issues. However, these factors were largely overshadowed by solid demand from investors looking to generate incremental yield in the low interest rate environment.
Short-term Treasury yields moved higher, whereas longer-term Treasury yields declined during the twelve months ended November 30, 2014. Two-year Treasury yields rose from 0.28% at the beginning of the period to 0.47% at the end of the period. Their peak of 0.59% occurred in mid-September 2014. Ten-year Treasury yields were 2.75% at the beginning of the period and reached a low of 2.15% on October 15, 2014. Their peak of 3.04% occurred on December 31, 2013 and they ended the reporting period at 2.18%.
The municipal bond market significantly outperformed its taxable bond counterpart during the twelve month reporting period. Over that time, the Barclays Municipal Bond Indexiii and the Barclays U.S. Aggregate Indexiv returned 8.23% and 5.26%, respectively. The municipal bond market generated negative results during the first month covered by this report. In addition to rising interest rates, investor sentiment weakened given questions regarding the future tax favored status for municipal bonds, as well as credit issues in Puerto Rico and the fallout from the city of Detroit’s bankruptcy filing. However, the municipal bond market then rallied sharply and posted positive returns over the last eleven months of the reporting period. This turnaround was triggered by a number of factors, including improving municipal fundamentals, attractive valuations and generally robust demand.
Q. How did we respond to these changing market conditions?
A. There were several changes to the Fund during the reporting period. We reduced the Fund’s overall risk exposure by selling certain strong performers and maintained a cash position in the event of a market selloff. The Fund employed the use of short U.S. Treasury futures during the reporting period to manage duration. This strategy detracted from the Fund’s performance.
Performance review
For the twelve months ended November 30, 2014, Western Asset Municipal Defined Opportunity Trust Inc. returned 9.96% based on its net asset value (“NAV”)v and 15.72% based on its New York Stock Exchange (“NYSE”) market price per share. The Fund’s unmanaged benchmark, the Barclays Municipal Bond Index, returned 8.23% for the same period. The Lipper General and Insured Municipal Debt (Unleveraged) Closed-End Funds Category Averagevi returned 11.22% over the same time frame. Please note that Lipper performance returns are based on each fund’s NAV.
Certain investors may be subject to the federal alternative minimum tax, and state and local taxes will apply. Capital gains, if
| 2 | Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report |
any, are fully taxable. Please consult your personal tax or legal adviser.
During the twelve-month period, the Fund made distributions to shareholders totaling $1.01 per share.* The performance table shows the Fund’s twelve-month total return based on its NAV and market price as of November 30, 2014. Past performance is no guarantee of future results.
| Performance Snapshot as of November 30, 2014 | ||||
| Price Per Share | 12-month total return** |
|||
| $22.90 (NAV) | 9.96 | %† | ||
| $23.07 (Market Price) | 15.72 | %‡ | ||
All figures represent past performance and are not a guarantee of future results.
** Total returns are based on changes in NAV or market price, respectively. Returns reflect the deduction of all Fund expenses, including management fees, operating expenses, and other Fund expenses. Returns do not reflect the deduction of brokerage commissions or taxes that investors may pay on distributions or the sale of shares.
† Total return assumes the reinvestment of all distributions at NAV.
‡ Total return assumes the reinvestment of all distributions in additional shares in accordance with the Fund’s Dividend Reinvestment Plan.
Q. What were the leading contributors to performance?
A. The largest contributor to the Fund’s relative performance during the reporting period was its sector positioning. In particular, overweights and security selection in the Industrial Revenue and Health Care sectors were additive for results. Security selection in the Water & Sewer sector also enhanced the Fund’s performance.
Elsewhere, the Fund’s quality biases contributed to results. In particular, having an overweight to municipal securities rated A and below, along with underweights to securities rated AA and AAA, benefited results as lower rated municipal bonds outperformed their higher rated counterparts over the twelve month period.
Q. What were the leading detractors from performance?
A. The Fund outperformed its benchmark during the reporting period. In addition to the Fund’s Treasury futures position, its underweight to the Transportation sector slightly detracted from performance.
Looking for additional information?
The Fund is traded under the symbol “MTT” and its closing market price is available in most newspapers under the NYSE listings. The daily NAV is available on-line under the symbol “XMTTX” on most financial websites. Barron’s and the Wall Street Journal’s Monday edition both carry closed-end fund tables that provide additional information. In addition, the Fund issues a quarterly press release that can be found on most major financial websites as well as www.lmcef.com.
In a continuing effort to provide information concerning the Fund, shareholders may call 1-888-777-0102 (toll free), Monday through Friday from 8:00 a.m. to 5:30 p.m. Eastern Time, for the Fund’s current NAV, market price and other information.
Thank you for your investment in Western Asset Municipal Defined Opportunity Trust Inc. As always, we appreciate that you have
| * | For the tax character of distributions paid during the fiscal year ended November 30, 2014, please refer to page 22 of this report. |
| Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report | 3 |
Fund overview (cont’d)
chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.
Sincerely,
Western Asset Management Company
December 16, 2014
RISKS: The Fund’s investments are subject to credit risk, inflation risk and interest rate risk. As interest rates rise, bond prices fall, reducing the value of the fixed-income securities held by the Fund. The Fund may invest in lower rated high-yield bonds which are subject to greater credit risk (risk of default) than higher-rated obligations. Municipal securities purchased by the Fund may be adversely affected by changes in the financial condition of municipal issuers and insurers, regulatory and political developments, uncertainties and public perceptions, and other factors. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. The Fund may invest up to 10% of its assets in securities that have the economic effects of leverage which can increase the risk and volatility of the Fund. Shares of closed-end exchange-traded funds may trade at a discount or premium to their original offering price and often trade at a discount to their NAV.
The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. Portfolio holdings are subject to change at any time and may not be representative of the portfolio managers’ current or future investments. The Fund’s portfolio composition is subject to change at any time.
All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.
| i | Duration is the measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows. |
| ii | The Federal Reserve Board (“Fed”) is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments. |
| iii | The Barclays Municipal Bond Index is a market value weighted index of investment grade municipal bonds with maturities of one year or more. |
| iv | The Barclays U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage- and asset-backed issues, rated investment grade or higher, and having at least one year to maturity. |
| v | Net asset value (“NAV”) is calculated by subtracting total liabilities, including liabilities associated with financial leverage (if any) from the closing value of all securities held by the Fund (plus all other assets) and dividing the result (total net assets) by the total number of the common shares outstanding. The NAV fluctuates with changes in the market prices of securities in which the Fund has invested. However, the price at which an investor may buy or sell shares of the Fund is the Fund’s market price as determined by supply of and demand for the Fund’s shares. |
| vi | Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the twelve-month period ended November 30, 2014, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 6 funds in the Fund’s Lipper category. |
| 4 | Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report |
Investment breakdown (%) as a percent of total investments
| † | The bar graph above represents the composition of the Fund’s investments as of November 30, 2014 and November 30, 2013 and does not include derivatives such as futures contracts. The Fund is actively managed. As a result, the composition of the Fund’s investments is subject to change at anytime. |
| Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report | 5 |
Economic exposure — November 30, 2014
| Total Spread Duration | ||
| MTT | — 5.58 years | |
| Benchmark | — 5.70 years | |
Spread duration measures the sensitivity to changes in spreads. The spread over Treasuries is the annual risk-premium demanded by investors to hold non-Treasury securities. Spread duration is quantified as the % change in price resulting from a 100 basis points change in spreads. For a security with positive spread duration, an increase in spreads would result in a price decline and a decline in spreads would result in a price increase. This chart highlights the market sector exposure of the Fund’s portfolio and the exposure relative to the selected benchmark as of the end of the reporting period.
| Benchmark | — Barclays Municipal Bond Index | |
| MTT | — Western Asset Municipal Defined Opportunity Trust Inc. |
| 6 | Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report |
Effective duration (unaudited)
Interest rate exposure — November 30, 2014
| Total Effective Duration | ||
| MTT | — 5.23 years | |
| Benchmark | — 5.86 years | |
Effective duration measures the sensitivity to changes in relevant interest rates. Effective duration is quantified as the % change in price resulting from a 100 basis points change in interest rates. For a security with positive effective duration, an increase in interest rates would result in a price decline and a decline in interest rates would result in a price increase. This chart highlights the interest rate exposure of the Fund’s sectors relative to the selected benchmark sectors as of the end of the reporting period.
| Benchmark | — Barclays Municipal Bond Index | |
| MTT | — Western Asset Municipal Defined Opportunity Trust Inc. |
| Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report | 7 |
November 30, 2014
Western Asset Municipal Defined Opportunity Trust Inc.
| Security | Rate | Maturity Date |
Face Amount |
Value | ||||||||||||
| Municipal Bonds — 97.2% | ||||||||||||||||
| Alabama — 2.1% |
||||||||||||||||
| Jefferson County, AL, Sewer Revenue, Convertible CAB |
0.000 | % | 10/1/50 | $ | 9,910,000 | $ | 5,885,747 | (a) | ||||||||
| Arizona — 2.9% |
||||||||||||||||
| Salt Verde, AZ, Financial Corp. Gas Revenue |
5.000 | % | 12/1/32 | 7,110,000 | 8,074,898 | |||||||||||
| California — 3.0% |
||||||||||||||||
| California State PCFA, Water Furnishing Revenue |
5.000 | % | 11/21/45 | 3,500,000 | 3,731,455 | (b)(c) | ||||||||||
| California Statewide CDA, Student Housing Revenue, Provident Group-Pomona Properties LLC |
5.600 | % | 1/15/36 | 800,000 | 811,928 | |||||||||||
| Lower Tule River, CA, Irrigation District Revenue, COP |
5.000 | % | 8/1/40 | 1,000,000 | 1,057,430 | |||||||||||
| M-S-R Energy Authority, CA, Gas Revenue |
6.125 | % | 11/1/29 | 2,000,000 | 2,565,260 | |||||||||||
| Total California |
8,166,073 | |||||||||||||||
| Colorado — 2.7% |
||||||||||||||||
| Public Authority for Colorado Energy, Natural Gas Purchase Revenue |
6.125 | % | 11/15/23 | 6,000,000 | 7,382,580 | |||||||||||
| Florida — 3.6% |
||||||||||||||||
| Citizens Property Insurance Corp., FL, Senior Secured High Act |
6.000 | % | 6/1/17 | 6,900,000 | 7,769,745 | |||||||||||
| Florida State Municipal Power Agency Revenue, All Requirements Power |
6.250 | % | 10/1/31 | 1,000,000 | 1,188,030 | |||||||||||
| Orange County, FL, IDA Revenue, Vitag Florida LLC Project |
8.000 | % | 7/1/36 | 500,000 | 504,935 | (b)(c) | ||||||||||
| Palm Beach County, FL, Health Facilities Authority Revenue, Sinai Residences Boca Raton Project |
6.250 | % | 6/1/23 | 500,000 | 554,870 | |||||||||||
| Total Florida |
10,017,580 | |||||||||||||||
| Georgia — 7.3% |
||||||||||||||||
| Atlanta, GA, Water & Wastewater Revenue |
6.000 | % | 11/1/23 | 5,000,000 | 6,114,450 | |||||||||||
| Atlanta, GA, Water & Wastewater Revenue |
6.250 | % | 11/1/34 | 3,260,000 | 3,894,820 | |||||||||||
| DeKalb, Newton & Gwinnett Counties, GA, Joint Development Authority Revenue, GGC Foundation LLC Project |
6.125 | % | 7/1/40 | 9,000,000 | 10,248,120 | |||||||||||
| Total Georgia |
20,257,390 | |||||||||||||||
| Illinois — 0.8% |
||||||||||||||||
| Chicago, IL, Motor Fuel Tax Revenue |
5.000 | % | 1/1/26 | 1,000,000 | 1,119,900 | |||||||||||
| Metropolitan Pier & Exposition Authority, IL, Dedicated State Tax Revenue, McCormick Project |
5.250 | % | 6/15/50 | 1,000,000 | 1,060,460 | |||||||||||
| Total Illinois |
2,180,360 | |||||||||||||||
| Indiana — 7.1% |
||||||||||||||||
| Indiana Municipal Power Agency, Power Supply System Revenue |
6.000 | % | 1/1/39 | 8,000,000 | 9,209,680 | |||||||||||
| Indiana State Finance Authority Revenue, I-69 Development Partners LLC |
5.000 | % | 9/1/46 | 1,000,000 | 1,056,000 | (b) | ||||||||||
| Richmond, IN, Hospital Authority Revenue, Reid Hospital & Health Care Services Inc. Project |
6.500 | % | 1/1/29 | 8,000,000 | 9,413,120 | |||||||||||
| Total Indiana |
19,678,800 | |||||||||||||||
See Notes to Financial Statements.
| 8 | Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report |
Western Asset Municipal Defined Opportunity Trust Inc.
| Security | Rate | Maturity Date |
Face Amount |
Value | ||||||||||||
| Iowa — 1.6% |
||||||||||||||||
| Iowa State Finance Authority Midwestern Disaster Area Revenue: |
||||||||||||||||
| Iowa Fertilizer Co. Project |
5.000 | % | 12/1/19 | $ | 800,000 | $ | 843,296 | |||||||||
| Iowa Fertilizer Co. Project |
5.250 | % | 12/1/25 | 3,350,000 | 3,546,880 | |||||||||||
| Total Iowa |
4,390,176 | |||||||||||||||
| Louisiana — 4.2% |
||||||||||||||||
| Louisiana State Citizens Property Insurance Corp., Assessment Revenue, AGC |
6.125 | % | 6/1/25 | 10,000,000 | 11,568,800 | |||||||||||
| Maryland — 4.0% |
||||||||||||||||
| Howard County, MD, Housing Commission Revenue, Columbia Commons Apartments |
5.000 | % | 6/1/44 | 1,350,000 | 1,472,485 | |||||||||||
| Maryland State Health & Higher EFA Revenue Bonds, Washington County Hospital Issue |
5.750 | % | 1/1/38 | 9,000,000 | 9,445,410 | |||||||||||
| Total Maryland |
10,917,895 | |||||||||||||||
| Michigan — 12.5% |
||||||||||||||||
| Detroit, MI, Water Supply System Revenue, AGM |
6.250 | % | 7/1/36 | 3,000,000 | 3,265,050 | |||||||||||
| Michigan State Finance Authority Limited Obligation Revenue, Higher Education, Thomas M Cooley Law School Project |
6.000 | % | 7/1/24 | 1,500,000 | 1,543,935 | (c) | ||||||||||
| Michigan State Finance Authority Revenue: |
||||||||||||||||
| Detroit School District |
5.500 | % | 6/1/21 | 6,000,000 | 6,897,600 | |||||||||||
| Senior Lien Detroit Water & Sewer |
5.000 | % | 7/1/33 | 410,000 | 442,345 | |||||||||||
| Michigan State Hospital Finance Authority Revenue, McLaren Health Care Corp. |
5.750 | % | 5/15/38 | 9,000,000 | 10,049,400 | (d) | ||||||||||
| Royal Oak, MI, Hospital Finance Authority Revenue: |
||||||||||||||||
| William Beaumont Hospital |
5.000 | % | 9/1/39 | 2,000,000 | 2,200,560 | |||||||||||
| William Beaumont Hospital |
8.250 | % | 9/1/39 | 8,000,000 | 10,180,480 | (e) | ||||||||||
| Total Michigan |
34,579,370 | |||||||||||||||
| New Jersey — 5.5% |
||||||||||||||||
| Gloucester County, NJ, PCFA Revenue, Keystone Urban Renewal, Logan Generating |
5.000 | % | 12/1/24 | 750,000 | 842,843 | (b) | ||||||||||
| New Jersey State EDA Revenue, Continental Airlines Inc. Project |
4.875 | % | 9/15/19 | 1,515,000 | 1,603,885 | (b) | ||||||||||
| New Jersey State EFA Revenue, University of Medicine and Dentistry |
7.500 | % | 12/1/32 | 10,000,000 | 12,763,600 | (e) | ||||||||||
| Total New Jersey |
15,210,328 | |||||||||||||||
| New York — 4.9% |
||||||||||||||||
| Liberty, NY, Development Corporation Revenue, Goldman Sachs Headquarters |
5.250 | % | 10/1/35 | 2,500,000 | 2,998,125 | |||||||||||
| New York State Liberty Development Corp., Liberty Revenue: |
||||||||||||||||
| 3 World Trade Center LLC Project |
5.375 | % | 11/15/40 | 270,000 | 282,161 | (c) | ||||||||||
See Notes to Financial Statements.
| Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report | 9 |
Schedule of investments (cont’d)
November 30, 2014
Western Asset Municipal Defined Opportunity Trust Inc.
| Security | Rate | Maturity Date |
Face Amount |
Value | ||||||||||||
| New York — continued |
||||||||||||||||
| 3 World Trade Center LLC Project |
5.000 | % | 11/15/44 | $ | 990,000 | $ | 1,007,849 | (c) | ||||||||
| Port Authority of New York & New Jersey, Special Obligation Revenue, JFK International Air Terminal LLC |
5.500 | % | 12/1/31 | 7,925,000 | 9,264,959 | |||||||||||
| Total New York |
13,553,094 | |||||||||||||||
| Ohio — 4.9% |
||||||||||||||||
| Ohio State Air Quality Development Authority Revenue: |
||||||||||||||||
| FirstEnergy Generation Corp. |
5.700 | % | 8/1/20 | 2,500,000 | 2,862,925 | |||||||||||
| FirstEnergy Nuclear Generation Corp. |
5.750 | % | 6/1/16 | 10,000,000 | 10,648,800 | (a)(f) | ||||||||||
| Total Ohio |
13,511,725 | |||||||||||||||
| Pennsylvania — 4.2% |
||||||||||||||||
| Pennsylvania Economic Development Financing Authority, Water Facility Revenue, American Water Co. Project |
6.200 | % | 4/1/39 | 10,000,000 | 11,481,800 | |||||||||||
| Puerto Rico — 0.3% |
||||||||||||||||
| Puerto Rico Commonwealth, GO, Public Improvement |
5.000 | % | 7/1/41 | 1,300,000 | 901,966 | |||||||||||
| Rhode Island — 4.2% |
||||||||||||||||
| Rhode Island State Health & Educational Building Corp., Revenue, Hospital Financing |
7.000 | % | 5/15/39 | 10,000,000 | 11,681,700 | |||||||||||
| Tennessee — 3.1% |
||||||||||||||||
| Tennessee Energy Acquisition Corp., Gas Revenue |
5.000 | % | 9/1/16 | 8,000,000 | 8,557,680 | |||||||||||
| Texas — 11.2% |
||||||||||||||||
| Brazos River, TX, Harbor Navigation District, Brazoria County Environmental, Dow Chemical Co. Project |
5.950 | % | 5/15/33 | 10,000,000 | 11,214,100 | (b) | ||||||||||
| Love Field Airport Modernization Corp., TX, Special Facilities Revenue, Southwest Airlines Co. Project |
5.250 | % | 11/1/40 | 3,000,000 | 3,198,810 | |||||||||||
| North Texas Tollway Authority Revenue |
5.750 | % | 1/1/33 | 10,200,000 | 11,294,154 | |||||||||||
| Texas Municipal Gas Acquisition & Supply Corp. I, Gas Supply Revenue |
5.250 | % | 12/15/18 | 3,325,000 | 3,766,560 | |||||||||||
| Texas Municipal Gas Acquisition & Supply Corp. I, Gas Supply Revenue |
6.250 | % | 12/15/26 | 1,310,000 | 1,621,937 | |||||||||||
| Total Texas |
31,095,561 | |||||||||||||||
| U.S. Virgin Islands — 2.1% |
||||||||||||||||
| Virgin Islands Public Finance Authority Revenue, Matching Fund Loan |
6.625 | % | 10/1/29 | 5,000,000 | 5,762,550 | |||||||||||
| Virginia — 0.7% |
||||||||||||||||
| Virginia State Small Business Financing Authority Revenue, Elizabeth River Crossings OpCo LLC Project |
5.000 | % | 7/1/23 | 1,775,000 | 1,990,982 | (b) | ||||||||||
| Wisconsin — 4.3% |
||||||||||||||||
| Wisconsin State HEFA Revenue, Prohealth Care Inc. Obligation Group |
6.625 | % | 2/15/39 | 10,000,000 | 11,778,700 | |||||||||||
| Total Investments before Short-Term Investments (Cost — $223,042,376) |
|
268,625,755 | ||||||||||||||
See Notes to Financial Statements.
| 10 | Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report |
Western Asset Municipal Defined Opportunity Trust Inc.
| Security | Rate | Maturity Date |
Face Amount |
Value | ||||||||||||
| Short-Term Investments — 1.3% | ||||||||||||||||
| California — 0.3% |
||||||||||||||||
| Los Angeles, CA, Department of Water & Power Revenue, Royal Bank of Canada |
0.030 | % | 7/1/35 | $ | 700,000 | $ | 700,000 | (g)(h) | ||||||||
| Missouri — 0.0% |
||||||||||||||||
| Missouri State HEFA, Educational Facilities Revenue, St. Louis University, LOC-Bank of America N.A. |
0.040 | % | 10/1/35 | 100,000 | 100,000 | (g)(h) | ||||||||||
| Nevada — 0.5% |
||||||||||||||||
| Las Vegas Valley, NV, Water District, GO, Water Improvement, SPA-Dexia Credit Local |
0.200 | % | 6/1/36 | 1,300,000 | 1,300,000 | (g)(h) | ||||||||||
| New York — 0.5% |
||||||||||||||||
| New York City, NY, GO, AGM, SPA-Dexia Credit Local |
0.180 | % | 11/1/26 | 100,000 | 100,000 | (g)(h) | ||||||||||
| New York City, NY, Municipal Water Finance Authority, Water & Sewer System Revenue: |
||||||||||||||||
| Second General Resolution, SPA-Dexia Credit Local |
0.150 | % | 6/15/32 | 900,000 | 900,000 | (g)(h) | ||||||||||
| SPA-Dexia Credit Local |
0.180 | % | 6/15/32 | 500,000 | 500,000 | (g)(h) | ||||||||||
| Total New York |
1,500,000 | |||||||||||||||
| Texas — 0.0% |
||||||||||||||||
| Rockwall, TX, ISD, GO, School Building, PSFG, SPA-Dexia Credit Local |
0.040 | % | 8/1/37 | 100,000 | 100,000 | (g)(h) | ||||||||||
| Total Short-Term Investments (Cost — $3,700,000) |
3,700,000 | |||||||||||||||
| Total Investments — 98.5% (Cost — $226,742,376#) |
272,325,755 | |||||||||||||||
| Other Assets in Excess of Liabilities — 1.5% |
4,165,150 | |||||||||||||||
| Total Net Assets — 100.0% |
$ | 276,490,905 | ||||||||||||||
| (a) | Variable rate security. Interest rate disclosed is as of the most recent information available. |
| (b) | Income from this issue is considered a preference item for purposes of calculating the alternative minimum tax (“AMT”). |
| (c) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Directors, unless otherwise noted. |
| (d) | All or a portion of this security is held at the broker as collateral for open futures contracts. |
| (e) | Pre-Refunded bonds are escrowed with U.S. government obligations and/or U.S. government agency securities and are considered by the manager to be triple-A rated even if issuer has not applied for new ratings. |
| (f) | Maturity date shown represents the mandatory tender date. |
| (g) | Variable rate demand obligations have a demand feature under which the Fund can tender them back to the issuer or liquidity provider on no more than 7 days notice. |
| (h) | Maturity date shown is the final maturity date. The security may be sold back to the issuer before final maturity. |
| # | Aggregate cost for federal income tax purposes is $224,262,369. |
See Notes to Financial Statements.
| Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report | 11 |
Schedule of investments (cont’d)
November 30, 2014
Western Asset Municipal Defined Opportunity Trust Inc.
| Abbreviations used in this schedule: | ||
| AGC | — Assured Guaranty Corporation — Insured Bonds | |
| AGM | — Assured Guaranty Municipal Corporation — Insured Bonds | |
| CAB | — Capital Appreciation Bonds | |
| CDA | — Communities Development Authority | |
| COP | — Certificates of Participation | |
| EDA | — Economic Development Authority | |
| EFA | — Educational Facilities Authority | |
| GO | — General Obligation | |
| HEFA | — Health & Educational Facilities Authority | |
| IDA | — Industrial Development Authority | |
| ISD | — Independent School District | |
| LOC | — Letter of Credit | |
| PCFA | — Pollution Control Financing Authority | |
| PSFG | — Permanent School Fund Guaranty | |
| SPA | — Standby Bond Purchase Agreement — Insured Bonds | |
| Ratings table* (unaudited) | ||||
| Standard & Poor’s/Moody’s/Fitch** | ||||
| AAA/Aaa | 4.1 | % | ||
| AA/Aa | 13.2 | |||
| A | 43.7 | |||
| BBB/Baa | 28.7 | |||
| BB/Ba | 2.5 | |||
| B/B | 0.6 | |||
| A-1/VMIG 1 | 1.4 | |||
| NR | 5.8 | |||
| 100.0 | % | |||
| * | As a percentage of total investments. |
| ** | The ratings shown are based on each portfolio security’s rating as determined by Standard & Poor’s, Moody’s or Fitch, each a Nationally Recognized Statistical Rating Organization (“NRSRO”). These ratings are the opinions of the NRSRO and are not measures of quality or guarantees of performance. Securities may be rated by other NRSROs, and these ratings may be higher or lower. In the event that a security is rated by multiple NRSROs and receives different ratings, the Fund will treat the security as being rated in the highest rating category received from a NRSRO. |
See Notes to Financial Statements.
| 12 | Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report |
Statement of assets and liabilities
November 30, 2014
| Assets: | ||||
| Investments, at value (Cost — $226,742,376) |
$ | 272,325,755 | ||
| Cash |
63,627 | |||
| Interest receivable |
4,367,324 | |||
| Prepaid expenses |
9,417 | |||
| Total Assets |
276,766,123 | |||
| Liabilities: | ||||
| Investment management fee payable |
136,381 | |||
| Payable to broker — variation margin on open futures contracts |
58,125 | |||
| Directors’ fees payable |
2,299 | |||
| Accrued expenses |
78,413 | |||
| Total Liabilities |
275,218 | |||
| Total Net Assets | $ | 276,490,905 | ||
| Net Assets: | ||||
| Par value ($0.001 par value; 12,074,701 shares issued and outstanding; 100,000,000 shares authorized) |
$ | 12,075 | ||
| Paid-in capital in excess of par value |
230,598,267 | |||
| Undistributed net investment income |
1,499,580 | |||
| Accumulated net realized loss on investments and futures contracts |
(740,000) | |||
| Net unrealized appreciation on investments and futures contracts |
45,120,983 | |||
| Total Net Assets | $ | 276,490,905 | ||
| Shares Outstanding | 12,074,701 | |||
| Net Asset Value | $22.90 | |||
See Notes to Financial Statements.
| Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report | 13 |
For the Year Ended November 30, 2014
| Investment Income: | ||||
| Interest |
$ | 14,888,584 | ||
| Expenses: | ||||
| Investment management fee (Note 2) |
1,627,185 | |||
| Directors’ fees |
49,937 | |||
| Audit and tax fees |
48,030 | |||
| Transfer agent fees |
38,075 | |||
| Legal fees |
30,278 | |||
| Fund accounting fees |
27,036 | |||
| Stock exchange listing fees |
24,898 | |||
| Shareholder reports |
22,622 | |||
| Insurance |
6,182 | |||
| Custody fees |
1,921 | |||
| Miscellaneous expenses |
9,910 | |||
| Total Expenses |
1,886,074 | |||
| Net Investment Income | 13,002,510 | |||
| Realized and Unrealized Gain (Loss) on Investments and Futures Contracts (Notes 1, 3 and 4): | ||||
| Net Realized Gain (Loss) From: |
||||
| Investment transactions |
1,467,386 | |||
| Futures contracts |
(1,042,212) | |||
| Net Realized Gain |
425,174 | |||
| Change in Net Unrealized Appreciation (Depreciation) From: |
||||
| Investments |
12,768,704 | |||
| Futures contracts |
(485,090) | |||
| Change in Net Unrealized Appreciation (Depreciation) |
12,283,614 | |||
| Net Gain on Investments and Futures Contracts | 12,708,788 | |||
| Increase in Net Assets from Operations | $ | 25,711,298 | ||
See Notes to Financial Statements.
| 14 | Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report |
Statements of changes in net assets
| For the Years Ended November 30, | 2014 | 2013 | ||||||
| Operations: | ||||||||
| Net investment income |
$ | 13,002,510 | $ | 13,027,024 | ||||
| Net realized gain |
425,174 | 1,123,549 | ||||||
| Change in net unrealized appreciation (depreciation) |
12,283,614 | (22,635,285) | ||||||
| Increase (Decrease) in Net Assets From Operations |
25,711,298 | (8,484,712) | ||||||
| Distributions to Shareholders From (Note 1): | ||||||||
| Net investment income |
(12,165,813) | (12,159,586) | ||||||
| Decrease in Net Assets From Distributions to Shareholders |
(12,165,813) | (12,159,586) | ||||||
| Fund Share Transactions: | ||||||||
| Reinvestment of distributions (8,973 and 11,959 shares issued, respectively) |
201,996 | 277,714 | ||||||
| Increase in Net Assets From Fund Share Transactions |
201,996 | 277,714 | ||||||
| Increase (Decrease) in Net Assets |
13,747,481 | (20,366,584) | ||||||
| Net Assets: | ||||||||
| Beginning of year |
262,743,424 | 283,110,008 | ||||||
| End of year* |
$ | 276,490,905 | $ | 262,743,424 | ||||
| *Includes undistributed net investment income of: |
$1,499,580 | $1,271,990 | ||||||
See Notes to Financial Statements.
| Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report | 15 |
| For a share of capital stock outstanding throughout each year ended November 30: | ||||||||||||||||||||
| 20141 | 20131 | 20121 | 20111 | 20101 | ||||||||||||||||
| Net asset value, beginning of year | $21.78 | $23.49 | $21.39 | $20.90 | $21.27 | |||||||||||||||
| Income (loss) from operations: | ||||||||||||||||||||
| Net investment income |
1.08 | 1.08 | 1.08 | 1.08 | 1.10 | |||||||||||||||
| Net realized and unrealized gain (loss) |
1.05 | (1.78) | 2.03 | 0.42 | (0.35) | |||||||||||||||
| Total income (loss) from operations |
2.13 | (0.70) | 3.11 | 1.50 | 0.75 | |||||||||||||||
| Less distributions from: | ||||||||||||||||||||
| Net investment income |
(1.01) | (1.01) | (1.01) | (1.01) | (1.07) | |||||||||||||||
| Net realized gains |
— | — | — | — | (0.05) | |||||||||||||||
| Total distributions |
(1.01) | (1.01) | (1.01) | (1.01) | (1.12) | |||||||||||||||
| Net asset value, end of year | $22.90 | $21.78 | $23.49 | $21.39 | $20.90 | |||||||||||||||
| Market price, end of year | $23.07 | $20.86 | $24.75 | $21.62 | $20.83 | |||||||||||||||
| Total return, based on NAV2,3 |
9.96 | % | (3.04) | % | 14.83 | % | 7.52 | % | 3.57 | % | ||||||||||
| Total return, based on Market Price4 |
15.72 | % | (11.77) | % | 19.69 | % | 9.04 | % | 7.41 | % | ||||||||||
| Net assets, end of year (000s) | $276,491 | $262,743 | $283,110 | $256,638 | $250,679 | |||||||||||||||
| Ratios to average net assets: | ||||||||||||||||||||
| Gross expenses |
0.70 | % | 0.69 | % | 0.68 | % | 0.71 | % | 0.70 | % | ||||||||||
| Net expenses5 |
0.70 | 0.69 | 0.68 | 0.71 | 0.70 | |||||||||||||||
| Net investment income |
4.79 | 4.79 | 4.77 | 5.18 | 5.11 | |||||||||||||||
| Portfolio turnover rate | 6 | % | 3 | % | 1 | % | 8 | % | 3 | % | ||||||||||
| 1 | Per share amounts have been calculated using the average shares method. |
| 2 | 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. |
| 3 | The total return calculation assumes that distributions are reinvested at NAV. Prior to January 1, 2012, the total return calculation assumed the reinvestment of all distributions in accordance with the Fund’s dividend reinvestment plan. Past performance is no guarantee of future results. |
| 4 | The total return calculation assumes that distributions are reinvested in accordance with the Fund’s dividend reinvestment plan. Past performance is no guarantee of future results. |
| 5 | The impact of compensating balance arrangements, if any, was less than 0.01%. |
See Notes to Financial Statements.
| 16 | Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report |
1. Organization and significant accounting policies
Western Asset Municipal Defined Opportunity Trust Inc. (the “Fund”) was incorporated in Maryland on January 15, 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 Fund’s primary investment objective is to provide high current income exempt from federal income tax and then to liquidate on or about April 30, 2021 and distribute all of the Fund’s net assets to shareholders. As a secondary investment objective, the Fund will seek total return. There can be no assurance the Fund’s investment objectives will be achieved.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation. The valuations for fixed income securities (which may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Short-term fixed income securities that will mature in 60 days or less are valued at amortized cost, unless it is determined that using this method would not reflect an investment’s fair value. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Directors.
The Board of Directors is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North American Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Directors, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of
| Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report | 17 |
Notes to financial statements (cont’d)
Directors. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.
For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Directors quarterly.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.
GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:
| Ÿ | Level 1 — quoted prices in active markets for identical investments |
| Ÿ | Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) |
| Ÿ | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
| 18 | Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report |
The following is a summary of the inputs used in valuing the Fund’s assets and liabilities carried at fair value:
| ASSETS | ||||||||||||||||
| Description | Quoted Prices (Level 1) |
Other Significant Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
| Municipal bonds† | — | $ | 268,625,755 | — | $ | 268,625,755 | ||||||||||
| Short-term investments† | — | 3,700,000 | — | 3,700,000 | ||||||||||||
| Total investments | — | $ | 272,325,755 | — | $ | 272,325,755 | ||||||||||
| LIABILITIES | ||||||||||||||||
| Description | Quoted Prices (Level 1) |
Other Significant Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
| Other financial instruments: | ||||||||||||||||
| Futures contracts |
$ | 462,396 | — | — | $ | 462,396 | ||||||||||
| † | See Schedule of Investments for additional detailed categorizations. |
(b) Futures contracts. The Fund uses futures contracts generally to gain exposure to, or hedge against, changes in interest rates or gain exposure to, or hedge against, changes in certain asset classes. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
Upon entering into a futures contract, the Fund is required to deposit cash or cash equivalents with a broker in an amount equal to a certain percentage of the contract amount. This is known as the “initial margin” and subsequent payments (“variation margin”) are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. The daily changes in contract value are recorded as unrealized gains or losses in the Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.
Futures contracts involve, to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
(c) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. 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.
(d) Distributions to shareholders. Distributions from net investment income of the Fund, if any, are declared quarterly and paid on a monthly basis. The Fund intends to satisfy
| Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report | 19 |
Notes to financial statements (cont’d)
conditions that will enable interest from municipal securities, which is exempt from federal and certain state income taxes, to retain such tax-exempt status when distributed to the shareholders of the Fund. Distributions of net realized gains, if any, are taxable and 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.
(e) Compensating balance arrangements. The Fund has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash on deposit with the bank.
(f) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.
Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of November 30, 2014, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
(g) 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 values per share. During the current year, the following reclassifications have been made:
| Undistributed Net Investment Income |
Accumulated Net Realized Loss |
|||||||
| (a) | $ | (609,107) | $ | 609,107 | ||||
| (a) | Reclassifications are primarily due to differences between book and tax accretion of market discount on fixed income securities. |
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager and Western Asset Management Company (“Western Asset”) is the Fund’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).
LMPFA provides administrative and certain oversight services to the Fund. The Fund pays LMPFA an investment management fee, calculated daily and paid monthly, at an annual rate of 0.60% of the Fund’s average daily Managed Assets. “Managed Assets” means the total assets of the Fund (including assets financed through the creation of tender option bond trusts) minus the sum of accrued liabilities (other than Fund liabilities representing financial leverage).
| 20 | Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report |
LMPFA delegates to Western Asset the day-to-day portfolio management of the Fund. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Fund.
All officers and one Director of the Fund are employees of Legg Mason or its affiliates and do not receive compensation from the Fund.
3. Investments
During the year ended November 30, 2014, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
| Purchases | $ | 15,797,685 | ||
| Sales | 22,181,499 |
At November 30, 2014, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
| Gross unrealized appreciation | $ | 48,063,386 | ||
| Gross unrealized depreciation | — | |||
| Net unrealized appreciation | $ | 48,063,386 |
At November 30, 2014, the Fund had the following open futures contracts:
| Number of Contracts |
Expiration Date |
Basis Value |
Market Value |
Unrealized Depreciation |
||||||||||||||||
| Contracts to Sell: | ||||||||||||||||||||
| U.S. Treasury Long-Term Bonds | 93 | 12/14 | $ | 12,935,417 | $ | 13,397,813 | $ | (462,396) | ||||||||||||
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 November 30, 2014.
| LIABILITY DERIVATIVES1 | ||||
| Interest Rate Risk |
||||
| Futures contracts2 | $ | 462,396 | ||
| 1 | Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation (depreciation) and for liability derivatives is payables/net unrealized appreciation (depreciation). |
| 2 | Includes cumulative appreciation (depreciation) of futures contracts as reported in the footnotes. Only variation margin is reported within the receivables and/or payables on the Statement of Assets and Liabilities. |
The following tables provide information about the effect of derivatives and hedging activities on the Fund’s Statement of Operations for the year ended November 30, 2014. The first table provides additional detail about the amounts and sources of gains (losses) realized on derivatives during the period. The second table provides additional information about the change in unrealized appreciation (depreciation) resulting from the Fund’s derivatives and hedging activities during the period.
| Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report | 21 |
Notes to financial statements (cont’d)
| AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED | ||||
| Interest Rate Risk |
||||
| Futures contracts | $ | (1,042,212) | ||
| CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED | ||||
| Interest Rate Risk |
||||
| Futures contracts | $ | (485,090) | ||
During the year ended November 30, 2014, the volume of derivative activity for the Fund was as follows:
| Average Market Value |
||||
| Futures contracts (to sell) | $ | 11,615,084 | ||
The following table presents by financial instrument, the Fund’s derivative liabilities net of the related collateral pledged by the Fund at November 30, 2014:
| Gross Amount of Derivative Liabilities in the Statement of Assets and Liabilities1 |
Collateral Pledged2,3,4 |
Net Amount |
||||||||||
| Futures contracts5 | $ | 58,125 | $ | (58,125) | — | |||||||
| 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 | Gross amounts are not offset in the Statement of Assets and Liabilities. |
| 3 | In some instances, the actual collateral received and/or pledged may be more than the amount shown here due to overcollateralization. |
| 4 | See the accompanying Schedule of Investments for securities pledged as collateral. |
| 5 | Amount represents the current day’s variation margin as reported in the Statement of Assets and Liabilities. It differs from the cumulative appreciation (depreciation) presented in the previous table. |
5. Distributions subsequent to November 30, 2014
The following distributions have been declared by the Fund’s Board of Directors and are payable subsequent to the period end of this report:
| Record Date | Payable Date | Amount | ||||||
| 12/19/2014 | 12/26/2014 | $ | 0.0840 | |||||
| 1/23/2015 | 1/30/2015 | $ | 0.0840 | |||||
| 2/20/2015 | 2/27/2015 | $ | 0.0840 | |||||
6. Income tax information and distributions to shareholders
The tax character of distributions paid during the fiscal years ended November 30, was as follows:
| 2014 | 2013 | |||||||
| Distributions paid from: | ||||||||
| Tax-exempt income | $ | 12,165,813 | $ | 12,159,586 | ||||
| 22 | Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report |
As of November 30, 2014, the components of accumulated earnings on a tax basis were as follows:
| Undistributed tax-exempt income — net | $ | 1,558,124 | ||
| Undistributed ordinary income — net | 152 | |||
| Total undistributed earnings | $ | 1,558,276 | ||
| Deferred capital losses* | (305,903) | |||
| Capital loss carryforward** | (3,376,500) | |||
| Other book/tax temporary differences(a) | 403,700 | |||
| Unrealized appreciation (depreciation)(b) | 47,600,990 | |||
| Total accumulated earnings (losses) — net | $ | 45,880,563 |
| * | These capital losses have been deferred in the current year as either short-term or long-term losses. The losses will be deemed to occur on the first day of the next taxable year in the same character as they were originally deferred and will be available to offset future capital gains. These losses must be utilized before any of the Fund’s capital loss carryforward may be utilized. |
| ** | During the taxable year ended November 30, 2014, the Fund utilized $ 415,797 of its capital loss carryforward available from prior years. As of November 30, 2014, the Fund had the following net capital loss carryforward remaining: |
| Year of Expiration | Amount | |||
| 11/30/2018 | $ | (3,376,500 | ) | |
This amount will be available to offset any future taxable capital gains.
| (a) | Other book/tax temporary differences are attributable primarily to the realization for tax purposes of unrealized gains (losses) on certain futures contracts and book/tax differences in the timing of the deductibility of various expenses. |
| (b) | The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable primarily to the difference between book & tax accretion methods for market discount on fixed income securities. |
| Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report | 23 |
Report of independent registered public accounting firm
The Board of Directors and Shareholders
Western Asset Municipal Defined Opportunity Trust Inc.:
We have audited the accompanying statement of assets and liabilities of Western Asset Municipal Defined Opportunity Trust Inc. (the “Fund”), including the schedule of investments, as of November 30, 2014, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of November 30, 2014, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Western Asset Municipal Defined Opportunity Trust Inc. as of November 30, 2014, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
New York, New York
January 21, 2015
| 24 | Western Asset Municipal Defined Opportunity Trust Inc. 2014 Annual Report |
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 Municipal Defined Opportunity Trust Inc. (the “Fund”), including a majority of its members that 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 contract (the “Management Agreement”) with the Fund’s manager, Legg Mason Partners Fund Advisor, LLC (the “Manager”), and the sub-advisory agreement (the “Sub-Advisory Agreement”) with the Manager’s affiliate, Western Asset Management Company (the “Sub-Adviser”). At a meeting (the “Contract Renewal Meeting”) held in-person on November 12 and 13, 2014, the Board, including the Independent Directors, considered and approved the continuation of each of the Management Agreement and the Sub-Advisory Agreement for an additional one-year term. To assist in its consideration of the renewals of the Management Agreement and the Sub-Advisory Agreement, the Board received and considered a variety of information (together with the information provided at the Contract Renewal Meeting, the “Contract Renewal Information”) about the Manager and the Sub-Adviser, as well as the management and sub-advisory arrangements for the Fund and the other closed-end funds in the same complex under the Board’s supervision (collectively, the “Legg Mason Closed-end Funds”), certain portions of which are discussed below. A presentation made by the Manager and the Sub-Adviser to the Board at the Contract Renewal Meeting in connection with its evaluations of the Management Agreement and the Sub-Advisory Agreement encompassed the Fund and other 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-Adviser to the Fund. The Board’s evaluation took into account the information received throughout the year and also reflected the knowledge and familiarity gained as members of the Boards of the Fund and other Legg Mason Closed-end Funds with respect to the services provided to the Fund by the Manager and the Sub-Adviser.
The Manager provides the Fund with investment advisory and administrative services pursuant to the Management Agreement and the Sub-Adviser provides the Fund with certain investment sub-advisory services pursuant to the Sub-Advisory Agreement. 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-Adviser.
Board approval of management agreement and sub-advisory agreement
In its deliberations regarding renewal of the Management Agreement and the Sub-Advisory Agreement, the Board, including the Independent Directors, considered the factors below.
Nature, extent and quality of the services under the management agreement and sub-advisory agreement
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-Adviser
| Western Asset Municipal Defined Opportunity Trust Inc. | 25 |
Board approval of management and subadvisory agreements (unaudited) (cont’d)
under the Management Agreement and the Sub-Advisory Agreement, respectively, during the past year. The Board also reviewed Contract Renewal Information regarding the Fund’s compliance policies and procedures established pursuant to the 1940 Act.
The Board considered the qualifications, backgrounds and responsibilities of the Fund’s senior personnel and the portfolio management team 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 Contract Renewal Information and the Board’s discussions with the Manager and the Sub-Adviser at the Contract Renewal Meeting, the general reputation and investment performance records of the Manager and the Sub-Adviser and their affiliates and the financial resources available to the corporate parent of the Manager and the Sub-Adviser, Legg Mason, Inc. (“Legg Mason”), to support their activities in respect of the Fund and the other Legg Mason Closed-end Funds.
The Board considered the responsibilities of the Manager and the Sub-Adviser under the Management Agreement and the Sub-Advisory Agreement, respectively, including the Manager’s coordination and oversight of the services provided to the Fund by the Sub-Adviser and others. 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. Pursuant to this provision of the Management Agreement, the Manager does not provide day-to-day portfolio management services to the Fund. Rather, portfolio management services for the Fund are provided by the Sub-Adviser pursuant to the Sub-Advisory Agreement.
In reaching its determinations regarding continuation of the Management Agreement and the Sub-Advisory Agreement, the Board took into account that Fund shareholders, in pursuing their investment goals and objectives, likely purchased their shares based upon the reputation and the particular investment style, philosophy and strategy of the Manager and the Sub-Adviser, as well as the resources available to the Manager and the Sub-Adviser. The Board concluded that, overall, the nature, extent and quality of the management and other services provided to the Fund under the Management Agreement and the Sub-Advisory Agreement have been satisfactory under the circumstances.
Fund performance
The Board received and considered performance information and analyses (the “Lipper Performance Information”) for the Fund, as well as for a group of funds (the “Performance Universe”) selected by Lipper, Inc. (“Lipper”), an independent provider of investment company data. The Board was provided with a description of the methodology Lipper used to determine the similarity of the Fund with the funds included in the Performance Universe. The Performance Universe included the Fund and all general and insured municipal debt closed-end funds, as classified by Lipper, regardless of asset size. Both leveraged and non-leveraged funds were included by Lipper in the Performance Universe because of the limited number of similar funds. The Performance Universe consisted of six funds, including the Fund, for each of the 1-, 3- and 5-year periods ended June 30, 2014. The Board noted that it
| 26 | Western Asset Municipal Defined Opportunity Trust Inc. |
had received and discussed with the Manager and the Sub-Adviser information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark and its peer funds as selected by Lipper.
The Lipper Performance Information comparing the Fund’s performance to that of the Performance Universe based on net asset value per share showed, among other things, that the Fund’s performance for the 1-year period ended June 30, 2014 was ranked fourth among the six funds in the Performance Universe (first being best in these performance rankings) and was worse than the Performance Universe median for that period. The Fund’s performance for each of the 3- and 5-year periods ended June 30, 2014 was ranked second out of the six funds in the Performance Universe for that period and was better than the Performance Universe median. The Board noted that the small number of funds comprising the Performance Universe (five of which are managed by a single, non-affiliated investment manager) and the inclusion of both leveraged and non-leveraged funds in the Performance Universe made meaningful performance comparisons difficult. In explaining the Fund’s performance relative to the Performance Universe, the Manager also noted differences between the investment strategies of the Fund and other Performance Universe funds in pursuing their investment objectives, in addition to differences in the use of coverage. In this regard, the Fund’s lack of tobacco exposure detracted from the Fund’s performance relative to the Performance Universe. In addition to the Fund’s performance relative to the Performance Universe, the Board considered the Fund’s performance in absolute terms and relative to its benchmark. On a net asset value basis, the Fund outperformed its benchmark in each of the 1-, 3- and 5-year periods ended June 30, 2014.
Based on the reviews and discussions of Fund performance and considering other relevant factors, including those noted above, the Board concluded that, under the circumstances, continuation of the Management Agreement and the Sub-Advisory Agreement for an additional one-year period would be consistent with the interests of the Fund and its shareholders.
Management fees and expense ratios
The Board reviewed and considered the management fee (the “Management Fee”) payable by the Fund to the Manager under the Management Agreement and the sub-advisory fee (the “Sub-Advisory Fee”) payable to the Sub-Adviser under the Sub-Advisory Agreement in light of the nature, extent and overall quality of the management, investment advisory and other services provided by the Manager and the Sub-Adviser. The Board noted that the Sub-Advisory Fee is paid by the Manager, not the Fund, and, accordingly, that the retention of the Sub-Adviser does not increase the fees or expenses otherwise incurred by the Fund’s shareholders.
Additionally, the Board received and considered information and analyses prepared by Lipper (the “Lipper Expense Information”) comparing the Management Fee and the Fund’s overall expenses with those of funds in an expense group (the “Expense Universe”) selected and provided by Lipper. The comparison was based upon the constituent funds’ latest fiscal
| Western Asset Municipal Defined Opportunity Trust Inc. | 27 |
Board approval of management and subadvisory agreements (unaudited) (cont’d)
years. The Expense Universe consisted of the Fund, one other general and insured municipal debt fund, and six high yield municipal debt funds, as classified by Lipper, and included both leveraged and non-leveraged funds. The funds in the Expense Universe had net common share assets ranging from $149.6 million to $471.5 million. Four of the other funds in the Expense Universe were larger than the Fund and three were smaller.
The Lipper Expense Information, comparing the Management Fee as well as the Fund’s actual total expenses to the Fund’s Expense Universe, showed, among other things, that the Fund’s contractual Management Fee was ranked fourth among the funds in the Expense Universe (first being lowest and, therefore, best in these expense rankings) and was at the Expense Universe median for that expense component. The Fund’s actual Management Fee (i.e., giving effect to any voluntary fee waivers implemented by the Manager with respect to the Fund and by the managers of the other Expense Universe funds) was ranked third among the funds in the Expense Universe and was better (i.e., lower) than the Expense Universe median for that expense component. The Fund’s actual total expenses also ranked second among the funds in the Expense Universe and were better than the Expense Universe median for that expense component. The Board considered that the small number and different types of funds in the Expense Universe, as well as the inclusion of both leveraged and non-leveraged funds, made meaningful expense comparisons difficult.
The Board also reviewed Contract Renewal Information regarding fees charged by the Manager 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 Board was advised that the fees paid by such institutional, separate account and other clients (collectively, “institutional clients”) generally are lower, and may be significantly lower, than the Management Fee. The Contract Renewal Information discussed the significant differences in scope of services provided to the Fund and to institutional clients. Among other things, institutional clients have fewer compliance, administration and other needs than the Fund and the Fund is subject not only to heightened regulatory requirements relative to institutional clients but also to requirements for listing on the New York Stock Exchange. The Contract Renewal Information noted further that the Fund is provided with administrative services, office facilities, Fund officers (including the Fund’s chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other fund service providers. The Contract Renewal Information included information regarding management fees paid by open-end mutual funds in the same complex (the “Legg Mason Open-end Funds”) and such information indicated that the management fees paid by the Legg Mason Closed-end Funds generally were higher than those paid by the Legg Mason Open-end Funds. The Manager, in response to an inquiry from the Board as to the reasons for the fee differential, provided information as to differences between the services provided to the Fund and the other Legg Mason Closed-end Funds and the services provided to the Legg Mason Open-end Funds. The Board considered the fee comparisons in light of the different services provided in managing these other types of clients and funds.
| 28 | Western Asset Municipal Defined Opportunity Trust Inc. |
Taking all of the above into consideration, the Board determined that the Management Fee and the Sub-Advisory Fee were reasonable in light of the nature, extent and overall quality of the management, investment advisory and other services provided to the Fund under the Management Agreement and the Sub-Advisory Agreement.
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 Manager’s fiscal years ended March 31, 2014 and March 31, 2013. The Board also received profitability information with respect to the Legg Mason fund complex as a whole. In addition, the Board received Contract Renewal Information with respect to the Manager’s revenue and cost allocation methodologies used in preparing such profitability data. The Board received a report from an outside consultant engaged by the Manager that had reviewed the Manager’s revenue and cost allocation methodologies. The profitability to the Sub-Adviser was not considered to be a material factor in the Board’s considerations since the Sub-Advisory Fee is paid by the Manager, not the Fund. The profitability analysis presented to the Board as part of the Contract Renewal Information indicated that profitability to the Manager had decreased during the period covered by the analysis and remained at a reasonable level in light of judicial guidance and the nature, extent and overall quality of the investment advisory and other services provided to the Fund by the Manager and the Sub-Adviser.
Economies of scale
The Board received and discussed Contract Renewal Information concerning whether the Manager realizes economies of scale if the Fund’s assets grow. The Board noted that because the Fund is a closed-end fund with no current plans to seek additional assets beyond maintaining its dividend reinvestment plan, any significant growth in its assets generally will occur through appreciation in the value of the Fund’s investment portfolio, rather than sales of additional shares in the Fund. The Board determined that the Management Fee structure, which incorporates no breakpoints reducing the Management Fee at specified increased asset levels, was appropriate under present circumstances.
Other benefits to the manager and the sub-adviser
The Board considered other benefits received by the Manager, the Sub-Adviser and their affiliates as a result of their relationship with the Fund and did not regard such benefits as excessive.
* * * * * *
In light of all of the foregoing and other relevant factors, the Board determined that, under the circumstances, continuation of the Management Agreement and the Sub-Advisory Agreement would be consistent with the interests of the Fund and its shareholders and unanimously voted to continue each Agreement for a period of one additional year. No single factor reviewed by the Board was identified by the Board as the principal factor in
| Western Asset Municipal Defined Opportunity Trust Inc. | 29 |
Board approval of management and subadvisory agreements (unaudited) (cont’d)
determining whether to approve continuation of the Management Agreement and the Sub-Advisory Agreement, and each Board member attributed different weights to the various factors. The Independent Directors were advised by separate independent legal counsel throughout the process. Prior to the Contract Renewal Meeting, the Board received a memorandum prepared by the Manager discussing its responsibilities in connection with the proposed continuation of the Management Agreement and the Sub-Advisory Agreement as part of the Contract Renewal Information and the Independent Directors separately received a memorandum discussing such responsibilities from their independent counsel. Prior to voting, the Independent Directors also discussed the proposed continuation of the Management Agreement and the Sub-Advisory Agreement in private sessions with their independent legal counsel at which no representatives of the Manager or the Sub-Adviser were present.
| 30 | Western Asset Municipal Defined Opportunity Trust Inc. |
Additional information (unaudited)
Information about Directors and Officers
The business and affairs of Western Asset Municipal Defined Opportunity Trust Inc. (the “Fund”) are conducted by management under the supervision and subject to the direction of its Board of Directors. The business address of each Director is c/o Kenneth D. Fuller, Legg Mason, 100 International Drive, 11th Floor, Baltimore, Maryland 21202. Information pertaining to the Directors and officers of the Fund is set forth below.
| Independent Directors†: | ||
| Robert D. Agdern1 | ||
| Year of birth | 1950 | |
| Position(s) held with Fund2 | Director and Member of the Nominating and Audit Committees, Class III | |
| Term of office2 and length of time served | Since 2015 | |
| Principal occupation(s) during past five years | Member of the Advisory Committee of the Dispute Resolution Research Center at the Kellogg Graduate School of Business Northwestern University (since 2002); Deputy General Counsel responsible for western hemisphere matters for BP PLC (1999 to 2001); Associate General Counsel at Amoco Corporation responsible for corporate, chemical, and refining and marketing matters and special assignments (1993 to 1998) (Amoco merged with British Petroleum in 1998 forming BP PLC) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 31 | |
| Other board memberships held by Director during past five years | None | |
| Carol L. Colman | ||
| Year of birth | 1946 | |
| Position(s) held with Fund2 | Director and Member of the Nominating and Audit Committees, Class I | |
| Term of office2 and length of time served | Since 2009 | |
| Principal occupation(s) during past five years | President, Colman Consulting Company (consulting) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 31 | |
| Other board memberships held by Director during past five years | None | |
| Daniel P. Cronin | ||
| Year of birth | 1946 | |
| Position(s) held with Fund2 | Director and Member of the Nominating and Audit Committees, Class I | |
| Term of office2 and length of time served | Since 2009 | |
| Principal occupation(s) during past five years | Retired; formerly, Associate General Counsel, Pfizer Inc. (prior to and including 2004) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 31 | |
| Other board memberships held by Director during past five years | None | |
| Western Asset Municipal Defined Opportunity Trust Inc. | 31 |
Additional information (unaudited) (cont’d)
Information about Directors and Officers
| Independent Directors cont’d | ||
| Paolo M. Cucchi | ||
| Year of birth | 1941 | |
| Position(s) held with Fund2 | Director and Member of the Nominating and Audit Committees, Class II | |
| Term of office2 and length of time served | Since 2009 | |
| Principal occupation(s) during past five years | Emeritus Professor of French and Italian at Drew University (since 2014); formerly, Professor of French and Italian at Drew University (2009 to 2014); Vice President and Dean of College of Liberal Arts at Drew University (1984 to 2009) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 31 | |
| Other board memberships held by Director during past five years | None | |
| Leslie H. Gelb | ||
| Year of birth | 1937 | |
| Position(s) held with Fund2 | Director and Member of the Nominating and Audit Committees, Class II | |
| Term of office2 and length of time served | Since 2009 | |
| Principal occupation(s) during past five years | President Emeritus and Senior Board Fellow (since 2003), The Council on Foreign Relations; formerly, President, (prior to 2003), the Council on Foreign
Relations; formerly, Columnist, Deputy Editorial Page Editor and Editor, Op-Ed Page, The New York Times | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 31 | |
| Other board memberships held by Director during past five years | Director of two registered investment companies advised by Aberdeen Asset Management Asia Limited (since 1994) | |
| William R. Hutchinson | ||
| Year of birth | 1942 | |
| Position(s) held with Fund2 | Director and Member of the Nominating and Audit Committees, Class III | |
| Term of office2 and length of time served | Since 2009 | |
| Principal occupation(s) during past five years | President, W.R. Hutchinson & Associates Inc. (consulting) (since 2001) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 31 | |
| Other board memberships held by Director during past five years | Director (Non-Executive Chairman of the Board (since December 1, 2009)), Associated Banc Corp. (banking) (since 1994) | |
| 32 | Western Asset Municipal Defined Opportunity Trust Inc. |
| Independent Directors cont’d | ||
| Eileen A. Kamerick | ||
| Year of birth | 1958 | |
| Position(s) held with Fund2 | Director and Member of Nominating and Audit Committees, Class III | |
| Term of office2 and length of time served | Since 2013 | |
| Principal occupation(s) during past five years | Adjunct Professor, Washington University in St. Louis and University of Iowa law schools and Consultant, corporate governance matters (since 2014); formerly CFO, Press Ganey Associates (health care informatics company) (2012-2014); Managing Director and CFO, Houlihan Lokey (international investment bank and advisory firm) (2010 to 2012); Senior Vice President, CFO & CLO, Tecta America Corp (commercial roofing company) (2008 to 2010); Executive Vice President and CFO, Bearing Point Inc. (management and technology consulting firm) (2008); Executive Vice President, CFO and CAO Heidrick & Struggles (international executive search and leadership consulting firm) (2004 to 2008) | |
| Number of portfolios in fund complex everseen by Director (including the Fund) | 31 | |
| Other board memberships held by Director during past five years | Director of Associated Banc-Corp (financial services company) (since 2007); Westell Technologies, Inc. (technology company) (since 2003) | |
| Riordan Roett | ||
| Year of birth | 1938 | |
| Position(s) held with Fund2 | Director and Member of the Nominating and Audit Committees, Class III | |
| Term of office2 and length of time served | Since 2009 | |
| Principal occupation(s) during past five years | The Sarita and Don Johnston Professor of Political Science and Director of Western Hemisphere Studies, Paul H. Nitze School of Advanced International Studies, The John Hopkins University (since 1973) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 31 | |
| Other board memberships held by Director during past five years | None | |
| Western Asset Municipal Defined Opportunity Trust Inc. | 33 |
Additional information (unaudited) (cont’d)
Information about Directors and Officers
| Interested Director and Officer: | ||
| Kenneth D. Fuller3 | ||
| Year of birth | 1958 | |
| Position(s) held with Fund2 | Director, Chairman, President and Chief Executive Officer, Class II | |
| Term of office2 and length of time served | Since 2013 | |
| Principal occupation(s) during past five years | Managing Director of Legg Mason & Co., LLC (“Legg Mason & Co.”) (since 2013); Officer and/or Trustee/Director of 159 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) or its affiliates (since 2013); President and Chief Executive Officer of LM Asset Services, LLC (“LMAS”) and Legg Mason Fund Asset Management, Inc. (“LMFAM”) (formerly registered investment advisers) (since 2013); formerly, Senior Vice President of LMPFA (2012 to 2013); formerly, Director of Legg Mason & Co. (2012 to 2013); formerly, Vice President of Legg Mason & Co. (2009 to 2012); formerly, Vice President — Equity Division of T. Rowe Price Associates (1993 to 2009), as well as Investment Analyst and Portfolio Manager for certain asset allocation accounts (2004 to 2009). | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 149 | |
| Other board memberships held by Director during past five years | None | |
| Additional Officers: | ||
| Ted P. Becker Legg Mason 620 Eighth Avenue, 49th Floor, New York, NY 10018 | ||
| Year of birth | 1951 | |
| Position(s) held with Fund2 | Chief Compliance Officer | |
| Term of office2 and length of time served | Since 2009 | |
| Principal occupation(s) during past five years | Director of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance of Legg Mason & Co. (since 2005); Chief Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006) | |
| 34 | Western Asset Municipal Defined Opportunity Trust Inc. |
| Additional Officers cont’d | ||
| Vanessa A. Williams Legg Mason 100 First Stamford Place, 6th Floor, Stamford, CT 06902 | ||
| Year of birth | 1979 | |
| Position(s) with Fund2 | Identity Theft Prevention Officer | |
| Term of office2 and length of time served | Since 2011 | |
| Principal occupation(s) during past five years | Vice President of Legg Mason & Co. (since 2012); Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); formerly, Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (2011 to 2013); formerly, Senior Compliance Officer of Legg Mason & Co. (2008 to 2011); formerly, Compliance Analyst of Legg Mason & Co. (2006 to 2008) and Legg Mason & Co. predecessors (prior to 2006) | |
| Robert I. Frenkel Legg Mason 100 First Stamford Place, 6th Floor, Stamford, CT 06902 | ||
| Year of birth | 1954 | |
| Position(s) held with Fund2 | Secretary and Chief Legal Officer | |
| Term of office2 and length of time served | Since 2009 | |
| Principal occupation(s) during past five years | Vice President and Deputy General Counsel of Legg Mason (since 2006); Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006) | |
| Thomas C. Mandia Legg Mason 100 First Stamford Place, 6th Floor, Stamford, CT 06902 | ||
| Year of birth | 1962 | |
| Position(s) held with Fund2 | Assistant Secretary | |
| Term of office2 and length of time served | Since 2009 | |
| Principal occupation(s) during past five years | Managing Director and Deputy General Counsel of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); Secretary of LMPFA (since 2006); Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); Secretary of LMAS (since 2002) | |
| Western Asset Municipal Defined Opportunity Trust Inc. | 35 |
Additional information (unaudited) (cont’d)
Information about Directors and Officers
| Additional Officers cont’d | ||
| Richard F. Sennett Legg Mason 100 International Drive, 7th Floor, Baltimore, MD 21202 | ||
| Year of birth | 1970 | |
| Position(s) held with Fund2 | Principal Financial Officer | |
| Term of office2 and length of time served | Since 2011 | |
| Principal occupation(s) during past five years | Principal Financial Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); Managing Director of Legg Mason & Co. and Senior Manager of the Treasury Policy group for Legg Mason & Co.’s Global Fiduciary Platform (since 2011); formerly, Chief Accountant within the SEC’s Division of Investment Management (2007 to 2011); formerly, Assistant Chief Accountant within the SEC’s Division of Investment Management (2002 to 2007) | |
| Steven Frank Legg Mason 620 Eighth Avenue, 49th Floor, New York, NY 10018 | ||
| Year of birth | 1967 | |
| Position(s) held with Fund2 | Treasurer | |
| Term of office2 and length of time served | Since 2010 | |
| Principal occupation(s) during past five years | Vice President of Legg Mason & Co. and Legg Mason & Co. predecessors (since 2002); Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2010); formerly, Controller of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2010) | |
| Jeanne M. Kelly Legg Mason 620 Eighth Avenue, 49th Floor, New York, NY 10018 | ||
| Year of birth | 1951 | |
| Position(s) held with Fund2 | Senior Vice President | |
| Term of office2 and length of time served | Since 2009 | |
| Principal occupation(s) during past five years | Senior Vice President of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006) and LMFAM (since 2013); Managing Director of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005) | |
| † | Directors who are not “interested persons” of the Fund within the meaning of Section (a)(19) of the 1940 Act. |
| 1 | Effective January 1, 2015, Mr. Agdern became a Director. |
| 2 | The Fund’s Board of Directors is divided into three classes: Class I, Class II and Class III. The terms of office of the Class I, II and III Directors expire at the Annual Meetings of Stockholders in the year 2016, year 2017 and year 2015, respectively, or thereafter in each case when their respective successors are duly elected and qualified. The Fund’s executive officers are chosen each year at the first meeting of the Fund’s Board of Directors following the Annual Meeting of Stockholders, to hold office until the meeting of the Board following the next Annual Meeting of Stockholders and until their successors are duly elected and qualified. |
| 3 | Mr. Fuller is an “interested person” of the Fund as defined in the 1940 Act because Mr. Fuller is an officer of LMPFA and certain of its affiliates. |
| 36 | Western Asset Municipal Defined Opportunity Trust Inc. |
Annual chief executive officer and
principal financial officer certifications (unaudited)
The Fund’s Chief Executive Officer (“CEO”) has submitted to the NYSE the required annual certification and the Fund also has included the certifications of the Fund’s CEO and Principal Financial Officer required by Section 302 of the Sarbanes-Oxley Act in the Fund’s Form N-CSR filed with the SEC for the period of this report.
| Western Asset Municipal Defined Opportunity Trust Inc. | 37 |
Other shareholder communications regarding accounting
matters (unaudited)
The Fund’s Audit Committee has established guidelines and procedures regarding the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters (collectively, “Accounting Matters”). Persons with complaints or concerns regarding Accounting Matters may submit their complaints to the Chief Compliance Officer (“CCO”). Persons who are uncomfortable submitting complaints to the CCO, including complaints involving the CCO, may submit complaints directly to the Fund’s Audit Committee Chair. Complaints may be submitted on an anonymous basis.
The CCO may be contacted at:
Legg Mason & Co., LLC
Compliance Department
620 Eighth Avenue, 49th Floor
New York, New York 10018
Complaints may also be submitted by telephone at 1-800-742-5274. Complaints submitted through this number will be received by the CCO.
| 38 | Western Asset Municipal Defined Opportunity Trust Inc. |
Dividend reinvestment plan (unaudited)
Unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends, on your Common Shares will be automatically reinvested by American Stock Transfer & Trust Company, LLC (“AST”), as agent for the Common Shareholders (the “Plan Agent”), in additional Common Shares under the Fund’s Dividend Reinvestment Plan (the “Plan”). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by AST as dividend paying agent.
If you participate in the Plan, the number of Common Shares you will receive will be determined as follows:
(1) If the market price of the Common Shares on the record date (or, if the record date is not an NYSE trading day, the immediately preceding trading day) for determining shareholders eligible to receive the relevant dividend or distribution (the “determination date”) is equal to or exceeds the net asset value per share of the Common Shares, the Fund will issue new Common Shares at a price equal to the net asset value per share at the close of trading on the NYSE on the determination date.
(2) If the net asset value per share of the Common Shares exceeds the market price of the Common Shares on the determination date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Shares in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading day following the determination date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date or (b) the record date for the next succeeding dividend or distribution to be made to the Common Shareholders; except when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price rises so that it equals or exceeds the net asset value per share of the Common Shares at the close of trading on the NYSE on the determination date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases, the Plan Agent will cease purchasing Common Shares in the open market and the Fund shall issue the remaining Common Shares at a price per share equal to the net asset value per share at the close of trading on the NYSE on the determination date.
Common Shares in your account will be held by the Plan Agent in non-certificated form. Any proxy you receive will include all Common Shares you have received under the Plan.
You may withdraw from the Plan by notifying the Plan Agent in writing at 6201 15th Avenue, Brooklyn, NY 11219 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 Agent’s investment of the most recently declared dividend or distribution on the Common Shares. The Plan may be terminated by the Fund upon notice in writing mailed to Common Shareholders at least 30 days prior to the
| Western Asset Municipal Defined Opportunity Trust Inc. | 39 |
Dividend reinvestment plan (unaudited) (cont’d)
record date for the payment of any dividend or distribution by the Fund for which the termination is to be effective. Upon any termination, you will be sent a certificate or certificates for the full Common Shares held for you under the Plan and cash for any fractional Common Shares. You may elect to notify the Plan Agent in advance of such termination to have the Plan Agent sell part or all of your Common Shares on your behalf. You will be charged a
service charge and the Plan Agent is authorized to deduct brokerage charges actually incurred for this transaction from the proceeds.
There is no service charge for reinvestment of your dividends or distributions in Common Shares. 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 Common Shares, this allows you to add to your investment through dollar cost averaging, which may lower the average cost of your Common Shares over time. Dollar cost averaging is a technique for lowering the average cost per share over time if the Fund’s net asset value declines. While dollar cost averaging has definite advantages, it cannot assure profit or protect against loss in declining markets.
Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. Investors will be subject to income tax on amounts reinvested under the Plan.
The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of Directors, the change is warranted. There is no direct service charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants. Additional information about the Plan and your account may be obtained from the Plan Agent at 1-888-888-0151.
| 40 | Western Asset Municipal Defined Opportunity Trust Inc. |
Important tax information (unaudited)
All of the net investment income distributions paid monthly by the Fund during the taxable year ended November 30, 2014 qualify as tax-exempt interest dividends for Federal income tax purposes.
Please retain this information for your records.
| Western Asset Municipal Defined Opportunity Trust Inc. | 41 |
Western Asset
Municipal Defined Opportunity Trust Inc.
Directors
Robert D. Agdern*
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
Kenneth D. Fuller
Chairman
Leslie H. Gelb
William R. Hutchinson
Eileen A. Kamerick
Riordan Roett
Officers
Kenneth D. Fuller
President and Chief Executive Officer
Richard F. Sennett
Principal Financial Officer
Ted P. Becker
Chief Compliance Officer
Vanessa A. Williams
Identity Theft Prevention Officer
Robert I. Frenkel
Secretary and Chief Legal Officer
Thomas C. Mandia
Assistant Secretary
Steven Frank
Treasurer
Jeanne M. Kelly
Senior Vice President
Western Asset Municipal Defined Opportunity Trust Inc.
620 Eighth Avenue
49th Floor
New York, NY 10018
Investment manager
Legg Mason Partners Fund Advisor, LLC
Subadviser
Western Asset Management Company
Custodian
State Street Bank and Trust Company
1 Lincoln Street
Boston, MA 02111
Transfer agent
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
Independent registered public accounting firm
KPMG LLP
345 Park Avenue
New York, NY 10154
Legal counsel
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
New York Stock Exchange Symbol
MTT
| * | Effective January 1, 2015, Mr. Agdern became a Director. |
Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds
This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsored closed-end funds and certain closed-end funds managed or sub-advised by Legg Mason or its affiliates. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:
| Ÿ | Personal information included on applications or other forms; |
| Ÿ | Account balances, transactions, and mutual fund holdings and positions; |
| Ÿ | Online account access user IDs, passwords, security challenge question responses; and |
| Ÿ | Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt, payment history, etc.). |
How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have authorized or as permitted or required by law. The Funds may disclose information about you to:
| Ÿ | Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business or comply with obligations to government regulators; |
| Ÿ | Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform marketing services solely for the Funds; |
| Ÿ | The Funds’ representatives such as legal counsel, accountants and auditors; and |
| Ÿ | Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust. |
| NOT PART OF THE ANNUAL REPORT |
Legg Mason Funds Privacy and Security Notice (cont’d)
Except as otherwise permitted by applicable law, companies acting on the Funds’ behalf are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to perform.
The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds’ practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.
Keeping You Informed of the Funds’ Privacy and Security Practices
The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.
The Funds’ Security Practices
The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.
In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is incomplete, not accurate or not current, or if you have questions about the Funds’ privacy practices, write the Funds using the contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at www.leggmason.com, or contact the Fund at 1-888-777-0102.
Revised April 2011
| NOT PART OF THE ANNUAL REPORT |
Western Asset Municipal Defined Opportunity Trust Inc.
Western Asset Municipal Defined Opportunity Trust Inc.
620 Eighth Avenue
49th 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 Common Stock in the open market.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Fund, shareholders can call 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 relating to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102, (2) on the Fund’s website at www.lmcef.com and (3) on the SEC’s website at www.sec.gov.
This report is transmitted to the shareholders of Western Asset Municipal Defined Opportunity Trust Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or any securities mentioned in the report.
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
WASX010710 1/15 SR15-2390
| ITEM 2. | CODE OF ETHICS. |
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
The Board of Directors of the registrant has determine that Eileen A. Kamerick, a member of the Board’s Audit Committee, possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert” and that she is independent for purposes of this item
| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
a) Audit Fees. The aggregate fees billed in the last two fiscal years ending November 30, 2013 and November 30, 2014 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $115,000 in 2013 and $43,750 in 2014.
b) Audit-Related Fees. The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrant’s financial statements were $12,000 in 2013 and $0 in 2014. These services consisted of procedures performed in connection with the Re-domiciliation of the various reviews of Prospectus supplements, and consent issuances related to the N-1A filings Western Asset Municipals Defined Opportunity Trust.
(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $38,750 in 2014 and $3,840 in 2014. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.
There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee.
d) All Other Fees. There were no other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item 4 for the Western Asset Municipal Defined Opportunity Trust Inc.
All Other Fees. There were no other non-audit services rendered by the Auditor to Legg Mason Partners Fund Advisors, LLC (“LMPFA”), and any entity controlling, controlled by or under
common control with LMPFA that provided ongoing services to Western Asset Municipal Defined Opportunity Trust Inc. requiring pre-approval by the Audit Committee in the Reporting Period.
(e) Audit Committee’s pre-approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by LMPFA or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee.
The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.
Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.
(2) For the Western Asset Municipal Defined Opportunity Trust Inc., the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 100% for 2013 and 2014; Tax Fees were 100% and 100% for 2013 and 2014; and Other Fees were 100% and 100% for 2013 and 2014.
(f) N/A
(g) Non-audit fees billed by the Auditor for services rendered to Western Asset Municipal Defined Opportunity Trust Inc., LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Western Asset Municipal Defined Opportunity Trust Inc. during the reporting period were $0 in 2014.
(h) Yes. Western Asset Municipal Defined Opportunity Trust Inc.’s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates, which were not pre-approved (not requiring pre-approval), is compatible with maintaining the Accountant’s independence. All services provided by the Auditor to the Western Asset Municipal Defined Opportunity Trust Inc. or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.
| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
a) Registrant has a separately-designated standing Audit Committee established in accordance with Section 3(a)58(A) of the Exchange Act. The Audit Committee consists of the following Board members:
Robert D. Agdern (Effective January 1, 2015, Mr. Agdern became a member of the Audit Committee and the Board of Directors.)
William R. Hutchinson
Paolo M. Cucchi
Daniel P. Cronin
Carol L. Colman
Leslie H. Gelb
Eileen A. Kamerick
Dr. Riordan Roett
Jeswald W. Salacuse (Effective June 30, 2014, Mr. Salacuse retired from the Audit Committee and the Board of Directors.)
b) Not applicable
| ITEM 6. | SCHEDULE OF INVESTMENTS. |
Included herein under Item 1.
| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Proxy Voting Guidelines and Procedures
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) delegates the responsibility for voting proxies for the fund to the subadviser through its contracts with the subadviser. The subadviser will use its own proxy voting policies and procedures to vote proxies. Accordingly, LMPFA does not expect to have proxy-voting responsibility for the fund. Should LMPFA become responsible for voting proxies for any reason, such as the inability of the subadviser to provide investment advisory services, LMPFA shall utilize the proxy voting guidelines established by the most recent subadviser to vote proxies until a new subadviser is retained.
The subadviser’s Proxy Voting Policies and Procedures govern in determining how proxies relating to the fund’s portfolio securities are voted and are provided below. Information regarding how each fund voted proxies (if any) relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge (1) by calling 888-777-0102, (2) on the fund’s website at http://www.lmcef.com and (3) on the SEC’s website at http://www.sec.gov.
Policy
As a fixed income only manager, the occasion to vote proxies is very rare. However, Western Asset Management Company (“WA” or “Western Asset”) have adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). Our authority to vote the proxies of our clients is established through investment management agreements or comparable documents, and our proxy voting guidelines have been tailored to reflect these specific contractual obligations. In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.
In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (except that WA may so consult and agree with each other) regarding the voting of any securities owned by its clients.
Western Asset’s proxy voting procedures are designed and implemented in a way that is reasonably expected to ensure that proxy matters are handled in the best interest of our clients. While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on a case-by-case basis, taking into consideration Western Asset’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent Western Asset deems appropriate).
Procedures
Responsibility and Oversight
The Western Asset Legal and Compliance Department (“Legal and Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.
Client Authority
The Investment Management Agreement for each client is reviewed at account start-up for proxy voting instructions. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Legal and Compliance Department maintains a matrix of proxy voting authority.
Proxy Gathering
Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to
Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.
Proxy Voting
Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:
| a. | Proxies are reviewed to determine accounts impacted. |
| b. | Impacted accounts are checked to confirm Western Asset voting authority. |
| c. | Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.) |
| d. | If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party. |
| e. | Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department. |
| f. | Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials. |
Timing
Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.
Recordkeeping
Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:
| a. | A copy of Western Asset’s policies and procedures. |
| b. | Copies of proxy statements received regarding client securities. |
| c. | A copy of any document created by Western Asset that was material to making a decision how to vote proxies. |
| d. | Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests. |
| e. | A proxy log including: |
| 1. | Issuer name; |
| 2. | Exchange ticker symbol of the issuer’s shares to be voted; |
| 3. | Committee on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted; |
| 4. | A brief identification of the matter voted on; |
| 5. | Whether the matter was proposed by the issuer or by a shareholder of the issuer; |
| 6. | Whether a vote was cast on the matter; |
| 7. | A record of how the vote was cast; and |
| 8. | Whether the vote was cast for or against the recommendation of the issuer’s management team. |
Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.
Disclosure
Part II of the WA Form ADV contains a description of Western Asset’s proxy policies. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.
Conflicts of Interest
All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:
| 1. | Whether Western Asset (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company; |
| 2. | Whether Western Asset or an officer or director of Western Asset or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and |
| 3. | Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders. |
Voting Guidelines
Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.
Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.
I. Board Approved Proposals
The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:
1. Matters relating to the Board of Directors
Western Asset votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:
| a. | Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors. |
| b. | Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director. |
| c. | Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences. |
| d. | Votes are cast on a case-by-case basis in contested elections of directors. |
2. Matters relating to Executive Compensation
Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:
| a. | Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution. |
| b. | Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options. |
| c. | Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price. |
| d. | Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less. |
3. Matters relating to Capitalization
The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.
| a. | Western Asset votes for proposals relating to the authorization of additional common stock. |
| b. | Western Asset votes for proposals to effect stock splits (excluding reverse stock splits). |
| c. | Western Asset votes for proposals authorizing share repurchase programs. |
4. Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions
Western Asset votes these issues on a case-by-case basis on board-approved transactions.
5. Matters relating to Anti-Takeover Measures
Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:
| a. | Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans. |
| b. | Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions. |
6. Other Business Matters
Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.
| a. | Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or by laws. |
| b. | Western Asset votes against authorization to transact other unidentified, substantive business at the meeting. |
II. Shareholder Proposals
SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:
1. Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans.
2. Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals.
3. Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors.
III. Voting Shares of Investment Companies
Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.
1. Western Asset votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios.
2. Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided.
IV. Voting Shares of Foreign Issuers
In the event Western Asset is required to vote on securities held in non-U.S. issuers – i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.
1. Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management.
2. Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees.
3. Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated.
4. Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights.
Retirement Accounts
For accounts subject to ERISA, as well as other Retirement Accounts, Western Asset is presumed to have the responsibility to vote proxies for the client. The Department of Labor (“DOL”) has issued a bulletin that states that investment managers have the responsibility to vote proxies on behalf of Retirement Accounts unless the authority to vote proxies has been specifically reserved to another named fiduciary. Furthermore, unless Western Asset is expressly precluded from voting the proxies, the DOL has determined that the responsibility remains with the investment manager.
In order to comply with the DOL’s position, Western Asset will be presumed to have the obligation to vote proxies for its Retirement Accounts unless Western Asset has obtained a specific written instruction indicating that: (a) the right to vote proxies has been reserved to a named fiduciary of the client, and (b) Western Asset is precluded from voting proxies on behalf of the client. If Western Asset does not receive such an instruction, Western Asset will be responsible for voting proxies in the best interests of the Retirement Account client and in accordance with any proxy voting guidelines provided by the client.
| ITEM 8. | INVESTMENT PROFESSIONALS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
(a)(1):
| NAME AND ADDRESS |
LENGTH OF TIME SERVED |
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS | ||
| S. Kenneth Leech Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 |
Since March 31, 2014 | Responsible for the day-to-day management with other members of the Fund’s portfolio management team; Chief Investment Officer of Western Asset from 1998 to 2008 and since 2014; Senior Advisor/Chief Investment Officer Emeritus of Western Asset from 2008-2013; Co- Chief Investment Officer of Western Asset from 2013-2014. | ||
| David Fare Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 |
Since 2009 | Responsible for the day-to-day management with other members of the Fund’s portfolio management team; portfolio manager at Western Asset since 2005; prior to that time, Mr. Fare was with Citigroup Asset Management or one of its affiliates since 1989. | ||
| Robert Amodeo Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 |
Since 2009 | Responsible for the day-to-day management with other members of the Fund’s portfolio management team; portfolio manager at Western Asset since 2005; prior to that time, Mr. Amodeo was a Managing Director and portfolio manager with Salomon Brothers Asset Management Inc from 1992 to 2005. | ||
| Dennis J. McNamara Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 |
Since 2012 | Responsible for the day-to-day management with other members of the Fund’s portfolio management team; portfolio manager at Western Asset since 2001. | ||
(a)(2): DATA TO BE PROVIDED BY FINANCIAL CONTROL
The following tables set forth certain additional information with respect to the above named fund’s investment professional responsible for the day-to-day management with other members of the Fund’s portfolio management team for the fund. Unless noted otherwise, all information is provided as of November 30, 2014.
Other Accounts Managed by Investment Professional
The table below identifies the number of accounts (other than the fund) for which the below named fund’s investment professional has day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles, and other accounts. For each category, the number of accounts and total assets in the accounts where fees are based on performance is also indicated.
| Name of PM |
Type of Account |
Number of Accounts Managed |
Total Assets Managed | Number of Accounts Managed for which Advisory Fee is Performance-Based |
Assets Managed for which Advisory Fee is Performance-Based | |||||
| S. Kenneth Leech‡ | Other Registered Investment Companies | 107 | $ 198.2 billion | None | None | |||||
| Other Pooled Vehicles | 244 | $ 86.8 billion | 9 | $ 2.1 billion | ||||||
| Other Accounts | 676 | $ 177.2 billion | 56 | $ 17.8 billion | ||||||
| Robert E. Amodeo‡ | Other Registered Investment Companies | 21 | $ 15.5 billion | None | None | |||||
| Other Pooled Vehicles | None | None | None | None | ||||||
| Other Accounts | 18 | $ 3.4 billion | None | None | ||||||
| David T. Fare‡ | Other Registered Investment Companies | 16 | $ 13.8 billion | None | None | |||||
| Other Pooled Vehicles | None | None | None | None | ||||||
| Other Accounts | 2 | $ 1.9 billion | None | None | ||||||
| Dennis McNamara‡ | Other Registered Investment Companies | 35 | $ 148.6 billion | None | None | |||||
| Other Pooled Vehicles | 21 | $10.6 billion | 1 | $ 345 million | ||||||
| Other Accounts | 138 | $ 44.2 billion | 7 | $ 1.5 billion | ||||||
| ‡ | The numbers above reflect the overall number of portfolios managed by employees of Western Asset Management Company (“Western Asset”). Mr. Leech is involved in the management of all the Firm’s portfolios, but they are not solely responsible for particular portfolios. Western Asset’s investment discipline emphasizes a team approach that combines the efforts of groups of specialists working in different market sectors. They are responsible for overseeing implementation of Western Asset’s overall investment ideas and coordinating the work of the various sector teams. This structure ensures that client portfolios benefit from a consensus that draws on the expertise of all team members. |
(a)(3): Investment Professional Compensation
With respect to the compensation of the investment professionals, Western Asset’s compensation system assigns each employee a total compensation range, which is derived from annual market surveys that benchmark each role with its job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market value of their skills, experience, and ability to produce desired results. Standard compensation includes competitive base salaries, generous employee benefits, and a retirement plan.
In addition, the subadviser’s employees are eligible for bonuses. These are structured to closely align the interests of employees with those of the subadviser, and are determined by the professional’s job function and pre-tax performance as measured by a formal review process. All bonuses are completely discretionary. The principal factor considered is an investment professional’s investment performance versus appropriate peer groups and benchmarks (e.g., a securities index and with respect to a fund, the benchmark set forth in the fund’s Prospectus to which the fund’s average annual total returns are compared or, if none, the benchmark set forth in the fund’s annual report). Performance is reviewed on a 1, 3 and 5 year basis for compensation—with 3 years having the most emphasis. The subadviser may also measure an investment professional’s pre-tax investment performance against other benchmarks, as it determines appropriate. Because investment professionals are generally responsible for multiple accounts (including the funds) with similar investment strategies, they are generally compensated on the performance of the aggregate group of similar accounts, rather than a specific account. Other factors that may be considered when making bonus decisions include client service, business development, length of service to the subadviser, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to the subadviser’s business.
Finally, in order to attract and retain top talent, all professionals are eligible for additional incentives in recognition of outstanding performance. These are determined based upon the factors described above and include Legg Mason stock options and long-term incentives that vest over a set period of time past the award date.
Potential Conflicts of Interest
Conflicts of Interest
The manager, the subadviser and investment professionals have interests which conflict with the interests of the fund. There is no guarantee that the policies and procedures adopted by the manager, the subadviser and the fund will be able to identify or mitigate these conflicts of interest.
Some examples of material conflicts of interest include:
Allocation of Limited Time and Attention. An investment professional who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds and/or accounts. An investment professional may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those funds and accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. Such an investment professional may make general determinations across multiple funds, rather than tailoring a unique approach for each fund. The effects of this conflict may be more pronounced where funds and/or accounts overseen by a particular investment professional have different investment strategies.
Allocation of Limited Investment Opportunities; Aggregation of Orders. If an investment professional identifies a limited investment opportunity that may be suitable for multiple funds and/or accounts, the opportunity may be allocated among these several funds or accounts, which may limit the fund’s ability to take full advantage of the investment opportunity. Additionally, the subadviser may aggregate transaction orders for multiple accounts for purpose of execution. Such aggregation may cause the price or brokerage costs to be less favorable to a particular client than if similar transactions were not being executed concurrently for other accounts. In addition, the subadviser’s trade allocation policies may result in the fund’s orders not being fully executed or being delayed in execution.
Pursuit of Differing Strategies. At times, an investment professional may determine that an investment opportunity may be appropriate for only some of the funds and/or accounts for which he or she exercises investment responsibility, or may decide that certain of the funds and/or accounts should take differing positions with respect to a particular security. In these cases, the investment professional may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and/or accounts. For example, an investment professional may determine that it would be in the interest of another account to sell a security that the fund holds long, potentially resulting in a decrease in the market value of the security held by the fund.
Cross Trades. Investment professionals may manage funds that engage in cross trades, where one of the manager’s funds or accounts sells a particular security to another fund or account managed by the same manager. Cross trades may pose conflicts of interest because of, for example, the possibility that one account sells a security to another account at a higher price than an independent third party would pay or otherwise enters into a transaction that it would not enter into with an independent party, such as the sale of a difficult-to-obtain security.
Selection of Broker/Dealers. Investment professionals may select or influence the selection of the brokers and dealers that are used to execute securities transactions for the funds and/or accounts that they supervise. In addition to executing trades, some brokers and dealers provide the subadviser with brokerage and research services, These services may be taken into account in the selection of brokers and dealers whether a broker is being selected to effect a trade on an agency basis for a commission or (as is normally the case for the funds) whether a dealer is being selected to effect a trade on a principal basis. This may result in the payment of higher brokerage fees and/or execution at a less favorable price than might have otherwise been available. The services obtained may ultimately be more beneficial to certain of the manager’s funds or accounts than to others (but not necessarily to the funds that pay the increased commission or incur the less favorable execution). A decision as to the selection of brokers and dealers could therefore yield disproportionate costs and benefits among the funds and/or accounts managed.
Variation in Financial and Other Benefits. A conflict of interest arises where the financial or other benefits available to an investment professional differ among the funds and/or accounts that he or she manages. If the amount or structure of the investment manager’s management fee and/or an investment professional’s compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the investment professional might be motivated to help certain funds and/or accounts over others. Similarly, the desire to maintain assets under management or to enhance the investment professional’s performance record or to derive other rewards, financial or otherwise, could influence the investment professional in affording preferential treatment to
those funds and/or accounts that could most significantly benefit the investment professional. An investment professional may, for example, have an incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor such funds and/or accounts. Also, an investment professional’s or the manager’s or the subadviser’s desire to increase assets under management could influence the investment professional to keep a fund open for new investors without regard to potential benefits of closing the fund to new investors. Additionally, the investment professional might be motivated to favor funds and/or accounts in which he or she has an ownership interest or in which the investment manager and/or its affiliates have ownership interests. Conversely, if an investment professional does not personally hold an investment in the fund, the investment professional’s conflicts of interest with respect to the fund may be more acute.
Related Business Opportunities. The investment manager or its affiliates may provide more services (such as distribution or recordkeeping) for some types of funds or accounts than for others. In such cases, an investment professional may benefit, either directly or indirectly, by devoting disproportionate attention to the management of funds and/or accounts that provide greater overall returns to the investment manager and its affiliates.
Investment Professional Securities Ownership
The table below identifies the dollar range of securities beneficially owned by the named investment professional as of November 30, 2014.
| Investment Professional |
Dollar Range of Portfolio Securities Beneficially Owned | |
| S. Kenneth Leech |
A | |
| David T. Fare |
A | |
| Robert Amodeo |
A | |
| Dennis McNamara |
A |
Dollar Range ownership is as follows:
| A: | none |
| B: | $1 - $10,000 |
| C: | 10,001 - $50,000 |
| D: | $50,001 - $100,000 |
| E: | $100,001 - $500,000 |
| F: | $500,001 - $1 million |
| G: | over $1 million |
| ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
Not Applicable.
| ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
Not Applicable.
| ITEM 11. | CONTROLS AND PROCEDURES. |
| (a) | The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934. |
| (b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting. |
| ITEM 12. | EXHIBITS. |
(a) (1) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(a) (2) Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.CERT
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.906CERT
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
Western Asset Municipal Defined Opportunity Trust Inc.
| By: | /s/ Kenneth D. Fuller | |
| Kenneth D. Fuller | ||
| Chief Executive Officer | ||
| Date: | January 23, 2015 | |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ Kenneth D. Fuller | |
| Kenneth D. Fuller | ||
| Chief Executive Officer | ||
| Date: | January 23, 2015 | |
| By: | /s/ Richard F. Sennett | |
| Richard F. Sennett | ||
| Principal Financial Officer | ||
| Date: | January 23, 2015 | |